December 11, 2018 Food & Beverages Gan Bei: low inventory to support growth HINA C

■ We believe the China baijiu sector’s short-term slowdown has been priced in, and we consider the sector’s current valuation to be attractive. ■ Positive on the long-term outlook on product mix upgrades and channel reforms. Current tight channel inventory supports volume growth in 1H19F ■ We initiate coverage on China’s baijiu sector with an Overweight rating. Our top pick is Moutai. We have an Add call on Yanghe and Hold on Wuliangye. AVIGATING AVIGATING N

Analyst(s) Lei YANG, CFA T (86) 21 6162 9676 E [email protected] FeiFei SUN T (86) 21 6162 5750 E [email protected]

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE Powered by END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CGS-CIMB the EFA SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. Platform

Navigating China Consumer Staples │Food & Beverages │December 11, 2018

TABLE OF CONTENTS Sector summary ...... 5 Our market survey finds younger generation has started to drink baijiu ...... 9 China Baijiu sector overview ...... 13 Comparison of major baijiu players ...... 19 Valuation and stock recommendation ...... 21 Sector, Company Briefs OR Appendices… ...... 27

2

INITIATION

Sector Note Navigating China │Food & Beverages │December 11, 2018

China Food & Beverages Overweight

Gan Bei: low inventory to support growth Highlighted Companies ■ We believe the China baijiu sector’s short-term slowdown has been priced in, Jiangsu Yanghe Brewery and we consider the sector’s current valuation to be attractive. ADD, TP Rmb120.0, Rmb99.4 close ■ Positive on the long-term outlook on product mix upgrades and channel Moutai is the king of the super-premium baijiu sector in China, with its strong reforms. Current tight channel inventory supports volume growth in 1H19F brand name and high collectable value. ■ We initiate coverage on China’s baijiu sector with an Overweight rating. Our We expect its Series brands to become top pick is Moutai. We have an Add call on Yanghe and Hold on Wuliangye. another sales growth driver for the future. Moutai is our top pick for the sector. Short-term slowdown has been largely priced in… Kwechow Moutai Co. Ltd Following their 3Q18 results announcements, baijiu companies’ share prices corrected ADD, TP Rmb720.0, Rmb583.0 close significantly due to the slowdown in sales growth. The SW Baijiu Index has dropped 24% Yanghe has a strong distribution network YTD. The current trailing P/E for the SW Baijiu Index is down to 20.6x, close to 1 s.d. and well-recognised brand. Thanks to its below its historical average P/E of 25.5x in Apr 2015-YTD 2018 (-1 s.d. is 20.1x). We expansion to new markets and further believe the baijiu sector’s short-term slowdown has been priced in, and we consider the penetration into its home market of Jiangsu, we expect a solid 17% sales sector’s valuation to be relatively cheap now. We do not expect the current slowdown to CAGR and 19% net profit CAGR over be as severe as in 2013-15, when the baijiu sector underwent a restructuring period. FY17-20F. … and we are positive on the long-term outlook Wuliangye Yibin We expect premiumisation and channel penetration to drive baijiu sales growth in the HOLD, TP Rmb55.00, Rmb52.82 close long run. Euromonitor forecasts China’s super premium (retail selling price of Wuliangye’s channel reform is currently >Rmb600/bottle) and premium baijiu segments (Rmb300-600/bottle) to post sales CAGR in progress. We expect these reforms and its series brands to drive a sales of 12% and 13%, respectively, in 2017-20F. We expect the tight channel inventory now CAGR of 17% over FY17-20F. to support baijiu companies’ sales growth. Our channel checks revealed Moutai’s channel inventory is c.1 month and Wuliangye’s is 1.0-1.5 months (vs. normalised 2-3 months).

Summary Valuation Metrics Baijiu becoming more popular with the younger generation P/E (x) Dec-18F Dec-19F Dec-20F Traditionally, the main consumers of baijiu are aged 30-50 years. However, based on our Jiangsu Yanghe Brewery 18.32 15.99 13.28 market survey in Oct 2018, 45% of survey respondents aged 20-30 years indicated they Kwechow Moutai Co. Ltd 21.65 18.94 15.96 Wuliangye Yibin 16.25 14.24 12.28 habitually drink baijiu. Our survey also revealed that demand for baijiu is likely to be more resilient than for other alcoholic drinks. Around 62% of survey respondents said they P/BV (x) Dec-18F Dec-19F Dec-20F would increase baijiu consumption in the long run. Jiangsu Yanghe Brewery 4.42 3.89 3.38 Kwechow Moutai Co. Ltd 6.57 5.51 4.61 Wuliangye Yibin 3.45 3.09 2.76 We like Moutai’s brand name and Yanghe’s distribution network Moutai achieved sales CAGR of 7% during the last baijiu downturn (2013-15), when Dividend Yield Dec-18F Dec-19F Dec-20F industry sales contracted by 6% CAGR, reflecting Moutai’s superior market position. For Jiangsu Yanghe Brewery 3.17% 3.63% 4.37% Kwechow Moutai Co. Ltd 2.36% 2.69% 3.20% Yanghe, we think its unique “go to market” distribution model as a competitive advantage. Wuliangye Yibin 3.21% 3.66% 4.25% It has more than 5,000 sales personnel vs. Moutai’s 684 and Wuliangye’s 576 in FY17.

Insert Initiate coverage on baijiu sector with Overweight We initiate on China’s baijiu sector with Overweight for its longer-term earnings growth potential. We have Add ratings on Moutai & Yanghe and Hold on Wuliangye. Catalysts: 1) government tax cuts and stimulus policies triggering domestic consumption recovery, Analyst(s) and 2) rise in weightage of China’s large-cap securities in MSCI to 20% from 5%.

Figure 1: Moutai’s, Wuliangye’s and Yanghe’s relative share price performance vs. market index (rebased 31 Dec 2012 = 100)

Share performance comparison ( rebase 31 Dec 2012 =100) 400 Baijiu industry adjustment cycle Baijiu industry recovery cycle

Lei YANG, CFA 300 T (86) 21 6162 9676

E [email protected] 200 FeiFei SUN T (86) 21 6162 5750 100 E [email protected]

0 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Moutai Wuliangye Yanghe Shanghai Stock Exchange Composite Index Shenzhen Stock Exchange Component Index SOURCES: CGS-CIMB RESEARCH, BLOOMBERG

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN Powered by EFA THE UNITED STATES IT IS DISTRIBUTED BY CGS-CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. EFACustomEntityStatement Platform

Navigating China Food & Beverages │December 11, 2018

KEY CHARTS

Short-term slowdown largely priced in… SW Baijiu Index trailing P/E Following their 3Q18 results announcements, baijiu Current trailing P/E(x): 20.6; Mean:25.5; +1std: 31.0; -1std: 20.1 companies’ share prices corrected significantly due to the 45 slowdown in sales growth. The Shenwan (SW) Baijiu The trailing P/E (x) on CSSW Baijiu Index Mean +1 std -1 std Index has dropped 24% YTD. The current trailing P/E for 40 the SW Baijiu Index is down to 20.6x, close to 1 s.d. below 35 its historical average P/E of 25.5x in Apr 2015-YTD 2018 (- 30 1 s.d. is 20.1x). The baijiu sector’s short-term slowdown 25 has been priced in and we consider the sector’s P/E 20 valuation to be attractive now. 15

Jun-15 Jun-17 Jun-18 Jun-16

Oct-16 Oct-15 Oct-17 Oct-18

Apr-18 Apr-15 Apr-16 Apr-17

Feb-17 Feb-16 Feb-18

Dec-15 Dec-16 Dec-17

Aug-15 Aug-16 Aug-17 Aug-18

… and we are positive on the industry’s long- China baijiu industry sales performance and forecast term prospects China baijiu industry cycle Adjustment period Recovery period New growth period sales value growth 2012-15 CAGR 2015-17 CAGR 2017-20F CAGR Euromonitor forecasts that China’s super premium (retail Low-end 10% 0% -8% selling price of >Rmb600/bottle) and premium baijiu Mid-range 7% 9% 9% Premium 1% 13% 13% segments (Rmb300-600/bottle) will achieve sales CAGR Super premium -11% 14% 12% of 12% and 13%, respectively, in 2017-20F. We also Total China Baijiu Industry -5% 12% 11% Note: Recovery period sales CAGR of 2015-17 is higher than the sales CAGR of the new growth expect the current tight channel inventory to support baijiu period of 2017-20F, due to a low base in 2015 (2015:Rmb729bn vs 2017: Rmb915bn) companies’ sales growth.

Our market survey finds baijiu becoming Our survey revealed younger consumers are drinking baijiu more popular with the younger generation 100% Traditionally, the main consumers of baijiu are aged 30-50 years. However, based on our market survey in Oct 2018, 45% of survey respondents aged 20-30 years indicated they habitually drink baijiu. Our survey revealed that baijiu 50% is gaining popularity among consumers aged below 20 years.

0% < 20yrs old 20-30 yrs old 30-40 yrs old 40-50 yrs old > 50 yrs old

Drink baijiu Don't drink

Moutai is the most valuable baijiu brand; we Yanghe's number of sales personnel far exceeds Moutai’s and like Yanghe’s unique distribution network Wuliangye’s Moutai achieved 7% sales CAGR in 2012-15, when there No. of sales persons was downturn in the baijiu industry; over this period 6000 Wuliangye’s sales declined by 7% CAGR and Yanghe’s fell 5000 by 2% CAGR. This reflects Moutai’s superior market position, in our opinion. 4000

Yanghe’s unique “go-to-market” distribution model is its key 3000 competitive advantage. Yanghe has more than 5,000 sales personnel (vs. Moutai’s 684 and Wuliangye’s 576) and 2000 collaborates with more than 8,000 distributors (vs. Moutai’s 1000 3,546 and Wuliangye’s 1,136). 0 FY12 FY13 FY14 FY15 FY16 FY17 Yanghe Moutai Wuliangye

SOURCES: CGS-CIMB RESEARCH, WIND, EUROMONITOR, COMPANY REPORTS

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Navigating China Food & Beverages │December 11, 2018

Gan Bei: low inventory supports growth Sector summary Short-term slowdown in demand has been priced in… The A-share listed Chinese hard liquor companies achieved average revenue growth and net profit growth of 12.6% and 11.9%, respectively, in 3Q18, significantly lower than their growth rates in 1Q18 and 2Q18, mainly due to: 1) some companies – such as Wuliangye and Kouzijiao (603589 CH, Not Rated) – proactively limiting sales volume growth in 3Q18 in order to support selling prices, 2) the high base of 3Q17, and 3) economic slowdown negatively affecting sales volume growth. We expect the slowdown in volume growth to continue in 4Q18F and into 1H19F, and have reflected this relatively short-term blip (the last downturn lasted from 2013-15) into our earnings forecasts. We expect topline growth to face moderate slowdown in 4Q18F but project that Moutai, Wuliangye and Yanghe would still achieve over 20% topline growth and earnings growth in FY18F to meet their respective management’s guidance.

Figure 2: Baijiu sector’s revenue growth and net profit growth performance vs. Moutai’s, Wuliangye’s and Yanghe’s Revenue YoY growth 1Q18 2Q18 3Q18 4Q18F FY18F FY19F Moutai 31.2% 46.4% 3.2% 21.4% 22.6% 11.7% Wuliangye 36.8% 37.7% 23.2% 14.4% 28.0% 11.0% Yanghe 25.7% 27.0% 20.1% 12.7% 22.5% 12.1% Baijiu sector 27.9% 36.4% 12.6% NA NA NA

Net profit YoY growth 1Q18 2Q18 3Q18 4Q18F FY18F FY19F Moutai 38.9% 41.5% 2.7% 28.1% 24.9% 14.3% Wuliangye 38.3% 55.2% 19.6% 15.5% 30.5% 14.1% Yanghe 26.7% 31.3% 21.5% 8.6% 23.3% 14.6%

Baijiu sector 36.9% 46.2% 11.9% NA NA NA Note: Baijiu sector refers to the listed baijiu companies in the SW Baijiu Index from WIND. Moutai, Wuliangye and Yanghe forecasts are based our estimates. SOURCES: CGS-CIMB RESEARCH ESIMTATES, WIND

Following their 3Q18 results announcements, baijiu companies’ share prices corrected significantly due to the slowdown in sales growth. The SW Baijiu Index has dropped 11% during 26-30 Oct 2018 (and is down 24% YTD), underperforming the SW Food and Beverage Index (9% decline during 26-30 Oct 2018 and 22% decline YTD) and Shanghai-Shenzhen CSI 300 Index (2% decline during 26-30 Oct 2018 and 22% drop YTD). The current trailing P/E for the SW Baijiu Index is down to 20.6x, close to 1 s.d. below its historical average P/E of 25.5x in Apr 2015-YTD 2018 (-1 s.d. is 20.1x). The SW Food and Beverage Index is currently trading at 22.8x, close to 1 s.d. below its historical average P/E of 36.2x in Jan 2000-YTD2018 (-1 s.d. is 22.4x). We think the baijiu sector’s short-term slowdown has been priced in and we consider the sector’s P/E valuation to be attractive now.

