The original fragrance has a rich heritage, and has been revitalized through the second reform. Fenjiu, Shanxi, is located in Xinghuacun, the capital of Jiudu. It is one of the national standards for fragrant liquor. It was known as the “Boss Fen” before the 90s.
In 2017, Li Qiuxi, Chairman of Fenjiu Group, came to power and began a second reform. Market vitality was stimulated by introducing war investment+integrating assets, implementing a cabinet formation system, and implementing equity incentives to innovate the company's institutional mechanism. The CAGR for the 2017-2023 period was 32%/49%, respectively. Due to the rise in blue and white series volume and product structure, overall profitability continued to improve.
The product matrix gradient is clear, and the volume can be adjusted dynamically and flexibly. The company has strong products on the high-end, sub-high-end, mid-range, and popular models, respectively. Among them, Bofen is positioned as a pioneer in nationalization, plays a role in cultivating consumers, and currently maintains controlled operation; Lao Baifen Panama is a mature large single product. The former is deeply involved in provincial channels, and the latter is anchored to emerging markets and continues to increase the digitization of banquets; the blue and white series Zhongqing 20 is the main product, and the blue 30 is a high-value single product. Fenjiu has many major single product brands, and management can make flexible choices to balance short- and long-term development.
The nationalization base is stable, and both offense and defense demonstrate resilience. The company continues to advance the pace of nationalization, accounting for more than half of the market in the province, and mainly implements refined operations; the Shanxi market has a strong fragrance atmosphere, market cultivation is mature, and channel upgrading is mainly achieved through terminal upgrades and bundling with major local merchants; the market south of the Yangtze River has a high consumption level and has adopted a product strategy of importing Bofen and cultivating blue and white flowers. Currently, the Fenjiu base market has maintained steady growth, and the market south of the Yangtze River has some potential (blue and white 20 will gradually expand, and blue and white 30 is expected to return in value in the future).
Fenjiu began an era of great fragrance, and its multiple potential energies favored subsequent development. We believe that the company's main future growth points come from the dual release of fragrance potential energy & fenjiu potential energy: 1) the fragrance category has experienced a brilliant 70% market share, and is also highly palatability+young group preferences+leading leaders, and is expected to continue to revive and open up Fenjiu's growth ceiling in the future; 2) the company has a practical management (helmsman) +cultural wine genes (long-term advantage) +production capacity & market & product overall layout (production and sales increase and sufficient momentum). The overall structure is expected to be highly flexible in the future. to create a continuous steady growth trend.
Profit forecast: We expect the company's revenue for 2024-2026 to be 386/464/54.9 billion yuan (up 21%/20%/18% year on year), net profit to mother is 131/159/19.3 billion yuan (up 25%/22%/21% year on year), and corresponding PE is 23X/19X/16X, respectively. Considering that Bofen cultivates a strong fragrance atmosphere & blue and white 20 continues to be nationalized and blue and white 30 high-end circle cultivation is gradually improved, we are optimistic about the company's future development. We will give 1.25X PEG in 2024. The calculated PE is 28 times PE, and the target price is 300.16 yuan/share, maintaining a “buy” rating.
Risk warning: Macroeconomic growth falls short of expectations; industry competition intensifies; expansion outside the province falls short of expectations; growth of medium- and high-priced alcoholic beverages falls short of expectations.