Luzhou Laojiao, the top Baijiu with the highest decline this year

This year, Baijiu has been continuously adjusting. Among the top Baijiu brands, Luzhou Laojiao has experienced the largest decline in stock price this year. Especially recently, it has been continuously adjusting. Currently, its valuation is chasing after the slow-growing Yanghe.

However, looking at its past growth, whether in terms of revenue or profit, it has maintained a growth rate of over 20%. In 2023, its revenue broke through the 30 billion mark for the first time. In theory, it should not have such a valuation and stock price performance.

Is there any underlying problem with Luzhou Laojiao?

1. Extraordinary Origins, Twists and Turns in the Process

Luzhou Laojiao is known as the "Originator of Strong Aroma Baijiu" and the creator of the strong aroma technique and standards. The company was established on the basis of 36 wine workshops from the Ming and Qing dynasties, inheriting the "traditional brewing techniques of Luzhou Laojiao" for over 700 years. The Luzhou Laojiao 1573 national treasure cellar group has been in continuous use for over 450 years.

In 1952, Luzhou Laojiao, along with Maotai, Fenjiu, and Xifeng, was named one of the "Four Famous Chinese Liquors". It then went on to win the title of "National Famous Liquor" in 1963, 1979, 1984, and 1989, making it the only strong aroma Baijiu to win the title of National Famous Liquor for 5 consecutive sessions.

With such a great background, Luzhou Laojiao currently ranks 5th among listed companies, far behind Maotai and Wuliangye. This gap is just a moment of difference in the changing market environment, falling behind step by step.

In 1988, the State Council approved the comprehensive deregulation of prices for 13 famous liquors, allowing liquor companies to have pricing autonomy. Maotai, Wuliangye, and Jiannanchun adopted a price increase strategy to dominate the high-end market. However, Luzhou Laojiao and many other liquor companies, such as Gujing Gongjiu and Fenjiu, adopted a strategy of increasing quantity without increasing prices, aiming to produce affordable liquor for the common people. The original intention was good, but they missed the opportunity for high-end development.

Later, watching Maotai and Wuliangye making big profits, Luzhou Laojiao also launched the premium product "Guojiao 1573" to enter the high-end Baijiu market. Leveraging the "Golden Decade of Baijiu", they continuously targeted the high-end market and raised prices. While they were not keen on the high-end market before, they became eager for it later on. According to Huachuang Securities, from July 2006 to August 2023, in a span of 17 years, Luzhou Laojiao's premium Guojiao product only underwent 3 price reductions in 2014, and has not reduced prices since 2015

From 2012 to 2014, the Baijiu industry entered a period of deep adjustment due to the impact of the eight regulations and six prohibitions. Luzhou Laojiao also did not want to lower prices, but reality did not allow it, leading to a period of decline.

Now, Guojiao 1573, along with Feitian Moutai and Puwu, are known as the three leading high-end Baijiu brands in China. Although there is still a considerable gap in terms of individual product scale, they have also achieved good results.

However, as good as the high-end market is, it is not advisable to focus solely on it. Especially during economic downturns and weak consumer spending, consumer downgrading continues to occur. Most Baijiu brands now cover all price segments to prevent mistakes and keep up with market changes.

Luzhou Laojiao is currently focusing on a product strategy of "dual brands, three product lines, and five major single products," with a focus on creating five super single products consisting of Guojiao 1573, aged liquor, Tequ, Touqu, and Erqu. Price coverage spans all segments to target different consumer groups and consumption scenarios. However, the main source of revenue still comes from Guojiao 1573, accounting for over 60%.

II. Seeking Quick Success and Instant Benefits?

"Returning to the top three" has always been Luzhou Laojiao's slogan, but unexpectedly, it was surpassed by Fenjiu and dropped to fifth place, seemingly causing some impatience within the company.

The overall market environment for the Baijiu industry is not favorable, with overall channel inventory backlog and even Moutai's prices showing some instability. Despite this, Luzhou Laojiao, known as the "price increase king" in the market, is still raising prices against the trend.

Starting from July 2nd this year, the settlement price of the classic 38-degree Guojiao 1573 (500ml*6) for distribution customers increased by 30 yuan/bottle. It was stated that this adjustment was made based on market dynamics, and the sales performance of the 38-degree Guojiao 1573 has been good.

However, the reality is that Luzhou Laojiao has long faced a price inversion issue, raising prices for several years while facing market resistance. On e-commerce platforms, the retail prices of products like Guojiao 1573 are often lower than the official prices. During the recent "618" promotion, some e-commerce platforms offered subsidies that caused Guojiao 1573 to fall below the 800 yuan price line. This thin profit margin situation makes it challenging for distributors and end markets to drive sales.

Looking at the distributor situation of Luzhou Laojiao in the past 3 years, in recent years, the number of distributors has decreased by nearly 400. As of the end of 2020, Luzhou Laojiao had 2,221 distributors (2,047 domestic, 174 overseas). By the end of 2023, the number of distributors had dropped to 1,829 (1,710 domestic, 104 overseas) Price inversion continues, the number of distributors keeps decreasing, and if the product demand is really good, the data looks very contradictory.

In addition, Luzhou Laojiao's inventory has been rapidly increasing in recent years. In the current market environment, with high inventory levels, it is unknown how much pressure has been put on the distribution channels.