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Navigating China Food & Beverages │December 11, 2018

Figure 3: SW Baijiu Index underperformed SW Food & Beverage Index and CSI 300 Index (Rebased 29 Dec 2017 =100)

120

110

100

90

80

70

60 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 SW Baijiu Index SW F&B Index CSI300 Index

SOURCES: CGS-CIMB RESEARCH, , WIND

Figure 4: SW Baijiu Index performance Figure 5: SW Food & Beverage Index Figure 6: CSI 300 Index performance performance

30,000 14,000 6,000 SW Baijiu Index down 24% SW F&B Index down 22% YTD 12,000 25,000 YTD 5,000

10,000 20,000 4,000 8,000 15,000 3,000 6,000 10,000 2,000 4,000 CSI300 down 22% YTD 5,000 2,000 1,000

0 0 0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

SOURCES: CGS-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH, WIND

Figure 7: Trailing P/E of SW Baijiu Index Figure 8: Trailing P/E of SW Food & Figure 9: Trailing P/E of CSI 300 Index Beverage Index

Current trailing P/E(x) on SW Baijiu Index: 20.6; Mean:25.5; +1std: Current trailing P/E(x) on SW F&B Index:22.8; Mean:36.2; +1 std: Current trailing P/E (x) on CSI300 Index: 10.5; Mean: 16.9; +1std: 31.0; -1std: 20.1 50.0; -1 std: 22.4 25.7; -1std: 8.1 45 120 60 The trailing P/E (x) on SW Baijiu Index Mean +1 std -1 std The trailing P/E(x) on SW Food & Beverage Index Mean +1 std -1 std The trailing P/E(x) on CSI300 Index Mean +1 std -1 std 40 50 90 35 40

30 60 30

25 20 30 20 10

15 0 0

Jul-10 Jul-17

Jan-01 Jan-04 Jan-07 Jan-10 Jan-13 Jan-16 Jan-00 Jan-02 Jan-03 Jan-05 Jan-06 Jan-08 Jan-09 Jan-11 Jan-12 Jan-14 Jan-15 Jan-17 Jan-18

Jan-07 Jan-14

Jun-06 Jun-13

Jun-15 Jun-17 Jun-18 Jun-16

Oct-08 Oct-15

Oct-16 Oct-15 Oct-17 Oct-18

Apr-05 Apr-12

Apr-18 Apr-15 Apr-16 Apr-17

Feb-11 Sep-11 Feb-18 Sep-18

Feb-17 Feb-16 Feb-18

Dec-09 Dec-16

Dec-15 Dec-16 Dec-17

Aug-07 Aug-14

Aug-15 Aug-16 Aug-17 Aug-18

Nov-05 Nov-12

Mar-08 Mar-15 May-16 May-09 SOURCES: CGS-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH, WIND

Figure 10: Share price performance of listed companies on SW Baijiu Index Company name in Chinese English Bloomberg Share performance YTD 1w changes 1m changes 3m changes 2017 ticker since 26-30 Oct 2018 口子窖 Kouzi 603589 CH -16% -23% -5% 5% -24% 43% 贵州茅台 Moutai 600519 CH -14% -17% -4% 3% -11% 109% 古井贡酒 Gujing 000596 CH -14% -12% -4% 1% -22% 44% 顺鑫农业 Shunxin 000860 CH -13% 84% -3% 5% -14% -13% 五粮液 Wuliangye 000858 CH -13% -34% -5% 5% -14% 132% 洋河股份 Yanghe 002304 CH -12% -14% -5% 4% -9% 63% 老白干酒 Laobaigan 600559 CH -11% -55% -7% 2% -18% 33% 伊力特 YiLite 600197 CH -11% -41% -6% 5% -20% 62% 山西汾酒 Fenwine 600809 CH -10% -34% 0% 14% -16% 128% 今世缘 King's Luck 603369 CH -9% 2% -2% 5% -9% 18% 酒鬼酒 Jiuguijiu 000799 CH -9% -37% -2% 12% -5% 34% 舍得酒业 Shede 600702 CH -9% -46% 2% 22% -4% 106% 水井坊 Swellfun 600779 CH -9% -32% -1% 11% -16% 145% 迎驾贡酒 Yingjia 603198 CH -7% -16% -2% -1% 3% -18% 金徽酒 Jinhui 603919 CH -5% -27% -5% 0% -11% -42% 泸州老窖 Luzhou Liaojiao 000568 CH -4% -36% -2% 8% 3% 100% 金种子酒 Jinzhongzi 600199 CH -3% -36% -6% 5% -4% -16% *ST皇台 *ST Huangtai 000995 CH 2% -55% 5% 6% 15% -20% CSSW白酒 SW Baijiu Index 930622.CSI -11% -24% -3% 6% -11% 79% 食品饮料(申万) SW F&B Index 801120.SI -9% -22% -4% 2% -8% 54%

沪深300 CSI300 Index 000300.SH -2% -22% -4% -1% -2% 22% SOURCES: CGS-CIMB RESEARCH, WIND

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Navigating China Food & Beverages │December 11, 2018

We do not expect the current slowdown in the baijiu industry to be as severe as in 2013-15, during the baijiu sector restructuring period caused by the government’s anti-corruption measures, as the baijiu consumption structure has largely changed since then. Individuals and private companies are now prime consumers of baijiu, accounting for 45% and 50%, respectively, of total baijiu sales (2012: 28% for private companies; 22% for individuals), while government- led consumption has shrunk rapidly to an insignificant 5% of the total, from around 50% in 2012 (source: www.chyxx.com).

Figure 11: Individuals and private companies have become the largest baijiu consumers by sales after 2014

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS, CHYXX.COM

We expect the personal- and commercial-led baijiu consumption to be more resilient than government-led consumption, and we forecast a moderate slowdown in baijiu demand in 2H18F and 1H19F. Moutai still managed to achieve a 7% sales CAGR in 2012-15 when the baijiu industry was in a downturn, although Wuliangye’s sales declined by 7% CAGR and Yanghe’s fell by 2% CAGR. Figure 12: Moutai’s, Wuliangye’s and Yanghe’s sales growth for Figure 13: Moutai’s, Wuliangye’s and Yanghe’s net profit growth FY12-20F for FY12-20F

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

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Navigating China Food & Beverages │December 11, 2018

…and we are positive on the sector’s long-term outlook In the longer term, with the continued growth of China’s urban disposal income and given that private consumption represented less than 40% of China’s GDP in 2017, we expect domestic consumption of baijiu to maintain its solid growth, with premiumisation remaining an important growth driver. Euromonitor forecasts that China’s super premium baijiu segment (with retail selling prices of above Rmb600/bottle) and premium baijiu segment (with retail selling prices of Rmb300-600/bottle) will achieve sales CAGR of 12% and 13%, respectively, in 2017-20F.

Figure 14: China baijiu industry’s sales performance by segment and Euromonitor forecasts China baijiu industry cycle Adjustment period Recovery period New growth period Sales value growth 2012-15 CAGR 2015-17 CAGR 2017-20F CAGR Low-end 10% 0% -8% Mid-range 7% 9% 9% Premium 1% 13% 13% Super premium -11% 14% 12%

Total China Baijiu Industry -5% 12% 11% SOURCES: CGS-CIMB RESEARCH, EUROMONITOR

We also expect the current tight channel inventory to provide support to baijiu companies’ sales growth. Based on our channel checks, Moutai’s current channel inventory is around one month, while Wuliangye’s is 1.0-1.5 months (vs. their normalised levels of 2-3 months). Wuliangye’s fairly-low channel inventory level is caused by its proactive limits imposed on sales volume in 3Q18 to improve the retail prices of its products. As for Moutai, its low channel inventory is due to the change in senior management in 3Q18 to temporarily impact sales growth. Moutai has already guided that its sales growth will be back to over 20% yoy in 4Q18F. The current channel inventory levels for Moutai and Wuliangye have hit the historical low. The highest channel inventory level historically (3-6 months) appeared in 2H12. When the China government announced the implementation of anti-corruption measures in Dec 2012, it took the market a long time to absorb the channel inventory and recover. We expect channel penetration and product mix upgrades to drive up Chinese hard liquor sales growth in the long run. Currently, the retail prices of Moutai, Wuliangye and Yanghe are holding up well. Based on our channel checks, Moutai’s first-layer distributor and average retail prices have been maintained at Rmb1,720/bottle and Rmb1,988/bottle, respectively, in 3Q18, in line with the levels in 2Q18. Wuliangye’s first-layer distributor price has been maintained at Rmb820/bottle, while its current retail price of Rmb1,059/bottle is higher than its 2Q18/3Q18 price of Rmb840/bottle, due to its proactive sales volume control in 3Q18.

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Navigating China Food & Beverages │December 11, 2018

Our market survey shows baijiu is gaining popularity with the younger generation We conducted a market survey on China’s baijiu sector in Nov 2018 with 532 participants. The key findings from our survey were:  The primary consumers of baijiu are aged between 30-50 years. However, based on our market survey, baijiu is becoming more popular with the younger generation, with consumers aged 20-30 years and those below 20 years starting to drink baijiu. Around 45% of our respondents aged between 20-30 years said they drink baijiu.

Figure 15: Our survey in Nov 2018 shows that younger consumers have started to drink baijiu

SOURCES: CGS-CIMB RESEARCH

 We expect a short-term negative impact on baijiu consumption from China’s economic slowdown. Around 60% of respondents to our survey said their baijiu consumption in 2019F would be negatively affected by a sluggish economy in China. However, Chinese consumers’ demand for baijiu tends to be more resilient than other alcoholic drinks in the long run. Around 62% of respondents replied that among all alcoholic drinks, they would increase their consumption of baijiu over the long term.

Figure 16: 60% of survey respondents indicated they would Figure 17: Around 62% of respondents intend to increase baijiu reduce baijiu consumption in 2019F if the economy weakens consumption in the long run

80%

70%

60%

50%

40%

30%

20%

10%

0% Baijiu Red wine Huangjiu Beer Flavoured Imported liquor spirits

SOURCES: CGS-CIMB RESEARCH SOURCES: CGS-CIMB RESEARCH,

 Business activities and social gatherings are key opportunities for consumers to drink baijiu. Based on our survey, over 80% of our respondents choose to drink baijiu with friends. Currently, individuals account for over 45% of total consumption and businesses comprised 50%, and government-led consumption only accounts for 5%. We believe this

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Navigating China Food & Beverages │December 11, 2018

makes baijiu demand more resilient and less vulnerable to China’s fixed assets investment cycle.

Figure 18: Baijiu consumption structure led by individual consumption, based on our survey

SOURCES: CGS-CIMB RESEARCH

 Around 80% of respondents to our survey said that the brand was the most important factor in their choice of baijiu.

Figure 19: Brand and price are the most important factors in survey respondents’ choice of baijiu

Flavour

Place of production

Health concern

Promotions

Price

Brand

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

SOURCES: CGS-CIMB RESEARCH

 Supermarkets and baijiu exclusive stores are the two main channels through which consumers purchase baijiu, while online purchases have become the preferred choice of people living in tier 1 and 2 cities due to convenience.  The mid-range baijiu segment (Rmb100-300 per 500ml unit) is the largest segment in China, but we are starting to see product mix upgrades among consumers in second-tier cities.

Figure 20: Supermarkets and baijiu exclusive stores are key Figure 21: We see upgrades in consumption trends in second-tier distribution channels, based on our survey cities, based on our survey

40%

based on retail selling price per 500ml unit 30%

20%

10%

0% Beijing, Shanghai, Shenzhen & Provincial capital & municipalities Tier 3&4 cities Tier 5 cities & below Guangzhou Rmb600

SOURCES: CGS-CIMB RESEARCH SOURCES: CGS-CIMB RESEARCH,

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Navigating China Food & Beverages │December 11, 2018

Moutai is the most valuable baijiu brand A well-known brand name is the strongest competitive advantage in China’s baijiu industry, and in China’s baijiu market, the most well-known brand is Moutai. Moutai had over 60% market share of the super premium baijiu segment in 2017, and no other competitor has the capability to challenge Moutai’s market position in the near term, in our view. Moutai achieved a 7% sales CAGR in 2012-15 during a downturn in the baijiu industry, while Wuliangye’s sales declined by a 7% CAGR and Yanghe’s fell by a 2% CAGR. We now forecast Moutai to achieve sales growth of 11.7% in FY19F and 16.1% in FY20F vs. 11.0% and 13.5% for Wuliangye and 12.1% and 17.2% for Yanghe, respectively. Moutai’s brand value has been supported by: 1) its unique manufacturing process, whereby for example the grain and water used to manufacture Moutai comes from the town of Moutai and the brew is stored in urns for at least four years before being bottled and sold, and 2) its unique collectable value, which underpins sales volume growth from 4,057 tonnes in 2001 to 30,206 tonnes in 2017 for its core Moutai brand. A 500ml bottle of Moutai baijiu from ex-factory year of 1957 was sold for Rmb2.1m at auction on 7 Dec 2017 (source: ifeng.com). According to JD.com, the retail selling price (RSP) for 53°Feitian Moutai produced in 2017 is Rmb1,988 per 500ml unit, 49% higher than its original RSP in 2017 of Rmb1,338 per 500ml unit. As for Yanghe, we think it has strong capability to upgrade its brand image by leveraging on its strong distribution network. We believe building a strong brand name and close relationships with customers are key to its sales growth. Yanghe is a good example of how to build a brand name and cultivate brand value. Based on the type of fragrance, China’s baijiu sector can be divided into thirteen categories. The mainstream fragrance categories are strong fragrance (浓香型, representing 51% market share of China’s baijiu industry in terms of revenue in 2017), sauce fragrance (酱香型, 15%) and light fragrance (清香型,12%). Moutai is the most representative brand, deriving the highest proportion of its FY17 revenue from the sauce fragrance category. In 2003, Yanghe launched its Blue Classic brand, which has become one of the most valuable brands of baijiu, worth US$4.3bn in 2017, according to Brand Finance. We believe Yanghe’s wide price range from the mid-range (Rmb per 500ml unit for Yanghe brand and Shuanggou brand) to premium segments (Rmb600 per 500ml unit for its Blue Classic brand) would enable it to penetrate lower-tier cities that are at different stages of consumption upgrade and premiumisation.

Figure 22: Top 10 most valuable spirit brands worldwide in 2017 Figure 23: The top baijiu brands in 1989 according to Brand Finance (US$ m) Rank Brand name Domicile Brand value (US$ m) YoY （%） Top Ranking Brand Place of origin Type of fragrance 1 Moutai Guizhou Source fragrance 1 Moutai China 11,548 60% 2 Fengwine Shanxi (山西） Light fragrance 2 Johnnie Walker UK 4,548 -2% 3 Wuliangye Sichuan Strong fragrance 3 Yanghe China 4,281 50% 4 Yanghe Daqu Jiangsu Strong fragrance 5 Jiannanchun Sichuan Strong fragrance 4 Jack Daniel's US 3,055 22% 6 Gujing Anhui Strong fragrance 5 Hennessy France 2,711 -6% 7 Dong wine Guizhou Herbal fragrance 6 Luzhou Laojiao China 2,509 73% 8 Xifeng Shanxi (陕西） Unique feng fragrance 9 Luzhou Liaojiao Sichuan Strong fragrance 7 Bacardi US 2,185 15% 10 Quangxin Daqu Sichuan Strong fragrance 8 Smirnoff UK 2,033 0% 11 Yanghe Shuanggou Jiangsu Strong fragrance 12 Huanghe Lou Wuhan Light fragrance 9 Wuliangye China 1,975 86% 13 Liang Sichuan Strong fragrance 14 Wuling wine Hunan Source fragrance 10 Absolut France 1,759 22% 15 Baofeng Henan Light fragrance 16 Songhe Henan Strong fragrance 17 Tuopai Sichuan Strong fragrance

SOURCES: CGS-CIMB RESEARCH, BRAND FINANCE SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS, ZHIHU.COM

Flatter distribution channels Yanghe’s unique “go to market” distribution model gives it a key competitive advantage, in our opinion. It has a more extensive sales team and distribution network compared to Wuliangye and Moutai. As at end-2017, Yanghe had more than 5,000 sales personnel (Moutai: 684 and Wuliangye: 576) and more than 8,000 distributors (Moutai: 3,546 and Wuliangye: 1,136). Yanghe’s selling and

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Navigating China Food & Beverages │December 11, 2018

distribution expenses ratio of 12.0% in 2017 is in line with Wuliangye’s, but below the industry average of 15.5%. By leveraging on its strong distribution network, Yanghe has quickly expanded beyond its home market, i.e. Jiangsu province. According to Yanghe’s management, in 1H18, sales growth from the “new Jiangsu market” (i.e. Anhui, Shandong, Henan, Hubei and Zhejiang provinces) was 40-50% yoy. However, it expects sales growth to decline to 35-40% yoy in 2H18, given the current slowdown in China’s economic growth.

