Jiangsu King’s Luck Brewery Strong sales expected in 1Q21F
■ Jiangsu King’s Luck Brewery reported that FY20 sales grew by 5.1% yoy to Rmb5.1bn and net profit rose by 7.5% yoy to Rmb1.57bn, in line with our estimates.
■ We expect the upgraded version of Guoyuan4, to be launched in May, to receive good feedback and gain market share in the price range of above Rmb500 per bottle.
■ We now expect the Company’s sales to grow by 30–40% yoy in 1Q21, and 24% yoy in FY21F, with net profit up by 20% yoy in FY21F, driven by the continual consumption upgrade in Jiangsu province and further expansion in outside markets.
■ Reiterate Add with a new DCF-based TP of Rmb62. Strong recovery mode in home market Baijiu consumption in Jiangsu province remained in strong recovery mode, and the Company achieved strong yoy sales growth of 22% in 4Q20 after -9%/+4%/+21% yoy in 1Q20/2Q20/3Q20, respectively. Sales in 2020 grew by 5.1% yoy, owing to a 4.5% ASP increase and 0.6% volume growth.
Sales of premium products with an ex-factory price above Rmb300 per bottle grew by 13% yoy to Rmb3bn and their sales contribution improved by 4% pts to 60% in 2020, driven mainly by an accelerated baijiu consumption upgrade in Jiangsu province. The Jiangsu market contributed 94% of King’s Luck’s total baijiu sales in 2020. Management said the Company’s market share in Jiangsu province reached c. 15% in 2020 (FY19: 12%), and there is still room for improvement.
Advance payments from customers in 4Q20 declined by 16% yoy, but grew by 73% qoq, which indicated distributors’ strong demand to replenish stocks for CNY. Stable margin in the medium term In 2020, the overall GPM declined by 1.7% pts to 71.1%, mainly because of 1) accounting policy changes, including the net sales promotion rebate being deducted from sales, and transportation costs being deducted from COGS, instead of S&D expenses; and 2) bigger discounts to its distributors to help them overcome the Covid-19 situation. Accordingly, the S&D expenses ratio dropped by 0.4% pt to 17.1%.
The G&A expenses ratio rose by 0.4% pt to 4.9%, owing to environmental protection costs and higher R&D investment. The NPM slightly improved by 0.7% pt to 30.6% in FY20. The Company had 948 distributors at the end of FY20, a net increase of 193, of which 123 were new distributors in outside markets, and 70 were new distributors in its home market, Jiangsu province.
Management said the Company’s new market distributors covered 144 cities and 479 counties in 2020 and are expected to cover 230 or more cities and 1,100 counties in 2025. It expects the city-level coverage rate to reach 70% and the countylevel rate to reach 40% in 2025. Distributors in new markets will increase from the current 548 to 1,200 in 2025, and it will have over 1,500 exclusive stores in new markets. As the Company is seeking significant breakthroughs in outside markets, we expect its NPM in the medium term to remain at 30%, as its overweight position in the corporate channel will largely offset the higher marketing investment in new markets and channels.
Capacity expansion to support future sales growth The Company said Shanghai, Zhejiang, Anhui, Henan and Shandong are the key developing markets, and its target is for the sales contribution from these outside markets to improve to 20% in 2025. Management expects the Company’s total sales in 2025 to reach Rmb15bn, for a 24% sales CAGR in FY21–25F. The
Company will build another 38k tonnes of product capacity within the next five years, reaching over 100k tonnes in FY25. King’s Luck initiated a share option plan for the management team, which is still under review by the local government. We expect the plan to be launched in 2021.
Strong sales expected in 1Q21F Reiterate Add with a new DCF-based TP of Rmb62 We slightly lowered our EPS forecast for FY21F–22F by 2.5%/4% to reflect the fact that the COVID-19 pandemic slowed down the pace of the Company’s product structure upgrades; we also rolled over our forecast to FY23F.
We reiterate Add with a new TP of Rmb62, as the Company’s brand power has strengthened in its home market, and the product structure has been consistently upgraded as well.
We believe the Company’s current brand image will largely improve sales in new markets surrounding Jiangsu province. Near-term catalysts include strong sales growth in 1Q21 and the expected launch of the share option plan, which will improve management’s motivation and the Company’s long-term efficiency. The downside risks include more intense competition in the market for baijiu with a retail price of Rmb500–1000 per bottle.
– By CIMB Bank Research