Morningstar | Wuliangye’s Fourth-Quarter Results Beat Our Expectations, Raising Our Fair Value Estimate to CNY 80
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. Thick fragrance baijiu is a type of distilled liquor that is sweet-tasting, smooth 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.Compared with Moutai, Wuliangye offers a much wider range of products that suit the needs of consumers from different income classes. The diversified product portfolio allows the company to access the mass market more efficiently by offering middle-class consumers a broad range of products at competitive prices. 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 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. 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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