Figure 24: Number of sales personnel and distributors for each Figure 25: Yanghe’s selling and distribution expenses as a % baijiu company (as at end-2017) revenue was below the industry average in 2017

No. of Salespeople No. of Distributors (%) Moutai 684 3546 35 Wuliangye 576 1136 30 25 Yanghe 5036 over 8000 20

Luzhou Laojiao 588, with over 8000 sales 3000 15 persons in its 4 sales companies 10 Fen wine 1058 1268 5 322 50 0 Swellfun Wuliangye Yanghe Moutai Luzhou Gujing Fenwine Jiugui Shunxin YiLite Swellfun Yingjia King's luck Kouzi Laojiao Selling and distribution expense as a % of revenue Baijiu industry average

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS, WIND

Distribution channels have become increasingly important for China’s baijiu players to drive sales growth and upgrades in the product mix. We note a trend among major baijiu players to adopt a more diverse distribution network in order to cover more retail points and have greater control over channel inventory, as well as carry out marketing activities more effectively. Yanghe is well-known for its strong and unique “go to market” distribution model. It has formed close partnerships with distributors to capture significant market share in its home base, Jiangsu province, and started to replicate its distribution model in other markets (which the company refers to as the “new Jiangsu market”) in 2014. After four years of development, Yanghe’s New Jiangsu market has started to bear fruit. Luzhou Laojiao (000568 CH, Not Rated) is also widening its distribution network and developing new markets, while Anhui Gujing Distillery (000596 CH, Not Rated) is building a similar distribution model to Yanghe’s.

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Navigating China Food & Beverages │December 11, 2018

Figure 26: Three major distribution models in China’s baijiu industry General wholesale model of China's baijiu Cooperation model with distributors Direct-selling model industry Description * Use of wholesalers network comprising multiple *A "Go-to-market" model, first implemented by *Baijiu manufacturers set up their own sales tiers of third parties to reach target customer Yanghe. subsidiaries and employing sales team to take segments. * Yanghe develops new markets for distributors charge of developing new markets, brand * Wholesalers are entirely resposible for marketing, and takes charge of brand promotion, product promotion, product display and product distribution promotion and distribtution in their respective display and other services. to the end-consumer. territories. * Distributors are responsible for basic functions * Distributor network is flattened. such as market management, logistics, warehouse and cash flow in their respective territories. * Front-line salespeople are managed and evaluated by Yanghe using the Amoeba operating model. Distributors' * Wholesalers have strong bargaining power and * Distributors have small bargaining power and * Baijiu manufacturer earn fairly thin margins. margin earn high channel distribution margins. earn fairly low channel distribution margins. * As each party in the wholesaler pyramid model wants a piece of the profits, baijiu companies frequently offer discounts and promotions to retailers and consumers. Advantage * Wholesalers have sufficient cash flow and * The baijiu manufacturer (e.g. Yanghe) has * Baijiu manufacturer has strong control of channel established local distribution networks to achieve access to valuable and targeted point-of-sale inventory. rapid and extensive coverage in many cities at low information that enables it to make intelligent * Baijiu manufacturer has the ability to coordinate expense. decisions about pricing, promotions and shelf its sales interactions via production and marketing space. strategies. * Yanghe can easily to promote a new and small- * Baijiu manufacturer gets direct feedback from its volume SKUs in Yanghe's own distribution end-customers, enabling it to evaluate the network. effectiveness of its marketing strategy and tailor its development of new products to consumer interests. Disadvantage * Baijiu manufacturing companies have minimal * Baijiu manufacturer must invest significant * Requires huge investment to build the distribution information about product sales, pricing and human resources and capital to build its own network, which can only be justified for brands with distribution, as it is difficult to track wholesalers' distribution network to reach target customers. large scale and high profit margins. sales to products to retailers. Such information (on * Lack of assistance from local distributors at the consumer purchasing behaviour, demographics) early stage makes it difficult to penetrate the could help the baijiu manufacturers to better regional market, given the high barriers to entry compete. built by local brands. * Baijiu companies focus on pushing products through the channels, which could easily cause wholesalers to hold too much inventory. * The wholesalers tend to focus on high-volume products and neglect new, small -volume SKUs. Representative Moutai, Wuliangye Yanghe, Anhui Gujing Distillery Luzhou Laojiao baijiu manufacturer SOURCES: CGS-CIMB RESEARCH, WIND, SOHU.COM

Figure 27: Proportion of revenue from top 5 customers

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

China’s baijiu sector overview Rising sales volume to drive growth of the premium baijiu market We expect sales volumes of low-end baijiu to continue to decline, but sales volumes of the premium and super premium segments to grow rapidly, driven by consumption upgrades and premiumisation. For the premium baijiu segments, the majority of baijiu companies saw price hikes through either product mix upgrades or ASP hikes during the baijiu recovery period of 1Q16-2Q18. We

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Navigating China Food & Beverages │December 11, 2018

expect rising sales volume to be the key driver of premium baijiu market growth in 2019F.

Figure 28: Retail prices of major baijiu products on JD.com over the past three months

Product Name in Chinese In English Alcohol content Size per unit Retail selling price (Rmb per unit) (%) (ml) 01/09/2018 28/9/2018 29/10/2018 29/11/2018 Moutai 飞天茅台 53°Feitian Moutai 53 500ml 2,038 1,988 Out of stock Out of stock 飞天茅台 43°Feitian Moutai 43 500ml 988 988 989 938 茅台王子酒 53°Prince 53 500ml 158 159 158 158 茅台王子黑金 53°Prince Black 53 500ml 298 298 218 258 茅台 金王子 53°Prince Gold 53 500ml 388 388 388 338 茅台迎宾 53°Yingbin 53 500ml 98 98 97 98 茅台迎宾中国红 53°Yingbin Red 53 500ml 169 169 148 168 茅台汉酱-铂金蓝 51°Hanjiang Blue 51 500ml 569 569 569 569 茅台汉酱 51°Hanjiang 51 500ml 399 399 399 318 茅台赖茅-传承蓝 53°Laimao Blue 53 500ml 343 343 343 458 茅台赖茅-金樽 53°Laimao Gold 53 500ml 699 688 688 699 茅台赖茅-红御 53°Laimao Red 53 500ml 558 508 508 558 Wuliangye 普五 52°Wuliangye 52 500ml 1,025 1,059 1,019 959 五粮液39度 39°Wuliangye 39 500ml 600 610 566 594 五粮液虎符令 52°Tiger Wuliangye 52 500ml 1,200 1,200 1,198 1,199 五粮液豪华装 52°Luxury Wuliangye 52 500ml 900 912 900 906 五粮液1618 52°Wuliangye 1618 52 500ml 950 922 883 901 五粮液 68°Wuliangye 68 500ml 788 799 799 769 五粮春 50°WL Spring 50 500ml 241 257 240 231 五粮春 45°WL Spring 45 500ml 188 200 183 180 五粮春 35°WL Spring 35 500ml 173 184 166 178 五粮醇 -红淡雅 50°WL Mellow Red 50 500ml 67 67 62 66 五粮醇 -红淡雅 42°WL Mellow Red 42 500ml 68 67 67 70 五粮醇-金淡雅 50°WL Mellow Golden 50 500ml 145 134 133 142 五粮醇-臻选6 50°WL Mellow Zhenxuan6 50 500ml 218 217 194 198 五粮头曲 52°WL Touqu 52 500ml 123 118 103 100 五粮特曲 52°WL Tequ 52 500ml 228 229 200 215 五粮特曲精品 52°WL Tequ special 52 500ml 275 276 275 283 尖庄曲酒 52°Jianzhuang 52 500ml 22 31 22 21 Yanghe 梦之蓝-手工班 52°Blue Dream Handmade 52 500ml 1,788 1,788 1,788 1,788 梦之蓝M9 52°Blue Dream M9 52 500ml 1,699 1,699 1,569 1,599 梦之蓝M9 45°Blue Dream M9 45 500ml 1,599 1,509 1,509 1,509 梦之蓝M6 52°Blue Dream M6 52 500ml 699 769 759 709 梦之蓝M6 45°Blue Dream M6 45 500ml 659 709 699 649 梦之蓝M3 52°Blue Dream M3 52 500ml 498 569 516 517 梦之蓝M3 45°Blue Dream M3 45 500ml 458 512 461 462 梦之蓝 M1 52°Blue Dream M1 52 500ml 348 344 339 330 梦之蓝 M1 45°Blue Dream M1 45 500ml 399 334 319 329 天之蓝 52°Blue Sky 52 520ml 345 342 338 340 海之蓝 52°Blue Sea 52 520ml 158 154 154 144 洋河 微分子 43.8°Yanghe Micromolecule 43.8 500ml 308 308 288 306 洋河大曲 55°Yanghe Daqu 55 500ml 54 51 50 54 洋河大曲-新天蓝 52°Yanghe Daqu Blue 52 500ml 58 53 46 63 洋河小曲 42°Yanghe Xiaoqu 42 480ml 35 35 33 34 洋河特曲 52°Yanghe Tequ 52 500ml 99 99 99 113 洋河-洋小二 46°Yangxiaoer 46 500ml 58 48 58 54 双沟-珍宝坊君坊 41.8°Shuanggou -Zhenbaofang 41.8 500ml 108 129 114 103 双沟-普苏 42°Shuanggou -Pusu 42 500ml 103 108 98 99 双沟大曲-小青花 42°Shuanggoudaqu -Xiaoqinghua 42 480ml 98 98 94 98 Luzhou Laojiao 国窖1573 52°Cellar1573 52 500ml 879 843 899 860 国窖1573 38°Cellar1573 38 500ml 655 631 646 660 百年泸州老窖 窖龄90年 52°Luzhou Laojiao Cellar age of 90yrs 52 500ml 428 381 481 430 百年泸州老窖 窖龄60年 52°Luzhou Laojiao Cellar age of 60yrs 52 500ml 280 268 278 288 百年泸州老窖 窖龄30年 52°Luzhou Laojiao Cellar age of 30yrs 52 500ml 228 215 215 230 泸州老窖特曲 52°Luzhou Laojiao Tequ 52 500ml 228 201 218 248 泸州老窖特曲 38°Luzhou Laojiao Tequ 38 500ml 188 171 211 208 泸州老窖头曲 52°Luzhou Laojiao Touqu 52 500ml 66 55 56 61 泸州老窖头曲-六年窖 52°Luzhou Laojiao Touqu age of 6yrs 52 500ml 61 61 61 63 Gujing 古5 （5年） 50°Gujing age of 5yrs 50 500ml 178 161 158 135 古5 （5年） 45°Gujing age of 5yrs 45 500ml 168 151 148 118 古8 （8年） 50°Gujing age of 8yrs 50 500ml 358 348 348 320 古8 （8年） 45°Gujing age of 8yrs 45 500ml 328 278 268 278 中国香古7 50°Gujing age of 7yrs 50 500ml 298 248 248 220 中国香古20 52°Gujing age of 20yrs 52 500ml 688 638 748 715 中国香古20 42°Gujing age of 20yrs 42 500ml 668 618 738 688 古16 50°Gujing age of 16yrs 50 500ml 528 495 495 495 古16 45°Gujing age of 16yrs 45 500ml 498 488 488 455 古26 50°Gujing age of 26yrs 50 500ml 1,288 988 988 988 古井贡酒1989 50°Gujing1989 50 500ml 188 171 168 168 古井贡酒v 6 40.6°Gujing V6 40.6 500ml 98 98 98 98 古井贡酒v 6 50°Gujing V6 50 500ml 108 103 113 113 古井贡酒v 9 40.6°Gujing V9 40.6 500ml 118 113 118 118 古井贡酒 窖龄30年 50°Gujing age of 30yrs 50 500ml 98 71 88 78 古井贡酒 窖龄60年 50°Gujing age of 60yrs 50 500ml 188 171 168 168 古井贡酒-毫菊 37°+ Gujing Haoju 37+ 500ml 298 248 248 248 古井贡酒-毫菊 37°- Gujing Haoju 37- 500ml 269 118 118 118 Fengwine 青花20 53°Qinghua 20 53 500ml 408 408 408 408 青花20 42°Qinghua 20 42 500ml 388 388 388 388 青花30 53°Qinghua 30 53 500ml 678 678 665 665 青花30 48°Qinghua 30 48 500ml 658 658 658 659 黑坛20 53°Heitan 20 53 475ml 341 341 341 341 黑坛20 42°Heitan 30 42 475ml 348 348 348 349 10老白汾 53°Laobaifen age of10yrs 53 475ml 148 148 155 155 10老白汾 45°Laobaifen age of10yrs 45 475ml 140 140 148 148 老白汾 -醇柔 53°Laobaifen Chunrou 53 475ml 108 108 95 95 老白汾-封坛15 42°Laobaifen Fengtan15 42 475ml 205 205 205 206 甲等老白汾酒 53°Laobaifen Jiadeng 53 500ml 188 188 188 188 汾酒-波汾 53°Fengwine Bofeng 53 475ml 41 41 41 41 汾酒-波汾 42°Fengwine Bofeng 42 475ml 40 40 40 40 汾酒-乳玻汾 48°Fengwine Rubofeng 48 475ml 69 69 69 69 汾酒-蓝汾 53°Fengwine Blue 53 475ml 128 128 128 128

汾酒 -紫砂 56°Fengwine Purple 53 475ml 108 108 98 98 SOURCES: CGS-CIMB RESEARCH, JD.COM

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Navigating China Food & Beverages │December 11, 2018

According to Euromonitor, the premium and super premium baijiu segments will expand by sales CAGR of 13% and 12%, respectively, in 2017-20F, while the low-end segment will see sales contract by 8% CAGR over the same period.

