Equity Research February 8, 2018

China Mengniu Long-term expectation prevails in bull market

Results Preview Maintain BUY

Near-term earnings could be a miss Ticker 02319.HK We expect Mengniu’s core earnings (Mengniu + Yashili) will shrink CICC investment rating BUY from Rmb1.48bn in 1H to Rmb1.15bn in 2H due to cost inflation and Last close HK$23.85 an increased SG&A/sales ratio HoH despite accelerated top line CICC target HK$25.92 growth and narrowed losses from Yashili (est. at Rmb34mn vs. 52wk price range HK$27.25–14.11 Rmb122mn in 1H) in 2H. CMD losses also trimmed in 2H but cannot Market cap (bn) HK$94 offset the decline of Mengniu’s accounting profit HoH. We thus Daily value (mn) HK$388.61 expect full year earnings may come in at Rmb2.1bn on the back of Shares outstanding (mn) 3,927 10% top line growth, 15.3% below market consensus and 12.8% Free float (%) 100 below our earlier expectation. Dividend payout ratio may stay at the Daily volume (mn sh) 15.37 guided range of 20–25% although free operating cash flow can Business sector Food & Beverages suggest a maximum of 70% to indicate possible M&A opportunities.

02319.HK HSCEI 188 Trends to watch 166 ► Earnings miss could be dragged by mild cost inflation, a resilient expense ratio and weaker-than-expected return from both 144 Yashili and CMD. 122

Relative Value (%) Value Relative 100 ► Long-term outlook remains unchanged as top line growth is 78 accelerating while a product-driven growth strategy has been Feb-2017 May-2017 Aug-2017 Nov-2017 Feb-2018 working effectively. ► Long-term expectations may prevail in the bull market despite a (Rmb mn) 2016A 2017E 2018E 2019E possible miss in near-term earnings. Revenue 53,779 59,366 64,644 70,536 (+/-) 9.7% 10.4% 8.9% 9.1% Valuation and recommendation Net profit -751 2,072 3,159 3,811 (+/-) -131.7% N.M. 52.5% 20.6% We cut our FY17 & FY18 earnings forecasts by 12.8% and 6.9% while lifting our sales expectations by 2.2% and 3.1% to reflect a stronger EPS -0.19 0.53 0.80 0.97 top line momentum vs. a slower pace of margin uptrend. We believe BPS 5.31 5.75 6.43 7.21 DPS 0.09 0.13 0.18 0.22 Mengniu’s product-driven strategy may still be able to maintain both top line rally and a margin uptrend in the long run. We thus raise the CPS 1.15 1.23 1.39 1.51 long-term growth expectation in our DCF model and raise our P/E N.M. 38.7 23.5 19.5 end-2018 TP from HK$20.24 to HK$25.92. Maintain BUY though we P/B 4.0 3.6 2.9 2.6 EV/EBITDA 76.3 17.8 14.3 12.5 believe the earnings miss may cap share price performance in the near term. Dividend yield 0.4% 0.6% 1.0% 1.2% ROAA -1.5% 4.0% 5.6% 6.3% ROAE -3.5% 9.5% 13.2% 14.2% Risks

Margin recovery pace slower than expected.

Source: Wind Info, Bloomberg, company data, CICC Research

Paul Feiyang YUAN

Analyst [email protected] SAC Reg. No.: S0080511030012 SFC CE Ref: AIZ727

Please read carefully the important disclosures at the end of this report CICC Research: February 8, 2018

