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1、 Citigroup Research is a division of Citigroup Global Markets Inc.(the Firm),which does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report.Investo
2、rs should consider this report as only a single factor in making their investment decision.Non-US research analysts who have prepared this report are not registered/qualified as research analysts with the NYSE and/or NASD.1Citigroup Global Markets Asia Not for distribution in the Peoples Republic of
3、 China,excluding the Hong Kong Special Administrative Region.Citigroup Global Markets|Equity Research Figure 1.China Spirits Industry:Valuation Snapshot Figure 1.China Spirits Industry:Valuation Snapshot Price Price ETR PE Price Price ETR PE EPS CAGR EPS CAGR ROE ROE Name Rating Current Target(%)06E
4、 07E 08E 09E 06-09EName Rating Current Target(%)06E 07E 08E 09E 06-09E 09-12E 07E 08E09-12E 07E 08E Kweichow Moutai 1L 94.8 119.8 27.7 59.2 43.6 28.0 21.9 39%22%31%38%Luzhou Laojiao 1M 30.7 37.3 22.8 79.4 48.9 28.5 20.1 59%26%24%35%Wuliangye 2M 32.7 36.6 12.1 75.8 56.5 39.7 31.8 34%22%18%21%Shanxi F
5、enjiu 3H 34.9 33.0-4.3 57.8 40.8 28.3 23.3 36%18%31%38%Source:Citigroup Investment Research estimates;ETR=expected total return Asia Pacific Beverages Beverages Industry In-Depth Industry In-Depth 10 April 2007|60 pages China Spirits Industry China Spirits Industry High-end Players Lead Industry Gro
6、wth High-end Players Lead Industry Growth Industry still at early stage of consolidation Industry still at early stage of consolidation Rapid organic growth at Chinas leading spirits producers has limited any impetus for industry consolidation.The top 5 distillers have a combined market share of onl
7、y 22%and the top 25 brands claim just 14%of industry sales,leaving ample room for further growth.Top players benefit from high barriers to market entry Top players benefit from high barriers to market entry Chinese spirits are categorized into flavor types,with the three most popular being associate
8、d with Luzhou Laojiao,Kweichow Moutai and Shanxi Fenjiu.Also,premium spirits are an acquired taste derived from age-old production facilities and some blending of vintage spirits,which cannot be easily replicated by would-be competitors.High-end players lead industry growth High-end players lead ind
9、ustry growth Given their protected market positioning,and thus pricing power,the top distillers are posting fast growth in volumes and revenues for their premium labels.Over the past three years,volumes of Kweichow Moutai and Wuliangye,the dominant players in the premium market,have surged 63%and 32
10、%,even though their respective prices have spiked 41%and 43%.Channel management affects long-term competitiveness Channel management affects long-term competitiveness This is because Chinas distribution channels are weakly regulated,with cross-dumping and poor implementation of pricing policies a un
11、iversal headache for producers.Initiating coverage on top 4 playersInitiating coverage on top 4 players We initiate with Buy ratings on Kweichow Moutai and Luzhou Laojiao,a Hold on Wuliangye and a Sell on Shanxi Fenjiu.Joye QiaoJoye Qiao1 1 +852-2501-2484 See Appendix A-1 for Analyst Certification a
12、nd important disclosures.See Appendix A-1 for Analyst Certification and important disclosures.China Spirits Industry China Spirits Industry 10 April 2007 Citigroup Global Markets|Equity Research 2 Contents Contents Investment Thesis 3Investment Thesis 3 Kweichow Moutai(Buy/Low Risk):Best growth visi
13、bility 3 Luzhou Laojiao(Buy/Medium Risk):Growth potential not priced in 4 Wuliangye(Hold/Medium Risk):A giant in the re-making 4 Shanxi Fenjiu(Sell/High Risk):Growth engine faces slowdown 4 Industry Competition 5Industry Competition 5 Chinese producers dominate the local spirits market 5 Market conc
14、entration is low 5 Industry growth:post-2004 recovery with rising ASPs 6 Top players benefit from entry barriers 6 Brands translate into stronger growth 7 Entry Barriers Result in Significant Pricing Power 8Entry Barriers Result in Significant Pricing Power 8 Channel Management Makes a Long-term Dif
15、ference 9Channel Management Makes a Long-term Difference 9 Tax Rate Unification in 2008 to Enhance Earnings 11Tax Rate Unification in 2008 to Enhance Earnings 11 Companies 12Companies 12 Kweichow Moutai(600519.SS)13Kweichow Moutai(600519.SS)13 Initiate at Buy:Profiting from Franchise Value 13 Luzhou
16、 Laojiao(000568.SZ)23Luzhou Laojiao(000568.SZ)23 Initiating at Buy:Growth from a Low Base 23 Wuliangye Yibin(000858.SZ)35Wuliangye Yibin(000858.SZ)35 Initiate at Hold:A Giant in the Re-making 35 Shanxi Fenjiu(600809.SS)45Shanxi Fenjiu(600809.SS)45 Initiate at Sell:Growth Engine Faces Slowdown 45 App
17、endix A-1 57Appendix A-1 57 Analyst Certification 57 China Spirits Industry China Spirits Industry 10 April 2007 Citigroup Global Markets|Equity Research 3 Investment Thesis Investment Thesis With histories of hundreds of years,producers of traditional Chinese spirits have loyal consumer bases that