Figure 29: Sales volume growth by product category during each Figure 30: Sales growth by product category during each baijiu baijiu industry cycle in China industry cycle in China China baijiu industry cycle Adjustment period Recovery period New growth period China baijiu industry cycle Adjustment period Recovery period New growth period Sales volume growth 2012-15 CAGR 2015-17 CAGR 2017-20F CAGR Sales value growth 2012-15 CAGR 2015-17 CAGR 2017-20F CAGR Low-end 7% -5% -11% Low-end 10% 0% -8% Mid-range 4% 5% 6% Mid-range 7% 9% 9% Premium -2% 11% 12% Premium 1% 13% 13% Super premium -4% 14% 12% Super premium -11% 14% 12%

Total baijiu 4% 2% 1% Total baijiu -5% 12% 11%

SOURCES: CGS-CIMB RESEARCH, EUROMONITOR SOURCES: CGS-CIMB RESEARCH, EUROMONITOR

Based on retail selling price (RSP), the baijiu industry can be divided into four segments: 1) low-end (RSP per 500ml unit Rmb600), as shown in Figure 32.

Figure 31: Major brands in each baijiu category Category Retail selling price Baijiu Brewery Popular Brand (RSP) per 500ml unit Super premium >Rmb600 Moutai 53°Feitian MT Wuliangye 52°WLY Luzhou Laojiao Cellar1573 Yanghe M6 , M9 Premium Rmb300-600 Yanghe M3, Blue Sky Luzhou Laojiao Cellar age Guijing Guijing Jiannanchun Jiannanchun 52° Swellfun Zhennian No.8, Jingtai Liangjiu Liangjiu Red Finwine Qinghua Jiuguijiu Jiuguijiu Red Mid-range Rmb100-300 Yanghe M1, Blue Sea Moutai Prince Wuliangye WL Spring Fenwine Llaobaifen Luzhou Laojiao Tequ Low-end

SOURCES: CGS-CIMB RESEARCH, JD.COM

According to Euromonitor, the premium and super premium segments combined accounted for 15% of total sales volume in 2017 (super premium comprised 6% and premium accounted for 9%), but contributed 73% of sales value (premium contributed 20% and super premium comprised 53%).

Figure 32: Baijiu sales volume breakdown by category, based on Figure 33: Baijiu sales value breakdown by category, based on Euromonitor estimates Euromonitor estimates

100% 100% 6% 5% 5% 5% 5% 6% 7% 7% 8% 8% 7% 8% 9% 8% 9% 10% 11% 12% 80% 80% 52% 52% 58% 53% 53% 54% 55% 55% 64% 43% 42% 42% 43% 42% 45% 60% 47% 60% 50% 52%

40% 40% 19% 19% 20% 20% 17% 20% 21% 21% 16% 43% 43% 46% 46% 43% 20% 20% 40% 36% 32% 21% 24% 24% 24% 23% 22% 28% 17% 22% 22% 5% 5% 4% 0% 0% 3% 4% 4% 3% 3% 2% 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F Low-end Mid-range Premium Super premium Low-end Mid-range Premium Super premium

SOURCES: CGS-CIMB RESEARCH, EUROMONITOR SOURCES: CGS-CIMB RESEARCH, EUROMONITOR

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Figure 34: Sales volume – Premium & super premium segments Figure 35: Sales value – Premium & super premium segments to to expand by CAGR of 12% in 2017-20F, based on Euromonitor expand by CAGRs of 13% and 12% in 2017-20F, based on estimates Euromonitor estimates

SOURCES: CGS-CIMB RESEARCH, EUROMONITOR SOURCES: CGS-CIMB RESEARCH, EUROMONITOR

The premium baijiu market to consolidate further The super premium baijiu market in China is highly concentrated and dominated by Moutai, Wuliangye, Luzhou Laojiao and Yanghe. We estimate that Moutai had over-60% market share of the super premium baijiu segment in 2017, based on the revenue for these four companies. We do not believe any competitor has the capability to challenge Moutai’s dominant market position in the near term. Conversely, the premium baijiu market is more fragmented. Apart from national brands, certain regional brands are also popular. According to Euromonitor, sales value of the top five premium brands accounted for 57% of total premium baijiu sales in 2017. We expect the premium baijiu market to consolidate further and leading players with higher brand recognition, flatter and wider distribution network, as well as stronger management execution ability (such as Yanghe), could gain market share.

Figure 36: Super premium baijiu market share (sales) breakdown Figure 37: Premium baijiu market share (sales) breakdown (2017) (2017), based on our estimates – Moutai dominant with market share of over 60%

SOURCES: CGS-CIMB RESEARCH ESTIMATES, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, EUROMONITOR

Three drivers for Baijiu’s long-term sales growth We expect the three major growth drivers of baijiu consumption in China to be: 1) continuous urbanisation and a rising middle class, 2) increasing proportion of younger consumers aged between 18 and 35 years, and 3) the expansion of online and offline combined channels to provide impetus to private consumption. We expect consumption upgrades and premiumisation to remain dominant themes in China in the long run.

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Figure 38: Slowdown in China’s GDP growth since 2Q18 Figure 39: China’s urban income and consumption expenditure per head (yoy % change)

(Rmb bn) ( %) 12.0 25,000 11.0 10.0 10.0 20,000 8.0 9.0 15,000 6.0 8.0 4.0 10,000 7.0 2.0 5,000 6.0 0.0

0 5.0

Sep-14 Sep-15 Sep-16 Sep-17 Sep-18

Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Nominal disposable income Real disposable income

Sep-16 Sep-18 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-17

Mar-11 Mar-13 Mar-15 Mar-17 Mar-12 Mar-14 Mar-16 Mar-18 China quarterly GDP (Rmb bn) GDP growth ( YoY %, RHS) Nominal consumption expenditure Real consumption expenditure

SOURCES:NATIONAL BUREAU OF STATISTICS, CGS-CIMB RESEARCH SOURCES: NATIONAL BUREAU OF STATISTICS, CGS-CIMB RESEARCH

Figure 40: China’s urban consumption expenditure breakdown Figure 41: China’s food consumption expenditure per capita is (%) rising, as urban nominal disposable income per capita is steadily increasing

(Rmb) 40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0 2011 2012 2013 2014 2015 2016 2017 Jan-Sep Urban nominal disposable income Food expenditure 2018

SOURCES: NATIONAL BUREAU OF STATISTICS, CGS-CIMB RESEARCH SOURCES: NATIONAL BUREAU OF STATISTICS, CGS-CIMB RESEARCH

Figure 42: Consumption expenditure (2016) and growth over 2016-21F by country – China could add US$1.8tr in new consumption by 2021F, based on a conservative GDP growth assumption of 5.5% by Economist Intelligence Units

SOURCES: ECONOMIST INTELLIGENCE UNITS, BCG ANALYSIS, ALIRESEARCH,CGS-CIMB RESEARCH

Consumption structure for baijiu has changed The consumption structure of China’s baijiu market has changed drastically since 2014, with individuals and private companies becoming more dominant and accounting for 45% and 50% of total baijiu sales after 2014 (2012: private companies comprised 28%; individuals constituted 22%), while government-led consumption shrank to a minimal level of 5% (2012: >50%). We expect

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individual consumption in the premium baijiu segment to continue to rise in the long run, mainly due to: High net worth households driving consumption upgrades: The number of high net worth households with investable assets above US$1m in China continues to expand and the number will rise by an estimated 2016-21F CAGR of 13% to 4m by 2021F, in tandem with investable assets growth of 15% CAGR to Rmb111tr by 2021F, based on the Boston Consulting Group (BCG) research report titled “China private banking 2017”. These households are expected to contribute significantly to the premium and super premium baijiu markets, as the philosophy of “drinking less, but drinking better” has continued to influence the behaviour of Chinese consumers, particularly the upper-middle and high income consumers. Young consumers becoming a new driver in the consumption sector: Based on BCG’s estimates, the new generation of consumers aged between 18 and 35 years will contribute consumption expenditure of US$2.6tr in 2021F from US$1.5tr in 2016, likely surpassing the consumers aged above 35 years that will account for US$2.4tr in 2021F, vs. US$1.9tr in 2016. According to our market survey, the number of younger baijiu consumers aged between 20 and 30 years, as well as those aged below 20 years, has been on the rise over 2011-16. Premiumisation upside from lower-tier cities: Based on McKinsey & Company’s estimates, by 2022F, the middle class from lower-tier cities will account for over 30% of China’s middle-class population, compared with 15% in 2002. Thus, we see high potential for upgrades in the baijiu product mix in lower- tier cities over the next 3-5 years.

Figure 43: : Individuals and private companies have become the Figure 44: The number of high net worth households with largest baijiu consumers by sales after 2014 investable assets above US$1m in China to reach 4m in 2021F, based on BCG estimates

No. of net worth householders with the investable assets above US$1m ('000)

4,500 4,000 4,000 3,550 3,500 3,140 3,000 2,770 2,440 2,500 2,120 2,000 1,500 1,860 1,500 1,210 1,000 500 0 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F US$1m-5m US$5m-20m >US$20m

SOURCES: CGS-CIMB RESEARCH, CHYXX.COM SOURCES: BCG, CGS-CIMB RESEARCH

Figure 45: Urban consumption expenditure by consumer age Figure 46: The proportion of middle-class population from lower- bracket – Young consumers aged 18-35 years have huge tier cities to increase by 2022F, based on McKinsey & Company consumption power estimates

Consumption amount in urban cities and towns （Type of city，share (%) of middle class) (US$ trillion) 6 Tier 1, 16%

5.0 Tier 1, 40%

4 3.4 2.6 Tier 2, 45%

2.1 1.5 Tier 2, 43% 2 0.7 2.4 Tier 3, 31% 1.9 1.4 0 Tier 3, 15% Tier 4, 8% 2011 2016 2021 Tier 4, 3% 2002 2022 Consumers at age above 35 years old Young consumers at age of 18-35 years old N ote: McKinsey defines based on 2010 nominal GDP, Tier-1 cities >Rmb932bn, Tier 2 cities at Rmb120-932bn, Tier 3 cities at Rmb22-120bn, Tier 4 cities Rmb229,000, upper middle class at Rmb106,000-229,000, mass middle class at Rmb60,000-106,000, Poor

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Navigating China Food & Beverages │December 11, 2018

Comparison between major baijiu players There are 19 baijiu manufacturers listed on the A-share stock exchange in China. We choose 13 of these with large market cap to represent the baijiu industry and analyse their financial performance and earnings prospects. Given the current weak economic cycle and after baijiu companies released their 3Q18 results, Wind consensus revised down their baijiu earnings forecasts for FY18-19F. However, consensus still has a positive view on long-term sales growth, projecting sales CAGR of 22% in 2017-20F. We also looked at the sales performance of baijiu companies during the last restructuring cycle in 2013-2015, which was negatively affected by the China government’s anti-corruption measures. Moutai’s sales performance is more defensive than peers’. Moutai was able to achieve a 7% sales CAGR in 2012-15, when the baijiu industry faced a downturn. In comparison, Wuliangye’s sales declined by a 7% CAGR, slightly below the industry average of a 6% decline, and Yanghe’s fell by a 2% CAGR. When the industry entered a recovery phase in 2015-17, Moutai’s performance was still impressive, with sales increasing by a 34% CAGR, much higher than the industry average of 19%, while Wuliangye’s rebounded to 18%, in line with the industry average, and Yanghe’s increased by 11%.

Figure 47: Investors expect the baijiu industry to expand by a 22% sales CAGR in 2017-20F, based on Wind consensus

SOURCES: CGS-CIMB RESEARCH, WIND

Figure 48: Baijiu companies’ revenue growth performance during the adjustment cycle (2013-15) and recovery cycle (2016-17)

SOURCES: CGS-CIMB RESEARCH, WIND

Moutai has the highest 2017 net profit margin, followed by Yanghe, then Wuliangye. Moutai also has the highest 2017 gross profit margin in the baijiu industry, supported by its superior market position and dominant position in the super premium segment. Wuliangye and Yanghe are both strong fragrance baijiu players, typically producing and selling out their entire production volume within a year. Thus, Wuliangye’s and Yanghe’s gross margins in 2017 are similar. Moutai and Wuliangye are both nationwide brands and their distribution

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Navigating China Food & Beverages │December 11, 2018

networks cover almost the whole country. Yanghe’s markets are more regional region and 53% of its revenue was derived from its home market, Jiangsu Province, in FY17. We estimate around 40% of Yanghe’s FY17 revenue came from its “New Jiangsu market”, the five provinces surrounding Jiangsu province, i.e. Henan, Shandong, Anhui, Zhejiang and Hubei. In 2017, Yanghe’s net profit margin is slightly better than Wuliangye’s and much better than Luzhou Laojiao’s, which we believe reflects Yanghe’s more efficient marketing capability and distribution network.

Figure 49: Gross profit margin by company (2017) Figure 50: Net profit margin by company (2017)

SOURCES: CGS-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH, WIND

The larger pricing gap between Moutai’s ex-factory and retail prices (vs. peers) provides its distributors with incentive to drive sales growth. Moutai’s pricing gap of Rmb1,019 per 500ml unit between its current ex-factory price of Rmb969 and retail price of Rmb1,988 is much larger than Wuliangye’s Rmb270 per 500ml unit (i.e. ex-factory price of Rmb789 and retail price of Rmb1,059). We believe this reflects Moutai’s superior brand positioning. The larger pricing gap provides Moutai’s distributors with higher incentive to drive sales growth.

Figure 51: 53°Feitian Moutai ex-factory price and retail selling Figure 52: 52°Wuliangye ex-factory price and retail selling price price (Rmb per 500ml unit) (Rmb per 500ml unit)

(Rmb) (Rmb) 2500 Gap between Ex-factory price and 1300 Gap between Ex-factory price and Retail selling price = Rmb1019 per 1200 Retail selling price =Rmb270 per 500ml unit 500ml unit 2000 1100 1000 1500 900 800 1000 700

500 600 500 0 400 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Ex-factory price on 53°Feitian Moutai Retail selling price on 53° Feitian Moutai Ex-factory price on 52°Wuliangye Retail selling price on 52° Wuliangye

SOURCES: CGS-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH, WIND

Moutai has good working capital management, and its working capital turnover days of 39 in 2017 were far below the industry average of 122 days. Wuliangye’s and Yanghe’s are slightly above average at 145 days and 135 days, respectively. We think this is attributable to Moutai’s: 1) strategy of controlling supply volumes, supported by its high brand value, and 2) larger advanced payments from customers to secure a certain quantity of products for delivery in the future, depending on Moutai’s sales plan. Yanghe’s inventory turnover days stood at 230 in 2017, almost double Wuliangye’s 120 days. Wuliangye had the highest receivable turnover days among its peers in 2017, which we attribute to

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Navigating China Food & Beverages │December 11, 2018

Wuliangye’s distribution channels being heavily dependent on first-layer wholesalers. In 2017, Wuliangye’s revenue from its top 5 customers accounted for 11% of total sales in 2017, higher than 3.5% for Yanghe and 6.4% for Moutai.

