With Moutai as its escort, the "magic weapon" of Moutai has not gone away.

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Guizhou Maotai (600519.SH) released its annual report for 2022 on the evening of Thursday, March 30th Beijing time. The actual operating income and profit situation is consistent with the production and operation announcement released by the company at the end of last year, and the growth trend of the first three quarters was continued in the fourth quarter. The key points of the financial report are as follows:

1. Another stable and happy year

The annual revenue from liquor sales (Maotai liquor + series liquor) reached RMB 123.7 billion, a YoY growth of 16.7%, reaching the company's growth target. Over the past decade, no matter whether the industry was in an adjustment period starting from 2013 or a recovery period after 2017, Maotai has almost been able to achieve its initial target every year. This stable and happy situation can be said to be unique.

For this year, the company still provides its operating targets: 1) the total operating income will increase by 15% over the previous year; 2) basic construction investment will be RMB 7.109 billion.

Marginally, liquor sales in the fourth quarter reached RMB 36.8 billion, a YoY growth of 16.8%, slightly higher than the growth rates in the second and third quarters. This period marks the first time that Maotai's single-quarter revenue has surpassed RMB 35 billion, which is considered a small leap forward.

In terms of profits, the consolidated net profit attributable to shareholders exceeded RMB 60 billion in the whole of last year, with a growth rate of 19.6%, which is faster than the growth rate of revenue. This mainly benefited from high profit growth in the first and fourth quarters (with revenue ratios of 26% and 30%, respectively), which pulled up the annual average level.

2. Maotai liquor remains stable, while the series liquor fluctuates

Maintaining a revenue growth rate of 16% last year is still the result of Maotai liquor and series liquor working together. Throughout the year, Maotai's revenue ratio still remained at 85%, which basically determined the trend of the annual revenue. Except for a slightly lower growth rate in the third quarter at only 11%, the growth rates in the other quarters were firmly above 15%.

The growth volatility is relatively high for series liquor. Due to a relatively small revenue base (which is only relatively small, with a single quarter absolute value reaching RMB 3-5 billion), the growth in the four quarters last year was relatively uneven, with growth mainly concentrated in the first three quarters. After two consecutive quarters of sales exceeding RMB 4 billion, there was some decline in the fourth quarter, with a single quarter growth rate of only 11%, but it did not affect the annual growth rate, which still remained at 27%.

3. Continued structural optimization and a new high in the proportion of direct sales

On the basis of only a small increase in sales volume, it has to be said that the company's revenue sustained double-digit growth, and most of the contribution came from the increase in the proportion of direct sales. In the whole of last year, the sales amount from direct sales doubled from the previous year, with a proportion of 40%, an increase of 17pct from the same period the year before.

Among them, "i Maotai" digital marketing platform achieved sales revenue of RMB 11.9 billion, accounting for 9% of the company's total revenue. Although it showed a slight decline in each of the past three quarters, in its first year it has already registered more than 30 million users, becoming a phenomenal APP and playing a very important role. Due to the expansion of direct sales, the revenue of dealerships has been squeezed slightly, but the annual decline can be controlled within 10%. The declining trends in each quarter are relatively balanced. The decline was slightly lower in the first quarter because it was not affected by the "i Maotai" product.

During the past decade, with the exception of Q2 and Q4 in 2017, Maotai's quarterly gross profit margin has never dropped below 90%. Regardless of the external environment, macroeconomic cycles, industry inventory cycles, or competition, Maotai's gross profit margin has always been independent.

There are some small details worth mentioning. The Maotai wine series, as the company's mainstay, boasts a gross profit margin as high as 94%, holding up the banner of the company's comprehensive gross profit margin. In comparison, the series' gross profit margin is slightly lower at 77%. Although the series has shown rapid growth in the past two years, its base is too small to have a significant impact on the overall structure.

In light of the stable gross profit margin, Maotai, as a non-promoted consumption item, only needs to cover consumption tax and management expenses, resulting in a stable net profit margin of 48-50%, as it was last year.

From what sources does the growth come? As stated at the beginning, Maotai's growth goal for this year is to increase its total revenue by around 15% compared to the previous year. Considering the market situation last year, the scale of liquor companies above a certain size decreased by 5.6%, and although revenue increased, it was less than 10%. In comparison, Maotai maintained its pace quite well. After all, it has already achieved such a large volume.

In the long-term, the company has also begun to make preparations for future growth. In addition to the "30,000-ton sauce aroma series technical modification and supporting projects" previously completed, the company approved the Maotai liquor "14th Five-Year" technical modification and construction project at the end of last year, which is expected to add about 20,000 tons of Maotai liquor production capacity annually and increase storage capacity to 80,000 tons. In terms of capital expenditure, the company plans to reach ¥7.1 billion in basic construction investment.

In the short-term, the contract liabilities in Q4 have grown slightly, increasing by ¥3.6 billion compared to the previous quarter. The current balance has reached ¥15.5 billion. Overall, the company has maintained the momentum of "cash flow in" despite this, and judging from recent shipment rates and the enthusiasm of dealers to pay, Dolphin Jun believes that the company's target for this year is almost achievable.

