Zhongtong Caijing APP learned that Tianfeng Securities released a research report stating that under the squeezed growth, the price differentiation among the price segments in the baijiu sector continued in Q1 2024. Strong alpha liquor companies that enjoy the expansion of the price band (middle price range is the main market) have increased their market share against the trend. Under the assumption of beta balance, we still believe that the acceleration of the concentration of strong alpha liquor companies will bring dividend opportunities + potential reform expectations, and always adhere to the three investment themes: 1) performance stability: that is, stable performance growth rate in 2024: Kweichow Moutai (600519.SH)/Shanxi Xinghuacun Fen Wine Factory (600809.SH)/Luzhou Laojiao(000568.SZ)/Anhui Gujing Distillery(000596.SZ), etc.; 2) potential reform theme: Wuliangye(000858.SZ), etc.; 3) beta theme: Jiugui Liquor(000799.SZ)/Shede Spirits(600702.SH)/Sichuan Swellfun(600779.SH), etc.

Tianfeng Securities' main points are as follows:

Review of the baijiu sector: high-end liquors continue to be steady, and internal upgrading of mid-range liquors is evident.

Revenue: High-end liquor revenue performance is steady, and the volume of mid-range liquors drives regional liquor performance steadily. Q1 2024 revenue of the baijiu industry increased by 14.93% year-on-year to 150.047 billion yuan. Revenue growth rate: high-end liquor (15.86%) > regional leading liquor (15.08%) > secondary high-end liquor (14.21%) > third and fourth tier liquor (6.45%).

Profitability: The trend of price increase remains unchanged, and the internal upgrading of mid-range liquors is significant. The net profit attributable to mothers of the baijiu industry in Q1 2024 was 62.005 billion yuan, a year-on-year increase of 15.85%, and the upward trend in prices continued to push up the profitability. Net profit attributable to mothers growth rate: third and fourth tier liquor (37.20%) > secondary high-end liquor (20.94%) > high-end liquor (15.21%) > regional leading liquor (13.53%).

Profit margin: The profit margin continues to rise, and the regional liquor has excellent profitability. The gross profit margin of the baijiu industry in 2023/Q1 2024 increased by 0.89/0.45pct year-on-year to 81.07%/81.21%, and the net profit margin increased by 0.83/0.27pct year-on-year to 39.12%/42.32%. Q1 2024 gross profit margin changed year-on-year: third and fourth tier liquor (+1.40pct) > secondary high-end liquor (+0.43pct) > high-end liquor (+0.23pct) > regional liquor (+0.03pct); Net profit margin changes year-on-year: third and fourth tier liquor (+3.06pct) > secondary high-end liquor (+2.01pct) > high-end liquor (-0.38pct) > regional liquor (-0.42pct).

Contract liabilities: High-end liquor prepayments perform well, and the differentiation of secondary high-end/regional liquor is significant. The overall prepayments of the baijiu sector in Q1 2024 increased slightly year-on-year and decreased month-on-month, with different stock performances. At the end of Q1 2024, the year-on-year/month-on-month changes in the contract liabilities of the baijiu industry were +0.42%/-23.25%, with a drop (month-on-month) and a steady trend (year-on-year).

Operating cash flow: Strong alpha liquor companies have sufficient cash flow, and the sector continues to perform well. In 2023 and Q1 of 2024, the operating cash flow of the baijiu sector increased by 51.95%/19.95% year-on-year. Q1 2024 net cash flow year-on-year: third and fourth tier liquor (+163.68%) > secondary high-end liquor (+78.01%) > regional leading liquor (+56.50%) > high-end liquor (-13.67%).

Dividend payout ratio: The dividend payout ratio of 15 liquor companies increased in 2023. Among the 18 major listed baijiu companies in 2023, 15 listed companies have increased their dividend payout ratio year-on-year, including Kweichow Moutai, Hengshui Laobaigan, Shede Spirits, Jinhui Liquor, Shanxi Xinghuacun Fen Wine Factory, Wuliangye, Anhui Gujing Distillery, and Jiugui Liquor, which have increased their dividend payout ratio by more than 2%.

Thoughts and Prospects: Strong alpha liquor companies continue to increase their market share, and the trend of expanding the mid-range market continues.

Price differentiation continues, with mid-range liquor outperforming: under the squeeze of growth, the first-class wine companies that enjoy the dividend of price range expansion (mainly in the mid-range price) have increased their market share against the trend. The percentage of regional liquor in the revenue of baijiu further increased; the proportion of Huangjiu in the regional liquor increased further; the proportion of Gujing tribute wine in Huangjiu increased further; and the proportion of Shanxi Fenjiu in the second-tier high-end liquor increased further, etc.

The high-end liquor is stable and the mid-range liquor is expanding, and the industry upgrade is continuing, but the slope is slowing down. On the basis of the continuous increase in the proportion of listed companies' revenue in the scale-above liquor enterprises in 2023, the profit growth rate is still higher than the income growth rate, showing that the performance of listed companies is resilient, and their strong ability to seize market share makes them benefit the most from the expansion and upgrade of some price ranges. Therefore, for listed companies, although the price increase slope has slowed down compared with previous years, the upgrade trend remains unchanged.

As the main theme of "outstanding merchants", Shanxi Fenjiu and other liquor companies continue to show high growth in channel quality. Under the strategy of "outstanding merchants", the increase in the scale of merchants promotes revenue growth.

Outstanding performance of prepayments by high-quality liquor companies, optimistic about 24Q2 performance: the performance of prepayments in 24Q1 varies, among which Jin Hui Jiu, Shanxi Fen Jiu, and other liquor companies have the highest safety margins in their reservoirs: in 24Q1, Jin Hui Jiu, Luzhou Laojiao, Shanxi Fen Jiu, and Yilite achieved a year-on-year growth of more than 20% in prepayments; and among Yanghe, Shanxi Fen Jiu, Gujing tribute wine, Jin Hui Jiu, Sichuan Swellfun, Lao Baigan Liquor, the proportion of 24Q1 prepayments to 23Q2 revenue is greater than 80%. We are optimistic about the performance of liquor companies with sufficient prepayment reservoirs in 24Q2.

The goal achievement rate of liquor companies in 23 is high, and the overall target for 24 is positive: among the 11 liquor companies that announced specific performance targets in 2023, 8 of them have successfully achieved their targets, with a high target achievement rate, among which Kweichow Moutai and Luzhou Laojiao significantly exceeded their established targets. In 2024, the performance growth target of leading liquor companies represented by Kweichow Moutai, Wuliangye, Luzhou Laojiao, Shanxi Fenjiu, and Gujing tribute wine is basically consistent with that of 2023, and the overall trend is still positive.

Risk warning: weak consumer demand; food safety risks; market expansion falling short of expectations; intensified market competition.