Figure 53: Working capital turnover days, by company (2017)

SOURCES: CGS-CIMB RESEARCH, WIND

China’s baijiu companies are typically in net cash positions, and Moutai and Wuliangye have a relatively significant amount of cash, at Rmb87.9bn and Rmb40.6bn, respectively, as at end-2017, compared to peers.

Figure 54: Working capital turnover days, by company (2017) Figure 55: Net cash/total equity (%), by company (2017)

SOURCES: CGS-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH, WIND

Valuation and recommendation Initiate coverage with sector Overweight; top pick is Moutai We initiate coverage on China’s baijiu sector with an Overweight rating due to its long-term earnings growth potential, to be driven by upgrades in product mix and distribution channel expansion. We initiate coverage on Moutai and Yanghe with Add ratings, but we have a Hold rating on Wuliangye as we wait to see the outcome of its distribution channel reform. Our sector top pick is Moutai. Potential re-rating catalysts could come from: 1) less severe slowdown in sales growth in 2019F, 2) increase in the weightage of China’s large-cap securities in the MSCI to 20% from 5% currently which is a part of the consultation issued by MSCI Inc on 25 Sep 2018 and 3) potential tax cuts and stimulus policies by the Chinese government in Mar 2019 during China’s National People’s Congress, which we believe could trigger domestic consumption recovery in 2H19F. Downside risks include: 1) worse-than-expected macroeconomic slowdown in China that would drag down baijiu consumption growth in the country, 2) the government implementing restrictions on baijiu price hikes, 3) increase in consumption tax, and 4) any food safety issues. After their 3Q18 results announcements, baijiu companies’ share prices have corrected significantly. The SW Baijiu Index has dropped by 11% during 26-30 Oct 2018 and declined by 24% YTD, underperforming the SW Food and Beverage Index’s 9% decline during 26-30 Oct 2018 and 22% decline YTD, as well as the Shanghai-Shenzhen CSI 300 Index’s 2% decline during 26-30 Oct 2018 and 22% drop YTD. The current trailing P/E for the SW Baijiu Index is 20.6x, which is close to 1 s.d. below its historical average P/E of 25.5x in Apr 2015-YTD 2018 (-1 s.d. is 20.1x). The SW Food and Beverage Index is currently trading at 22.8x, close to 1 s.d. below its average P/E of 36.2x in Jan 2000- YTD 2018 (-1 s.d. is 22.4x). We

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Navigating China Food & Beverages │December 11, 2018

think the baijiu sector’s short-term slowdown has been largely priced in and view the sector’s current P/E valuation as attractive.

Figure 56: SW Baijiu Index is underperforming the SW Food & Beverage Index and CSI 300 Index (Rebased 29 Dec 2017 = 100)

120

110

100

90

80

70

60 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 SW Baijiu Index SW F&B Index CSI300 Index

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 57: SW Baijiu Index performance Figure 58: SW Food & Beverage Index Figure 59: CSI 300 Index performance performance

30,000 14,000 6,000 SW Baijiu Index down 24% SW F&B Index down 22% YTD 12,000 25,000 YTD 5,000

10,000 20,000 4,000 8,000 15,000 3,000 6,000

10,000 2,000 4,000 CSI300 down 22% YTD 5,000 2,000 1,000

0 0 0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

SOURCES: CGS-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH, WIND

Figure 60: Trailing P/E of SW Baijiu Index Figure 61: Trailing P/E of SW Food & Figure 62: Trailing P/E of CSI 300 Index Beverage Index

Current trailing P/E(x) on SW Baijiu Index: 20.6; Mean:25.5; +1std: Current trailing P/E(x) on SW F&B Index:22.8; Mean:36.2; +1 std: Current trailing P/E (x) on CSI300 Index: 10.5; Mean: 16.9; +1std: 31.0; -1std: 20.1 50.0; -1 std: 22.4 25.7; -1std: 8.1 45 120 60 The trailing P/E (x) on SW Baijiu Index Mean +1 std -1 std The trailing P/E(x) on SW Food & Beverage Index Mean +1 std -1 std The trailing P/E(x) on CSI300 Index Mean +1 std -1 std 40 50 90 35 40

30 60 30

25 20 30 20 10

15 0 0

Jul-10 Jul-17

Jan-01 Jan-04 Jan-07 Jan-10 Jan-13 Jan-16 Jan-00 Jan-02 Jan-03 Jan-05 Jan-06 Jan-08 Jan-09 Jan-11 Jan-12 Jan-14 Jan-15 Jan-17 Jan-18

Jan-07 Jan-14

Jun-06 Jun-13

Jun-15 Jun-17 Jun-18 Jun-16

Oct-08 Oct-15

Apr-05 Apr-12

Oct-16 Oct-15 Oct-17 Oct-18

Feb-11 Sep-11 Feb-18 Sep-18

Apr-18 Apr-15 Apr-16 Apr-17

Feb-17 Feb-16 Feb-18

Dec-09 Dec-16

Aug-07 Aug-14

Dec-15 Dec-16 Dec-17

Aug-15 Aug-16 Aug-17 Aug-18

Nov-05 Nov-12

Mar-08 Mar-15 May-16 May-09 SOURCES: CGS-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH, WIND

After their 3Q18 results announcements, the entire baijiu sector de-rated due to concerns over a slowdown in baijiu consumption in 2019F. The share prices of Wuliangye, Yanghe and Moutai have fallen by 34%, 14% and 17% YTD, respectively. Moutai’s FY19F P/E of 18.9x has fallen below its historical average P/E of 19.4x since 2001. While Yanghe’s FY19F P/E of 15.9x is 0.6 s.d. below its historical average of 18.6x since listing. Wuliangye’s FY19F P/E of 14.2x is also 0.6 s.d. below its historical average of 22.4x since 2000.

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Navigating China Food & Beverages │December 11, 2018

We believe the baijiu sector’s P/E valuation is attractive now. Our TP implies that Moutai deserves to trade at 23.4x FY19F P/E (0.5 s.d. above its historical average P/E), while Yanghe deserves to trade at 19.2x (0.1 s.d. above its historical average P/E) and Wuliangye should trade at 14.8x FY19F P/E (0.5 s.d. below its historical average P/E). We believe China’s consumer sector is still undergoing product mix upgrades, and we see strong potential for higher consumption expenditure in lower-tier cities. In our opinion, households in lower-tier cities with limited mortgage loan pressure would have reasonable purchasing power. Since the baijiu industry recovery started in 2016, many baijiu companies (such as Yanghe) have not only upgraded their product mix, but also expanded their distribution network to lower-tier cities.

We initiate coverage on Moutai with an Add, and it is our sector top pick. We view Moutai as a defensive stock, as it has a significant amount of net cash on hand (Rmb101bn at end-Sep 2018). During the industry’s last restructuring cycle in 2013-15, Moutai still achieved a positive sales CAGR of 7%, outperforming its peers (average 6% decline). We like Moutai for its unique collectable value and dominant market position. We derive our TP of Rmb720 using the DCF methodology (WACC: 10.2%, terminal growth: 3.0%). We also initiate coverage on Yanghe with an Add rating. Yanghe has invested in its new Jiangsu market for more than three years, and we expect these markets to start to bear fruit, as we forecast revenue from non-Jiangsu markets to rise by a 22% CAGR in FY17-20F. In addition, Yanghe’s diversified premium product portfolio enables the company to cope with demand from consumers during different phases of premiumisation. Yanghe also has strong execution ability due to its capable management team and unique distribution network, which enables the company to better control its operating leverage. We derive our TP of Rmb120 using the DCF methodology (WACC: 10.4%, terminal growth: 3.0%). We initiate coverage on Wuliangye with a Hold rating. Although Wuliangye’s FY19F P/E valuation of 14.2x looks attractive to us, we remain cautious and wait to see whether Wuliangye’s channel reform will bear fruit. Wuliangye’s new chairman, Li Shuguang, who joined the company in Mar 2017, proposed a new marketing strategy of “opening ten thousand stores” in China to expand Wuliangye’s distribution network. We derive our TP of Rmb55 using the DCF methodology (WACC: 14.5%, terminal growth: 3.0%).

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Navigating China Food & Beverages │December 11, 2018

Figure 63: Moutai’s, Wuliangye’s and Yanghe’s share price performance vs. the relative market index performance (rebase 31 Dec 2012 = 100)

Share performance comparison ( rebase 31 Dec 2012 =100) 400 Baijiu industry adjustment cycle Baijiu industry recovery cycle

300

200

100

0 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18

Moutai Wuliangye Yanghe Shanghai Stock Exchange Composite Index Shenzhen Stock Exchange Component Index

SOURCES: CGS-CIMB RESEARCH, WIND, BLOOMBERG

Figure 64: The 5-year trailing P/E (x) for baijiu companies since 2013

40 40

35 35

30 30 +1std 25 25 Highest 20 20 Lowest 15 15 -1std

10 10 Mean Today 5 5

0 0 Wuliangye Luzhou Yanghe Moutai Gujing Fenwine Jiugui Shunxin YiLite Swellfun Yingjia King's luck Kouzi Laojiao

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS, BLOOMBERG

Figure 65: The five-year P/BV (x) for baijiu companies since 2013

10 10 9 9 8 8

7 7 +1std 6 6 Highest 5 5 Lowest 4 4 -1std 3 3 Mean 2 2 Today 1 1 0 0 Wuliangye Luzhou Yanghe Moutai Gujing Fenwine Jiugui Shunxin YiLite Swellfun Yingjia King's luck Kouzi Laojiao

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS, BLOOMBERG

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Navigating China Food & Beverages │December 11, 2018

Figure 66: Moutai 12-month forward P/E (x) Figure 67: Moutai 12-month forward EV/EBITDA (x)

MT Current P/E (x): 18.9; Mean:19.4; +1STD: 28.1; -1STD: 10.7 Current EV/EBITDA (x): 11.5; Mean: 11.7; +1STD: 18.1; -1STD: 60 5.3 12M forward P/E(x) 40 12M forward EV/Ebitda 50 Mean +1 std Mean -1 std 30 +1 std 40 -1 std 30 20 20 10 10

0 0

Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18

Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

SOURCES: CGS-CIMB RESEARCH, BLOOMBERG SOURCES: CGS-CIMB RESEARCH, BLOOMBERG

Figure 68: Yanghe 12-month forward P/E (x) Figure 69: Yanghe 12-month forward EV/EBITDA (x) Current P/E (x): 15.9; Mean:18.6; +1STD: 23.2; -1STD: 13.9 Current EV/EBITDA (x): 12.8; Mean: 14.0; +1STD: 17.4; -1STD: 10.6 35 25 12M forward P/E(x) Mean 12M forward EV/Ebitda Mean 30 +1 std -1 std 20 +1 std -1 std 25

20 15

15 10 10

5 5

Sep-16 Sep-18 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-17

Nov-10 Nov-13 Nov-14 Nov-17 Nov-09 Nov-11 Nov-12 Nov-15 Nov-16 Nov-18

Mar-11 Mar-13 Mar-15 Mar-17 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18

May-10 May-13 May-17 May-12 May-14 May-15 May-16 May-18 May-11 SOURCES: CGS-CIMB RESEARCH, BLOOMBERG SOURCES: CGS-CIMB RESEARCH, BLOOMBERG

Figure 70: Wuliangye 12-month forward P/E (x) Figure 71: Wuliangye 12-month forward EV/EBITDA (x)

Current P/E (x): 14.2; Mean:22.4; +1STD: 36.8; -1STD: 8.0 Current EV/EBITDA (x): 8.5; Mean: 12.6; +1STD: 22.3; -1STD: 2.8 60 12M forward PE(x) Mean 30 12M forward EV/Ebitda 50 Mean +1 std +1 std -1 std -1 std 40 20 30

20 10 10

0 0

Feb-01 Feb-05 Feb-06 Feb-10 Feb-11 Feb-16 Feb-00 Feb-02 Feb-03 Feb-04 Feb-07 Feb-08 Feb-09 Feb-12 Feb-13 Feb-14 Feb-15 Feb-17 Feb-18

Mar-02 Mar-06 Mar-10 Mar-14 Mar-18 Mar-03 Mar-04 Mar-05 Mar-07 Mar-08 Mar-09 Mar-11 Mar-12 Mar-13 Mar-15 Mar-16 Mar-17

SOURCES: CGS-CIMB RESEARCH, BLOOMBERG SOURCES: CGS-CIMB RESEARCH, BLOOMBERG

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Navigating China Food & Beverages │December 11, 2018

