Included in the Hong Kong Stock Connect for three days, the market value has increased by over 7 billion. Can Zhenjiu Lidu welcome a valuation reconstruction?

As a rare value investment in the secondary market, "Jinjiu Lidu" (06979.HK), known as the "number one liquor stock in Hong Kong stocks," has been somewhat neglected by investors in the secondary market.

However, recently, there seems to be a sign of a "comeback" in the stock price of Jinjiu Lidu.

On September 5th, Jinjiu Lidu was officially included in the Hong Kong Stock Connect, and its stock price finally managed to climb off the floor. On September 5th, the stock price of Jinjiu Lidu rose by more than 12%, and in the past three trading days, it has risen by nearly 25%, with a market value increase of more than 7 billion Hong Kong dollars.

One reason may be that after being included in the Hong Kong Stock Connect, southbound funds can trade Jinjiu Lidu, providing incremental liquidity and amplifying stock price fluctuations. As the only listed liquor company in Hong Kong stocks, Jinjiu Lidu's pricing anchor lies in the A-share liquor sector, and its stock price will also respond to the pricing logic of southbound funds.

A food and beverage analyst from a securities firm in South China stated that if Jinjiu Lidu is priced based on the pricing logic of a second-tier high-end nationwide liquor company, "there is a lot of flexibility."

However, in terms of performance fundamentals alone, on the one hand, due to Jinjiu Lidu's relatively high expense ratios, its profitability is somewhat lower than that of second-tier high-end nationwide liquor companies. On the other hand, in an industry adjustment, especially in the environment of sauce liquor, Jinjiu Lidu still needs to further prove that it has stepped out of the pressure of channel inventory.

Market Value Increased by Over 7 Billion in Three Days

Jinjiu Lidu, which once carried the title of "the second liquor stock after Maotai," did not receive the same level of attention for a long time.

In April of this year, Jinjiu Lidu went public and immediately fell below the issue price, with a first-day decline of over 17%. The stock price remained on the floor, reaching a low of HKD 6.76 per share.

Therefore, being included in the Hong Kong Stock Connect and having the opportunity to be repriced by southbound funds is a rare positive for Jinjiu Lidu. On September 6th, the stock price of Jinjiu Lidu reached a new high since its listing at HKD 11.62 per share, finally catching up to the initial offering price, with a slight increase of 0.74% year-to-date.

In the eyes of some sellers, the valuation of Jinjiu Lidu is clearly underestimated. For example, Wang Zehua, an analyst at Founder Securities, stated in a research report that the liquidity of Jinjiu Lidu is expected to further improve after being included in the Stock Connect, and its current value is still undervalued.

Xiong Peng, an analyst at Debon Securities, believes in a research report that "Jinjiu Lidu's inclusion in the Hong Kong Stock Connect to a certain extent reflects the capital market's optimism about the company's fundamentals and recognition of its development prospects. If it can receive the support of southbound funds in the future, it means a broader investor base and better liquidity."

Currently, the increase in liquidity from southbound funds has immediately improved the valuation of Jinjiu Lidu in the short term. However, based on past data and experience, it is not easy to sustain a long-term uptrend for stocks included in the Stock Connect.

According to Wind data, apart from the recent adjustment to the Stock Connect, a total of 314 stocks have been included in the Stock Connect in the past three years. Among them, 129 stocks experienced an uptrend after being included for 30 days, accounting for 41%. Among them, only 31 stocks are classified as Wind's primary industries of daily consumption and optional consumption, accounting for 24% of the total number of stocks that have risen. According to private equity investors who have been tracking the food and beverage industry in the East China region, they stated that they "would not consider" investing in Zhenjiu Lidu after its market value exceeded 30 billion. These investors believe that the current influx of funds is mainly driven by short-term speculation. From a fundamental perspective, the soy sauce and liquor industry is currently experiencing consolidation, especially for manufacturers focusing on the mid-to-high-end price range, which have suffered significant losses and are actively reducing inventory. These investors are more inclined towards targets with stronger certainty, as the liquor stocks in the A-share market are currently in a "value trap".

