Moutai: Can the backbone of A-shares still be supported by the pillar?

Hello everyone, I am Dolphin Jun!

$Moutai(600519.SH) released its third-quarter financial report for 2023 on Friday night, October 25th Beijing time. Despite the overall weakening external demand in the third quarter, Moutai still achieved a growth of nearly 16%, ensuring the basic achievement of the 15% annual growth target without suspense. The key points are as follows:

1. Rational and Pragmatic, Proactively Slowing Down

In the third quarter, the revenue from alcoholic beverages (Moutai + series of wines) reached 38.8 billion yuan, a 15% year-on-year increase. Compared to the second quarter, there was a slight slowdown. Dolphin Jun believes that due to insufficient domestic demand in the third quarter, coupled with the intensification of conflicts between scalpers and e-commerce platforms in June, leading to some distributors panic-selling following scalpers, causing a short-term sharp drop in wholesale prices. Therefore, the company took proactive measures in the third quarter to control inventory and support prices to stabilize distributor confidence, which is a rational and pragmatic move. After all, traditional distributors are still the backbone of Moutai.

In terms of profit, the net profit attributable to shareholders in the third quarter was 19.1 billion yuan, a 13% year-on-year increase, slightly lower than the revenue growth rate. This is mainly due to the increase in selling expenses and consumption tax. Dolphin Jun speculates that the increase in selling expenses is mainly due to the increased frequency of the company's marketing and promotional activities, while the increase in consumption tax is due to the increase in ex-factory prices last November, which raised the tax base.

2. Direct Sales Proportion Rebounds Again

From a channel perspective, in the third quarter, the proportion of direct supply from Moutai reversed the downward trend in the first half of the year and rebounded significantly, with a revenue share of 47%, approaching historical highs. This also indirectly proves that in a continuous decline in wholesale prices, distributors in the third quarter may still be in a wait-and-see process. Therefore, in order to achieve steady growth in performance, Moutai still needs to periodically increase the proportion of direct supply.

3. Slower Growth in Series Wines

From a product structure perspective, the series wines achieved a revenue of 6.2 billion yuan in the third quarter, a 13% year-on-year increase, with a slower growth rate compared to the second quarter. This is mainly due to wholesale price inversion, where the flagship product Moutai 1935 stopped shipping, underwent upgrades in taste, re-selected distributors, and thereby affected shipment volume.

Dolphin Jun's Overall Viewpoint

Unlike the previous industry upswing period where price increase expectations led to insufficient terminal supply, continuous channel inventory accumulation, and continuous growth in corporate financial statements, in a downturn period with slowing demand, excellent companies need to achieve a balance between stable prices, sales volume, and inventory reduction, and navigate through the cycle with distributors.

Behind Moutai's strong performance in the past two years against the trend is actually achieved through significantly increasing the proportion of direct sales, releasing non-standard wines (zodiac signs, rare items, etc.). However, Dolphin Jun believes that currently, on the one hand, the proportion of direct sales is close to half, with limited room for further increase, and on the other hand, the inventory of non-standard wines accumulated heavily in the past two years, making it difficult to continue releasing them. Therefore, the slowdown in performance growth is completely within expectations. For investors, Moutai's performance "stability" during the industry adjustment period is reassuring. Achieving the transformation of consumer groups and consumption scenarios may be the optimal solution.

Below is a detailed interpretation of the financial report

1. Slower Growth in Performance, Key Factor is the Slowdown in Series Liquor

1) In the third quarter, Moutai achieved total revenue and net profit of 39.7 billion and 19.1 billion respectively, with year-on-year growth of 16% and 13% respectively, both slowing down compared to the second quarter. Specifically, Moutai liquor maintained a steady growth rate, but the growth rate of series liquor slowed down from 43% in the previous quarter to 13%. It is understood that this is mainly due to Moutai's flagship product Moutai 1935 in the third quarter stopping shipments, upgrading the product, and reselecting distributors, which affected the shipment volume. Moutai 1935, as the star product of Moutai in the past two years, was listed in 2022 and quickly achieved a turnover of over 10 billion yuan in its second year on the market. However, as the baijiu industry gradually cooled down, the decline in Moutai's ex-factory price led to a continuous decline in the ex-factory price of Moutai 1935, eventually resulting in an inventory backlog, damaging the confidence of many distributors. Therefore, Moutai's intention is very clear, hoping to control inventory, support prices, and gradually digest market inventory.