If too much inventory is pushed to the channels, although it may reflect positively on the company's performance and make the data look good, there is a high suspicion of padding. The problem is how much padding has been done. If only a little padding has been done, it can be acceptable, but the worst scenario is not knowing the extent of padding. This kind of uncertainty is what capital markets detest the most. If everything is transparently disclosed, the market actually prefers it.

In recent years, Luzhou Laojiao's receivables financing has increased significantly. In accounting treatment, receivables financing may involve transferring the rights of accounts receivable to financial institutions, or using them as collateral while the company still retains the right to collect. If the company transfers the rights of accounts receivable to financial institutions, these accounts receivable will no longer be recorded under accounts receivable but will be reflected in other current assets or long-term assets. However, fundamentally, they are still receivables, just that the company receives the money upfront. But why the rush to liquidate?

At the same time, the company's long-term borrowings have surged to 12 billion yuan, but there is over 30 billion yuan in cash on hand, leaving people puzzled. The company stated: By using low-cost borrowed funds, combined with its own funds, it is carrying out important projects such as intelligent brewing technology upgrades and brand enhancements. It is also conducting reasonable cash management according to project progress, moderately increasing financial leverage, enhancing capital returns, and improving company earnings.

However, it seems that no one believes this explanation. Some have discovered that in March last year, Luzhou Laojiao Group Co., Ltd.'s official WeChat account announced the launch of an industrial chain financial service platform by its subsidiary Longma Xingda Microfinance Co., Ltd., which simultaneously launched three loan products - "liquor merchant loan," "liquor enterprise loan," and "liquor personnel loan," targeting downstream distributors, upstream suppliers, and high-quality individual customers in Luzhou Laojiao's industrial chain.

Therefore, there is a possibility that if Luzhou Laojiao uses the loan money to lend to downstream distributors for them to buy their own liquor, it can continuously boost performance and earn more interest, but all the pressure will be on the distributors. Luzhou Laojiao has stated that there is no situation of providing loans to distributors through related parties, but the market's continuous skepticism cannot be stopped There is also a long-standing controversy over the production capacity of the old cellar pools.

In the early stages of promoting Guojiao 1573, in order to embody the concept of scarcity of high-end liquor, it was publicly stated that it required a hundred-year-old cellar pool to brew. To produce good liquor, Luzhou Laojiao owns a group of 1619 national treasure-level cellar pools that are over a hundred years old, with a total annual production capacity of about 3000 tons. Initially, this production capacity was not specified as base liquor or finished liquor in the promotional materials, and it was commonly believed to be finished liquor. Later, with the increase in production of Guojiao 1573, this 3000 tons/year production capacity became the base liquor production capacity, capable of blending 8500 tons/year of finished liquor.

According to data from Luzhou Laojiao itself and securities research, the production of Guojiao exceeded 3200 tons in 2017, with sales of around 9000 tons in 2020. The production capacity of these hundred-year-old cellar pools has always been unpredictable. The 20,000 tons of Guojiao base liquor reserves airdropped in 2019 are said to be inventory left over from the industry downturn before 2015.

According to the analysis by Xueqiu blogger Chang Youli, the following figure shows the changes in the promotional materials of Luzhou Laojiao regarding the production capacity of Guojiao. Also in 2020, there was a change in the statistical caliber of Luzhou Laojiao's products, no longer separately disclosing the revenue of low, medium, and high-end liquor, but instead combining medium and high-end liquor (including Guojiao, Tequ, and aged liquor series) for disclosure. This means that since 2020, we can no longer see the separate revenue of the Guojiao series products. Instead of being transparent, they are becoming more secretive.

The concept of scarce production capacity created by the story of Guojiao 1573 has contributed to its success, but at the same time seems to have limited its development. The management could have maintained a consistent production capacity of 3000 tons/year and waited for demand to outstrip supply, continuously raising prices, becoming the pinnacle of high-end liquor over time. However, it seems that the management felt this was too slow and decided to increase production capacity while raising prices.

In 2020, they developed the "cellar mud replication" technology. According to Luzhou Laojiao's official statement, the 30-year-old cellar pools only have a low yield of excellent liquor, which does not affect the quality of Guojiao 1573. With modern technologies such as "cellar mud replication," new cellar pools can also produce products of no less quality than those aged for 30 years. On the quality front, Luzhou Laojiao is vigorously promoting the upgrading of high-quality liquor production capacity to ensure that every drop of liquor is brewed from pure grain. Over 90% of the national protected cultural relic cellar pools in the liquor industry are in Luzhou Laojiao, and the various types of old cellar pool groups produce different characteristic aroma mud groups. Through the company's unique mud grafting technology, newly built tens of thousands of cellar pools can produce liquor quality at a premium level.

The quality of the new cellar pools is no less than that of the 30-year-old cellar pools, and the 30-year-old cellar pools can match the quality of the hundred-year-old cellar pools. The "cellar mud replication" is truly a great technology, overcoming the challenge of not having old enough strong aroma cellar pools.** How many bottles of Guojiao 1573 are actually produced from century-old cellars? Besides the company itself, perhaps no one else can figure it out. But if treating consumers like this, treating one's own products like this, just to return to the top three, it would truly be a waste of the century-old cellars and profound heritage of Luzhou Laojiao.

III. Conclusion

For a good asset to go far, it needs a good management philosophy, a reliable management team, and patience.

Behind every good brand, there is a good story. A good story can be told continuously, but if the story is told poorly, the brand will also be damaged