Financial summary

Financial statement (Rmb mn) 2016A 2017E 2018E 2019E Financial ratios 2016A 2017E 2018E 2019E Income statement Growth ability Revenue 53,779 59,366 64,644 70,536 Revenue 9.7% 10.4% 8.9% 9.1% COGS -36,144 -38,762 -42,018 -45,628 Operating profit -115.9% N.M. 15.6% 11.4% Selling expenses -13,435 -14,845 -16,033 -17,482 EBITDA -71.1% 321.4% 12.9% 9.9% Administrative expenses -2,471 -2,331 -2,607 -2,818 Net profit -131.7% N.M. 52.5% 20.6% Other ops income (expense) -2,851 -854 -705 -754 Profitability Operating profit -420 3,276 3,786 4,218 Gross margin 32.8% 34.7% 35.0% 35.3% Finance costs 184 150 312 559 Operating margin -0.8% 5.5% 5.9% 6.0% Other income (expense) 0 0 0 0 EBITDA margin 2.2% 8.4% 8.7% 8.8% Profit before income tax -461 2,868 4,164 4,952 Net margin -1.4% 3.5% 4.9% 5.4% Income tax -351 -571 -701 -808 Liquidity Minority interest 62 -226 -304 -334 Current ratio 1.30 1.60 1.78 1.96 Net profit -751 2,072 3,159 3,811 Quick ratio 1.08 1.27 1.44 1.62 EBITDA 1,181 4,979 5,624 6,183 Cash ratio 0.46 0.65 0.84 1.03 Recurrent net income -751 2,072 3,159 3,811 Liabilities / assets 48.1% 48.4% 46.5% 44.5% Balance sheet Net debt / equity 6.1% 11.7% 0.2% net cash Cash and bank balances 7,031 8,336 11,530 15,214 Return Trade and bill receivables 5,045 3,575 3,896 4,256 RoA -1.5% 4.0% 5.6% 6.3% Inventories 3,314 4,220 4,581 4,983 RoE -3.5% 9.5% 13.2% 14.2% Other current assets 4,447 4,447 4,447 4,447 Per-share data Total current assets 19,837 20,578 24,454 28,900 EPS (Rmb) -0.19 0.53 0.80 0.97 Fixed assets and CIP 13,970 14,322 14,541 14,634 BPS (Rmb) 5.31 5.75 6.43 7.21 Intangible assets and others 15,317 19,025 19,135 19,353 DPS (Rmb) 0.09 0.13 0.18 0.22 Total non-current assets 29,287 33,348 33,677 33,987 Cash flow per share (Rmb) 1.15 1.23 1.39 1.51 Total assets 49,124 53,926 58,131 62,887 Valuation Short-term borrowings 3,045 1,143 1,143 1,143 P/E N.M. 38.7 23.5 19.5 Trade and bill payables 11,917 11,308 12,275 13,356 P/B 4.0 3.6 2.9 2.6 Other current liabilities 341 442 358 260 EV/EBITDA 76.3 17.8 14.3 12.5 Total current liabilities 15,303 12,893 13,776 14,759 Dividend yield 0.4% 0.6% 1.0% 1.2% Long-term borrowings 5,542 10,455 10,455 10,455 Total non-current liabilities 8,318 13,231 13,231 13,231 Total liabilities 23,621 26,124 27,007 27,990 Share capital 357 357 357 357 Retained profit 20,488 22,210 24,878 27,968 Equity 20,845 22,567 25,236 28,325 Total liabilities & equity 49,124 53,926 58,131 62,887 Cash flow statement Pretax profit -461 2,868 4,164 4,952 Depreciation & amortization 1,602 1,703 1,837 1,965 Change in working capital 1,897 57 201 221 Others 1,476 186 -729 -1,193 Cash flow from operations 4,513 4,815 5,473 5,946 Capital expenditure -3,037 -2,706 -2,200 -2,200 Others -968 -3,114 763 1,011 Cash flow from investing -4,005 -5,819 -1,437 -1,189 Equity financing 0 0 0 0 Bank borrowings -2,970 3,448 0 0 Others -1,066 -1,138 -843 -1,073 Cash flow from financing -4,036 2,310 -843 -1,073 Foreign exchange gain (loss) 51 0 0 0 Net changes in cash -3,529 1,305 3,194 3,684 Source: Company data, CICC Research

Company description

China Mengniu Dairy Co., Ltd and its subsidiaries manufacture and distribute quality dairy products in China. It is one of China’s leading manufacturers of dairy products, with Mengniu being its core brand. The group’s diversified range of products includes liquid products, such as UHT milk, milk beverages and yogurt, as well as ice cream and other dairy products like milk powder. Mengniu’s market share has ranked among the top two in China over recent years. In 2013, Mengniu acquired controlling stakes in China Modern Dairy and Yashili, comprehensively upgrading its raw milk and products.

