This China stock is ‘positioned for structural growth’, says Jefferies

The luxury market in China is recovering, with luxury brands’ results showing a trend of stabilising demand and sentiment for luxury goods, says a recent note from Jefferies. In the note, firm analysts discuss the potential impacts of near-term sentiment drivers and raw material price shocks, and also identify a stock “positioned for structural growth.” Jefferies identifies distillery company Kweichow Moutai’s (600519) shares as “positioned for structural growth.” The stock is also seen by the firm as a good proxy of China luxury consumption.Kweichow Moutai stock is rated Buy at the firm with a price target of RMB 1,458.49.Moutai has seen a strong rebound in retail sales over the last four to six months, and retail sales have largely become positive YOY again, according to the firm’s checks.Raw-material price shocks are unlikely to pose a problem for the company’s margins.“Unlike other staple and alcohol companies, we believe Moutai’s high margins make it immune to raw-material cost shocks. In addition, utilities and transportation costs appear insignificant to Moutai’s margins. We do not see oil shortage as a risk to Moutai’s production,” the analysts said.The company is expected to accelerate its market share gain in major premium baijiu price ranges (above RMB 1,000 per bottle, 600-1,000, 400-600). The factors contributing to this development are two-fold: on-line and off-line integration, and distributor incentives.Discussing on-line and off-line integration, firm analysts said that the company’s greater control over Feitian prices has prevented on-line off-line resell activities. This is what allows it to make better use of the on-line channel, where it can enjoy both traffic as well as subsidies from e-commerce platforms.Regarding distributor incentives, the analysts note that distributors remain encouraged despite Moutai’s DTC push. The Moutai 1935 and Moutai Prince product overhauls have been proven successful, allowing distributors to benefit from a new source of earnings, whereas previously they relied on Feitian only.This is encouraging distributors to promote Moutai’s full range of products.The positive distributor sentiment and margins enjoyed by Moutai are rare in today’s baijiu industry, the analysts added. This is expected to help Moutai capture market share.The company is the dominant player in China’s super-premium liquor market, and it has the strongest brand equity. The prices of Feitian will likely be stabilised by Moutai’s channel strategy of giving the market back to large distributors.The firm is forecasting mid-to-high-single-digit volume growth for the next three years, while price hikes and product mix changes are seen as key drivers of sales growth.