EUR 850.00 For Business Accounts Only

Morningstar | Moutai’s 4Q 2018 Results Were Upbeat; Raising Our FVE to CNY 830 from Sustainable Profit Growth. See Updated Analyst Note from 29 Mar 2019

Wide-moat Kweichow Moutai reported 2018 full-year results, surpassing its preliminary numbers, with underlying revenue and net profit up 26.5% and 30% year on year, respectively, versus the previous 23% and 25% growth guidance. This implied revenue and net profit growth in the fourth quarter accelerated again to 34% and 48% year on year, respectively, compared with 4% and 3% in the third quarter. The promising growth was attributable to an increase in sales of higher-priced nonstandardized products. We’re raising our fair value estimate to CNY 830 per share from CNY 750 to reflect our view that the strong profit growth will be sustained in the medium term, driven by structural sales distribution reforms, which will help to increase its shipments mix to direct sales channels. Given a strong 37% share price rally in the last three months, we think the shares are fairly valued at current levels and suggest investors wait for a better entry point at a wider margin of safety.

The market was worried about the drop in advance payments from customers, with the decrease pointing to weaker consumption demand for premium Moutai liquor. Sales of the brand dropped 36%, compared with the prior year, by the end of third quarter of 2018. Encouragingly, a significant increase in advance payments in the fourth quarter (versus third quarter), resulted in the 2018 year-end balance at only 6% short versus last year, eliminating these concerns.

Revenue from high-end Moutai liquor grew 25% year on year to CNY 65.5 billion, accounting for 89% of total sales. Sales were up 8% to 32,464 metric tons, while the average selling prices increased 16% to CNY 1,009 per bottle, based on estimates. Mid-market liquor sales were better than anticipated, up 40% year on year to CNY 8.1 billion. The strong growth was solely from the 40% increase in the average selling prices, while the sales volume was flat from last year.

Higher-than-expected gross margin expansion was the biggest surprise, about 80 basis points higher than our forecast. This was driven by the price hikes and increasing mix of higher-margin nonstandardized products, as the gross margin of the high-end segment rose further to 93.7% from 92.8% in 2017. On the costs front, the company lowered its marketing and advertising expenses/sales ratio, while the higher consumption tax costs partially offset the positive effect. As a result, the operating profit and margins were better than expected. Operating profit increased strongly, by 32.5% year on year, with the operating margin improving 3 percentage points to 65.1%. The dividend payout ratio was 52%, in line with the average over the past three years.