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Morningstar | 1Q Result Beat Again; Raising Wuliangye’s FVE to CNY 94 From Higher Profit Growth. See Updated Analyst Note from 30 Apr 2019

Wide-moat-rated premium baijiu distiller Wuliangye Yibin posted strong first-quarter results exceeding our forecasts, with revenue up 27% and net profit up 30% from the prior year. We’re raising our fair value estimate to CNY 94 from CNY 85 from higher profit growth forecast, as we revise up our assumptions on the revenue growth and gross margins. We expect the average selling prices and gross margins will advance, buoyed by its new high-end product launches and its strategies in consolidating its mid-end series brands. Having said that, we think the Wuliangye shares are slightly overvalued at current levels, compared with our new fair value estimate, and suggest investors wait for greater margin of safety.

Revenue in the first quarter grew 27% year on year to CNY 17.6 billion, higher than our full-year growth forecast. The promising top-line growth was driven by robust demand for high-end Wuliangye 52-ABV liquor that we estimated sales volume was up 20% year on year. Along with the company’s strategies in driving its mix toward premium products and integrating its low- to mid-price ranged sub-brands, the gross margin, up 260 basis points from the quarter a year ago to 75.8%, was a surprise to us. We think the upbeat gross margin will be sustainable, driven by the strong sales volume of the higher-priced collection version and new (packaging design) version of Wuliangye 52-ABV liquors. We expect the premium liquor mix will increase to 78% in 2019 from 75% in 2018.

Meanwhile, the company effectively implemented its “4 plus 4” sub-brands sales strategies, which focus on four mid- to high-end series brands and four midpriced series brands, while downsizing the numbers of other series brands. It requested all distributors clean up or discontinue selling the look-alike products, which resemble its primary Wuliangye brand’s liquors but have much lower selling prices. We expect the strategies will not only help the company to allocate its marketing and advertising resources precisely and effectively, but also boost the aggregate average selling prices.

We also lower our operating expenses ratio forecast slightly, given that the number in the first quarter was lower than we anticipated, thanks to the good management controls. The selling expense ratio was nearly flat from last year at 7.2% and administrative expenses ratio slightly went up 26 basis points year on year to 4.5%. On top of the improving gross margin, the operating profit rose 2.6 percentage points year on year to 52.2% in the first quarter. Net profit increased 30.3% year on year to CNY 6.48 billion.