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Morningstar | Wuliangye’s 3Q Result Fell Short of Forecast, Cutting Wuliangye’s FVE to CNY 72, Shares Undervalued

Wide-moat Wuliangye Yibin’s third-quarter results came in below our forecasts, with revenue and net profit growing 23.2% and 19.6% year on year, respectively, to CNY 7.83 billion and CNY 2.38 billion. Although ex-factory price increased 6%, top-line growth decelerated in the third quarter compared to 37% sales growth in the first-half, mainly owing to weaker-than-expected demand in the Mid-Autumn Festival and National Day holidays, as well as a high base (43% sales growth) last year. Sales volume of high-end Wuliangye liquor was estimated to grow at mid-teens rate. Advance payments from distributors was CNY 2.44 billion by the end of third quarter, down from CNY 4.42 billion in the second quarter. The company’s pause in receiving new orders from distributors indicates the end-channel inventory was high.

We maintain our wide-moat rating, but we are cutting our fair value estimate for Wuliangye Yibin to CNY 72 per share from CNY 80, as we revise down our revenue and profit growth forecasts, given that we are concerned the demand for premium baijiu will be curbed as Chinese economy weakens. We now anticipate the company’s revenue and net profit to grow at CAGRs of 14.5% and 15.5% in the next five years, down from 16.2% and 17.6% previously. We expect the short-term share price performance will remain soft as the market worries about the weak future demand, but we think the current price provides a good entry point from a long run perspective, as it is trading at a 34% discount to our new fair value estimate.

Gross margin saw significant improvement in the third quarter, increasing 5.4 percentage points to 75.2%, driven by higher ex-factory price and better product mix. However, the operating profit margin only increased by 20 basis points to 42.4%, due to higher consumption tax and selling expenses.