Shanxi Fenjiu, with a ten-year low valuation

With the unstable ex-factory price of Maotai, the market is starting to feel anxious. If Maotai's demand cannot hold up, the situation for other Baijiu brands may be even worse.

The entire Baijiu sector has experienced a wave of sell-offs, with Maotai's P/E ratio dropping to around 20 times, and other major well-known Baijiu brands also falling to around a dozen times.

Undoubtedly, the Baijiu sector has once again reached a cyclical low.

Shanxi Fenjiu's valuation is also at a ten-year low, with the last time its dynamic P/E ratio dropped below 20 times being in 2013-2014, during an extremely depressed stock market. At that time, the Shanghai Composite Index fell to around 2000 points.

When the past prices are once again in front of us, should we bottom fish Shanxi Fenjiu?

I. Leading Fragrant Baijiu Brand

In recent years, Fenjiu has developed well. Since 2017, Fenjiu has maintained high-speed growth. Both revenue and profit growth rates have rarely fallen below 20%.

Fenjiu's revenue in 2021 barely reached 20 billion RMB, and by 2023, it surpassed the 30 billion mark. With Fenjiu's current momentum, it won't be long before it surpasses Yanghe, leaving only Maotai and Wuliangye ahead.

Why is Fenjiu so strong?

Reviewing Fenjiu's development, it has been closely related to the ups and downs of the Baijiu industry.

Shanxi Fenjiu was the first Baijiu company listed on the A-share market in China. Before the 1990s, relying on the good reputation it had built in markets outside of Henan and other provinces, Fenjiu's production and sales volume had long been ranked first in the Baijiu industry. With Fenjiu's influence, the light-flavored Baijiu became the largest category of Baijiu at that time, with a market share reaching around 70%. This was Fenjiu's relatively glorious moment in the past.

After the Baijiu price was liberalized in 1993, like many other Baijiu brands, Fenjiu failed to see the advantages and trends of high-end products, missed the opportunity, and was surpassed by Wuliangye in 1994. In addition, it was also impacted by the Shanxi fake liquor case, causing its ranking to decline continuously until the golden decade of Baijiu in the new millennium when the industry began to rise. Starting in 2013 with restrictions on government officials' consumption, Fenjiu also faced difficulties. For four consecutive years, it failed to break free from the quagmire, and began to reflect on its mistakes, deciding to turn over a new leaf.

It can be said that Fenjiu has had quite a tumultuous journey. 2017 was a turning point for Fenjiu, as it embarked on a rapid growth wave that has yet to fade to this day.

In February 2017, Fenjiu Group signed a three-year operating target responsibility agreement with the provincial state-owned assets supervision and administration commission. According to the agreement, with the principle of "unified rights and responsibilities, benchmarking against advanced standards, and positive incentives," Fenjiu Group formulated revenue (liquor) growth targets for 2017, 2018, and 2019 at 30%, 30%, and 20% respectively; and profit (liquor) growth targets for the three years at 25%, 25%, and 25%.

The "military order" not only pushed itself into a corner but also provided the company with a strong reason for drastic reforms, cutting through long-standing problems and initiating comprehensive reform for Fenjiu.

Significant changes were made in terms of equity, management, products, channels, and more, both in personnel and institutional aspects.

For example, in 2017, Fenjiu Sales Company announced the collective dismissal of managerial levels, department heads, and deputy division-level leadership positions, adopting a system of appointment and professional management, transforming into a market-oriented personnel mechanism that allows for upward and downward mobility and optimized combinations, as well as cadre incentive mechanisms, with equity incentives arranged for middle and senior management as well as core personnel. Once the entire organization started moving, it became vibrant, full of hope, and high in morale.

Perhaps the most significant change in Fenjiu's reform was the introduction of CR Group as the second largest shareholder.

