Zhongxin Jingwei October 18 Title: "Tao Jin on Liquor Investment: Consumption Upgrading Continues, What is the Prospect of the Sub-high-end Market?" 》
Author Tao Jin (Deputy Director, Macroeconomic Research Center, Suning Institute of Finance)
Liquor consumer stocks represented by Guizhou Moutai are the highlight of the stock market, driven by Moutai, many high-end, sub-high-end liquor stocks constitute the bottom position of fund companies. This reflects the market's recognition of the long-term growth of consumer stocks under the background of consumption upgrading. The growth of the liquor industry also determines the relative sensitivity of its valuation, and the industry often has a double rise or double kill in performance and valuation.
In the long run, the liquor industry has experienced trend and cyclical changes in terms of corporate fundamentals, valuations and stock price performance. Therefore, it is very important to grasp the influencing factors behind these fluctuations for investing in listed wine companies.
First, the characteristics and structure of demand
The liquor industry is a typical demand-driven industry, and the same is reflected in the capital market. The cyclical changes in the stock price of liquor stocks are basically linked to the changes in demand trends caused by various factors. Overall, there are trending and structural changes in liquor consumption demand.
As a unique traditional drink and consumer goods for domestic demand in China, liquor currently occupies a dominant position in China's alcohol and beverage industry, but with the change of consumer preferences and the state's promotion of moderate and healthy drinking, the demand for low-alcohol liquors such as beer, wine, health wine and fruit wine may increase accordingly, and the consumption of liquor may decline. Since the peak of liquor production in 2016, the annual output of liquor has decreased year by year until 2020 (Figure 1).
Figure 1 Liquor production is declining year by year
However, it is also the upgrading of consumption and the improvement of health awareness, and the reduction of total liquor consumption largely corresponds to the structural recovery of high-end liquor consumption, which can be seen from the continuous rise in the wholesale price of liquor (Figure 2). Therefore, despite the cyclical fluctuations, the general trend of the liquor industry should be a decline in overall production, consumer preferences tilted to the middle and high end, and prices rose.
Figure 2 The price of liquor is rising year by year
With demand changes as the leading factor, the development of the liquor industry can be roughly divided into three stages.
First, before 2012, benefiting from the rapid economic development, the increase in the income of urban and rural residents, and the rising demand for liquor, liquor production and sales continued to grow at a high speed, and the entire industry showed a booming development of supply and demand. During this period, national liquor brands and local regional liquor enterprises have achieved rapid development. Under the background of the rising volume and price of the liquor market, the sales revenue and total profit of liquor enterprises have achieved rapid growth, and correspondingly, the stock price has also performed well.
Second, from the second half of 2012 to 2016, a series of policies restricting the consumption of the "three gongs" such as the "Eight Provisions" have been introduced, the consumption scenarios such as business consumption and government consumption are restricted, consumer demand has declined rapidly in the short term, and the price of liquor has been seriously pressured, and the liquor industry has entered a period of deep adjustment. Since 2012, the liquor industry's production growth and revenue growth have slowed down simultaneously.
Third, since the second half of 2016, the liquor industry has begun to recover, and the consumption demand for end-user liquor has risen, driving the overall revenue and profit growth of the liquor industry. Since 2017, the recovery of mid-to-high-end liquor has picked up, while the market operation of low-end liquor has been under pressure. In 2019, the industry cycle gradually faded, the industry pattern was mature and optimized, the demand for high-end liquor expanded, the performance of listed liquor companies improved, and the stock price rose. In 2020, the epidemic has a small impact on liquor, especially high-end liquor, at this time, the growth of liquor companies is prominent, and the performance and valuation of liquor companies are both rising under the abundant liquidity.
Since 2021, the tightening of liquidity under high valuations and changes in industry policies have led to shocks in the liquor sector. However, during this period, the fundamentals of liquor have not changed substantially. From the perspective of revenue growth, the sub-high-end is faster than the high-end, and the high-end is faster than the low-end, which to a certain extent hints at the structural changes in the demand for liquor and industry opportunities.
Securities companies generally predict that benefiting from consumption upgrading and changes in consumption concepts, the promotion of sub-high-end liquor is the main driving force for the development of the liquor industry. Liquor companies need to fully grasp the golden opportunity of mass consumption upgrading, through quality improvement, market segmentation and product innovation and other means, to better meet the consumer demand of the mass market, and promote the transformation and upgrading of product structure.
Second, industrial attributes and regulatory policies
At the supply side, from the overall point of view, the entry barriers of the liquor industry are relatively low (especially the low-end liquor), and the economy of scale is small, so it can be seen that there are a large number of small and medium-sized liquor companies in the market. However, under the continuous consumption upgrade, the consumption preferences of the liquor industry have changed, and the consumer demand for high-end liquor has become prominent.
Relatively speaking, the entry barriers in the field of medium and high-end liquor are large. On the one hand, it comes from the quality of wine, which is related to the natural conditions such as climate and water sources of the wine production area, so it has a natural monopoly; on the other hand, it comes from brand recognition, liquor as a mental product, once consumers form a fixed brand understanding, it is more difficult to change. For example, in Moutai in Guizhou, the climate and water source of Moutai Town do have innate advantages, which are different from other regions, but the winery in Moutai Town is not only Moutai, but only Moutai has a stronger brand recognition.
In addition, changes in industry policies and regulations may also affect supply, for example, changes in GST policies.
Third, market competition and investment logic
As mentioned above, the overall production of liquor has decreased year by year, and the market space has gradually compressed. However, observing listed companies will find that their revenue and profitability are still growing, and the profit growth rate is still faster than the revenue growth rate, reflecting that while the listed wine companies are expanding in the market space, the market position is also likely to be improved, behind or a large number of small wine companies have been merged.
The demand characteristics have led to the segmentation of the liquor industry being divided into high-end, sub-high-end, mid-range or mass liquor. For high-end liquor, consumer awareness is high, the brand image is good, the market concentration is extremely high, and the enterprise channel construction is mature and the operation is stable.
Although the sub-high-end also has a certain degree of consumer awareness, this awareness has a regionality. Therefore, the market pays special attention to the channel construction of such enterprises outside the province and the whole country, and also pays attention to whether its brand value has improved with time, which is also an uncertain factor in the existence of sub-high-end liquor. If the sub-high-end liquor enterprise fails to promote the optimization and upgrading of the product structure in a timely manner, effectively expand the marketing network and corporate brand, and continuously improve the level of corporate governance, it will face a harsher competitive environment, and the company's operating performance will have the risk of a sharp decline.
For mid-range and mass brand liquor companies, as mentioned above, the consumption demand for liquor in this range has decreased, making the performance of mid-range and mass liquor differentiated, and the endogenous growth momentum of the industry is relatively weak. In terms of revenue, since 2020, the consumption scenarios of mid-range and mass liquor have been more affected by the epidemic, and profits and revenues have been significantly differentiated. Although from the perspective of the industry, whether the mid-end mass liquor companies can jump to the sub-high-end has a certain possibility, the barriers to advancement are not very high. However, in practice, it is very difficult to operate, especially in the face of the problem of how to deal with the reduction of consumer demand after the price increase. (Zhongxin Jingwei APP)
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