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Produced by/Company Research Office Wine Industry Group

Text/Huai Shangyue

Recently, different opinions have emerged in the industry regarding the current value positioning of Kweichow Moutai. After UBS Securities publicly downgraded Kweichow Moutai's rating, Huachuang Securities released a bullish report.

This in-depth report, "Kweichow Moutai: Liquor Price Logic, Growth Strategy and Pricing Paradigm", is somewhat in opposition to UBS Securities. In the article, after a series of research and demonstration, Huachuang Securities maintained a "strong recommendation" rating for this leading liquor company and maintained a target price of 2,600 yuan.

This is the 9th time that Huachuang Securities has released a research report on Kweichow Moutai since August 2023, and the target price and rating remain consistent.

After the above research report was released, the chief of Huachuang Securities' food and beverage team posted on a social platform, pointing out that when analyzing Moutai in a complex environment, we must not only find the inevitability from the laws of the liquor cycle, but also see the improvements in the operations of the liquor companies. Only in this way can we avoid "looking for swords in the boats" and more accurately judge the logic of liquor prices and business paths.

The company's research room carefully read this research report and believes that the following points may provide inspiration for market cognition.

First, have the confidence of Moutai distributors remained stable?

The decline in the wholesale price of Maotai in June was essentially due to pessimistic demand expectations and the loss of profits for scalpers. However, this led to a sharp drop in the wholesale price of Maotai in the market, causing dealers to be anxious and sell at low prices. Therefore, Huachuang Securities believes that the key to stabilizing the wholesale price of Maotai is the stability of dealer confidence.

The research report believes that Moutai's sales volume in 2023 will be about 42,000 tons, and the planned sales volume in 2024 will be about 45,000 tons. Judging from the sales structure of Moutai, traditional distributors and direct sales of the company account for most of Moutai's quota.

Excluding the self-operated portion that the company can directly control, the dealer share is about 50%. Boosting dealer confidence in a timely manner is the key to maintaining the price system. Therefore, when dealer confidence began to loosen at the end of June, the company immediately took countermeasures to maintain confidence.

In fact, one of the main reasons why Moutai hastily changed its leader in the first half of the year was that distributors were very dissatisfied with the company's hasty diversification, which affected the distributors' interests. After Zhang Deqin took office, his core job was to appease distributors in various places.

Since late June, the company has made a series of adjustments to its product launch policies, such as suspending "corporate subscription of 1,499 yuan Feitian" in some provinces, and discontinuing the sale of some products such as premium products and Moutai 1935; the company began to dynamically adjust distributors' ordinary Moutai and non-standard quotas in July, and the technical adjustment measures have been effective.

Recently, the wholesale price of Moutai has stabilized and slightly rebounded to around 2,350 yuan. In other words, Moutai distributors have basically stabilized.

Second, can Moutai avoid the collapse of its liquor prices, which dropped by 2/3?？

The sources of the goods that the e-commerce and scalpers sold at random prices mainly came from iMoutai, group buying, dealers, Guizhou specialty tie-in sales platforms, etc. In fact, the wholesale price of Maotai plummeted this time, in a sense, too much shipment from iMoutai was an important reason.

As a strategic support platform for the company's future transformation to "new business" and the "three transformations" (i.e., industrial transformation, scenario transformation, and service transformation), the importance of iMoutai is self-evident. The report analysis states that the price of ordinary Moutai above 2,000 yuan is the bottom line for maintaining the operation of iMoutai.

With reference to the price of 100ml iMoutai Xiaomao at 399 yuan, and the price of 500ml after standardization at 1995 yuan, it can be considered that the price of more than 2000 yuan for ordinary Moutai is the bottom line for the current operation of the online sales system of Xiaomaotai. If the price of ordinary Moutai breaks through 2000 yuan, it may cause an imbalance in the channel and product system, and even cause panic, which will accelerate the downward trend.

