Wuliangye: Not Yet the 'New Moutai' – But Still a Good Bet for 'Luzhou' [2/2]

► New entrants Luzhou Laojiao and Yanghe came to the battlefield after seeing Wuliangye's high gross margin from high-end liquors. But Wuliangye has maintained its advantage.

► Prepaid payments have increased 530% in the past five years, indicating a favorable guarantee for ensuring future sales.

► ROE is steadily increasing to the highest point among peers, and its sales expenses ratio is the lowest, implying customers' recognition of its products.

► The company may benefit from Moutai shorting supply as Wuliangye has a higher production capacity compared to competitors like Luzhou Laojiao.

In part I, we discussed why Wuliangye cannot be the next Moutai, mainly due to its Luzhou-flavor characteristics. Here, we explain why Wuliangye is still investable, primarily based on its financial performance.

Wuliangye's financial results are dazzling, leading its peers. Wuliangye beats other smaller brands in terms of net profits and margins. One of the reasons is that 86% of Wuliangye's revenue comes from high-end liquor, while only 54% of Luzhou Laojiao's income comes from high-end liquor, which has a gross profit margin of 90%.

High-end liquor sales as of the total Luzhou-flavor liquor market increased, from 17% in 2018 to 18% in 2019, as the price of high-end liquor continues to grow. According to Euromonitor's forecast, by 2029, China's high-end liquor market share will reach around 40%, signaling Wuliangye's ample top-line growth.

Favorable receivables and prepaid accounts reflect the company's good sales momentum and bargaining power. Wuliangye's accounts receivable has only increased by 26% in the past five years, while Yanghe has risen by 150%, implying that Wuliangye's business efficiency is high, capital utilization efficiency and resource unit costs are low.

Also, in the past five years, Wuliangye's prepaid accounts have increased by 530%, while Yanghe has risen by 430%, indicating dealers' recognition of the Wuliangye brand through active pre-orders. The advance payment system is a symbol of bargaining power in the industrial chain of liquor companies, and it is also a favorable guarantee for ensuring and smoothing performance. As a result, Wuliangye's future sales revenue will increase substantially.

Wuliangye's ROE has also shown steady growth in the past five years, reaching nearly 24% in 2019. Moreover, the company's sales expenses only accounted for 9% of revenue with a downward trend, implying rising customer recognition.

Since the company's listing, the cumulative dividend amount has reached CNY 40 billion, which is 10.41 times the total funds raised (CNY 3.82 billion). Therefore, in addition to enjoying stock price increases, shareholders can also get high dividends.

From a financial point of view, Wuliangye meets the various indicators of a good company worth investing in, including low cost, high gross profit, high net profit, high ROE, and increased dividends.

Wuliangye can absorb the market that Moutai fails to fulfill due to a lack of production capacity. According to Moutai's annual report, the company's inventory turnover is about six years – that is to say, the output of Moutai base liquor determines the sales of Moutai in 6 years. "After the expansion of 6,600 tons of production capacity is completed in 2019, the expansion will not be continued for a long time as environmental and resource factors can no longer support the expansion of Moutai's production capacity," said Li Baofang, the former chairman of Moutai Group. "It is estimated that the current supply of Moutai can only meet one-third of the demand."

Moutai's production capacity is gradually slowing down. During 2016-2019, the output of base liquor was 39,300 tons, 42,800 tons, 49,700 tons and 49,900 tons, respectively. According to people familiar with the matter, the capacity gap in the next three years will be 9,000 tons. This gap will be left to other high-end liquors to fill, with Luzhou Laojiao and Wuliangye becoming the most prominent competitors as their market shares rank second and third in the high-end liquor field.

The output of Luzhou Laojiao's high-end liquor is relatively small, with an annual production of only 5,000 tons. However, in 2017, Wuliangye already had a production capacity of 200,000 tons. Calculated based on the proportion of high-end base liquor accounting for 5%-10%, the production capacity of high-end liquors is about 10,000 to 20,000 tons. According to CICC's forecast, the proportion of Wuliangye base liquor may increase to 15%-20% in the future, so that the production capacity can be increased to 30,000-40,000 tons. In this way, Wuliangye has the power to release high-end liquor production capacity.

Finally, the risks cannot be ignored. Not only Wuliangye, but all liquor companies are facing the dilemma of shrinking industry. From 2016 to 2019, the output of liquor fell by 12%, 27%, and 9.8%, respectively. There were reasons for the tightening of environmental protection that led to the closure of small factories, as well as the shrinking of terminal demand. However, the overall market shrinkage will first affect small and medium-sized enterprises and will slowly spread to leading enterprises. With the increase in industry concentration, liquor companies are also facing new opportunities. Therefore, Wuliangye is still a leading company worth investing in in the short term.