Figure 72: Peer comparison

Company Name Bloomberg Recom Last Quoted Market P/E (x) 3yrs P/BV (x) EV/EBITDA (x) ROE (%) Dividend Yield (%) Ticker price currency cap EPS CAGR Local (US$, m) 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F Kweichow Moutai Co Ltd-A 600519 CH ADD 583.0 Rmb 106,147 21.6 18.9 15.9 19% 6.6 5.5 4.6 12.9 11.0 9.0 33.4 31.7 31.5 2.4 2.7 3.2 Jiangsu Yanghe Brewery -A 002304 CH ADD 99.4 Rmb 21,700 18.2 15.9 13.2 19% 4.4 3.9 3.4 12.5 10.6 8.5 25.9 26.0 27.3 3.2 3.6 4.4 Wuliangye Yibin Co Ltd-A 000858 CH HOLD 52.8 Rmb 29,717 16.1 14.2 12.3 20% 3.5 3.1 2.8 9.6 8.1 6.7 22.4 22.9 23.8 3.2 3.7 4.2 Luzhou Laojiao Co Ltd-A 000568 CH NR 42.5 Rmb 9,014 18.0 14.5 12.0 25% 3.7 3.2 2.8 11.8 9.7 8.1 21.0 22.9 24.1 3.6 4.5 5.3 Anhui Gujing Distillery Co-A 000596 CH NR 58.0 Rmb 3,853 18.0 14.4 12.2 28% 3.7 3.0 2.4 10.7 8.9 7.8 21.9 22.0 21.2 1.8 2.2 2.4 Shanxi Xinghuacun Fen Wine-A 600809 CH NR 38.1 Rmb 4,786 21.9 16.8 13.5 37% 5.2 4.3 3.5 14.2 11.3 9.5 24.5 26.5 27.1 2.1 2.6 3.3 Jiugui Liquor Co Ltd-A 000799 CH NR 17.7 Rmb 834 22.7 16.0 12.1 39% 2.6 2.4 2.1 12.9 9.7 7.3 12.2 15.2 18.0 1.3 1.7 1.7 Beijing Shunxin Agricult-A 000860 CH NR 35.7 Rmb 2,948 25.0 17.0 12.9 53% 2.7 2.4 2.1 15.0 10.9 9.3 11.0 14.1 15.2 1.2 1.7 1.9 Xinjiang Yilite Industry-A 600197 CH NR 13.9 Rmb 891 13.2 10.4 8.6 26% 2.3 2.0 1.6 NA NA NA 17.9 19.3 20.0 1.9 2.2 2.8 Hebei Hengshui Laobaigan-A 600559 CH NR 13.8 Rmb 1,334 22.3 15.3 12.0 63% 4.2 3.6 3.1 16.0 11.2 9.8 20.2 25.1 26.1 2.4 3.8 5.5 Shede Spirits Co Ltd-A 600702 CH NR 25.1 Rmb 1,225 23.9 16.4 11.1 75% 3.0 2.5 2.1 16.1 11.7 8.9 13.7 16.5 19.2 1.0 1.4 1.8 Sichuan Swellfun Co Ltd-A 600779 CH NR 32.6 Rmb 2,308 25.5 18.2 14.1 50% 8.4 6.9 5.6 18.3 13.9 10.9 34.3 39.8 44.8 3.0 4.3 5.9 Anhui Yingjia Distillery C-A 603198 CH NR 15.2 Rmb 1,759 14.8 12.7 12.3 14% 2.8 2.6 2.5 10.0 8.7 7.8 18.0 19.3 19.9 NA NA NA Jiangsu King'S Luck Brewer-A 603369 CH NR 15.8 Rmb 2,871 16.9 13.6 11.2 25% 3.3 2.8 2.3 11.7 9.6 8.3 19.7 21.0 21.7 1.9 2.3 2.8 Anhui Kouzi Distillery Co -A 603589 CH NR 36.0 Rmb 3,126 14.9 12.4 10.4 23% 3.5 3.0 2.5 10.5 9.1 8.3 24.0 24.8 25.0 2.4 2.9 3.0 Average in China domestic baijiu market 19.5 15.1 12.3 34% 4.0 3.4 2.9 13.0 10.3 8.6 21.3 23.1 24.3 2.2 2.8 3.4 Tingyi (Cayman Isln) Hldg Co 322 HK HOLD 10.2 HK$ 7,361 19.2 17.0 15.0 23% 2.6 2.4 2.2 6.5 6.3 5.9 13.2 13.4 14.2 2.4 2.8 3.1 Uni-President China Holdings 220 HK REDUCE 6.6 HK$ 3,648 23.3 20.1 18.2 16% 1.9 1.8 1.8 8.8 8.3 7.9 8.3 9.1 9.9 3.4 3.9 4.5 Want Want China Holdings Ltd 151 HK ADD 5.4 HK$ 8,491 18.9 17.5 15.7 6% 4.2 3.6 3.2 10.8 10.0 9.6 24.1 22.1 21.2 1.7 2.5 2.8 China Mengniu Dairy Co 2319 HK ADD 24.0 HK$ 12,062 26.8 21.6 18.6 29% 3.3 3.0 2.7 15.4 13.1 11.4 12.9 14.4 15.1 1.1 1.4 1.6 Tsingtao Brewery Co Ltd-H 168 HK REDUCE 30.7 HK$ 5,927 24.4 22.6 20.1 13% 2.0 1.9 1.8 10.6 9.7 8.6 8.5 8.6 9.1 1.2 1.3 1.5 China Resources Beer Holding 291 HK ADD 27.6 HK$ 11,561 30.1 22.6 19.5 51% 4.0 3.7 3.4 13.8 10.9 9.3 13.8 17.3 18.2 0.9 1.3 1.7 Dali Foods Group Co Ltd 3799 HK NR 5.7 HK$ 9,866 17.8 15.7 13.6 14% 4.6 4.0 3.6 11.3 9.9 8.6 26.7 27.4 28.3 3.3 3.8 4.0 Average in HK market 22.9 19.6 17.3 22% 3.2 2.9 2.7 11.0 9.7 8.8 15.4 16.1 16.6 2.0 2.4 2.7 Diageo Plc DGE LN NR 2,828.5 GBP 86,449 24.3 22.4 20.8 4% 6.7 7.3 7.9 18.7 17.4 16.4 28.4 32.2 33.0 2.3 2.4 2.5 Anheuser-Busch Inbev Sa/Nv ABI BB NR 62.0 EUR 142,459 17.6 14.7 13.1 10% 1.8 1.7 1.6 11.7 11.3 10.6 10.7 12.7 13.4 3.3 3.1 3.1 Ambev Sa ABEV3 BZ NR 15.9 BRL 63,775 20.5 18.9 16.9 26% 4.5 4.3 4.1 11.5 10.8 9.8 24.0 25.0 26.3 3.5 4.7 5.0 Constellation Brands Inc-A STZ US NR 187.3 US$ 35,604 21.9 19.8 18.2 -5% 4.6 3.1 2.8 16.4 15.0 13.7 23.1 21.8 16.8 1.1 1.6 1.7 Carlsberg As-B CARLB DC NR 713.6 DKK 16,477 20.4 19.0 17.4 71% 2.2 2.1 2.0 9.5 9.1 8.7 10.9 11.3 11.7 2.4 2.6 2.8 Molson Coors Brewing Co -B TAP US NR 62.7 US$ 13,609 12.6 12.6 12.0 -7% 1.0 0.9 0.9 9.5 9.4 9.3 8.1 7.5 7.6 2.7 3.3 4.0 Heineken Nv HEIA NA NR 78.3 EUR 51,329 19.2 17.6 16.1 13% 3.0 2.7 2.6 10.7 10.2 9.6 16.1 15.9 16.1 2.0 2.1 2.3 Asahi Group Holdings Ltd 2502 JP NR 4,380.0 JPY 18,728 13.7 13.0 12.2 5% 1.7 1.6 1.4 9.8 9.5 9.1 12.5 12.5 12.3 2.1 2.3 2.5 Kirin Holdings Co Ltd 2503 JP NR 2,400.5 JPY 19,399 13.8 13.7 13.1 -12% 2.2 2.0 1.8 10.2 9.9 9.4 16.2 15.3 15.0 2.0 2.3 2.6 Thai Beverage Pcl THBEV SP ADD 0.6 S$ 10,701 15.5 13.8 12.9 13% 2.5 2.7 2.5 16.0 15.9 14.9 16.9 16.9 17.1 2.9 3.0 3.3 Pernod Ricard Sa RI FP NR 138.6 EUR 41,868 24.2 22.4 20.6 4% 2.5 2.3 2.2 16.7 15.9 14.9 10.8 10.7 11.0 1.7 2.0 2.3 United Spirits Ltd UNSP IN NR 614.0 INR 6,210 85.1 57.3 46.1 14% 18.6 13.8 10.5 43.5 33.4 28.6 23.9 27.1 25.4 0.1 0.2 0.4 Brown-Forman Corp-Class B BF/B US NR 46.4 US$ 22,145 29.7 27.2 25.2 7% 18.5 13.4 11.3 21.9 20.8 19.6 60.2 55.4 48.9 1.3 1.4 1.5 Hite Jinro Co Ltd 000080 KS NR 17,600.0 KRW 1,091 31.2 24.0 20.7 67% 1.0 1.1 1.1 9.6 9.1 8.8 3.3 4.5 5.1 4.4 4.5 4.6 Remy Cointreau RCO FP NR 101.1 EUR 5,862 33.4 31.6 27.0 8% 3.7 3.4 3.1 21.0 19.5 17.3 11.5 11.3 12.2 1.7 1.7 1.9 Davide Campari-Milano Spa CPR IM NR 7.6 EUR 10,047 35.2 31.3 27.9 -4% 4.0 3.6 3.3 21.9 20.2 18.5 11.7 11.5 11.3 0.7 0.7 0.8 C&C Group Plc GCC ID NR 2.9 EUR 1,038 13.2 11.3 9.9 11% 1.8 1.7 1.6 11.8 9.8 9.0 12.5 14.2 15.1 5.0 5.0 5.2 Becle Sab De Cv CUERVO* MM NR 23.4 MXN 4,203 22.1 18.8 15.5 1% 1.8 1.7 1.6 13.2 11.7 10.2 7.7 9.3 10.2 2.6 2.7 3.1 Sapporo Holdings Ltd 2501 JP NR 2,390.0 JPY 1,665 22.4 22.5 21.9 -8% 1.0 1.0 1.0 11.6 11.6 11.4 4.8 4.6 4.6 1.7 1.7 1.6 Vina Concha Y Toro Sa CONCHA CI NR 1,334.8 CLP 1,470 20.7 16.5 13.6 14% 1.8 1.7 NA 13.5 11.2 9.9 8.7 10.5 11.3 1.8 2.0 3.0 Treasury Wine Estates Ltd TWE AU NR 14.2 AUD 7,338 28.9 22.5 18.6 15% 3.0 2.8 2.6 17.3 14.2 12.0 10.0 12.7 14.7 2.2 2.9 3.5

Average in International market 25.0 21.5 19.0 12% 4.2 3.6 3.3 15.5 14.1 12.9 15.8 16.3 16.1 2.3 2.5 2.8 *Not rated companies’ forecasts are based on Bloomberg consensus estimates. NOTE: AS AT 11 DEC 2018 SOURCES: CGS-CIMB RESEARCH ESTIMATES, BLOOMBERG

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Navigating China Food & Beverages │December 11, 2018

Company Briefs…

27

INITIATION

Company Note | Alpha series Food & Beverages │China │December 11, 2018

China Kwechow Moutai Co. Ltd ADD King of super-premium hard liquor Consensus ratings*: Buy 35 Hold 0 Sell 0 ■ We initiate coverage on Moutai with an Add rating for its dominant market Current price: Rmb583.0 position and superior brand name. Target price: Rmb720.0 Previous target: N/A ■ Moutai had over 63% market share of China’s super-premium baijiu sales in Up/downside: 23.5% 2017. We forecast 17% sales CAGR and 19% net profit CAGR in FY17-20F. CIMB / Consensus: -6.2% ■ We think its strong distribution network will drive sales of its Series brands, Moutai’s range of low- to mid-priced liquors, by 28% CAGR in FY17-20F. Reuters: 600519.SS

Bloomberg: 600519 CH Market cap: US$105,958m Moutai (MT) brand is the dominant super-premium baijiu Rmb732,351m MT is the top brand in China’s super-premium baijiu market with over 63% market share Average daily turnover: US$410.8m in terms of sales in 2017. We expect this to rise to over 67% in 2020F. We estimate MT Rmb2,814m brand’s sales to deliver 15% CAGR in 2017-20F, faster than the industry average of 13% Current shares o/s: 1,256m for the super-premium sector, as forecast by Euromonitor. Free float: 100.0% *Source: Bloomberg High collectable value to drive sales volume growth

Key changes in this note Consumers prize MT brand liquor and see it as an investment due to Moutai’s unique production method. For example, on JD.com, 53° Feitian MT with ex-factory year of 2017 N/A now retails for Rmb1,988 per 500ml unit, i.e. 49% above its 2017 average retail selling price (RSP) of Rmb1,338 per 500ml unit. We view its collectable nature as an important

Price Close Relative to SHCOMP (RHS) growth driver for Moutai in FY18-20F.

790 130.3

690 118.9 Series brands to become another growth driver

590 107.4 In the past few years, Moutai has gradually switched to developing its Series brands,

490 96.0 30 which is another potential sales growth driver in future. We estimate Series brands 20 revenue to post 28% CAGR in FY17-20F, after recording 128% CAGR over FY15-17. In 10

Vol m Vol 9M18, Series brands’ sales rose by 47.6% yoy, accounting for 11% of total revenue. Dec-17 Mar-18 Jun-18 Sep-18

Source: Bloomberg Deeper and wider distribution network Moutai has effectively penetrated the lower-tier cities in China. Moutai increased its Price performance 1M 3M 12M number of distributors from more than 1,400 in 2011 to c.3,000 in 2017 and 3,546 at end- Absolute (%) 3.7 -9.8 -10.5 Oct 2018. Based on our channel checks, Moutai’s first-layer distributor and retail average Relative (%) 3.9 -7.1 11.4 prices were maintained at Rmb1,720/bottle and Rmb1,988/bottle, respectively, in 3Q18,

Major shareholders % held in line with 2Q18 levels. Moutai’s current channel inventory is around one month and we Kweichow Moutai Group 62.0 expect the tight channel inventory to support to Moutai’s sales growth in 1H19F.

Initiate coverage with Add rating and DCF-based TP of Rmb720 Insert We initiate coverage on Moutai with an Add rating and DCF-based TP of Rmb720 (WACC: 10.2%). Moutai is our top pick in the Chinese hard liquor sector due to its dominant market position and superior brand name. Moutai is trading at 18.9x FY19F P/E slightly below its historical average 12M forward P/E of 19.4x. Our TP implies that Moutai trades at 23.4x FY19F P/E, 0.5 s.d. above its historical average forward P/E. A downside risk is lower baijiu consumption in China.

Analyst(s) Financial Summary Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F Revenue (Rmbm) 38,862 58,218 71,380 79,737 92,560 Operating EBITDA (Rmbm) 25,168 39,992 49,763 56,838 67,290 Net Profit (Rmbm) 16,718 27,079 33,823 38,674 45,890 Core EPS (Rmb) 13.36 21.60 26.97 30.83 36.58 Core EPS Growth 7.8% 61.8% 24.8% 14.3% 18.6% FD Core P/E (x) 43.65 26.98 21.61 18.91 15.94 DPS (Rmb) 6.79 11.00 13.74 15.71 18.64 Dividend Yield 1.16% 1.89% 2.36% 2.69% 3.20% Lei YANG, CFA EV/EBITDA (x) 26.99 16.49 12.89 10.98 8.95 T (86) 21 6162 9676 P/FCFE (x) 19.04 24.49 21.46 19.36 16.36 E [email protected] Net Gearing (73.9%) (80.6%) (82.5%) (82.9%) (83.3%) FeiFei SUN P/BV (x) 10.05 8.01 6.57 5.51 4.61 T (86) 21 6162 5750 ROE 24.5% 33.0% 33.4% 31.7% 31.5% E [email protected] % Change In Core EPS Estimates CIMB/consensus EPS (x) 0.98 0.96 0.97

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN Powered by the THE UNITED STATES IT IS DISTRIBUTED BY CGS-CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. EFA Platform

Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

King of super-premium hard liquor Investment summary

Moutai (MT) brand dominates super-premium baijiu market The Moutai (MT) brand is the top super-premium baijiu brand in China with 63% market share in terms of revenue in 2017, up from 45% in 2012, based on our estimates. MT brand contributed 90% of Moutai revenue in FY17. Based on our channel checks, Moutai’s first-layer distributor and retail average prices have been maintained at Rmb1,720/bottle and Rmb1,988/bottle, respectively, in 3Q18, in line with the levels seen in 2Q18. Moutai’s current channel inventory is around one month and we expect the tight channel inventory to provide a certain level of support to Moutai’s sales growth in 1H19F. As of now, we do not see any company with the ability to challenge Moutai’s position in the super-premium baijiu market. Its closest rival is Wuliangye Yibin (000858 CH, Hold, TP: Rmb55), which had market share of 26% in 2017, much lower than Moutai’s. Super-premium baijiu is defined as baijiu with a retail selling price (RSP) above Rmb600 per 500ml unit.