The pricing logic in the Hong Kong stock market differs significantly from that of the A-share market where liquor stocks are listed.

A food and beverage analyst from a securities firm in South China stated that the pricing of Zhenjiu Lidu, a nationwide high-end liquor company, has "great flexibility". The valuations of Shede Winery (600702.SH), Shuijingfang (600779.SH), and Jiugui Liquor (000799.SZ) can be used as references.

As of the close on September 6th, the trailing P/E ratios of the aforementioned three companies were 27 times, 34 times, and 42 times, while Zhenjiu Lidu was around 16 times.

Expanding Against the Trend to Clear Inventory

Since 2022, the soy sauce and liquor industry has been in a downturn, and companies other than Guizhou Maotai have entered a prolonged adjustment period.

For example, according to the semi-annual report of China Resources Beer (0219.HK), the acquired Jinsha Distillery saw a significant year-on-year decline of 51% and 41% in revenue and net profit respectively in the first half of this year. According to a research report by Huachuang Securities, Guotai Liquor, which belongs to the third camp of soy sauce and liquor companies along with Jinsha Distillery and Zhenjiu Lidu, recorded a negative growth of 22% last year.

However, the chill in the industry does not seem to have affected Zhenjiu Lidu. Its core soy sauce and liquor brand, Zhenjiu, achieved a revenue growth of 9.61% last year and contributed 2.31 billion yuan in revenue in the first half of this year, a year-on-year increase of 14.9%, accounting for 65.5% of the total revenue.

According to information obtained from private equity investors in East China, Zhenjiu Lidu conducted significant rebate activities for its Zhenjiu products in the first half of this year to clear inventory, such as giving consumers red envelopes for opening bottles.

To achieve meticulous management of its distribution channels, Zhenjiu Lidu has a large sales team.

According to a report by the Ouyangyu team of Huachuang Securities, Zhenjiu Lidu expanded against the trend and recruited nearly 2,000 sales personnel and over 3,000 marketing personnel. The number of marketing personnel ranks among the top three in the industry, along with Yanghe and Gujing, which have fine-tuned distribution channels.

However, Zhenjiu Lidu's sales expense ratio has been increasing year by year, reaching 16.79%, 20%, and 22.92% from 2020 to 2022, respectively. In the first half of this year, its sales expense ratio reached 22.69%, higher than the level of less than 20% for Shede Winery.

Representatives from Zhenjiu Lidu also stated that the company's inventory is relatively low compared to others in the industry.

However, the aforementioned private equity investors also mentioned that according to feedback from distribution channels, many distributors of Zhenjiu Lidu opened bottles, scanned QR codes, and sold the opened bottles at a lower price to clear inventory in the first half of this year. "Zhen 15 could be sold for as low as 200 yuan." Another industry insider confirmed this statement to Xinfeng.

According to the e-commerce platform, the retail price of Zhen 15 is about 450 yuan per bottle, so the 200 yuan opening retail price is essentially a 50% discount.

However, Xinfeng has learned that the manufacturer discovered some distributors engaging in arbitrage by opening bottles and scanning QR codes last month, and has temporarily suspended the activity.

Xinfeng (ID: TradeWind01) has reached out to relevant individuals at Zhenjiu Lidu to verify the widespread arbitrage behavior among distributors, but as of the time of writing, no response has been received.

In the first half of this year, the revenue of Zhenjiu Lidu's mid-high-end products, including Zhen 15, decreased by 0.3% YoY to 1.268 billion yuan, and the revenue proportion dropped to 36%, being surpassed by mid-low-end products.

In a horizontal comparison, due to the fact that nearly 40% of Zhenjiu Lidu's revenue comes from mid-low-end products, its profitability is slightly weaker compared to its peers. In the first half of this year, its gross profit margin was only 58%, while Shedaojiu, Jiuguijiu were both above 70%, and Shuijingfang was close to 80%.