Kweichow Moutai:The restocking cycle is just beginning;reiterating Buy

Channel restocking to be more relevant driver in 2H17-18

    Revisiting Different from the market consensus that Moutai’s recent recovery has been driven mainly by recovering private consumption, we expect channel restocking to be a stronger growth driver from 2017. Based on our proprietary channel models, we think Moutai entered a new restocking cycle from late 2016 and this new cycle will continue in 2017-19. As indicated by historical experience, Moutai often increases its supply and raises ex-factory prices during a re-stocking cycle. Raising TP by 34%, to Rmb550, and reiterating Buy.

    Revisiting the channel restocking and destocking cycles of 2009-16

    Owing to Moutai’s unique nature ? long shelf value, high-value items and limited supply perception, channel players demonstrate a strong impetus to store up on Moutai’s products when a price appreciation expectation emerges. In 2009-12, Moutai’s growth was driven firstly by demand recovery from infrastructure investments, and then by channel restocking, due to (and resulting in) a retail price hike expectation. In 2013-16, demand for Moutai’s products was firstly affected by anti-extravagant measures and then by channel destocking, which resulted in a retail price collapse.

    Entering a new restocking cycle from 2017

    After building a channel inventory model, we find that, owing to heavy channel destocking and increasing consumption in 2013-16, Moutai’s current channel stocking is at a seven-year low. From 2017, driven by price appreciation expectations, Moutai has started to enter a new channel restocking cycle. We expect this cycle to continue into 2017-19. As a reaction to the restocking cycles, we expect Moutai to increase its supply and raise its ex-factory prices in the near term.

    Raising target price (TP) by 34%; reiterating Buy; risks

    We raise our TP by 34%, to Rmb550, based on a DCF approach (factoring in 9.5% WACC and a 2% terminal growth rate), and we reiterate our Buy rating. Moutai is trading at 22x 2018E P/E, with a 24% earnings CAGR in 2016-19E, compared with its peers’ average P/E of 24x. Reiterating Buy. Main downside risks: shorter-than-expected restocking cycle; government policy changes; food safety incidents.