Kweichow Moutai: Stock of the Week

Key Takeaways for Kweichow Moutai 

- Despite disappointing earnings in the third quarter, Moutai is on track to achieve its double-digit sales growth target for the year. 

- Moutai's distributor margin remains impressive.

- Wait for a bigger discount before buying, says our analysts.

Chinese baijiu producer, Kweichow Moutai (600519), has made waves on the internet with its collection – through collaboration – of liquor lattes and baijiu-infused chocolates. This move echoes the company’s economic moat earned from strong brand equity.

Although Moutai’s headline earnings for the third quarter were slightly underwhelming, our analysts think a slowing growth in net profit was due to a seasonal adjustment in supply, rather than a decline in demand. This indicates that the demand for Moutai remains robust, paving the way for sales growth in the upcoming quarters.

Furthermore, the company enjoys an impressive distributor margin of up to 200%. This offers a substantial buffer against the challenging consumption environment in China right now.

Our analyst Jennifer Song believes that Moutai is on track to achieve its annual sales growth target of 15%.

While the outlook appears ‘cheers-worthy’, Song advises investors to wait for a bigger discount before buying into Moutai’s shares.

 Kweichow Moutai Bulls Say

- Kweichow Moutai’s iconic status in Chinese drinking culture is extremely difficult for its competitors to duplicate, giving it strong pricing power, the benefits of which are reflected in its industry-leading profitability.

- With disposable income rising, individual consumer demand for Moutai products is likely to improve. We expect demand from the mass market to drive revenue growth during the next few years.

- The company’s decision to roll out direct sales points and the launch of its e-commerce platform will help it target
the mass market more efficiently than its competitors

 Kweichow Moutai Bears Say

- China's anticorruption campaign could add pressure to Moutai’s revenue growth.

- Moutai’s long-term growth will likely slow, given the high base, changes in demographic structure and the drinking habits of the younger generation.

- A broader economic slowdown could affect demand for all high-end baijiu products, including Moutai.