Please read carefully the important disclosures at the end of this report 2 CICC Research: February 8, 2018

Earnings miss could be dragged by mild cost inflation, a resilient expense ratio and weaker-than-expected return from both Yashili and CMD. Dairy demand warm-up in 2H has driven up raw milk prices for both the industry and the company itself. An increase in packaging goods prices (mainly paper cartons) also added to the mild cost inflation in both 2H17 and possibly FY18. We expect the selling expense ratio to move up both HoH and YoY in 2H17 and in the near term given more new product launches, ongoing channel cultivation to penetrate lower tier cities, and World Cup promotions in FY18. The G&A expense ratio may also go up in 2H17 as the first batch of options and selective share fees are booked, especially as there is a seasonal pattern of G&A expenses going up HoH almost every year. Foreign exchange loss was an extra amid RMB appreciation, and estimated at Rmb200mn for the current year. This risk could be largely removed this year since the company bought futures contracts to hedge at the end of last year.

Yashili recovered as sales growth came back in 2H17, but it still needs to spend heavily on A&P to underpin the revenue growth outlook. We expect the company may narrow its loss to Rmb34mn in 2H17 but generate merely above breakeven earnings this year. Losses at CMD also narrowed in 2H17 according to the latest company announcement, but making accounting profit this year will require an average raw milk selling price of no less than Rmb3.90/kg by our estimate.

Long-term outlook remains unchanged as top line growth is accelerating and product-driven growth strategy has been working effectively. Despite a possible earnings miss in the near term, Mengniu may still appeal to the market for sales growth acceleration in 2H17 on the back of demand warm-up, market expansion into lower tier cities and a product-driven strategy that will contribute to both top line growth and margin improvement. Looking forward, we do not expect any of these three drivers will be muted noticeably, and believe sales growth from organic factors can be maintained at 10% in both FY18 and FY19 with a steady margin uptick from mainly the mix upgrade and GP margin expansion.

The company’s product-driven strategy has been working effectively since 1H17. On a full year basis, Deluxe UHT milk can still grow 12–13% YoY in FY17. Other premium products that can outpace the company’s average sales growth include Just Yogurt (30%), Fruit Yogurt (30%) and parent-brand chilled yogurt (15%). New product launches this year may still follow a premiumization strategy. So far this year we have seen Zuo yogurt (a high-end niche in the Suansuanru series), a UHT version of Fruit Yogurt, Charcoal Yogurt (a niche of parent brand chilled yogurt) and a cereal-enriched yogurt under the brand name Activia. We also expect Future Star (children’s milk series) may start to offer Organic Milk, Just Yogurt will have new products launched to expand the brand portfolio, and both Activia and Deluxe will develop more high-end offerings, all in this year. As we saw in 1H17, the mix upgrade pushed up GP margin by 1ppt YoY and this trend may continue if the new product development spree can be sustained.

Margin improvement can be expected as a result of both cross-category efforts and product mix upgrades within each category. Currently, both Ice Cream and Yashili’s IMF business are still laggards while chilled dairy products are also seeing below-average returns, making the UHT product category the sole driver. We expect the margin contribution of chilled dairy products may catch up this year since quite a few product ideas came from this product category, but both Ice Cream and Yashili’s IMF business may take a longer time to pay off.

Long-term expectations may prevail in bull market despite possible miss on near-term earnings. In a bull market, investors may try to forgive near-term earnings misses if long-term growth can still be expected. Also because the earnings miss could be a result of slower margin improvement while sales growth can even accelerate, the market may thus firmly believe in future margin prospects and tolerate a margin miss in the near term.

Please read carefully the important disclosures at the end of this report 3 CICC Research: February 8, 2018