2) From the perspective of channels, Moutai has temporarily increased the proportion of direct sales to 47%, but the revenue from e-commerce Moutai only reached 4.6 billion yuan, a year-on-year decrease of 18%, showing poor performance, and the proportion of direct sales also decreased from 34% in the previous quarter to 25%. It is believed that on the one hand, Moutai actively allocated the quota of Pu'er tea to offline direct stores in a phased manner to stabilize performance. On the other hand, the continuous decrease in the price of non-standard products of Moutai also led to a decrease in the number of people applying for e-commerce Moutai.

3) In addition, in terms of the number of distributors, as of the third quarter, Moutai has added a total of 42 distributors in 2024, all of which are series liquor distributors, with 25 added in the third quarter alone. From this, we can see that Moutai still attaches great importance to series liquor. Although the growth rate of series liquor slowed down in the third quarter, it is still a crucial part of Moutai's future performance growth after the phased control of inventory, price support, and inventory digestion.

4) From the perspective of cash flow, Moutai achieved a collection of 42.6 billion yuan in the third quarter, an increase of only 1% year-on-year, significantly slower than the previous two quarters. It is believed that this is mainly due to the company's active control of inventory to support prices. Looking at the "reservoir" of contract liabilities, as of the third quarter, Moutai's contract liabilities were 9.9 billion yuan, which is basically consistent with the end of the second quarter, indicating relatively stable channel confidence.

2. Gross profit margin remains stable, while marketing expenses & consumption tax have led to a slight decline in net profit margin in the short term

In terms of profitability, the company's gross profit margin in the third quarter was 91%, maintaining an extremely high level as usual. The net profit margin was 48%, a 1% decrease compared to the same period last year.

After analysis by the author, the issue lies in the sales expense ratio and consumption tax rate. Firstly, the consumption tax rate increased by 0.4% compared to the same period last year, mainly due to Moutai raising the ex-factory price in November last year, leading to an increase in the consumption tax base.

Furthermore, the sales expense ratio increased by 0.4% compared to the same period last year, with increases of 0.5% and 0.7% in the previous two quarters. It is believed that this is closely related to the new management's marketing transformation strategy:

At the market work conference in the first half of this year, Moutai proposed to complete "three transformations," namely customer group transformation, scene transformation, and service transformation, to better meet the personalized, diversified, and quality service consumption needs of consumers.

Therefore, this year it is evident that Moutai has carried out a series of promotional activities around new products such as scattered flowers and flying celestial beings, and promotions for prominent single products like Xunfeng Liquor. The frequency of circle activities has also significantly increased, reflecting the management's active engagement with consumers during the industry adjustment period to increase the fan base.

3. Moutai's wholesale price continues to decline, what lies ahead?

After analyzing Moutai's third-quarter report, the author would like to provide some insights on Moutai's wholesale price, which is of most concern to investors. After all, Moutai's wholesale price, as a "anchor" for the price and valuation of high-end liquor and even the entire liquor industry, has fallen from around 3000 yuan at the beginning of the year to around 2300 yuan, causing concerns for many investors. It is believed that due to the relatively stable supply of Moutai, the essence behind this actually reflects the weakness in demand and consumers' pessimistic expectations for future demand.

