China’s Thirst For Premium Liquor Fuels Profits Growth at Wuliangye Yibin

Wuliangye Yibin has tremendous pricing power and its premium liquors appeal to China’s burgeoning middle class; even an anti-corruption crusade isn’t likely to spoil the possibility of a positive earnings surprise next month.

The recent clampdown on political and business corruption in China has been bad news for the domestic liquor producers as well as those for whom Chinese sales have been booming; historically, a bottle of choice rice wine or special blended whisky has been one of the most common and traditional “gifts” presented to an official with the power to smooth the petitioner’s path to obtaining an essential permit or a place for a child at a top university. But even if the latest anti-corruption campaign works, that probably won’t alter the fact that China remains one of the world’s largest market for luxury goods, or that high-end liquors are among the most common gifts on social occasions or for more traditional corporate occasions.

Corporate gift giving remains strong, for instance, and it is very unlikely that the Chinese will suddenly shun the use of premium liquor at weddings and other special occasions. So the odds are that Wuliangye Yibin Co. Ltd. (000858.SZ) will continue to see sales of its Wuliangye liquor (made from broomcorn, rice, glutinous rice, wheat and corn) and its other products continue to climb. Indeed, analysts have been predicting that this year’s holiday season – which culminates in China with the celebration of the lunar New Year on February 10, 2013 – will witness strong sales.

Wuliangye Yibin is expected to be among the beneficiaries of this trend. Analysts have increased their earnings estimates for the company’s full calendar year, and the I/B/E/S consensus estimate now stands at 2.47 Chinese renminbi, up from 2.37 only 90 days ago. Indeed, so far in 2013, any analyst who has altered his or her estimates for the company’s earnings has boosted that forecast. Importantly, however, the StarMine SmartEstimate remains higher than the consensus, at 2.55 renminbi per share, giving Wuliangye Yibin a Predicted Surprise of 3.2%. Furthermore, the company can boast a strong score of 84 out of a possible 100 on the StarMine Analyst Revisions Model, as analysts have continued to boost their projections not only for the fourth quarter earnings, but also for both earnings and EBITDA in 2013.

Wuliangye Yibin has raised the prices it charges for most brands of the spirits that it produces and sells, which is contributing stronger profit margins. From an already impressive 28% only four years ago, margins for the trailing four quarter period have soared to an awe-inspiring 45.5% in the third quarter (the last period for which data is available), ended September 30, 2012. That is more than 15 percentage points above the industry median, and demonstrates the company’s tremendous pricing power.

China’s tradition of fermenting grain and producing alcoholic beverages dates back at least as far as 2100 BC, and there seem to be no signs that its citizens are about to slow their production or consumption of beverages such as those produced by Wuliangye Yibin. Indeed, the rapidly growing middle class is demanding premium liquors – a demand that the company is in a good position to satisfy. That growth, and the company’s pricing power, are a recipe for continued earnings growth and the kind of positive earnings surprise that Wuliangye Yibin is likely to produce when it reports its 2012 results on February 20.

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