Zhenjiu Li Du has a new analysis: Hong Kong's first liquor stock, can it break new?

The liquor industry is known for its strong profitability, good cash flow, and the older the inventory, the more valuable it is. From a long-term perspective, it is also a good idea for many investment institutions. Previously, all liquor companies were listed on A-shares; Hong Kong stocks had no other semicolons. However, due to the latest policy restrictions, the road for liquor stocks to go public in A was shattered, and they had to switch to Hong Kong stocks. Zhenjiu Li Du, which recently launched a stock offering, is about to become the first stock of liquor in Hong Kong stock. Of course there will be more in the future.

So, can Zhenjiu Li Du get a new one? Let's look at it from the perspectives of fundamentals, valuation, and distribution.

First, let's take a look at the fundamentals of Zhenshu Lidu.

Zhenjiu Li Du was founded by Wu Xiangdong, known as the godfather of liquor. There are four main liquor brands: Zhenjiu, Li Du, Xiang Jiao, and Kai Shou. Many people, including me, have probably never heard of these brands. This actually doesn't matter, because we probably don't know much about most other brands with A-share liquor stocks, except for a few brands with a lot of headlines and advertisements.

Here, Zhenjiu is a sauce-flavored wine brand. It was previously founded to imitate the taste of Maotai, known as Little Maotai. Currently, sales channels are spread all over the country, and it is the main revenue force of Zhenjiu Li Du.

Li Du is a flavored liquor brand. It is mainly sold in Jiangxi, and is growing relatively well. Xiangjiao and Kaijiao are local brands in Hunan, and their growth is quite steady.

Liquor has strong social attributes. It mainly focuses on the brand and price. The better the brand, the higher the price, and the higher the price, the better the brand. Branding mainly relies on long-term storytelling and marketing to occupy consumers' minds. Of course, brands are also ranked high; they are not the only good brands Mao Wulu can match. Demand is stratified. Different brands come out at different price points.

Although Zhenjiu Li Du doesn't have enough historical heritage, the marketing is very good. Not to mention anything else, the number of dealers and sales staff for rare liquor is high among A-share liquor stocks. After all, Wu Xiangdong created Golden Lukfook, a brand with great influence all over the country, and copied this style of play. Zhenjiu Li Du has developed very well in the past three years.

The increase in the brand power of fine wine is clearly reflected in the price. The overall average price of Zhenjiu Li Du increased from 123,000 per ton to 245,000 per ton, doubling in two years. The average price in the first two months of this year was about 300,000 per ton, further increasing.

Zhenjiu claims to focus on the second high-end, but at 300,000 a ton, the average is only 150 yuan per bottle. Doesn't it seem like it's a bit boastful of cowhide? In fact, A-share liquor is sold this way. This price range is already above average among all A-share liquor stocks.

In terms of performance, the company's revenue grew from 2.4 billion in 2020 to 5.9 billion in 2022, doubling 1.4 times in two years, and adjusted net profit also increased from 520 million to 1.2 billion, more than doubling in two years.

I've mentioned a few good places to make fine wine; in fact, rare wine also faces some problems.

First, the growth rate slowed in 2022. The growth rate fell back from doubling growth in 21 to less than 20%, and the continuation of growth is under pressure.

Second, the net profit margin is only about 20%. This is actually very high in terms of absolute value, but in the liquor industry, this is just a countdown of existence. As for the reason, some people say it is because the gross margin of Zhenjiu is too low, only 55%, while A-shares are generally over 70%.

It's wrong to blame it. Because taxes and surcharges are also counted as operating costs for Zhenjiu, and A-shares are not calculated this way. If this part is excluded, the gross margin of Zhenjiu is actually around 70%.

The main problem is in terms of sales expenses. The sales rate for rare wine is over 20%, which reduces profit margins. If the volume of rare wine continues to grow, the cost ratio can probably be reduced through scale effects. Of course, there is uncertainty about this.

The third is the issue of inventory. Inventory of rare liquor has risen dramatically in recent years. The main reason is that for high-end production, some base wine from the previous year needs to be stored. This is reflected in the products. The finished product inventory is actually fine. However, inventory takes up a large amount of capital, affects the cash flow situation, and may further affect investors' preferences.

Overall, the fundamentals of fine wine are not bad, and it can probably rank a little above average among A-share liquors.

Let's take another look at the valuation of rare wines.

The median stock market value of Zhenjiu in RMB is approximately RMB 34 billion. Looking vertically, this price is still 85% off the price of KKR investment in the US in June of last year.

Looking horizontally compared to A-share liquor stocks, the latest median price-earnings ratio of A-share liquor stocks is 35 times. If you go to Hong Kong stocks, they will have to be discounted. Considering that liquor is currently a scarce target in Hong Kong stocks, give a relatively high 20% discount, that is about 28 times. The price of fine wine is likely to be slightly off the lower limit. Calculated at 32 billion dollars, the price-earnings ratio is 26.7 times, and the valuation space is about 5%.

Based on the 23-year PE forecast, the median value of A-shares is about 27 times, and about 21.6 times that of Hong Kong stocks. Zhenjiu's profit guideline for 23 years is more than 1.6 billion dollars. The price is based on 32 billion yuan. The PE forecast is about 19.4 times, and the valuation space is about 9%.

In other words, the overall valuation space for fine wine is around 5%-10%. Of course, the variable here is that state-owned capital favors liquor stocks. If state-owned liquor stocks are better, then there may be a certain premium for fine wine. Also, if calculated based on pre-investment valuation (excluding financing amount), the valuation space is relatively larger.

Finally, let's take a look at the distribution level.

Zhenjiu's financing scale is 6 billion dollars, the largest number of new shares issued since this year, and there is no foundation. This requires a large amount of state funding to undertake it. If the national rating is less than 1.5 times this time, it's likely to hit the streets; if it's 3 times higher, it should be considered pretty good. The country's commitment is also where Zhenjiu's current IPO is most uncertain.

As far as I am concerned, first of all, the fundamentals of rare wine are pretty good, and there is still some room for valuation; I definitely want a bit more. Only considering the issuance factor, the initial positions will be very light. If we can confirm that the national distribution is good, we will only consider increasing the positions. Since it's basically about how many to open, the overall position probably won't exceed 10%. The above is just a personal operation and does not represent any investment advice.

OK, that's all for the analysis of fine wine. If you have different opinions, you are welcome to discuss it. If you think it's pretty good, please pay attention.