Morningstar | Wuliangye’s 3Q Result Fell Short of Forecast, Cutting Wuliangye’s FVE to CNY 72, Shares Undervalued
Traditional Chinese liquor, also known as baijiu, has a long and storied history. Dating back 5,000 years, the beverage was consumed by Chinese soldiers after winning battles in ancient times and is now widely used by the Chinese to celebrate important occasions. According to data from International Wine and Spirit Research, Chinese people consumed more than 13.5 billion liters of baijiu in 2016. The spirit, which is distilled from sorghum, wheat or rice, accounts for more than one third of total spirit consumption worldwide.Baijiu spirits are classified primarily by their fragrances. The two most common fragrance types are "sauce" fragrance and "heavy/thick" fragrance. Sauce fragrance baijiu is a highly pungent, distilled liquor of bold character, a prime example of which is the Kweichow Moutai brand. Heavy/thick fragrance baijiu is a type of distilled liquor that is sweet-tasting, unctuous in texture, and mellow, with a gentle, lasting fragrance. Wuliangye’s core product, Wuliangye 52°, is widely known as the best thick fragrant liquor in the market. Its premium quality and 600 years of history has given the company strong pricing power, which is reflected in its 72% gross margin as of 2017.Since early 2013, the broad economic slowdown, combined with the Chinese government’s sweeping anticorruption measures, have weighed heavily on the premium baijiu market. Shrinking demand from the public sector, high inventory levels in the distribution channel, and growing competition from cheaper alternatives dampened Wuliangye’s profit over 2013-15. However, we are now optimistic about Wuliangye’s long-term business outlook, as we are confident that China’s status-seeking middle class will eventually supplant the government and military as the major consumers of Wuliangye’s products. The sharp decline in the retail price of its high-end product has resulted in rising affordability and popularity among Chinese consumers. We believe the company will continue to benefit from the premiumization trend in the long term, as consumers are trading up to premium baijiu.Wuliangye Yibin is engaged in manufacture and sale of "Wuliangye" liquors and other series of alcoholic drinks. Through its subsidiaries, Co. is also engaged in the supply of raw materials; packaging and publication printing; investment activities; provision of parking service; and manufacture and sale of industrial-used steams, fine chemicals, fruit wines, white wines, white carbon, and black and lactic acids.
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