Deep-dive 2020-8: Yantai Changyu Pioneer Wine Co. Inc.

Yantai Changyu Pioneer Wine Co. Inc. (200869 CH) is China's largest wine producer, with a domestic market share of 11%.

The company has an illustrious history. It was founded during the Qing dynasty in 1892 by Cheong Fatt Tze, who bought 640,000 plants from Europe to grow grapes in the Shandong province of China. After three years of experimentation, he finally managed to find grapes that were well suited to the climate. The Yantai-Penglai region is now the core of China's wine industry, representing roughly 40% of domestic output.

Changyu is now one of top three brands in the industry together with Great Wall and Dynasty. Changyu's main Cabernet line costs somewhat above RMB 100 per bottle, but it also has much more affordable alternatives in the RMB 30-60 range. While the quality of their wines lags those of France or Australia, Changyu has been making progress. It has sought the help of European experts to develop its wines and even sought equity investments from foreign wineries. Changyu's new production facilities uses state-of-the-art European equipment.

After incredible growth in the 2000s, Changyu suffered throughout the 2010s. The first hit was from Xi Jinping's anti-corruption campaign launched around 2013. Following the anti-corruption campaign, sales of wines to restaurants used for government or SOE dinners was practically banned. Changyu's revenues took a nose-dive. Before the company had a chance to recover, imports of foreign wines sky-rocketed, partly thanks to lower tariffs. Foreign wines now make up roughly 53% of China's wine market. And finally in 2020, COVID-19 hit the restaurant industry, putting a further dent in Changyu's top-line growth.

We believe that these negative factors have now come to an end. Changyu reported a decent recovery in the third quarter of 2020 as China recovered from COVID-19. The prospects of mass-distributed vaccines increase our hopes for a full normalisation of the restaurant distribution channel. Second, China has imposed punitive tariffs on Australian wine of 107-212%, essentially shutting out roughly 19% of the supply. Some of this demand will switch to French or Chilean wines and some will flow to domestic producers such as Changyu.

Chinese consumption of wine is still minuscule compared to many other markets. China's per capita wine consumption in litres is 1/6 of that of the United States and only 1/25 of that of France. The older generation may prefer baijiu (rice wine), but younger consumers are more open to wine. Individuals are also becoming more health conscious, and wine is generally seen as a healthier option than baijiu.

While Changyu has an A-share listing, we see particular value in the company's B-share with ticker 200869 CH. The B-share trades at a 68% discount to the A-share, which is close to a record high. What might help narrow the discount is a relisting onto the Hong Kong Stock Exchange, as happened with property developer China Vanke in 2014. Even though a relisting might be a few years into the future, we think that you will get paid to wait. Changyu's B-share enjoys a 5%+ dividend yield and we project yearly earnings growth in the high single digits. We foresee a full recovery by 2022 leading to an EV/EBIT of 5.3x and a P/E of 7.9x - multiples that are almost unheard of in the global wine industry.

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The above article and PowerPoint presentation constitute the author’s personal views only and is for entertainment purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. The author may from time to time hold positions in the aforementioned stocks consistent with the views and opinions expressed in this article. Disclosure – we do not hold a position in Yantai Changyu B-share at the time of publishing this article (this is a disclosure and NOT A RECOMMENDATION).


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