KOUZI DISTILLERY(603589)：2Q22 REVENUE AND PROFIT IN LINE WITH OUR EXPECTATIONS;FULL-YEAR TARGET INTACT

　　2Q22 results in line with our expectations

    Kouzi Distillery announced its 1H22 results: Revenue rose 2.42% YoY to Rmb2.30bn and attributable net profit increased 7.58% YoY to Rmb740mn. In 2Q22, revenue dropped 7.87% YoY to Rmb986mn and attributable net profit declined 4.92% YoY to Rmb254mn. The firm’s revenue and profit are in line with our expectations.

    　　Trends to watch

    　　COVID-19 affected consumption; the firm maintained steady operation and refrained from channel marketing. Kouzi Distillery’s products are more commonly seen at friends’ dinners or family banquets than competitors. Due to COVID-19 resurgence, market demand for ready-to-drink baijiu products declined and has yet to recover. In 2Q22, revenue fell 8.6% YoY to Rmb924mn for the firm’s high-end baijiu products, 13.3% YoY to Rmb21mn for mid-range baijiu, and 15.5% YoY to Rmb16mn for low-end baijiu. According to our survey, the firm focused its efforts on increasing sales of Kouzi Wunian and Kouzi Liunian via marketing. Sales volume of baijiu products priced at under Rmb100 exceeded that of high-end baijiu. In 2Q22, gross margin fell 0.7ppt YoY to 72.1%, and selling expense ratio decreased 2.3ppt YoY to 14.9% thanks to lower marketing expenses amid COVID-19 resurgence. Net margin rose 0.8ppt YoY to 25.8% in 2Q22. In 2Q22, cash received from sales rose 2.4% YoY to Rmb979mn and contract liabilities decreased 20.1% YoY to Rmb396mn. The firm adopted a flexible payment collection strategy and maintained solid operations. As it refrained from channel marketing, channel inventory remained healthy despite being at a high level.

    　　Demand stayed resilient in Anhui and will likely recover QoQ. In 2Q22, revenue from sales in Auhui fell 1.89% YoY to Rmb813mn thanks to demand recovery since May; revenue from other provinces dropped 34.47% YoY to Rmb147mn, with demand for mid-range and low-end products decreasing notably. Banquets and inter-provincial travel have currently returned to normal in Anhui. According to our survey, sales of Kouzijiao have improved at end markets. We expect demand to continue to recover QoQ.

    　　Full-year target intact; expecting faster revenue growth in 3Q22. The firm maintained its target of 15% revenue growth for 2022. According to our survey, baijiu orders usually grow rapidly during the Mid-Autumn Festival. We think the firm’s revenue growth will likely increase QoQ in 3Q22. We expect the firm will likely fulfill its full-year target.

    　　Financials and valuation

    　　We leave our 2022 and 2023 earnings forecasts unchanged at Rmb1.8bn and Rmb2.1bn. The stock is trading at 17.0x 2022e and 14.4x 2023e P/E. We maintain OUTPERFORM and our TP of Rmb68.00, implying 22.6x 2022e and 19.1x 2023e P/E, offering 32.8% upside.

    　　Risks

    　　COVID-19 resurgence weighs on end-market demand; intensifying competition in Anhui; disappointing channel adjustment.