中国白酒业：行业在经历了四年的上升周期后是否即将迎来拐点

1、 cGlobalResearch31 October 2019China Baijiu SectorIsatippingpointcomingsoonafterafour-year industry upcycle?Autumn CFDF feedback indicated expectations are returning to rationalityLast week, we hosted investors to attend the 2019 Autumn China Food & Drinks Fair (CFDF)inTianjin,andhadmeetingswithsome

2、industryexperts.Feedbacksuggested investors and industry professionals expectations have been returning to rationality, primarily due to the healthy pull-back in premium baijiu prices as Moutai liquorsupply gradually recovers. Previously, after the 2019 Spring CFDF (report), premium baijiu pricesspi

3、kedsharplyduetoshrunkensupply,boostingmarketsentiment.Wethink:1) generally, despite rising economic uncertainties, increasing household consumption and leadingproducershealthychannelinventorysuggesthigher-endbaijiucouldachieve steady and sustainable growth over the next few years; and 2) unlike what

4、 some investorsexpect,theremaybenocyclicaltippingpointforbaijiuahead.A low-growth, less-cyclical age: major brands could attain structural growthWethinkhigher-endbaijiussteadygrowthsince2018couldhaveusheredinanewera for major baijiu companies structural growth amid consumption upgrades, with these i

5、ndustry characteristics: 1) slow growth and weak cyclicality, with continued market concentration towards major/higher-end baijiu brands (only about 1.5% market share in 2018 by sales volume); and 2) leading producers steady and structural growth, mainly driven by improving management, continuous pr

6、oduct mix upgrades, solid regional/channel expansion and appropriate price hikes. These clearly differ from the highgrowthandthestrongcyclicalitybefore2012drivenbygovernmentconsumption.Competition likely to rise structurally; even major brands could diverge further Premium baijiu makers face limited

7、 competition in their respective price bands due to strong brands, with growth depending mainly on the economy and their risk-resisting ability. High-end baijiu companies face rising competition due to more competitors, despite their stronger sub-sector growth outlook. In recent years, regionally fa

8、mous baijiu brand have upgraded their product mixes and brands amid premiumisationand arechallengingnationwidehigh-endbrandsintheirrespectivebasemarkets.Weagree withsectorexpertsthatthesectormayseemoreM&Aactivitiesgoingforward.Valuation: growth visibility/long-term potential matter for premium/high-

9、end Premium baijius valuation premium comes mainly from their high growth visibility, whilehigh-endbaijiuslong-termgrowthpotentialisamajordriverofvaluationupside, inourview.Amongbaijiustockswecover,ourorderofpreferenceis:JiangsuYanghe, KweichowMoutai,WuliangyeYibin,LuzhouLaojiaoandSichuanSwellfun.Di

10、stillers & BrewersChinaEquitiesBrad ChenDistillers & BrewersChinaEquities HYPERLINK mailto:brad-a.chen +86-213-8668985Frank HYPERLINK mailto:frank.su +86-213-8668811 HYPERLINK / ThisreporthasbeenpreparedbyUBSSecuritiesCo.Limited. ThisisatranslationofaChineseresearchnotepublishedbyUBS Securities Co L

11、td on 30 October 2019. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 21. UBSdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirm mayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisrepor

12、tasonlyasingle factor in making their investment decision.Contents 3 HYPERLINK l _TOC_250004 First meeting with experts: opinion leader Wang Zhaocheng on baijiu4 HYPERLINK l _TOC_250003 Second meeting: an expert from a baijiuconsultingfirm8 HYPERLINK l _TOC_250002 Third meeting with experts: a Hunan

13、baijiudistributor10 HYPERLINK l _TOC_250001 Fourth meeting with experts: a Henanbaijiudistributor13 HYPERLINK l _TOC_250000 Fifth meeting with experts: a Fenjiu distributor based in Shandong18Brad Chen HYPERLINK mailto:brad-a.chen +86-213-8668985Frank HYPERLINK mailto:frank.su +86-213-8668811China B

14、aijiu SectorUBS-S Research THESIS MAP a guide to our thinking and whats where in this reportMOSTFAVOREDLEAST FAVOREDJiangsu Yanghe, Kweichow Moutai, Wuliangye YibinSwellfun, Luzhou LaojiaoPIVOTALQUESTIONSQ: Can rising household consumption bolster demand for higher-end baijiu in 2019-21 with the wea

15、ker economy impacting business-relatedconsumption?Yes.WethecontinueddemandforandtocouldvaluegrowthintheFromaangle,we think baijiu is only halfway to We also think have their channel and pricing well in under continued value intowhichcouldUS vide ab se: y aay to s-ed cso” Q: Can major brands continue