In February 2018, Fenjiu Group transferred 11.45% of its shares to Huachang Xinrui (Hong Kong) under CR Group, bringing in capital of 5.16 billion yuan. After the transfer, Fenjiu Group's shareholding ratio decreased to 58.52%, remaining the largest shareholder of the company, while CR became the second largest shareholder of Fenjiu. Overall, there was not a significant change in the shareholding structure.

Fenjiu's biggest issues in the past were management problems and a lack of understanding of the market, while CR can provide relevant resources and answers. At the same time, CR may have also seen the potential of Fenjiu and the opportunity for a strong partnership. In addition to two experienced managers from the China Resources Group joining the board of directors, the marketing and other key teams also have the participation of China Resources personnel. In 2020, Fenjiu introduced high-end technical talents from China Resources to promote the digitalization of Fenjiu.

It must be said that China Resources has almost given everything to Fenjiu, providing people, knowledge, and resources. China Resources itself has national channel resources including beer, drinking water, and food. Just the China Resources Wanjia stores are spread across more than 3,000 locations in 29 provinces nationwide.

Currently, Fenjiu's overall financial situation is very good. Comparing the financial ratios in the first quarter of this year with other Baijiu companies in the industry, Fenjiu still maintains a relatively high operational efficiency, deserving its position as a leading Baijiu brand. Coupled with its current growth rate, from a business perspective alone, its return on investment is quite considerable.

The continuously improving gross profit margin and net profit margin have driven Fenjiu's overall return level.

In the first quarter report of this year compared to the end of 2023, except for the contracted liabilities decreasing to 5.59 billion, overall, Fenjiu's performance remains stable.

Of course, the good financial performance of Baijiu companies is not particularly significant, especially for leading enterprises, whose financial situations are generally enviable. For Fenjiu, perhaps more important is whether the current growth momentum can be sustained.

Second, profound heritage

What is the basis for Fenjiu's resurgence? Why is China Resources willing to invest and provide so much help?

First, we need to understand that Fenjiu's products are irreplaceable, it's just that the company's understanding of management and the market was relatively backward in the past. Otherwise, China Resources' investment would be in vain, and China Resources is not foolish with money. It is probably because they see a hidden gem that they are willing to make efforts to let it shine.

As introduced earlier, Fenjiu has had a glorious past. Established as one of the "Four Famous Liquors" at the founding banquet in 1949, Fenjiu began nationwide promotion in 1951, gradually becoming one of the representatives of Chinese national liquor. As early as 1915, Fenjiu won the highest honor of the Panama-Pacific International Exposition, the first-class gold medal, and enjoyed a high reputation worldwide.

But its historical heritage goes far beyond that. As an outstanding representative of Chinese Baijiu, Fenjiu's brand heritage is deep and long-standing. Multiple pieces of evidence show that Fenjiu's history can be traced back to the Longshan Culture period over 6,000 years ago During the Northern and Southern Dynasties period, Fenjiu was highly praised by Emperor Wucheng of Northern Qi as an imperial liquor and was recorded in the historical book "Book of Northern Qi".

Fenjiu is not only the originator of Chinese light-flavored liquor, but also known as the "Soul of Chinese Liquor" and "Xinghua Village Liquor", with extremely high cultural value and historical significance.

In today's liquor competition, if we talk about the essence, it is the brand heritage, the profound sense accumulated from long-term historical and cultural sedimentation, which is the most accepted and difficult to replicate by consumers. Markets can be developed, management can be improved, but the core competitiveness of liquor relies on the accumulation of time.

Although factors such as taste and mouthfeel have some influence, the intangible and mysterious influence brought by brand heritage, combined with historical and cultural impact on consumers' minds, always positions Fenjiu in the hearts of consumers.

The most obvious example is that people in Shanxi Province prefer Fenjiu over Maotai. That long-lasting experience is hard to change.

Fenjiu adheres to the brand positioning of "quality as the essence, history and culture as the soul", and continuously strengthens brand building efforts. With the positioning of "origin of national liquor, ancestor of light-flavored liquor, root of culture", Fenjiu is committed to making it the world's number one cultural famous liquor, which I personally think is the right direction.

