Morningstar | Moutai's Strong 2Q Results Were Largely In Line; Raising Our FVE to CNY 750. See Updated Analyst Note from 02 Aug 2018
Despite the traditional low season for baijiu, wide-moat Kweichow Moutai posted a promising second-quarter result that continues to track with our expectations, with revenue and net profit rising 46% and 42% year on year, respectively, to CNY 15.9 billion and CNY 7.26 billion. On the profitability front, the prior 18% price hikes and increasing sales volume for (higher-priced) special Zodiac edition liquors have boosted the gross margin to 90.5% from 87.7% last year. Although the selling expense ratio increased by 300 basis points year on year, due to higher marketing and advertising costs for promoting series liquors, the 67% operating profit was still in line with our forecast.On the negative side, advance payments from distributors, a key indicator when projecting sales growth, painted a picture of weakening demand, as the balance shrank 25% from the first quarter’s CNY 13.2 billion to CNY 9.9 billion. This decay potentially stems from a change in the company’s cash-collecting policy, as Moutai shortened the period of time for advanced payments from distributors before the shipments were delivered, in order to enhance its cash efficiency.
We are raising our fair value estimate to CNY 750 per share from CNY 730, owing to the time value of money. Based on our checks with distributors, the wholesale price of the Flying Moutai has increased to CNY 1,700 per bottle, from CNY 1,500 earlier this year, and inventory remained low in the end market, indicating demand is still robust in the second half. In the longer term, we believe Moutai will continue to dominate the premium baijiu sector, but we will likely see demand gradually slowing down beyond 2020, after the strong recovery since 2016. Our five-year 16.5% revenue growth and 15% net profit growth forecasts are intact, with gross margin and operating margin averaging at 90% and 59.5%, respectively. We think the shares are fairly valued and suggest to buy on dips to this high-quality name.
Kweichow Moutai is engaged in the manufacture and sale of "Guizhou Moutai" series distilled spirits; manufacture and sale of beverages, food and packaging materials; development of anti-counterfeiting technologies; and research and development of relevant IT products. Through its subsidiaries, Co. is also engaged in the wholesale of agricultural vice-local products, building materials, decoration materials, metal materials, machineries, electronic products, telecommunication products, hardware, rubber products, general merchandises and furniture. Co.'s products include millesimes liquor, gift liquor, common liquor and other liquor series.
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