By stabilizing the wholesale price bottom line of more than 2,000 yuan on this platform, the entire Moutai pricing system will have a guiding star.

Huachuang Securities believes that the reputation of the Moutai brand both at home and abroad, the unique collection and time value, and the centripetal force of the dealer system under many years of rich profits are all the underlying core of Moutai's passage through this cycle and continued steady growth.

At present, the price control of Moutai is still in the hands of the company, and the toolbox of technical adjustments is still sufficient. It is expected that the price will be maintained above 2,000 yuan at least within this year and avoid repeating the last round of wine price collapse of 2/3.

Third, from the perspective of financial attributes, has the price correction of Moutai liquor been in place?

As we all know, the current Kweichow Moutai has three major attributes: consumption, collection and finance.

The wholesale price of Pu Mao has been nominally set at 1,499 yuan, but the market price has been above 3,000 yuan for a long time. In a sense, it has become a financial product.

Huachuang Securities believes that from the perspective of financial attributes, the price of Moutai liquor can be regarded as a "catch-up decline" in the middle of the year, and the extent of the retracement is already comparable to the housing prices and stock indices in first-tier cities.

Comparing the price trends of Moutai liquor with the major core assets in China, Moutai liquor prices, housing prices in core cities, and stock indexes peaked one after another in 2021. After that, the prices of real estate in first-tier cities (taking Shenzhen as an example, data from Anjuke) fell 35% from their highs and gradually stabilized. The Shanghai Composite Index has fallen by 27.27% from its 21-year high, while the price of Sanping Feitian has fallen from the highest price of around 3,100 yuan in 21 to a low of around 2,200 yuan this year, with the maximum decline reaching about 30%.

Taking this as a reference indicator of "de-financialization", the mid-year decline in Moutai's wholesale price can be regarded as a "catch-up decline", and the magnitude has been reached in comparison.

Fourth, is the current share price of Moutai attractive enough?

After UBS Securities' bearish report came out, the market's bearish sentiment towards Kweichow Moutai became even stronger.

In fact, some funds have already started to reduce their holdings of liquor, represented by Kweichow Moutai. Data shows that the proportion of liquor held by funds has now fallen back to the level of 2018.

After reaching a historical high of 15.1% in Q4 2020, the proportion of public funds holding liquor has fluctuated downward. By Q2 2024, the proportion of holdings fell to 9.9%, down 2.6pcts from the previous quarter. Compared with history, it is comparable to the proportion in Q2-Q3 2018. In 2018, the market held a neutral attitude towards the fundamentals of the sector. Combined with valuation, the risk of excessive holdings in liquor has been released.

For ordinary investors, the core issue at present is: Since February 2021, the share price of Kweichow Moutai has fallen from 2,489 yuan to around 1,400 yuan at present. After falling for such a long time and with such a large drop, has the company's share price fallen to the right level?

In this regard, Huachuang Securities believes that investing in Moutai may usher in a rare window period where "good business, good company and good price" can be achieved simultaneously. They believe that even with deep value thinking, the bottom line value of Moutai can be "weighed" at present: first, from the perspective of dividend rate, the current dividend rate has exceeded the ten-year treasury bond, and the promised dividend rate still has room for improvement; second, from the perspective of reconstruction thinking, the value of stored wine is estimated to be more than 1.7 trillion yuan, including the current value of Moutai's stored wine and cash on hand.

Based on this, they use a neutral to cautious assumption that the compound growth rate of earnings in the next five years will be around 10%, that is, 240 billion in revenue and 120 billion in profit will be achieved around 2028. At the same time, they assume that the regular dividend rate will gradually increase to 75% and the valuation will be repaired to the central PE of 25 times. It is estimated that the investment in Moutai can be expected to double the return space in the next five years, which is attractive enough for long-term investors in the low-interest rate era. The pan-dividend style may be the market catalyst for the launch of the market.

This is the main basis for them to maintain Kweichow Moutai’s strong rating and maintain its target price of 2,600 yuan.