Figure 1: China’s super-premium baijiu market breakdown by revenue in 2017, based our estimates

SOURCES: CGS-CIMB RESEARCH ESTIMATES, COMPANY REPORTS

We observe that MT’s sales outperformed the industry average during the baijiu sector’s adjustment period (i.e. 2012-15) and recovery period (i.e. 2016-17). For 2019F, we anticipate Moutai’s sales to continue on an uptrend, with the new growth cycle (since 2018) for China’s baijiu industry, and expect MT’s sales to continue to outperform the industry. We estimate MT sales volume CAGR of 12% in FY17-20F (Euromonitor forecasts industry average sales volume growth of 12% in 2017-20F) and MT revenue CAGR of 15% in FY17-20F (Euromonitor forecasts industry average sales growth of 12% in 2017-20F).

Figure 2: China super-premium baijiu industry cycles – New growth cycle has started China baijiu industry cycle Adjustment period Recovery period New growth period 2012-15 CAGR 2015-17 CAGR 2017-20F CAGR Volume growth Volume growth in super-premium baijiu market based -4% 14% 12% on Euromonitor

MT Brand volume growth based on our estimates 9% 20% 12% Sales growth Sales growth in super-premium baijiu market based -11% 14% 12% on Euromonitor MT Brand sales growth based on our estimates 9% 29% 15%

SOURCES: CGS-CIMB RESEARCH ESTIMATES, COMPANY REPORTS, EUROMONITOR

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Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

High collectable value to drive up sales volume growth Moutai’s base liquor needs to be stored for at least four years. The grain and water used to manufacture MT liquor comes from Moutai town. The consumers prize the MT brand and collect MT brand liquor as an investment. For example, on JD.com, the retail selling price for 53° Feitian MT with the ex- factory year of 2017 is now Rmb1,988 per 500ml unit, 49% higher than its 2017 average retail selling price of Rmb1,338 per 500ml unit. We view the high collectable value as an important sales growth driver for Moutai in FY18-20F. In our view, MT is the most popular brand in the sauce fragrance category; sauce fragrance baijiu accounted for only c.5% of total annual baijiu output in China in 2017. China’s baijiu consumers are acutely aware of the limited supply of sauce fragrance baijiu in the market due to the long production cycle (its base liquor needs to be stored for at least four years compared to 1-2 years for strong fragrance baijiu manufactured by Wuliangye and Yanghe).

Figure 3: 53° Feitian MT retail selling price appreciation demonstrates unique collectable value of MT brand 53°Feitian MT MT Ex-factory Year Retail selling price at Retail selling price Collection value Ex-factory Year Auction price that ex-factory year at now multiples (x) (Rmb/500ml unit) (Rmb/500ml unit) (Rmb/500ml unit) 2002 280 107,167 383 1957 2,160,000 2003 320 92,733 290 1958 977,500 2004 350 7,990 23 1959 253,000 2005 500 7,223 14 1960 920,000 2006 500 6,947 14 1967 253,000 2007 580 5,715 10 1972 218,500 2009 708 4,900 7 1972 201,600 2010 846 4,317 5 1974 195,500 2011 1445 3,907 3 1978 61,600 2013 1367 3,110 2 1980-1982 32,775 2014 953 2,660 3 Note: Retai selling price at now data as of 28 Sep 2018 in JD.com

Auction price from ifeng.com SOURCES: CGS-CIMB RESEARCH, JD.COM, SOHU.COM, IFENG.COM

Series brands have become another sales growth driver In the past few years, Moutai has gradually switched its sales growth strategy to developing its Series brands, which target the mid- to low-priced baijiu market. Products under the Series brands are more suitable for capturing the benefits of the premiumisation trend in China’s lower-tier cities. The Series brands have achieved good results, recording revenue CAGR of 128% over FY15-17 and sales volume CAGR of 114% CAGR over the same period. Backed by Moutai’s strong distribution network, we expect Series brands to be another sales growth driver in future. We forecast this segment’s sales to deliver 28% CAGR in FY17- 20F, i.e. sales to rise from Rmb5.8bn in FY17 to c.Rmb12.1bn in FY20F.

Figure 4: Series brands’ sales (Rmb m) Figure 5: Moutai’s Series brands outperformed the market in terms of sales volume growth and sales growth China baijiu industry cycle Adjustment period Recovery period New growth period 2012-15 CAGR 2015-17 CAGR 2017-20F CAGR Volume growth Low-end volume growth based on Euromonitor 7% -5% -11% Mid-range volume growth based on Euromonitor 4% 5% 6% Premium volume growth based on Euromonitor -2% 11% 12% Series Brand volume growth based our estimates -12% 114% 11% Retail sales revenue growth Low-end sales growth based on Euromonitor 10% 0% -8%

Mid-range sales growth based on Euromonitor 7% 9% 9%

Premium sales growth based on Euromonitor 1% 13% 13%

Series Brand sales growth based on our estimates -23% 128% 28%

SOURCES: CGS-CIMB RESEARCH ESTIMATES SOURCES: CGS-CIMB RESEARCH ESTIMATES, EUROMONITOR

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Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

Prince (茅台王子酒), which retails at Rmb150-300 per 500ml unit, is the largest revenue generator among the Series brands. According to Moutai’s management, Prince’s sales volume surged 99% yoy to 12,000 tonnes in FY17. and achieved Rmb250m sales, accounting for 43% of the Series brands segment’s revenue. Since early 2018, Moutai has upgraded its product mix and focused on promoting higher-end products such as Prince Gold, Prince Classical and the regional brand Hanjiang ( 汉酱). We found the outcome to be encouraging, with c.9,000 tonnes of Prince Brand and Hanjiang sold in 1H18, which translates into revenue of over Rmb250m.

We believe Moutai will increase production of mid-range brands such as Prince (茅台王子酒) and premium brands such as Laimao (赖茅酒) and Hanjiang (汉酱), and reduce production volume of low-end brands. According to Euromonitor, the low-end baijiu market’s sales volume shrank by 5% CAGR in 2015-17 and the market researcher expects the decline to continue at a clip of 11% CAGR over 2017-20F. The mid-range and premium market would maintain steady 6% and 12% sales volume CAGR in 2017-20F, respectively, based on Euromonitor’s estimates.

Deeper and wider distribution network to accelerate the reach of Series brands Moutai has adjusted its wholesale distribution model to become flatter and has put more effort into developing small-sized distributors in order to reduce its reliance on large-scale wholesalers. Moutai has also expanded its sales network to lower-tier or county-level cities to attract more individual consumers to its products. As at end-Oct 2018, Moutai had a total of 3,546 distributors vs. more than 1,400 in 2011. Among Moutai’s distributors, 40% are exclusive MT Brand stores and 37% are distributors of Series brands. The flatter distribution network has accelerated the spread of its Series brands.

Figure 6: Moutai’s distributor breakdown by type

43°MT Brand Self-operating store, 1% distributors , 2% Others, 2%

Exclusive distributors, 18% Exclusive MT Brand stores, 40% Distributors under Series Brand, 37%

SOURCES: CGS-CIMB RESEARCH, COMPANY WEBSITE

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Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

Company profile

Moutai (MT) brand dominates China’s super-premium baijiu market We estimate MT has the largest market share with 63% of China’s super- premium baijiu market (RSP

Figure 7: MT brand revenue (Rmb m) Figure 8: MT brand market share increased to 64% in 2017 from 45% in 2012, based our estimates 100% (Rmb m)

90,000 45% 80% 80,000 40%

70,000 35% 60%

60,000 30%

50,000 25% 40% 64% 40,000 20% 20% 45% 30,000 15%

20,000 10% 0% 10,000 5% 2012 2017 0 0% Moutai (MT) Brand Wuliangye (WLY) Brand FY12 FY13 FY14 FY15 FY16 FY17 FY18F FY19F FY20F MT Brand sales revenue YoY (%, RHS) Yanghe's Blue Dream Luzhou Laojiao (Cellar1573)

SOURCES: CGS-CIMB RESEARCH ESTIMATES, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH ESTIMATES

Figure 9: Snapshot of Moutai’s two product categories - MT brand vs. Series brands

Note: Retail selling price (RSP) on JD.com as at 28 Sep 2018 SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS, JD.COM

Moutai has two product categories – Moutai (MT) brand and Series brands. The MT brand is the principal contributor to Moutai’s total revenue. Sales of MT increased 43% yoy to Rmb52.4bn in FY17, accounting for 90% of Moutai’s total baijiu revenue (Rmb58.2bn). MT, which has a retail selling price (RSP) of over Rmb1,000 per 500ml unit, is the top brand in China’s super-premium baijiu market (RSP above Rmb600 per 500ml unit), according to our research. In our view, MT’s leading position in the super-premium baijiu market is secure and no other brand is capable of challenging its position in the foreseeable future.

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Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

Figure 10: Moutai’s revenue breakdown by product segment in Figure 11: Moutai’s sales volume breakdown by product segment FY17 in FY17

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

High collectable and investment value Moutai’s base liquor needs to be stored for at least four years. The grain and water used to manufacture Moutai comes from Moutai town. The consumers prize the MT brand and collect MT brand liquor as an investment. For example, on JD.mall, the retail selling price of 53° Feitian MT with an ex- factory year of 2017 is now Rmb1,988 per 500ml unit, 49% higher than its 2017 average retail selling price of Rmb1,338 per 500ml unit. We view the high collectable value as an important sales growth driver for Moutai in FY18-20F. Based on the different types of fragrance, the China baijiu industry can be divided into thirteen categories. The top three fragrance categories in terms of sales value in China are strong fragrance (浓香型，representing 51% market share of China’s baijiu industry in 2017 (source: Qianzhan.com) ， sauce fragrance (酱香型，15%) and light fragrance (清香型，12%). However, the production output of sauce fragrance only accounted for 5% of China’s total baijiu production volume in 2017 (strong fragrance: 70%), according to CE.CN (中国经济网). In our view, MT is the most popular brand in the sauce fragrance category. Moutai was listed on the Shanghai Stock Exchange in 2001. Since then, the company has embarked on a comprehensive campaign to increase the awareness of MT brand’s longstanding history, its distinguished and complicated brewing techniques for sauce fragrance baijiu and the fact that the microbial environment required to produce MT can only be found in Moutai town – only Moutai soil, water and grain can be used to produce the MT brand of liquor. Moutai has successfully educated China’s baijiu consumers that there is a limited supply of sauce fragrance baijiu due to its long production cycle (at least four years, according to the company’s estimates), compared with 1-2 years to produce strong fragrance baijiu (as manufactured by Wuliangye), and high production cost. The company has also emphasised that Moutai products are healthier as the liquor is made from pure grain that is brewed at a high temperature. Mr Jikeliang, ex-chairman of Moutai, published a widely-read article entitled “Tell you a true story about aged Moutai” in 2005. It partially unveiled the mystery of Moutai production techniques to the public and helped to increase the collectable value of MT. According to Brand Finance, MT’s brand value rose 60% yoy to US$11,548m in 2017 and was the most valuable spirit brand in the world in 2017.

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Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

Figure 12: 2017 China baijiu market share breakdown by major Figure 13: Description of major fragrance categories in China’s fragrance categories in terms of revenue (2017) baijiu market

Categories Features Representative Brands

Others, 16% Strong fragrance Sweet and mellow taste, harmonious in flavour Wuliangye, Luzhou Laojiao, Yanghe, Mxied and a refreshing aftertaste Jiannanchun fragrance, 6% Sauce fragrance Light yellow and transparent colour, with a Moutai, Liangjiu, Xijiu prominent Source flavour and long-lasting Light Strong aftertaste fragrance, fragrance, 12% 51% Light fragrance Pure fragrance, sweet and soft taste with Fenjiu, Niulanshan refreshing aftertaste Sauce fragrance, Mixed fragrance A blend of two or more fragrances Baiyunbian, Kouzijiao 15%

SOURCES: CGS-CIMB RESEARCH, QIANZHAN.COM SOURCES: CGS-CIMB RESEARCH, CHINA NATIONAL FOOD INDUSTRY ASSOCIATION

Figure 14: MT brand value up by 60% yoy, making it the most valuable spirit brand in the world in 2017 Rank Brand name Domicile Brand value (US$ m) YoY （%） 1 Moutai China 11,548 60% 2 Johnnie Walker UK 4,548 -2% 3 Yanghe China 4,281 50% 4 Jack Daniel's US 3,055 22% 5 Hennessy France 2,711 -6% 6 Luzhou Laojiao China 2,509 73% 7 Bacardi US 2,185 15% 8 Smirnoff UK 2,033 0% 9 Wuliangye China 1,975 86%

10 Absolut France 1,759 22% SOURCES: CGS-CIMB RESEARCH, BRAND FINANCE

Sales volume growth to be key MT brand revenue driver in FY18-20F We expect the main driver for MT brand’s revenue growth in the near term to be sales volume growth of its high-alcohol content liquor under the MT brand, not price hikes. MT products with high alcohol content include the popular 53 ° Feitian MT and aged MT products, which we estimate contributed over 90% of MT Brand’s revenue in FY17, with the rest coming from the low-alcohol MT brand of liquor. Moutai often adjusts its supply volume of 53° Feitian MT to control the first-layer wholesale price. Due to Moutai’s leading market position, a price hike for MT brands, particularly the ex-factory price of 53° Feitian MT, may lead to a price hike cycle for the entire baijiu industry, hence this requires government approval. As such, the company does not frequently adjust the ex-factory price of 53° Feitian MT. Since 2001, Moutai has raised 53° Feitian MT’s ex-factory price 9x compared with Wuliangye’s 19x. On 28 Dec 2017, Moutai announced that it was lifting the ex-factory price of 53° Feitian MT for the first time in five years; the price per 500ml unit was increased by 18% to Rmb969 effective on 1 Jan 2018. We consider this a clear indication by Moutai that demand for premium baijiu has fully recovered to the 2012 level (the peak before the baijiu industry entered the trough) and is on a new upward trend. Reviewing the historical wholesale price trend for 53° Feitian MT, we observe that it has close positive correlation with the Chinese economy and business activities since Jan 2017, when baijiu consumption shifted from being led by the government to being led by individuals and businesses. We do not think Moutai is likely to raise its ex-factory price again in the near future considering the China’s weakening economic growth. The near-term revenue growth driver for Moutai is likely be sales volume growth of the MT brand.