Figure 1: Financial comparison Historical data YoY data Annual Semi-Annual (Rmb mn) 2H17E 2H16 YoY 2017E 2016 YoY 2015 2016 2017E 2018E 1H15 2H15 1H16 2H16 1H17 2H17E Sales 29,900 26,522 12.7% 59,366 53,779 10.4% 49,027 53,779 59,366 64,644 25,564 23,709 27,257 26,522 29,466 29,900 Liquid Milk 27,814 24,341 14.3% 53,186 48,103 10.6% 43,327 48,103 53,186 57,757 21,941 21,386 23,762 24,341 25,372 27,814 Ice Cream 490 477 2.8% 2,475 2,180 13.5% 2,141 2,180 2,475 2,772 1,644 497 1,703 477 1,985 490 Other Dairy Products 1,165 653 78.3% 1,487 1,293 15.0% 1,347 1,293 1,487 1,636 818 529 640 653 322 1,165 Mengniu 28,650 25,471 12.5% 57,149 51,576 10.8% 46,815 51,576 57,149 62,165 24,403 22,412 26,105 25,471 28,499 28,650 Yashili 1,251 1,057 18.4% 2,218 2,203 0.6% 2,762 2,203 2,218 2,479 1,465 1,297 1,147 1,057 967 1,251 Gross profit 10,101 8,454 19.5% 20,604 17,635 16.8% 15,375 17,635 20,604 22,626 8,143 7,350 9,181 8,454 10,503 10,101 Mengniu 9,562 7,994 19.6% 19,617 16,584 18.3% 14,242 16,584 19,617 21,496 7,573 6,669 8,590 7,994 10,055 9,562 Yashili 539 457 18.0% 987 1,052 -6.2% 1,133 1,052 987 1,130 722 680 580 457 448 539 Selling expenses -7,701 -6,986 10.2% -14,845 -13,435 10.5% -10,985 -13,435 -14,845 -16,033 -5,565 -5,522 -6,449 -6,986 -7,144 -7,701 G&A expenses -1,243 -1,313 -5.3% -2,331 -2,471 -5.7% -1,871 -2,471 -2,331 -2,607 -1,094 -778 -1,158 -1,313 -1,087 -1,243 Other expenses ,net 313 -2,100 n.m -153 -2,149 n.m 129 -2,149 -153 -200 -12 275 -49 -2,100 -466 313 EBIT 1,470 -1,946 n.m 3,276 -420 n.m 2,648 -420 3,276 3,786 1,472 1,324 1,525 -1,946 1,806 1,470 Mengniu 1,565 847 84.7% 3,585 2,554 40.3% 2,881 2,554 3,585 3,890 1,491 1,389 1,707 847 2,020 1,565 Yashili -95 -361 -73.7% -309 -2,974 n.m -233 -2,974 -309 -103 25 -65 -84 -361 -214 -95 Finance costs, net 112 58 94.3% 150 184 -18.7% 245 184 150 312 139 110 127 58 38 112 Share of asso. -202 -71 -185.5% -557 -225 -147.1% 138 -225 -557 67 143 -5 -155 -71 -355 -202 PBT 1,379 -1,959 n.m 2,868 -461 n.m 3,030 -461 2,868 4,164 1,754 1,430 1,498 -1,959 1,489 1,379 Taxation -197 -38 414.1% -571 -351 62.5% -510 -351 -571 -701 -321 -212 -313 -38 -374 -197 MI -238 169 n.m -226 62 n.m -153 62 -226 -304 -94 -178 -107 169 13 -238 Net profit 944 -1,828 n.m 2,072 -751 n.m 2,367 -751 2,072 3,159 1,339 1,040 1,077 -1,828 1,128 944 Mengniu 1,165 639 82.3% 2,759 1,872 47.4% 2,241 1,872 2,759 3,146 1,163 1,092 1,233 639 1,594 1,165 Yashili -34 -335 89.9% -156 -320 51.4% 118 -320 -156 5 109 9 15 -335 -122 -34 Gross margin 33.8% 31.9% 1.9% 34.7% 32.8% 1.9% 31.4% 32.8% 34.7% 35.0% 31.9% 31.0% 33.7% 31.9% 35.6% 33.8% Mengniu 33.4% 31.4% 2.0% 34.3% 32.2% 2.2% 30.4% 32.2% 34.3% 34.6% 31.0% 29.8% 32.9% 31.4% 35.3% 33.4% Yashili 43.1% 43.2% -0.1% 44.5% 47.7% -3.2% 41.0% 47.7% 44.5% 45.6% 49.3% 52.5% 50.6% 43.2% 46.3% 43.1% Selling expense/sales 25.8% 26.3% -0.6% 25.0% 25.0% 0.0% 22.4% 25.0% 25.0% 24.8% 21.8% 23.3% 23.7% 26.3% 24.2% 25.8% G&A expense/sales 4.2% 5.0% -0.8% 3.9% 4.6% -0.7% 3.8% 4.6% 3.9% 4.0% 4.3% 3.3% 4.2% 5.0% 3.7% 4.2% EBIT margin 4.9% -7.3% 12.3% 5.5% -0.8% 6.3% 5.4% -0.8% 5.5% 5.9% 5.8% 5.6% 5.6% -7.3% 6.1% 4.9% Mengniu 5.5% 3.3% 2.1% 6.3% 5.0% 1.3% 6.2% 5.0% 6.3% 6.3% 5.8% 5.6% 5.6% -7.3% 6.1% 4.9% Yashili -7.6% -34.1% 26.5% -13.9% -135.0% 121.1% -8.4% -135.0% -13.9% -4.2% 1.7% -5.0% -7.3% -34.1% -22.2% -7.6% PBT margin 4.6% -7.4% 12.0% 4.8% -0.9% 5.7% 6.2% -0.9% 4.8% 6.4% 6.9% 6.0% 5.5% -7.4% 5.1% 4.6% Effective tax rate 14.3% -2.0% 16.2% 19.9% -76.2% 96.1% 16.8% -76.2% 19.9% 16.8% 18.3% 14.8% 20.9% -2.0% 25.1% 14.3% Net margin 3.2% -6.9% 10.1% 3.5% -1.4% 4.9% 4.8% -1.4% 3.5% 4.9% 5.2% 4.4% 4.0% -6.9% 3.8% 3.2% Mengniu 4.1% 2.5% 1.6% 4.8% 3.6% 1.2% 4.6% 3.5% 4.6% 4.9% 4.8% 4.9% 4.7% 2.5% 5.6% 4.1% Yashili -2.7% -31.7% 29.0% -7.0% -14.5% 7.5% 4.3% -14.5% -7.0% 0.2% 7.4% 0.7% 1.3% -31.7% -12.6% -2.7% Source: Company data, CICC Research

