As a baijiu(chinese liquor) value investor in the secondary market, Zhenjiu Lidu (06979.HK), the 'No.1 Baijiu in Hong Kong Stocks', has been 'neglected' by secondary market investors.

Recently, Zhenjiu Lidu's stock price seems to have shown signs of a 'comeback'.

On September 5th, Zhenjiu Lidu was officially included in the Hong Kong Stock Connect trading, and its stock price finally climbed off the floor. On September 5th, Zhenjiu Lidu's stock price rose more than 12%, and in the past three trading days, it has risen 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 Zhenjiu Lidu, providing it with incremental liquidity and amplifying stock price fluctuations. As the only baijiu listed company in Hong Kong stocks, Zhenjiu Lidu's pricing anchor is in the A-share baijiu sector, and its stock price will also respond to the pricing logic of southbound funds.

According to a food and beverage analyst from a brokerage firm in South China who spoke to Tradewind01, if Zhenjiu Lidu were priced according to the pricing logic of a domestically-focused high-end wine enterprise, its "elasticity would be large".

However, just based on performance fundamentals, on the one hand, due to Zhenjiu Lidu's relatively high expense ratios, its profitability is somewhat behind that of domestically-focused high-end wine enterprises; on the other hand, in the context of industry adjustments, especially in the soy sauce liquor segment, Zhenjiu Lidu still needs to prove that it has stepped out of the pressure of channel inventory.

Up more than 7 billion in three days

Zhenjiu Lidu, once boasting the label of 'the second largest sauce liquor company after Maotai', did not receive matching attention for a long time.

In April of this year, Zhenjiu Lidu's IPO broke and fell, with a first-day drop of more than 17%, and its stock price lay 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 priced again by southbound funds is a rare bullish signal for Zhenjiu Lidu. On September 6th, Zhenjiu Lidu's stock price touched a new high of HKD 11.62 per share since its listing, finally catching up with its original IPO price, and rose 0.74% this year.

From the perspective of some sellers, Zhenjiu Lidu's valuation is clearly underestimated. For example, Wang Zehua, an analyst at Founder Securities, said in a research report that Zhenjiu Lidu's 'entry into the platform is expected to further enhance liquidity, and its current value is still undervalued.'

Xiong Peng, an analyst at Debont Securities, believes in a research report that 'Zhenjiu Lidu's inclusion in the Hong Kong Stock Connect reflects the capital market's bullish view on the company's fundamentals and recognition of its development prospects. If it can obtain the support of southbound funds in the future, it means a wider investor base and better liquidity.'

At present, the increase in southbound funds liquidity has an immediate positive effect on Zhenjiu Lidu's valuation, but past data experience shows that the long-term trend of stocks included in the Hong Kong Stock Connect is not easy to maintain.

According to Wind data, in addition to this Hong Kong Stock Connect adjustment, there have been a total of 314 stocks included in the Hong Kong Stock Connect in the past three years, of which 129 have shown an upward trend within 30 days after inclusion, accounting for 41% of the total. Among them, only 31 stocks were classified as Wind day-to-day consumption and optional consumption, accounting for 24% of the total number of upward trending stocks.

A private placement person who has been tracking the food and beverage industry in East China told Tradewind01 that he 'would not consider it' if Zhenjiu Lidu's market value exceeded 30 billion.

The above-mentioned person believes that the funds currently entering are mainly for short-term speculation. From a fundamental perspective, the current soy sauce liquor industry is in consolidation, especially manufacturers that focus on the mid-high end price band, which suffer significant losses and are resorting to inventory clearing. He leans more towards targets with more certainty, after all, the white wine targets in the A-share market are currently in a 'value valley.'

The pricing logic of Hong Kong stocks is quite different from that of A-shares in the baijiu sector.

According to a food and beverage analyst from a brokerage firm in South China who spoke to Tradewind01, if Zhenjiu Lidu were priced according to the pricing logic of a domestically-focused high-end wine enterprise, its 'elasticity would be large.' Its valuation can be compared to that of Shede Spirits (600702.SH), Sichuan Swellfun (600779.SH) and Jiugui Liquor (000799.SZ).

As of the close of September 6th, the rolling P/E ratios of the above-mentioned three companies were 27 times, 34 times, and 42 times, respectively, while Zhenjiu Lidu was about 16 times.

Expanding and clearing inventory against the trend

Since 2022, the sauce wine industry has been in a downturn, and sauce wine enterprises outside Kweichow Moutai have generally entered a long adjustment period.

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

But the industry's chill does not seem to have spread to Zhenjiu Lido. Its core sauce wine brand Zhenjiu recorded a revenue growth rate 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%, with a revenue ratio of 65.5%.

According to TradeWind01, an East China private equity source, Zhenjiu Lido's terminal rebate activity for Zhenjiu was "very strong" in the first half of this year, through opening bottles to give consumers red envelopes as a way to reduce inventory.

To achieve fine management of channels, Zhenjiu Lido has a large number of sales team members.

According to a report by the Ouyang Yu team of Huachuang Securities, feedback from channels shows that Zhenjiu expanded against the trend in 22, recruiting nearly 2,000 sales personnel and breaking through 3,000 marketing personnel. The number of marketing personnel ranks among the top three in the industry, alongside Yanghe and Gujing.

But Zhenjiu Lido's sales expense ratio has been rising 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% of Shede Spirits.

Zhenjiu Lido insiders also told TradeWind01 that Zhenjiu Lido's inventory is relatively low in the industry.

However, the above-mentioned private equity source also told TradeWind01 that according to feedback from channels, many distributors of Zhenjiu have arbitrage by opening bottles and scanning codes to sell low-priced bottled wine to reduce inventory. "Zhen 15 may have been sold for 200 yuan." Another industry source confirmed this.

According to the e-commerce platform, the retail price of Zhen 15 is about 450 yuan/bottle, and the above-mentioned retail price of opened bottle wine at 200 yuan is equivalent to a halving.

However, TradeWind01 learned that the manufacturer discovered some distributors' arbitrage behavior of opening bottles and scanning codes last month and has suspended the activity.

TradeWind01 contacted Zhenjiu Lido insiders to verify whether there is widespread arbitrage behavior among distributors, but as of press time, no response has been received.

In the first half of this year, the revenue of Zhenjiu Lido's second-tier products, including Zhen 15, decreased by 0.3% year on year to 1.268 billion yuan, and the revenue ratio decreased to 36%, overtaken by mid- to low-end products.

In comparison, due to Zhenjiu Lido's nearly 40% revenue contribution from mid-to low-end products, its profit performance is slightly weaker than that of its peers. In the first half of this year, its gross profit margin was only 58%, while Shede Spirits, Jiugui Liquor, and Sichuan Swellfun were all above 70% and Swellfun was close to 80%.