The mainstream Fenjiu can be divided into several series: the low-end Bo Fen series, the medium-low-end Lao Bai Fen series, the medium-high-end Panama series, the high-end Qinghua series, in addition to the health liquor Zhuyeqing and the recycled Xinghua liquor brands. It can be seen that Fenjiu's brands all have long historical heritage, even to the point of being unknown when they started.

In recent years, Fenjiu's Qinghua series and Bo Fen series on the product side have also undergone long-term accumulation, with a solid foundation. It is more about organizing them well and introducing them properly.

From a product perspective, both the Bo Fen and Qinghua series are still going strong.

The Bo Fen series has become the leader in bottled liquor in 2022, with its market share continuing to rise. In the current macro environment, and based on the upgrading of low-end bottled liquor consumption, Bo Fen still offers good value for money and has a broad consumer base Taking on the task of expanding the consumer base for premium Baijiu products, such as Lao Baifen, in order to drive the overall development of the mid-range products.

The Blue and White series is the company's high-end value product. Currently, Blue and White 20 is considered a mid-high-end product in the industry. According to Frost & Sullivan's forecast, the competition in China's mid-high-end Baijiu market is relatively crowded, with a low concentration. The scale of the high-end Baijiu market is expected to expand at a compound growth rate of 12.4% from 2022 to 2026, reaching 205.5 billion, making it the most promising segment in the Baijiu industry.

As the series of wines are gradually improved and the market segments are refined, the benchmark will shift from Blue and White 20 to Blue and White 30 and Blue and White 40 in the future, with clear levels and space overall.

In addition, the 2023 Fenjiu Global Distributors Conference clearly stated that Zhuyeqing Baijiu is to truly become the top brand in the market, indicating a subtle intention to make a strong push.

CR mainly empowers Fenjiu, helping to develop its potential and further promote its products. With the help of CR, Fenjiu's nationalization is progressing rapidly.

From a data perspective, in 2023, Fenjiu achieved revenues of 19.659 billion yuan outside the province and 12.084 billion yuan within the province, with CAGRs of 41.89% and 22.52% respectively compared to 2017. During this period, the compound growth rate outside the province was almost twice that of within the province, with the revenue contribution from outside the province increasing from 40.3% to 61.9%.

In terms of channels, from 2017 to 2023, the number of distributors outside the province and within the province increased from 248/1020 to 820/3120 respectively. At the same time, the number of national terminals grew rapidly, from 700,000 to 1.2 million from 2019 to the first half of 2023.

Looking at the smooth expansion of overall sales, Fenjiu's momentum remains strong.

According to Hongze Research statistics, Fenjiu's compound sales growth in the past three years in seven provinces including Beijing, Hunan, Guangdong, Zhejiang, Shandong, Fujian, and Jiangsu exceeded the compound growth rate during the three years of the state-owned enterprise reform starting from 2017, indicating that the momentum continues Based on some recent channel surveys, Fenjiu's overall channel inventory level is not high, sales are smooth, and the first quarter's stocking can basically be completed in the second quarter. The stability of distributors is relatively high. It can be said that the growth quality of Fenjiu should be relatively reliable.

III. Conclusion

In the past, the overall valuation of Baijiu was too high, coupled with the current consumption downturn, it is basically adjusting. Although Fenjiu's stock price has also adjusted, its performance is still good.

Fenjiu aims to achieve "One of the top three in the world" by 2025 and aims to enter the first echelon of the Baijiu industry. Therefore, efforts should be made to maintain a growth rate of over 20% in the next two years.

The 2023 annual report also indicates that efforts will be made to achieve a revenue growth rate of around 20% in 2024. If a slightly more conservative growth rate of 15% is adopted, the probability of any major issues is low.

The trade-off between assets, growth rate, and valuation is an art. Although Fenjiu's valuation has also come down, it is still relatively high in the industry. However, its assets and growth rate are relatively better compared to most Baijiu companies, making it worth considering based on different investment styles