Investment advice

Kweichow Moutai is the largest high-end baijiu brand in China, with its scarce high quality, unique cultural heritage, and strong brand power, giving the company the pricing power in the industry, and we estimate its high-end market share to be over 60%. Due to supply shortages and price increases slowing down in the past two years, butMaotai liquorStrong demand, solid fundamentals, we believe that in the future, there is significant room for both volume and price to increase, ensuring the company's long-term steady growth. Maintain the company's outperformance rating in the industry.

Reason

High-end baijiu is dominated by business and personal consumption, with steady and strong demand and significant room for growth. Currently, high-end baijiu consumption is mainly driven by private consumption, and the rise of the new rich in China is the basis for the rapid expansion of high-end baijiu consumption.

Scarce high quality forges strong brand power, coupled with forward-looking channel marketing capabilities, brings strong pricing power. Geographic advantage and brewing techniques guarantee Moutai's scarce quality, and by targeting the top market and continuously innovating the channel marketing system, it continues to expand its influence and deeply penetrate the hearts of consumers. We estimate that in 2019, Moutai's market share in the high-end baijiu market exceeded 60%, giving it pricing power in the industry.

Moutai has long-term room for volume and price increases, and its growth is currently mainly limited by supply. 2021 may be an important window for price increases. We estimate that Moutai's channel price difference currently exceeds 130%, providing a basis for price increases. Considering that the performance reservoir is basically depleted, and the limited actual increase in Moutai liquor in the next two years, we believe that the window for Moutai price increases may be in 2021, with an increase possibly reaching double digits. In the long run, due to the continuous expansion of demand, we believe that there is still further potential for Moutai in terms of both volume and price, and we will continue to maintain a high price level.

The impact of the epidemic on the company is temporary. Every time the Baijiu industry encounters an external crisis, it can successfully return to the development path, which is determined by the Chinese cultural background and the dual economic structure. The epidemic has caused a temporary shock to the consumption scene, but the demand for high-end Baijiu is rigid, and we predict that it will quickly recover as the epidemic subsides. Currently, Maotai Wuliangye and other high-end Baijiu overall channel inventory is good, and the company's management is more focused on the long-term, which will further promote the company and the industry to maintain stable and healthy development.

Profit forecast and valuation

Due to short-term supply bottlenecks and price increases, we have lowered our profit forecast for 2019/20 by 6.3/14.2% to 40.517/45.056 billion yuan, and introduced a profit forecast of 53.48 billion yuan for 2021. Due to the downward revision of the profit forecast, we have lowered the target price by 6.8% to 1,363 yuan, corresponding to a 2020/21 P/E ratio of 38/32x. The current stock price corresponds to a 2020/21 P/E ratio of 31/26.1x, and the target price has a 22.5% upside potential. We maintain an outperform rating in the industry.

Kweichow Moutai (600519) Alpha 100 Series: Sharing the expansion of high-end consumer market in China, with long-term potential for price and volume improvement.