Figure 2: Earnings forecast revisions Mengniu (consolidated P&L) 2017E 2018E 2019E (Rmb mn) Before After Chg. Before After Chg. Turnover 58,079 59,366 2.2% 62,680 64,644 3.1% 70,536 Gross profit 20,357 20,604 1.2% 22,088 22,626 2.4% 24,908 S&D costs -14,584 -14,845 1.8% -15,595 -16,033 2.8% -17,482 G&A expenses -2,287 -2,331 1.9% -2,526 -2,607 3.2% -2,818 Profit from operations 3,416 3,276 -4.1% 3,863 3,786 -2.0% 4,218 Finance cost, net 103 150 45.3% 260 312 19.9% 559 Profit before taxation 3,040 2,868 -5.6% 4,246 4,164 -1.9% 4,952 Taxation -636 -571 -10.2% -708 -701 -1.0% -808 Net profit 2,377 2,072 -12.8% 3,395 3,159 -6.9% 3,811 EPS (fully diluted) (Rmb) 0.61 0.53 -12.8% 0.86 0.80 -6.9% 0.97 Gross margin 35.1% 34.7% -0.4% 35.2% 35.0% -0.2% 35.3% Selling exp./sales 25.1% 25.0% -0.1% 24.9% 24.8% -0.1% 24.8% G&A exp./sales 3.9% 3.9% 0.0% 4.0% 4.0% 0.0% 4.0% EBIT margin 5.9% 5.5% -0.4% 6.2% 5.9% -0.3% 6.0% Effective tax rate 20.9% 19.9% -1.0% 16.7% 16.8% 0.1% 16.3% Net profit margin 4.1% 3.5% -0.6% 5.4% 4.9% -0.5% 5.4% Source: Company data, CICC Research

Please read carefully the important disclosures at the end of this report 4 CICC Research: February 8, 2018

Figure 3: China raw milk prices

2014 2015 2016 2017 2018 YTD Rmb/kg 4Q 4.4 1Q 2Q 3Q

4.2

4.0

3.8 1Q18: 3.498 3.6 1Q17: 3.538 2Q17: 3.457 3Q17: 3.423 4Q17: 3.500 1Q16: 3.549 2Q16: 3.445 3Q16: 3.408 4Q16: 3.473 3.4 1Q15: 3.474 2Q15: 3.405 3Q15: 3.428 4Q15: 3.506 1Q14: 4.238 2Q14: 4.150 3Q14: 3.958 4Q14: 3.844 3.2 6/Jan 6/Apr 6/Jul 6/Oct Source: MoA, CICC Research

Figure 4: Modern channel check on Mengniu’s products

80% Liquid milk Yogurt 20% 70% 60%

10% 50%

40% 0% 30%

20% -10% 10%

-20% 0% 2016 16-May 16-Aug 16-Nov 17-Mar 17-Jun 17-Sep 17-Dec 2016 16-May 16-Aug 16-Nov 17-Mar 17-Jun 17-Sep 17-Dec Jan&Feb Jan&Feb Overall Yili Mengniu Overall Yili Mengniu Bright 80% High-end UHT UHT Yogurt 60% 150%

