China Baijiu Sector:Recovery continues in 3Q15
Baijiu: 3Q15 net revenue/NPAT +7%/+17%
The combined net revenue/NPAT of China’s major listed baijiu companies were up 7%/17% in 3Q15; excluding Moutai, growth would have been stronger at 11%/38%. During the period, we believe both Wuliangye and Yanghe benefited from restocking, with 1) Wuliangye’s NPAT up 85% on strong 14% top-line growth, and a reduction in selling expenses and receivable days; and 2) Yanghe's double-digit top- and bottom-line growth has been consistent since 1Q15. We do not like Moutai's increasingly favourable credit terms for distributors, but this is not yet alarming.
Moutai: lengthened cash conversion cycle
Moutai’s net revenue/NPAT was flat/+2% yoy in 3Q15, and 9M15 net revenue/NPAT was up 7%/7% to RMB21.5bn/11.4bn, largely in line with our 2015 full-year forecast (net revenue/NPAT up 6%/7% yoy). However, notes receivable rose further to RMB8.3bn (94 days of annualized sales), up from RMB4bn as of June 2015 (44 days). Although customer advances also rose to RMB5.6bn (64 days) in September from RMB2.3bn June (26 days), the lengthened cash conversion cycle is not healthy in our view, but not yet alarming. We still like its irreplaceable brand and maintain Buy. Our DCF-based target price (9.5% WACC and 0% TG) is RMB275.4/share. Key downside risks: non-core investments and non-supreme spirits expansion could dilute returns and incur unnecessary risk, slowing cash conversion.
Wuliangye: encouraging recovery and SOE reform
Wulaingye’s 3Q15 net revenue/NPAT were up 14%/85% yoy, as selling expenses declined 69% yoy to 9.6% of sales (3Q14: 34.7%), comparable to levels before the anti-corruption campaign. Note that the company’s quarterly selling expense ratio has been volatile. 9M15 net revenue/NPAT were flat/-2% to RMB15.1bn/4.6bn, in line with our 2015 full-year forecast (revenue up 1%, NPAT -3% yoy). The company’s notes receivable declined to RMB6bn (106 days of annualized sales) from RMB7.6bn (121 days) as of June 2015. Customer advance remained insignificant at 12 days. Separately, the company proposed to issue 100m shares (2.6% of enlarged share capital) to employees, distributors and PE funds at RMB23.34/share (9.3% discount to the closing price before suspension on 29 July), with proceeds to be used on information system upgrades, e-commerce development, etc. The stock resumes trading today. The NPAT recovery and working capital improvement are encouraging, thus we maintain Buy. Our DCF-based target price (9.5% WACC and 0% TG) is RMB31/share. Key downside risks: prolonged destocking, slowing cash conversion.
Yanghe: consistent net revenue/NPAT growth of 12%/13%
Yanghe’s 3Q15 net revenue/NPAT were up 12%/13% yoy, and for 9M15, net revenue/NPAT rose 11%/12% yoy to RMB13.7bn/4.5bn, in line with our full-year 9%/10% forecast. The company estimates 2015 NPAT to grow 5-15%. With a short distribution channel and active channel management, advances (7 days) and receivables (3 days) were insignificant. We maintain Buy on Yanghe, which has been successfully modernizing baijiu, in our view. Our DCF-based TP (9.5% WACC and 0% TG) is RMB73.4/share. Key downside risks: a possible overhang if pre-IPO investors reduce their stakes; quality concerns; and insufficient efforts in corporate governance.