1) Looking at the ten-year cycle dimension, Moutai's last round of price increase started in 2015 with the monetaryization of shantytown renovation driving the real estate upturn cycle. During this period, on the one hand, shantytown residents received a large amount of monetary compensation, which led to a continuous rise in house prices after purchasing, thereby creating a significant wealth effect. On the other hand, real estate, as the "mother of the economic cycle," involves a deep industrial chain with many links, and its upturn cycle also created numerous political and business banquet scenes.

Therefore, the combined effect of the two made Moutai's demand extremely strong. However, on the supply side, due to the limited production process of Moutai liquor, the incremental supply of Moutai was limited. This led to an expectation of price increase - terminal demand exceeding supply - continuous accumulation of inventory in channels - continuous growth in corporate financial statements positive feedback loop. Moutai's wholesale price has surged from less than 900 yuan in 2015 to around 4000 yuan in 2021. However, all of this came to a halt as the real estate market peaked in 2021.

On one hand, the decline in house prices weakened the wealth effect on the residential side. On the other hand, indicators representing the pre-cycle of the real estate market, such as new housing construction area and real estate investment, turned negative year-on-year in the second half of 2021. The real estate market entered an adjustment phase, and the Baijiu industry officially entered a new downturn cycle. Naturally, Moutai's demand was also suppressed, and the reversal of supply and demand naturally led to a decline in Moutai's wholesale price.

2) Where will Moutai's wholesale price fall to? Dolphin Jun believes that, although the external demand environment still needs improvement, Moutai's wholesale price has strong support at 2000 yuan. Here are two perspectives for reference:

a) iMoutai, as a strategic platform for Moutai's direct sales, its pricing has strong reference significance. Referring to the pricing of 100ml Moutai liquor at 399 yuan, standardized to correspond to a standard Moutai price of 1995 yuan, it can be approximately considered that 2000 yuan is the bottom line for the operation of standard Moutai prices.

b) From the perspective of per capita disposable income, by reviewing the changes in Moutai's wholesale price in the past, it is evident that Moutai's wholesale price fluctuates around half of China's urban residents' per capita disposable income.

As Chairman Zhang Deqin said at the shareholders' meeting, Moutai's brand price must match the target consumer group, and prices will adjust with changes in economic and social conditions. Therefore, further analysis reveals that when Moutai's wholesale price deviates significantly from half of per capita disposable income, Moutai generally intervenes to make the wholesale price return to rationality. Currently, the half of per capita disposable income is around 2200 yuan, so Dolphin Jun believes that 2200 yuan is a reasonable level for Moutai's wholesale price.

Overall, although Moutai's ex-factory price has fallen significantly since the beginning of the year, accompanied by a downward revision of Moutai's valuation, after the analysis above, Dolphin believes that Moutai's ex-factory price has fallen back to a reasonable range. The downside is limited, and investors do not need to panic excessively.

Longbridge Dolphin Research on "Guizhou Moutai" Historical Articles:

Financial Report Season

April 3, 2024 Financial Report Review "Anyone Could Collapse, Only Moutai Stands Firm"

March 31, 2023 Financial Report Review "iMoutai Escorts, Moutai's 'Anchor' is Here to Stay"

October 17, 2022 Financial Report Review "Moutai's Performance is Flawless, Market Sentiment is Key"

August 3, 2022 Financial Report Review "Backbone Revealed: A-share Flows, Moutai Stands Strong"

April 26, 2022 Financial Report Review "Direct Sales Continues to Strengthen, Moutai Continues to Shine"

March 31, 2022 Financial Report Review "Continuous Marketing Transformation, Moutai Continues to Soar Without Raising Factory Prices"

October 23, 2021 Financial Report Review "New Leader, New Outlook, Moutai Still Worthy of Belief"

July 30, 2021 Financial Report Review "Guizhou Moutai: Performance Not the Core Contradiction, Valuation Risks Need Attention"

March 30, 2021 Financial Report Review "Guizhou Moutai: Slightly Exceeding Expectations, Yet Hard to Conceal Short-Term Overvaluation"

Risk disclosure and statement of this article: Dolphin Research Disclaimer and General Disclosure