40% 100% 20%

0% 50% -20%

-40% 0%

-60% -50% -80% 2016 16-May 16-Aug 16-Nov 17-Mar 17-Jun 17-Sep 17-Dec 2016 Jan& 2016/05 2016/08 2016/11 2017/03 2017/06 2017/09 2017/12 Jan&Feb Feb Overall Yili- Ambrosial Mengniu- Just Yogurt Bright- Mosilian UHT total Mengniu-Deluxe Yili-Satine Modern Dairy Shengmu Organic 60% IMF 40%

20%

0%

-20%

-40%

-60%

-80% 2016 2016/05 2016/08 2016/11 2017/03 2017/06 2017/09 2017/12 Jan& Feb Overall Yili Yashili Biostime

Source: MoC, CICC Research

Please read carefully the important disclosures at the end of this report 5 CICC Research: February 8, 2018

Figure 5: DCF model (Rmb mn) 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E EBIT 3,786 4,203 4,623 5,085 5,594 6,153 6,768 7,445 8,190 9,009 9,909 YoY Chg (%) 15.6% 11.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Operating FCF 2,700 2,997 3,296 3,626 3,989 4,388 4,826 5,309 5,840 6,424 7,066 YoY Chg (%) 76.1% 11.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Terminal grow th rate 1.0% WACC 7.9% NPV of free cash flow 33,112 Cost of debt after tax 4.5% PV of terminal value 48,907 Cost of equity 8.3% Enterprise Value 82,019 Risk-free rate 2.8% Net Cash (Debt) -68 Risk-premium rate 5.5% Equity Value 81,951 Beta 1.0 Target leverage 10.0% Value per share (HK$) 25.92 Source: Company data, CICC Research

Figure 6: Valuation table Stock price Target Market cap P/E (x) P/B (x) ROE (%) Dividend Yield (%) EV/EBITDA Company Ticker Rating 2018/2/7 price HKD mn 2016A 2017E 2018E 2016A 2017E 2018E 2016A 2017E 2018E 2016A 2017E 2018E 2016A 2017E 2018E Food & Beverage China Foods 0506.HK 3.99 5.56 11,161 BUY 22.3 32.1 24.6 2.0 1.9 1.8 9.2 6.0 7.3 0.6 0.0 1.2 12.3 9.2 7.6 WH Group 0288.HK 9.12 11.13 133,830 BUY 16.5 15.7 13.3 2.7 2.5 2.2 16.4 15.8 16.8 2.9 3.1 3.6 8.6 8.3 7.5 Tingyi 0322.HK 14.50 15.92 81,441 BUY 55.2 37.0 27.8 3.6 3.3 3.1 6.4 9.0 11.2 0.9 1.4 1.8 11.1 10.4 8.8 Dali 3799.HK 7.35 8.55 100,652 BUY 25.4 23.1 19.6 5.8 5.3 4.7 22.6 22.8 23.8 2.7 2.6 3.1 15.4 13.8 11.6 H&H International 1112.HK 49.75 33.90 31,695 HOLD 26.1 28.7 23.5 7.8 6.1 4.9 29.9 21.4 20.7 0.0 0.0 0.0 14.3 14.4 12.5 Yashili 1230.HK 1.38 1.45 6,549 HOLD n.m n.m n.m 0.9 0.9 0.9 -5.6 -2.8 0.1 0.0 0.0 0.0 n.m n.m 47.0 Mengniu 2319.HK 23.85 25.92 93,668 BUY N.M. 38.7 23.5 4.0 3.6 2.9 -3.5 9.5 13.2 0.4 0.6 1.0 76.3 17.8 14.3 Modern Dairy* 1117.HK 1.46 2.57 8,952 BUY 17.3 n.m 8.3 1.0 1.1 1.1 5.9 2.4 13.5 0.0 0.0 0.0 14.4 13.3 7.7 China Shengmu 1432.HK 1.20 1.39 7,625 HOLD 8.9 21.8 16.0 1.1 1.1 1.0 12.7 4.9 6.3 0.0 0.0 0.0 6.3 9.4 7.8 Want Want 0151.HK 6.35 7.34 79,157 BUY 17.8 19.7 17.6 5.2 4.6 3.9 29.2 23.3 22.1 1.5 1.6 1.8 10.7 11.1 9.8 UPC 0220.HK 6.65 5.94 28,724 HOLD 37.5 28.8 28.0 1.9 1.8 1.7 5.0 6.2 6.1 0.5 0.7 0.7 9.8 9.1 8.5 Yihai 1579.HK 9.34 10.58 9,778 BUY 41.5 31.6 24.7 6.1 4.9 3.9 14.7 15.5 15.9 0.6 0.7 0.9 29.5 18.2 13.4 ZHOUHEIYA 1458.HK 7.76 9.72 18,493 BUY 20.5 19.3 17.3 3.4 3.5 3.1 16.4 18.3 17.8 2.0 1.8 2.1 12.1 11.0 9.6 Vinda Intl 3331.HK 15.18 16.74 18,128 BUY 27.7 29.2 26.1 2.7 2.1 2.0 9.6 7.1 7.5 1.1 1.3 1.2 13.2 13.0 11.4 Hengan Intl 1044.HK 73.90 90.00 89,137 BUY 20.5 19.0 16.6 4.8 4.7 4.2 23.4 24.7 25.2 4.8 3.4 3.9 14.1 11.9 10.4 Average 25.9 26.5 20.5 3.5 3.2 2.8 12.8 12.3 13.8 1.2 1.1 1.4 17.7 12.2 12.5 Source: Bloomberg, company data, CICC Research