16、 to gain market share through regional expansion?Yes, due to consumers upgrading needs, stronger brand recognition and greater association of higher prices with better quality. Meanwhile, leading producers are investing more in brands and routestomarket,andhavestreamlinedtheirproductlinesinresponset

17、otheshiftingconsumption structure.TheymayalsopursueM&As.Webelieveallthecompanieswecoverwithstrongbrands, high-qualityproducts,extensivedistributionnetworks,effectivestrategies,strongexecution,and/or sufficientcasharelikelytobecomenationalnames(Moutaiisalreadyanationalbrand).US vide ab se: y aay to s

18、-ed cso” UBS-SVIEWHigher-end baijiu could be halfway to household-led consumption, and the reshaping supply/demand environment could lower the cyclicality that has caused investor concern as the economy weakens.EVIDENCEThe10th UBSEvidenceLabChinaPremiumAlcoholDemandSurvey(December2018)showed:1) resp

19、ondents baijiu spending/outlook in the past/next six months stayed positive; 2) “volume” as a reasonforspendingmoreonbaijiustayedresilientforbothself-consumptionandgifting;3)almost every baijiu product had higher penetration in non-business occasions/self-consumption than businessoccasions/gifting;a

20、nd4)consumersincomeoutlookstayedpositive,withcyclicaldrivers ranking low.WHATSPRICEDIN?WebelievethereisstillupsidepotentialinPEvaluationforleadingbaijiucompaniesoverthelong term, given their earnings growth outlook and ROIC.UBS-S proprietary model suggests the premiumisation of baijiu could continue

21、 in 2019-21E, though at a slower paceBaijiu growth by pr i ce band20122013201420152016201720182019E2020E2021E2012-15 CAGR2015-17 CAGR2017-21ECAGRRetail sales volume growthDown-cycle: government spending i n high-end/premium segments almost c l earedRecovery periodNew s table growth period: high-end/

22、premium segments tobe dr i ven by household consumptionTotal7.7%6.8%1.3%3.9%1.6%0.9%0.6%-2.0%-1.9%-1.9%4.0%1.2%-1.3%Low-end (Rmb500/500ml)22.2%-14.8%-7.1%9.4%20.0%10.0%21.0%12.0%9.0%8.5%-4.7%14.9%12.5%Retail sales revenue growthTotal12.8%-3.8%-4.8%6.8%7.3%8.9%9.4%5.0%4.0%4.2%-0.7%8.1%5.7%Low-end (Rm

23、b500/500ml)22.0%-37.8%-30.3%5.5%35.0%48.5%39.2%28.8%7.9%11.8%-23.0%41.6%21.3%Retail ASP growth Total4.8%-9.9%-6.1%2.8%5.7%7.9%8.8%7.1%6.1%6.2%-4.5%6.8%7.0%Low-end (Rmb500/500ml)-0.2%-27.0%-25.0%-3.6%12.5%35.0%15.0%15.0%-1.0%3.0%-19.2%23.2%7.8%Source: Euromonitor, National Bureau of Statistics of Chi

24、na, UBS-S estimatesIn the following pages, we have summarized views of industry experts and participants we met with last week. We note that while we do not cover two companies mentioned in this note, Gujing (000596.SZ) and Shanxi Fenjiu (600809.SS), we have included expert comments on their partici

25、pation in the market given they are two important regional baijiu companies that could potentially shape the sector landscape and impact baijiu companies under our coverage. Views expressed below may not be consistent with UBS published views.First meeting with experts: opinion leader Wang Zhaocheng

26、 on baijiuWeak recovery and strong polarisation in this round of growth. The baijiu industrys revenue growth has slowed significantly but profit growth remains strong, while actual volumes are flat or may even fall a bit. Industry development is diverging, with listed baijiu makers revenue growth fa

27、r outpacing the sector but non-listed and small/mid-sized peers doing quite poorly.Wang,ChairmanofShengchuConsulting,believesthisisexplainedby what is driving this round of growth: industry concentration and premiumisation. The number of firms is falling. Moutai is now the only brand attheabove-Rmb2

28、,000pricepoint,wheremanybrandsoncecompeted,and the same is true for Wuliangyes price band. Thus, a minority of firms are posting decent growth on the back of industry concentration, amid generally slowing industry growth.Industry cyclicalityChinas baijiu industry has traditionally shown strong yet h

29、ighly cyclical growth. The cyclicality has its roots in unstable demand. Baijiu makers earnings were not affected by economic weakness in 2008, as: 1) China did notexperienceafinancialcrisis;and2)thegovernmentintroducedeconomic stimulus measures. In 2012, premium baijiu1 saw price and volume decline

