VCOYY Viña Concha y Toro S.A.

Sector financial performance:

This company, grouped into wineries sector of alcoholic beverage industry, is a wine producer.

As cost of wine (grapes) increased in the past two years, producers in this sector have all experienced increasing pressure on selling price, which may be the major reason of a general decline in demand and thus in increasing competition and spending on marketing during this period. The decline in demand has been also indicated by declining wholesale of those producers, which means that their retail customers experienced troubles in selling their products. Some of producer turned to maintain their own retail sale by intensive marketing. However, increasing marketing costs resulted from expanding their owned retail operation also dragged down their efforts in improving profitability. However, since this is growing sector with about 3% annual growth in the past 20 years, a positive prospective future driven by stronger demand for premium wines may still be expected.

We have seen a diversified performance in terms of improvement in gross margin from producers of wine in this sector. There has been a generally increasing pressure on companies’ margin due to increasing wine costs and competition. However, as the focus of some of companies shifted to their owned retail channels by cutting off low efficient wholesale business, gross margin seems to be improved while the whole profitability was not due to increasing expenses in expanding their owned retail channels.

The typical gross margin for companies focusing on retail sales channels is about 65% with SG&A% of about 53% and operating margin of about 11%. And the gross margin of wine producers relying on wholesale is about 34% with SG&A% of 25% and operating margin of about 10%.

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Company performance:

It seems that demand from outside Chile and Argentina continued to be weak in since 2017 as indicated by declining sales volumes. The declining may be accelerating in 2018.

For the first nine months of fiscal 2018 compared with same period of 2017(ended 20180930)

Sales decreased about 4%.

For fiscal 2017 compared with 2016

Sales decreased about 2.2% attributable to decrease of about 4% in wine sales volume due to weaker demand from international market (other than Chile and Argentina).

Sales increased by 3.5% and 9% in 2016 and 2015 respectively.

Its gross margin continued to decline (down to about 34% in 2018) since 2016 due to increasing cost of raw materials (grapes). It seems that it has a large space to improve its production management and efficiency by comparing with its peers who have much better performance in terms of gross margin. While declining demand and intensive competition caused increased spending in marketing and advertising, this company has still been able to improve its efficiency and kept lowering its SG&A%, which helped offset the decline in gross margin. ( about 10% in 2018).

Stock price

Our relativity of valuation methods and analysis indicate that this stock is currently slightly overvalued compared with its peers with an enterprise price/EBI ratio of about 21($39/share) considering the uncertainty in demand and increasing cost of wine.

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