Kweichow Moutai (600519) Comments on 1Q14 Results:Multiple factors will buoy up valuation amid smooth operational transition in 2014
Revenue missed market expectations. Kweichow Moutai recorded revenue of Rmb7.45bn (+4% YoY), net profit attributable to shareholders of the parent company of Rmb3.7bn (+3% YoY) and EPS of Rmb3.56 in 1Q14. Its advance receipts decreased by Rmb1.42bn QoQ to Rmb1.62bn. The Company proposed to pay out cash dividend of Rmb43.74 (tax inclusive) plus one bonus share for every 10 shares outstanding, and it will hold the general meeting of shareholders on 18 May.
The 3% growth target implies smooth operational transition in 2014. The liquor sector witnessed drastic corrections in 2013. In order to attain the annual revenue target, Kweichow Moutai stepped up sales in 2H13 to boost the short-term revenue. This put pressure on the market capability, brand image and the distributor resources. The Company brought forward a 3% growth target for its 2014 turnover. Given the current competitive landscape of the liquor sector, combination of i) brand, ii) sales/inventory of retailers and iii) the distributor resources are able to underpin Kweichow Moutai’s normal sales. As the high scale of Moutai liquor supplied to distributors is gradually absorbed by the market, retail sales in 2014 will reflect the real demand. The Company’s output of the Moutai liquor and the series liquor rose from 25k tonnes to 52k tonnes during 2008-13, representing a CAGR of 16%. After Kweichow Moutai returns to normal sale in 2014, the growth in its Moutai liquor sales will be able to support a 15%+ increase p.a. in its turnover during the next 5 years.
Quarterly revenue growth will be steady. Given that age liquor accounted for a certain share of the Company’s sales in 1Q13, hot sale of the classic liquor products in 1Q14 will drive the product structure downgrade to a bottom. Along with unveiling of the “age liquor group purchase plus a certain share of ordinary liquor” policy and rollout of the customized liquor products, its business structure will improve slowly. The Company’s 2Q13 revenue amounted to Rmb7bn, and its advance receipts slipped Rmb2bn to Rmb800mn at end-2Q13. We forecast its revenue growth will be stable in 2Q14E.
Financial company changed the structure of financial expenses. Its 1Q14 gross margin stayed flat YoY at 93.3%; and the cost/income ratio rose by 3.5ppts YoY to 13.7%. The selling expense ratio moved up 0.4ppt to 4.3%; the administrative expense ratio increased by 1.8ppts to 9.6%, due to growth of the taxes and salary payment; and the financial expense ratio increased by 1.3ppts YoY from -1.6% in 1Q13 to -0.3%.Sharp change of the financial expenses was mainly because after the Kweichow Moutai Group Financial Co., Ltd. (the “financial company”), in which the Company has a 51% stake, began to sweep funds from member companies, interest income of the Company and its subsidiaries from commercial banks declined. The financial company obtained the business license in mid-Mar 2013 and started operation in May 2013. As a result, the Company’s 1Q14 interest income from the financial company increased by Rmb132mn, which pushed up the overall turnover of its core business by 5.8% YoY to Rmb7.58bn. Its minority interest jumped by 40.7% YoY to Rmb250mn, due to consolidation of new subsidiaries.
Potential risks: steep correction of the liquor sector will change the product mix.
Earnings forecast, valuation and investment advice: based on the sector’s development status and the Company’s operating condition and strategy, we forecast its 2014-16E EPS to be Rmb15.58/17.50/ 20.08 (2013 EPS: Rmb14.58). The current share price equals to merely 11x 2014E PE. Against the expectations that correction of the liquor sector will last for 1-2 more years, Kweichow Moutai maintains stable operation. Given the stable expectations, the SOE reform, integration of the series liquor and the mass consumer goods nature of its products, we set fair valuation of the Company at 15x 2014E PE, equivalent to a target price of Rmb230.