30、s amidanti-extravagancecurbsonofficialreceptions,vehiclesandtrips.Wang noted that price drops for Wuliangye and Moutai set off a chain reaction that strongly affected high-end baijiu as well. He noted that at that time, high-end baijiu was yet well cultivated.Tier-1 brandsCyclicality: Wang believes

31、cyclical performance of tier-1 baijiu is driven by three main factors: macroeconomic conditions, channel inventories and consumptionsettings.1)Macroconditions:ifMoutaipricesdropsignificantly, there is most likely a severe economic shock. 2) Channel inventories: high channelinventorieswereadriverofth

32、e2012baijiuindustrycorrection,which came as the government stepped up its anti-corruption efforts. Channel inventoriesgraduallysettleddownafterthatandwereverylowin2014,when the industrys recovery kicked off. Currently inventories are healthy for both Moutai and Wuliangye. 3) Changes to consumption s

33、ettings: Moutaidemand is 80-90% from business and individual settings, with a very low government share, and premium baijius current mix is not vulnerable to a collapse in1 We divide the China baijiu sector into four segments according to product retail prices in this report (unless otherwise stated

34、): 1) premium (retail prices: above Rmb500/500ml); 2) high-end (retail prices: Rmb300-500/500ml); 3) mid-range (retail prices: Rmb100- 300/500ml); and 4) low-end (retail prices: below Rmb100/500ml).demand. In general, the macroeconomic impact is mild and consumption settings are stable, but channel

35、inventories have a large impact.MoutaiandWuliangye:Wangbelieveschannelinventoriesareatasafelevel after Moutai cancelled 7,500t of distributor quota. Moutai wholesale pricing ralliedquicklybeforethisyearsMid-AutumnFestival,goingfromRmb2,200to Rmb2,800inonemonthamidsevereproductshortage.Afterthefestiv

36、al,this was followed by a retreat from Rmb2,800 to Rmb2,300 following significant priceincreases,withshipmentsviae-commercealsocontributing.YetMoutai cannotreleasehighvolumesinashortperiodandWangthinksitsQ3revenue miss was driven by slow shipment of the quota that Moutai withdrew earlier. With Mouta

37、i liquor very much in demand now, giving quota to any distributor is not ideal and the company has decided to trickle inventory into the market through direct sales. Moutai is capable of direct sales but Wang thinks it remains hesitant to ramp up thepace.This year Wuliangye raised its wholesale pric

38、es from Rmb800/bottle to over Rmb900/bottle in just over two months by halting its seventh-generation product and rolling out the eight-generation, which has boosted distributor profitability. Wuliangyes channel inventory has also been adjusted to reflect mix changes. High channel inventories for pr

39、emium baijiu typically mark the start of a new correction. Having navigated several industry cycles, Wang believes management at premium brands have grown adept at regulating inventoryinchannelstosmoothoutcycles.Thus,tier-1brandscouldbecome less cyclical and may not experience very high channel inve

40、ntories. Moutais consumptionscenariosareresilient,withnocompetitorsinthenearterm,and themainriskiseconomicweakness,asfallingshipmentswouldcutgrowthof premium baijiu, though with little change in prices. Given the above three factors, Wang thinks premium baijiu revenue growth could slow, but would re

41、main healthy.Regional leadersCyclicality:Wangbelievesregionalleaderscyclicalperformanceismainlydue toageingofcoreproductsandproductlineextensioncapabilities.Inthepast, regional leaders major products were in a narrow price band below Rmb100/bottle, with each brand positioned differently. When a majo

42、r brand succeeds, channels become plentiful and pricing more transparent, which,in turn, squeezes profit and makes retail stores less willing to recommend the products.Givenconsumersweakbrandloyaltytobaijiupricedbelowseveral dozen yuan, they can be easily swayed by store recommendations, which enabl

43、es the rise of other brands.Wang notes regional leaders cyclical profile has changed for a couple reasons.1)Steadierpositionsintheirhomemarkets,eg,GujingsNo.1rankinAnhuiin every price band along Rmb100-500/bottle, with no challengers. Nianfen YuanjiangGiftEditionsgrowthhasslowedbutotherproductscanpi

44、ckupthe slack. Yanghes Ocean and Sky are not doing well but Dreams strong performancebringsdefensiveness.KouzijiaoFive-yearhasaged,butgrowthof KouzijiaoTen-yearandTwenty-yearhascompensatedforit.Forregionalbaijiu makers,cyclesaredrivenbykeyproductsandproductlines.Wangbelievesa firmisverydefensivelypo