18、have kept foreign competition to a minimum.As the leading companies grew organically at a strong pace in recent years,and as they are relatively small,industry consolidation is at a very early stage.The top 5 distillers have a combined market share of only 22%and the top 25 brands claim just 14%of i
19、ndustry sales,leaving ample room for further growth.Chinese spirits are categorized into several flavor types,the individual originators of which are popularly recognized as Luzhou Laojiao,Kweichow Moutai and Shanxi Fenjiu.Although competition among brands is becoming more intense,regular consumers
20、usually remain loyal to a flavor.Also,high quality spirits are an acquired taste that is derived from age-old production facilities,geographical location and vintage spirits,which cannot be replicated by would-be competitors and thus provide a high barrier to market entry.With consumer tastes molded
21、 to their brands and with a competitive edge in quality production,the top Chinese distillers have significantly increased their volumes.High-end and mid-market consumption respectively make up 1%and 18%of the industrys total sales volume,which leaves the top high-end players especially with ample r
22、oom to expand.Barriers to entry give leading spirits producers notable pricing power.Over the past three years,Moutai and Wuliangye the dominant players in the premium market have respectively raised prices by 41%and 43%,while volumes grew by 63%and 32%.We forecast continued pricing power for the to
23、p brands.As time goes on,brand building with target consumers and execution of pricing policies are two factors that will enhance the long-term growth profile of the top distillers.Chinas distribution channels are weakly regulated and neither dealers nor retailers have shown much discipline in imple
24、menting the pricing policies of distillers;distribution management will be a key determinant of long-term competitiveness for spirits producers.Our forecasts for the leading distillers are based on our view that the industry will continue to benefit from rising affordability and consumer preferences
25、 shifting to recognized brands.Our forecasts for the leading distillers are based on our view that the industry will continue to benefit from rising affordability and consumer preferences shifting to recognized brands.Kweichow Moutai(Buy/Low Risk):Best growth visibility Kweichow Moutai(Buy/Low Risk)
26、:Best growth visibility Moutai targets key“idea-molders”in the premium market,a strategy that has contributed to its solid franchise value and a notable advantage when consumer preferences are shifting to recognized brands.More than 60%of the companys sales are institutional(meaning government,milit
27、ary and business bodies),giving it greater pricing power than producers dependent on weakly regulated distribution channels.Faced with strengthening demand,the company is leveraging its bargaining power to encourage sales of higher-margin products and is looking to expand its institutional consumer
28、base.Sales growth has averaged an annual 27%over the past three years,driven by higher ASPs and volumes,and we think this pace can be sustained over our forecast horizon.Our DCF-based target price equates to an 08E P/E of 35x,a premium to the peer group that reflects the companys long-term growth vi
29、sibility and low risk profile.Key risks to Buy callKey risks to Buy call:change in consumption trends,which is unlikely in the foreseeable future China Spirits Industry China Spirits Industry 10 April 2007 Citigroup Global Markets|Equity Research 4 Figure 2.Chinas Top 4 Spirits Producers:A Capsule S
30、ummary Figure 2.Chinas Top 4 Spirits Producers:A Capsule Summary Kweichow Moutai Wuliangye Luzhou Laojiao Shanxi Fenjiu Kweichow Moutai Wuliangye Luzhou Laojiao Shanxi Fenjiu Ticker Ticker 600519.SS 000858.SZ 000568.SZ 600809.SS Price Price Rmb94.39 Rmb32.70 Rmb30.69 Rmb34.90 Market cap(US$mn)Market
31、 cap(US$mn)11,519 11,465 3,458 1,954 Revenue CAGR 06-09E Revenue CAGR 06-09E 28%15%33%22%EPS CAGR 06-09E EPS CAGR 06-09E 39%34%59%36%Revenue CAGR 09-12E Revenue CAGR 09-12E 20%13%21%14.9%EPS CAGR 09-12E EPS CAGR 09-12E 22%22%26%18%Brand Building Brand Building Successfully targeted“key molders”in th
32、e premium market.Company has firm relationships with government and military bodies,and is aiming to expand its institutional consumer base to Chinas top enterprises Mediocre brand-building efforts and weak management of distribution channels have resulted in loss of once unrivalled position in the
33、premium market.Recently it has started to focus on“idea-molders”.Yet it has a long way to go to build the same franchise value as Moutai As a new entrant in the premium market,the company has successfully marketed its“Guojiao 1573”brand to high-end consumers.The company operates in the mid-market wh
34、ere competition is stronger and consumer loyalty weaker.The company has given up branding efforts and retail-end pricing power,which is causing cross-dumping and confusion among end consumers Distribution Channels Distribution Channels With institutional consumers accounting for more than 60%of sale