Please read carefully the important disclosures at the end of this report 6 CICC Research

Important legal disclosures

General Disclosures This report has been produced by China International Capital Corporation Hong Kong Securities Limited (CICCHKS). This report is based on information available to the public that we consider reliable, but CICCHKS and its associated company(ies)(collectively, hereinafter “CICC”) do not represent that it is accurate or complete. The information and opinions contained herein are for investors’ reference only and do not take into account the particular investment objectives, financial situation, or needs of any client, and are not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. Under no circumstances shall the information contained herein or the opinions expressed herein constitute a personal recommendation to anyone. Investors should make their own independent evaluation of the information contained in this research report, consider their own individual investment objectives, financial situation and particular needs. CICC does not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. Neither CICC nor its related persons shall be liable in any manner whatsoever for any consequences of any reliance thereon or usage thereof.

The performance information (including any expression of opinion or forecast) herein reflect the most up-to-date opinions, speculations and forecasts at the time of the report’s production and publication. Such opinions, speculations and forecasts are subject to change and may be amended without any notification. At different periods, CICC may release reports which are inconsistent with the opinions, speculations and forecasts contained herein.

The analysts named in this report may have from time to time discussed with our clients, including CICC salespeople, traders, and other professionals, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analysts' published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analysts' fundamental equity rating for such stocks as described herein.

CICC’s salespeople, traders, and other professionals may provide oral or written market commentary or trading ideas that may be inconsistent with, and reach different conclusions from, the recommendations and opinions presented in this report. Such ideas or recommendations reflect the different assumptions, views and analytical methods of the persons who prepared them, and CICC is under no obligation to ensure that such other trading ideas or recommendations are brought to the attention of any recipient of this report. CICC’s asset management area, proprietary trading desks and other investing businesses may make investment decisions that are inconsistent with the recommendations or opinions expressed in this report.

Unless stated otherwise, any performance data quoted represents past performance. Past performance is not a indicator of future performance. No representation or warranty is made that any returns indicated will be achieved. Certain assumptions may have been made in this analysis which have resulted in any returns detailed herein. Changes to the assumptions may have a material impact on any returns detailed.

To the extent this material is provided to any recipient, this material is provided solely on the basis that the recipient has the capability to independently evaluate investment risk and is exercising independent judgment in evaluating investment decisions in that its investment decisions will be based on its own independent assessment of the opportunities and risks presented by a potential investment, market factors and other investment considerations.

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CICC Research

Special Disclosures CICC does and seeks to do business with companies covered in CICC Research. As a result, investors should be aware that CICC and/or its associated persons may have a conflict of interest that could affect the objectivity of this report.

Disclosures in relation to the Companies contained this report could be found at http://research.cicc.com/disclosure_en, or in the published latest company-specific research.

Distribution of ratings is available at http://research.cicc.com/en/disclosure/general.xhtml.