45、sitionedwithaproductlinethatisthree-dimensional andhitsmanypricepoints.2)Regionalleadersthathavecompletedregional extension and price point coverage are hard-pressed to sustain high growth but they have also become much lesscyclical.Yanghe and Kings Luck: Wang believes this year Kings Luck has poste

46、d higher growth than Yanghe in their mutual home province because Yanghe finishedgoingprovince-widefirst.Yanghehasgrownextremelyquicklyinthe past two years driven by premiumisation and national expansion, but growth could soften going forward. Kings Lucks Guoyuan product has expanded quicklybutWangt

47、hinksisunlikelytotakemuchsharefromOcean/Sky/Dream. HebelievesthatYangheandKingsLuckareboththisstrongareexplainedby the Jiangsu markets largesize.Tier-2 brandsCyclicality: Tier-2 brands could be affected by cyclical factors, which Wang thinks has been greatly underestimated. Hardest hit in the 2012 c

48、orrection weretier-2brandssuchasSwellfun,ShedeandGuojiao(Guojiaowasnotyet tier-1 then). SOEs (tier-2 brands are mostly state-owned) fixed performance targets mean that when demand drops, they may push stock to distributors, whichleadstoextremelyhighchannelinventoriesandfallingretailprices.Tier-2bran

49、dsexistencehaslongbeenjustifiedbyapricepointbetweenthose oftier-1brandsandregionalleaders.WangbelievesTier-2brandscannotwin in the long term if they cut pricing to regional leaders general level. Tier-2 brands main price point is Rmb300+ (Jian Nan Chun, Dream 3, Fenjiu Qinghua 20, Swellfun Master Di

50、stiller No.8, etc). Regional baijius main price point is Rmb100-plus or over Rmb200 (eg, over Rmb100 in Shandong and over Rmb200 in Anhui).Wangnotesthatmanyregionalbaijiumakersaresellingindividualproductsat Rmb400-500withnoclearpushback,showingthatregionalleadersabilityto enter the high-priced segme

51、nt has been significantly underestimated. Tier-2 brandspricinghasnolineofdefenseagainstregionalleaders.According to Wang, regional baijiu winning out over well-known brands can be understood with the argument that, within their scope of reach, they have higher volume, circulation and output, and thu

52、s put more efforts into channels. If regional makers channel efforts go deep enough, tier-2 brands may lose market share.Wang notes that tier-2 brands do not have enough output in individual regions to justify lots of manpower to develop the end-market, so they have historically relied on only distr

53、ibutors. Regional makers are taking over the market one price point at a time, from the bottom up, forcing tier-2 brands to raise their prices bit by bit. When prices cannot rise further, tier-2 brands will be tightly squeezed.Sector premiumisation risksPremiumisation is quickly unfolding in the bai

54、jiu sector as major producers develop high-priced products. Low-priced baijiu is not a suitable gift while high-priced baijiu is too expensive to be given away, so gift-related mass- market baijiu spending is on the decline. Many consumers are now choosing top-tiermilkasagiftinstead.Premiumisationth

55、uscarriestheriskthatoverall volumes couldcontract.Industry M&AsWangbelievethereasonsforthelackofM&Asinthebaijiusectorinthepast years were SOE systems and unstructured competition. Top baijiu firms are generally state-owned and the government discourages them from M&As outside of their home provinces

56、. Meanwhile, regional firms disorderly competition means weaker potential benefits from M&As. In the next three to fiveyears,Wangbelievesregionalleadersaresettoconsolidatetheirpositions andbuyingleadersamountstobuyingtheirmarkets.Hebelievesdecelerating growthatregionalleadersalsomakestheirownersopen

57、toselling.WineIt is not that Chinese consumers do not like wine; imported wines short-term plight is due to channel issues. In the current round of imported wine replacingdomesticallyproducedwine,importedwinetendstobelow-quality, leading to a poor consumer experience. Baijiu is also more profitable

58、on the end market, which heavily squeezes other types of alcohol. Long term, it depends on demand. Wine caters to consumer demand for health and fruit- flavouredalcohol.Wangs outlook for imported wine: 1) mainstream brands have growth opportunities; 2) there is a need to seek new channels (modern ch

59、annels, categoryspecialtystores)outsideofbaijiuscurrentonesandnewend-market segments, so as to avoid going head-to-head with baijiu inside channels and faceconsumersonequalfooting;and3)unsteadydemandcouldcausenear- term setbacks but wine remains a hopeful sunrise industry. Industry competition is be

60、nign with plenty of market potential in the longterm.Digital transformationOne item, one barcode is driving digital transformation, which will not change products but has profound implications for brand marketing. Brand marketing of baijiu makers has not kept up with mobile internet, with the indust