35、s,the company has strong sway with retail dealers and has maintained a good price system Heavy reliance on traditional channels and a large number of dealers challenge the companys execution power to implement pricing policies The company takes a deposit from dealers to push the right execution of p
36、rices The company counts on regional exclusive dealers to expand markets.Loose monitoring of dealer behavior has resulted in cross-dumping Pricing policy(Rmb/500ml bottle,est)Pricing policy(Rmb/500ml bottle,est)Moutai(53%alcohol):Ex-factory:348 Retail:468-488 Target price well executed WuLiangYe(52%
37、alcohol):Ex-factory:388 Retail:418(target 448)Guo Jiao 1573(52%alcohol):Ex-factory:388 Retail:428(target 448)Lao Bai Fen(53%)Ex-factory:60 Retail:Over 100 Little pricing power Source:Citigroup Investment Research estimates Luzhou Laojiao(Buy/Medium Risk):Growth potential not priced in Luzhou Laojiao
38、(Buy/Medium Risk):Growth potential not priced in We believe the company will outperform peers owing to strong growth prospects driven by a premium series that should benefit from years of spending on marketing and a traditional middle-end series that has plenty of potential in terms of both price ri
39、ses and volume growth.Our channel checks suggest strong sales volumes with confirmed price rises in 1Q07,which could translate to upside surprises to our forecasts.Apart from brand recognition and an extensive,established production base,the company also is a strong manager of its distribution chann
40、els and pricing,as well as being smart in its marketing.Wuliangye(Hold/Medium Risk):A giant in the re-making Wuliangye(Hold/Medium Risk):A giant in the re-making Mediocre branding(mainly limited to TV commercials)and weak management of its distribution channels have resulted in lackluster sales grow
41、th for Wuliangye and the loss of its once-unrivalled position in the premium market.On the positive side,the company is still a major player in the premium market,and we expect top-line growth to be stable.The company has stated at various times its plan to“negotiate purchase of related-party assets
42、”which could greatly enhance transparency and profitability.Shanxi Fenjiu(Sell/High Risk):Growth engine faces slowdown Shanxi Fenjiu(Sell/High Risk):Growth engine faces slowdown Shanxi Fenjiu operates in the mid-market where competition is stronger and consumer loyalty weaker.Fast growth in recent y
43、ears was chiefly driven by its exclusive regional dealership model.However,the company has largely surrendered its branding efforts and retail-end pricing power to exclusive dealers and yet it only loosely monitors dealer behavior.This has resulted in cross-dumping in core markets and is causing a s
44、lowdown in some regions.Although our forecasts of earnings growth are not too far away from those of peer companies,the underlying driver for Shanxi Fenjiu is more related to margin(in stead of mere volume)increase.Key risk to Buy callKey risk to Buy call:failure of its strategy to reshape the tradi
45、tional“Luzhou Laojiao”series Key risk to Hold callKey risk to Hold call:Timing of expected asset injection,which could take our DCF fair value to as high as Rmb42.3(from our base case of Rmb25.1)Key risk to Sell callKey risk to Sell call:Greater responsiveness to market conditions,which could restor
46、e strong organic growth China Spirits Industry China Spirits Industry 10 April 2007 Citigroup Global Markets|Equity Research 5 Industry Competition Industry Competition Chinese producers dominate the local spirits market Chinese producers dominate the local spirits market Chinas liquor market is dom
47、inated by producers of traditional spirits,whose long production histories have endowed them with mature and loyal domestic consumer bases.Although global leaders such Diageo and Pernod Richard have entered the liquor market in China,they are competing in a different segment(ie,night-clubs).Figure 3
48、.Domestic Producers Dominate Local Spirits Industry(Volume mn litres)Figure 3.Domestic Producers Dominate Local Spirits Industry(Volume mn litres)1997 1998 1999 2000 1997 1998 1999 2000 20012001 20022002 20032003 20042004 20052005 2006E 2007E 2008E2006E 2007E 2008E 2009E2009E 2010E2010E Spirits 7,58
49、2.9 6,310.2 5,391.7 4,829.9 Spirits 7,582.9 6,310.2 5,391.7 4,829.9 4,366.14,366.1 3,929.83,929.8 3,632.23,632.2 3,605.53,605.5 3,602.93,602.9 3,614.7 3,636.8 3,672.53,614.7 3,636.8 3,672.5 3,712.33,712.3 3,752.73,752.7 Whisk(e)y 2.2 2.3 2.4 2.6 2.8 3.2 3.8 5.6 7.3 9.2 11.2 13.4 15.7 18.1 Brandy and
50、 Cognac 22.2 21.0 20.1 19.3 19.5 20.1 21.0 21.9 23.3 25.0 26.9 29.3 31.7 34.1 White spirits 0.8 0.8 0.9 0.9 0.9 1.0 1.1 1.6 2.1 2.7 3.4 4.2 5.1 6.2 Rum 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.3 0.3 Tequila(and mezcal)/0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 Liqueurs 0.4 0.4 0.4 0.4 0.5 0.5 0.6 0.6