Dolphin Jun's overall point of view is that with the good foundation laid in the previous three quarters and a slight boost in profit by the end of the year, Maotai has gone through another year steadily. The company has maintained its record of achieving targets for the past decade and is confident in meeting its 15% growth target this year. In fact, many investors had predicted the 15% target in the earlier stages. However, as a leader in consumer goods, Maotai's stock price seems to have been detached from its performance for a long time now. In the financial report review of the previous quarter ("Maotai's performance is impeccable, and market sentiment is the key"), Dolphin Jun shared with everyone that Maotai has always been very stable on the operational level. The almost constant gross profit margin and expense ratio allowed the company's revenue growth to translate into profits without any reduction over the past few years.

However, this has not affected the fact that Maotai's stock price still has considerable volatility. Although it has been trending upwards in the long term, it has also encountered its fair share of ups and downs. Since the gradual recovery of the liquor industry starting from 2017 and until it regained its prosperity, Maotai's valuation has also broken through since 2019 and reached a new milestone, raising the center to more than 30 times.

Whenever there are rumors or facts that press down its valuation, it slowly rises again after systemic risks have passed. Maotai's performance is not difficult to track, but understanding market psychology is somewhat challenging. Only when the valuation returns to a relatively reasonable position, "stable performance" has a chance to be rewarded with "stable returns." Combining the past five years of PE percentile performance, we still need to wait a while.

Data source: Wind, Changqiao Dolphin Research & Investment

If you are interested in the conference call with management to discuss the financial report, Dolphin Jun will subsequently share the minutes of the call via the Changqiao App community platform or investment research group. Interested users are welcome to add the WeChat account "dolphinR123" for access to the Changqiao Dolphin Investment Research group and get the information in real time.

The following is a detailed interpretation of the financial report:

1. Overall: Revenue and Profit Synchronized

Thanks to the fast growth of its direct sales business, the company's overall revenue still maintained strong double-digit growth. Marginally speaking, the company made a small effort at the end of last year, with a quarterly growth rate reaching 17%. As the sales peak season every year, as long as the performance in the fourth quarter is not too bad, liquor companies should not have major problems.

In this period's financial report, the more positive trend is that Maotai's gross profit margin still held steady, and the expense side did not miss anything. Therefore, the profit growth rate and revenue growth rate had a noticeable gap, and the growth rate reached 20%, which is a small bright spot.

In addition, from the perspective of combining prepayments, we can see that Maotai's "revenue + prepayment" trend maintains a good growth trend, with receivable accounts having good growth rates compared to the same period and month-on-month. Moreover, from the absolute amount of 15.5 billion, we can basically judge that there will be no major problems in sales next quarter.

From the industry perspective, the liquor industry has entered a stage of reduced production. To maintain a certain growth rate in the industry, there is not much that liquor companies can do. On the one hand, they can continue to improve market share, but this is quite difficult. For example, due to the product's tonality, production and sales growth of Maotai are relatively limited.

On the other hand, raising prices is also not simple. Although historically, the increase in liquor prices has been quite good, most of them are phased operations. The previous two rounds of significant price increases have basically caused a supply-demand imbalance, leading to a long adjustment period. Given the current macro background, it is difficult to directly increase prices.

But improving the structure is still operable, and this logic can still continue in the 14th Five-Year Plan period. Whether it is entering the high-end or adjusting channels, liquor companies are not idle in these aspects. For Maotai, the biggest source of growth is in direct sales.

Second, direct sales have lived up to expectations.

Looking at the structure, the proportion of the company's direct sales business is almost increasing quarter by quarter, especially in the past two years, it has progressed very fast. Of course, the biggest driver this year is "i Maotai." In the fourth quarter of last year, the structure of direct sales accounted for 48%, and the proportion for the entire year also increased to 40%, almost reaching half of the market.

Meanwhile, the real "half of the market" - the distribution business is also trying to maintain the base. As direct sales continue to squeeze, a decline is quite certain, but it seems that the speed of decline is still under control.

In terms of strict control on distributors, Maotai has streamlined this for many years to further regulate channels. After the violation removals in 2019 and 2020, there were relatively few changes in the past two years, and the channels are relatively stable.

Three, The Basic Disk Decides Gross Margin

Maotai has always been driven by "Maotai Liquor" and "Series Liquor". As Maotai's killer, "Maotai Liquor" has maintained a share of about 90%. The reason why the gross profit margin was relatively stable in the fourth quarter of last year, and the profit growth rate was faster, is closely related to the brief increase in the share of "Maotai liquor" to 91% in the fourth quarter of last year.

The absolute share makes the quarterly sales growth rate of "Maotai Liquor" almost equal to the overall sales growth rate of the company. From the perspective of growth rate alone, series liquor seems to often bring surprises, but so far, due to its small share, it has almost no impact on the overall situation.

In addition, there is a significant difference between the two in gross profit margin. Although the gross profit margin of series liquor has increased rapidly, it still cannot be compared with the gross profit margin of "Maotai Liquor" due to its ton price level.

Four, Rather Rigid Costs

"The Maotai liquor business with a relatively heavy proportion twists the gross profit margin very tightly, almost never dropping below 90%. As a product that can be sold without promotion, Maotai naturally has no sales costs." Leaving aside the consumption tax paid, low R & D expenses, and negative financial expenses created by a lot of cash in hand, the main expense item of Maotai is management expenses.

Relatively speaking, the nature of this cost is more rigid, and occasionally there are 1-3 percentage points of fluctuations before each quarter due to income base and seasonal reasons, Basically, it determines the level of net profit margin fluctuation.