Explanation of stock ratings: “BUY” indicates analyst perceives absolute return of 20% or more over the next 6~12 months; “HOLD” between +20% and -10%; “SELL” -10% and below. Asterisk denotes coverage initiation or resumption.

Explanation of sector ratings: Analyst expects a sector rated “OVERWEIGHT” to outperform the market by 10% or more over the next 6~12 months, “EQUAL-WEIGHT” to end up between 10% below and 10% above the market, and “UNDERWEIGHT” to fall behind the market by 10% or more, over the next 6~12 months.

Copyright of this report belongs to CICC. Any form of unauthorized distribution, reproduction, publication, release or quotation is prohibited without CICC’s written permission. V160908 Editing: Jim SATKO

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Nanjing Hanzhong Road Branch Guangzhou Tianhe Road Branch Chengdu Binjiang Road (East) Branch Section C, 30th Floor, Asia Pacific Tower 40th Floor, Teemtower 1st & 16th Floors, Shangri-La Center 2 Hanzhong Road, Gulou District 208 Tianhe Road Block 9B, Binjiang Road (East) Nanjing 210005, P.R. China Guangzhou 510620, P.R. China Chengdu 610021, P.R. China Tel: (86-25) 8316-8988 Tel: (86-20) 8396-3968 Tel: (86-28) 8612-8188 Fax: (86-25) 8316-8397 Fax: (86-20) 8516-8198 Fax: (86-28) 8444-7010

Xiamen Lianyue Road Branch Wuhan Zhongnan Road Branch Qingdao Middle Hongkong Road Branch 4th Floor, Office Building, Paragon Center 4301-B, Poly Plaza 11th Floor, Shangri-La Center 1 Lianyue Road, Siming District 99 Zhongnan Road, Wuchang District Block 9, Hongkong Road (M), South District Xiamen 361012, P.R. China Wuhan 430070, P.R. China Qingdao 266071, P.R. China Tel: (86-592) 515-7000 Tel: (86-27) 8334-3099 Tel: (86-532) 6670-6789 Fax: (86-592) 511-5527 Fax: (86-27) 8359-0535 Fax: (86-532) 6887-7018

Chongqing Honghu Road (West) Branch Tianjin Nanjing Road Branch Dalian Gangxing Road Branch 1st & 10th Floors, Ourui Lanjue Center 10th Floor, Tianjin Global Trading Center 16th Floor, Wanda Center Block 9, Honghu Road (W), New North District 219 Nanjing Road, Heping District 6 Gangxing Road, Zhongshan District Chongqing 401120, P.R. China Tianjin 300051, P.R. China Dalian 116001, P.R. China Tel: (86-23) 6307-7088 Tel: (86-22) 2317-6188 Tel: (86-411) 8237-2388 Fax: (86-23) 6739-6636 Fax: (86-22) 2321-5079 Fax: (86-411) 8814-2933

Foshan Jihua 5th Road Branch Yunfu Xinxing Dongdi North Road Branch Changsha Chezhan Road (North) Branch 12th Floor, Trend International Business Building 2nd Floor, Service Building C1, Wens Science & 3rd Floor, Annex Building, Securities Tower 2 Jihua 5th Road, Chancheng District Technology Garden, Dongdi North Road 459 Chezhan Road (North), Furong District Foshan 528000, P.R. China Xincheng Town, Xinxing County Changsha 410001, P.R. China Tel: (86-757) 8290-3588 Yunfu 527499, P.R. China Tel: (86-731) 8878-7088 Fax: (86-757) 8303-6299 Tel: (86-766) 2985-088 Fax: (86-731) 8446-2455 Fax: (86-766) 2985-018

Ningbo Yangfan Road Branch Fuzhou Wusi Road Branch Xi’an Yanta Branch 11th Floor, Building Five, 999 Yangfan Road 38th Floor, Henglicheng Office Building 21th Floor, Capitaland West Tower, Hi-tech Industrial Development Zone No.128 Wusi Road, Gulou District No.64 Second Ring South Road West Section, Ningbo 315103, P.R. China Fuzhou 350001, P.R. China Yanta District, Xi'an 710065, P.R. China Tel: (86-574) 8907-7288 Tel: (86-591) 8625 3088 Tel: (+86-29) 8648-6888 Fax: (86-574) 8907-7328 Fax: (86-591) 8625 3050 Fax: (+86-29) 8648-6868