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Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

Figure 15: China PMI and 53°Feitian MT wholesale price yoy % change – The wholesale price trend of 53°Feitian MT and business-related activities in China have been positive correlated since the premium baijiu consumption structure changed

58 100%

56 80% 60% 54 40% 52 20% 50 0% 48 -20% 46 -40%

44 -60%

Jul-15 Jul-17 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-16 Jul-18

Jan-12 Jan-15 Jan-17 Jan-18 Jan-10 Jan-11 Jan-13 Jan-14 Jan-16

China PMI 53°Feitian Moutai wholesale price YoY (%, RHS)

SOURCES: CGS-CIMB RESEARCH, WIND

Figure 16: 53° Feitian MT price hikes – 9 hikes in ex-factory price since 2001 Date Price hike % Ex-factory price after price Estimated distribution Retail selling price at the hike (Rmb per 500ml unit) channel profit （Rmb per same time (Rmb per 500ml 500ml unit) unit) Aug-01 +18% 218 40 258 Oct-03 +23% 268 20 288 Feb-06 +15% 308 90 398 Apr-07 +16% 358 140 498 Jan-08 +23% 439 210 649 Jan-10 +14% 499 370 869 Jan-11 +24% 619 830 1449 Sep-12 +32% 819 1200 2019

Jan-18 +18% 969 830 1799 SOURCES: CGS-CIMB RESEARCH, WIND

Sufficient MT base liquor reserves to support 12% sales volume CAGR for MT brand in FY17-20F Although we do not think Moutai will raise ex-factory prices in the near future, it is highly possible that the company will increase supply volume to the market considering its currently low channel inventory of slightly less than one month. According to Euromonitor, MT brand has performed much better than the industry average in terms of sales volume growth during the baijiu adjustment period (i.e. 2012-15) and recovery period (i.e. 2015-17). We expect 2018F to be the starting point of the new growth cycle for the China baijiu industry and for MT brand to continue to outperform. We estimate the sales volume of MT brand to post 12% CAGR in FY17-20F (Euromonitor forecasts super premium industry average volume growth of 12%) and its revenue to record 15% CAGR in FY17- 20F (Euromonitor forecasts industry average sales growth of 12%).

Figure 17: MT brand’s sales volume and annual growth

(Tons)

45000 35%

40000 30%

35000 25%

30000 20%

25000 15%

20000 10%

15000 5%

10000 0%

5000 -5%

0 -10% FY12 FY13 FY14 FY15 FY16 FY17 FY18F FY19F FY20F MT Brand sales volume YoY (%, RHS)

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

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Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

Due to Moutai’s unique production techniques for its sauce fragrance, the production of baijiu products under the MT brand, such as 53°Feitian MT, require the use of base liquor that has been stored for at least four years. To cope with the surge in market demand, Moutai has been able to ramp up its production capacity of MT base liquor over the past two decades. In 2017, Moutai’s actual production capacity for liquor under the MT brand was 42,800 tonnes. Based on our estimates of movements in Moutai’s reserves of MT base liquor (source: Mr Jikeliang, ex-chairman of Moutai group, as published in the article “Tell you a true story about aged Moutai” in 2005, as well as in Moutai’s IPO prospectus), we believe Moutai has sufficient base liquor to support 12% sales volume CAGR in FY17-20F. According to Moutai’s management, its MT base liquor production capacity would reach 56,000 tonnes in 2020F because in May 2018, it invested Rmb3.6bn in capex to increase production capacity.

Figure 18: The reserves of MT aged base liquor are well above Figure 19: Moutai has sufficient MT base liquor to support long- the sales volume of MT brand products (tonnes) term supply volume growth (tonnes)

SOURCES: CGS-CIMB RESEARCH ESTIMATES, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH ESIMATES, COMPANY REPORTS

Series brands have become another sales growth driver In recent years, Moutai has gradually switched its development strategy to Series brands and it now considers the segment another future sales growth driver. We estimate Series brands’ revenue will deliver 28% CAGR in FY17-20F and achieve sales of c.Rmb12bn in FY20F.

Moutai has established a “3+3” product strategy for its Series brands. For the nationwide market, it intends to widen brand awareness and increase marketing promotions on three core Series brands – Moutai Yingbin (茅台迎宾酒)，Moutai Prince (茅台王子酒) and Laimao (赖茅酒). For the regional market, it intends to consolidate the market positions of its three regional brands - Hanjiang (汉酱)， Guizhoudaqu (贵州大曲) and Ren Jiu (仁酒) – in a bid to enhance its regional market shares.

Over the years, Moutai had developed various kinds of baijiu products in the low- to mid-priced range under the Series brands. The marketing resources allocated to the segment were not particularly focused. During the baijiu adjustment cycle of FY12-15, revenue from Series brands declined by 23% CAGR. During the recovery cycle, Series brands achieved rapid sales volume growth, rising from 14,027 tonnes in FY16 to 29,903 tonnes in FY17, much higher than the 6,517 tonnes in FY15. Series brands posted revenue CAGR of 128% in FY15-17 and sales volume CAGR of 114%. In 1H18, the segment’s sales totalled c.16,000 tonnes, making up 53% of the full-year volume target for 2018F, while its revenue was over Rmb4.5bn, 57% of the company’s full-year guidance of Rmb8bn.

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Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

Figure 20: Series Brands’ revenue (Rmb m) Figure 21: Sales volume growth and revenue growth forecasts for Series brands China baijiu industry cycle Adjustment period Recovery period New growth period 2012-15 CAGR 2015-17 CAGR 2017-20F CAGR Volume growth Low-end volume growth based on Euromonitor 7% -5% -11% Mid-range volume growth based on Euromonitor 4% 5% 6% Premium volume growth based on Euromonitor -2% 11% 12% Series Brand volume growth based our estimates -12% 114% 11% Retail sales revenue growth Low-end sales growth based on Euromonitor 10% 0% -8%

Mid-range sales growth based on Euromonitor 7% 9% 9%

Premium sales growth based on Euromonitor 1% 13% 13%

Series Brand sales growth based on our estimates -23% 128% 28%

SOURCES: CGS-CIMB RESEARCH ESTIMATES, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH ESTIMATES, EUROMONITOR

Figure 22: Series brands’ launch history and Moutai’s marketing strategy for the segment

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS, COMPANY WEBSITE

Most of Moutai’s Series brands are in the mid-range price zone, which is quite a competitive and fragmented segment of China’s baijiu market, with regional markets usually dominated by local brands. For example, Gujinggongjiu (古井贡 酒) has 60% of 2017 revenue emanating from its home market, Anhui province; it has the largest market share (of over 15%) in the Anhui province in terms of 2017 revenue. Yanghe has over-40% market share in its home market of Jiangsu province in terms of 2017 revenue. Moutai has not yet built solid market positions in any region for its Series brands but we expect MT’s nationwide brand recognition and extensive distribution network to help cement its Series brands’ market positions in the future.

According to Euromonitor, the low-end baijiu market shrunk by 5% CAGR in terms of sales volume during the baijiu adjustment cycle of 2015-17 and it expects to see continued decline of 11% CAGR in 2017-20F. We expect Moutai to reduce the supply volume of its low-end products, such as Yingbin (茅台迎宾 酒), and switch its production capacity to mid-range products, such as Prince (茅 台王子酒), Laimao (赖茅酒) and Hanjiang (汉酱). We expect the mid-range products to maintain their steady growth of 6% CAGR by sales volume in FY17- 20F based on Euromonitor’s estimates. As the Prince brand has been in the market for over 20 years and has an established distribution network, we expect Prince (茅台王子酒) to maintain its sales volume growth momentum. According to Moutai’s management, Prince saw robust sales volume growth in FY17, up by 99% to 12,000 tonnes, and Rmb250m in revenue. Since Jan 2018, Moutai has adjusted its product mix and focused on promoting two mid-range products under the Prince brand – Prince Gold and Prince Classical– and the regional brand Hanjiang ( 汉酱). We observe that the outcome has been quite

37

Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

encouraging; in 1H18, Prince and Hanjiang achieved sales volumes of c.9,000 tonnes with over Rmb250m in revenue.

To cope with the accelerated development of Series brands, on 28 Sep 2018, Moutai announced its plans to invest c.Rmb8.4bn to build a 30,000-tonne p.a. sauce fragrance production line for products under the Series brands. After its completion, the company estimates the Series brands segment’s production capacity will increase to 60,000 tons p.a. The expansion will be internally financed.

Deeper and wider distribution network Since the adjustment cycle in China’s baijiu industry over 2012-15, Moutai has flattened its distribution network and put more effort into developing small-size distributors; the company is also trying to popularise the consumption of its products among individuals and businesses to penetrate deeper into and to widen its sales network in lower-tier cities and towns. The number of distributors has increased from over 1,400 in 2011 to c.3,000 in 2017. As at end-Oct 2018, Moutai had a total 3,546 distributors, of which more than 40% were exclusive stores and c.36% were Series brand distributors. Its number of salespeople has also increased rapidly from 529 in 2012 to 684 in 2017. The success of Moutai’s Series brands’ transformation s became evident when Series Brands’ revenue surged 172% yoy to Rmb5.8bn in FY17.

At the same time, Moutai is attempting to increase individual consumption by portraying its liquor as an ‘affordable luxury’ that can be enjoyed by the mass market, instead of purely during business occasions. Good discounts are often given to individual consumers; for instance, during the Spring Festival in 2018 and the Mid-Autumn Festival in Aug 2018, 53 ° Feitian MT was sold for Rmb1,399 instead of regular RSP of over Rmb1,600. Moutai is also developing the supermarket channel, the e-commerce channel and self-operated stores. For example, Moutai has upgraded the position of supermarkets in its distribution network to ensure this channel has better profit margins, while increasing supply to e-commerce players, such as Tmall [operated by Alibaba (BABA US, Not Rated)] and JD.com (JD US, Hold, TP: US$23.60); the company has also built its own Moutai e-commerce platform. We believe the flatter distribution structure will eventually enhance Moutai’s control over pricing and extend its retail coverage.

Figure 23: Number of Moutai distributors, by type as at end-Oct 2018

1600 1423 1400 1325

1200

1000

800 627 600

400

200 62 40 26 26 5 12 0 Exclusive stores Distributors Exclusive 43° MT Brand Self-operating Wholesale Sales points in Wholesale Others under Series distributors distributors store distributors airport and train distributors Brand under MT Brand station under Series Brand

SOURCES: CGS-CIMB RESEARCH, COMPANY WEBSITE

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Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

Figure 24: Moutai’s nationwide distribution coverage – Number of distributors in each province as at end-Oct 2018

600 506 500

400 338 285 300 217 213 195 190 200 141 133 125 101 96 90 85 83 70 70 100 68 62 60 55 55 53 46 45 41 38 36 20 17 12

0

Jilin

Hebei

Anhui

Hubei

Fujian

Gansu

Xizang

Henan

Shanxi

Hunan

Jiangxi

Tianjin

Beijing

Hainan

Jiangsu

Ningxia

Yunnan

Shaanxi Qinghai

Sichuan

Xinjiang

Guangxi

Guizhou

Liaoning

Zhejiang

Shanghai

Shandong

Chongqing

Guangdong Heilongjiang

Inner MongoliaInner SOURCES: CGS-CIMB RESEARCH, COMPANY WEBSITE

Figure 25: Advertisement and marketing promotion expenses Figure 26: Salesforce size has stabilised in FY16-17 increased in FY16-17, largely due to Series brands (Rmb m)

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Widening distributors’ profit margins to drive growth Moutai’s distributors are very loyal to the brand, not only because they can earn high profit margins, but also because the company provided support when the entire baijiu industry faced the trough period of 2012-15. As a result, when Moutai decided to flatten its distribution channel, there was less opposition from its large wholesalers. During the industry adjustment period of 2012-15, Moutai maintained the ex- factory price of its core product 53°Feitian MT and lowered its distributors’ threshold, as well as provided various other forms of assistance, such as price incentives and extra volume quota, to enhance the loyalty of its distributors. During the recovery period, particularly when market demand surged in 2017, Moutai did not immediately raise its ex-factory price, allowing its first layer of wholesale distributors to enjoy the fruits of staying with Moutai during the trough period with a channel profit margin of over 50% on average (i.e. the gap between its ex-factory price of Rmb969/500ml unit and the first-layer wholesale price of Rmb1,550/500ml unit at the end of Dec 2017). We expect the over-50% channel profit margin to incentivise Moutai’s distributors to expand their market coverage deeper and wider, which would eventually drive up the company’s premium baijiu market share.

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Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

Figure 27: Moutai kept its ex-factory prices stable to ensure its distributors enjoyed a reasonable profit during the adjustment cycle of the China baijiu industry (2012-15)

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 28: Ex-factory prices, first-layer wholesale prices and Figure 29: First-layer wholesale distributors’ profit margin spread retail selling prices for 53°Feitian MT (Rmb/500ml unit) (%) between 53° Feitian MT and 52° Wuliangye

2500 250% In Nov 2018, the first layer wholesale distributors' margin 200% difference =74% 2000 150%

1500 100%

1000 50%

0% 500 -50%

0

Jul-09 Jul-11 Jul-13 Jul-15 Jul-17 Jul-10 Jul-12 Jul-14 Jul-16 Jul-18

Jan-18 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-09 The first layer wholesale distributors' margin on 53° Feitian MT Ex-factory price The first layer wholesale price Retail selling price The first layer wholesale distributors' margin on 52°Wuliangye

SOURCES: CGS-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH, WIND

Financial review and outlook In FY17, Moutai achieved its second-highest revenue growth of 50% yoy since its listing (its record high of 58% yoy was posted in FY11, when consumption in the China baijiu industry was led by the government). In 9M18, Moutai saw sales growth of 23.1% yoy. Considering the weakening economic environment in China currently, we expect Moutai’s sales growth to decelerate and estimate that Moutai will deliver revenue CAGR of 17% in FY17-20F, with sales volume CAGR of 12% for the MT brand and 11% for Series brands in FY17-20F. In the near term, we think it unlikely that Moutai will increase the ex-factory price or ASP for the MT brand but we expect it to raise the ASP of the Series brands by 16% CAGR in FY17-20F. Due to Moutai’s strong brands and effective cost control, we expect its net profit margin to remain fairly stable at 47-50% over FY18-20F.

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Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

Figure 30: Moutai’s 9M earnings performance review (Rmb m) 9M17 9M18 YoY (%) FY17 FY18F YoY (%) Revenue 42,450 52,242 23.1% 58,218 71,380 22.6% MT Brand 38,404 46,265 20.5% 52,394 65,851 25.7% Series Brand 4,019 5,934 47.6% 5,774 7,680 33.0% Gross Profit 31,753 39,749 25.2% 43,873 54,677 24.6% Gross profit margin (%) 74.8% 76.1% 1.3% 75.4% 76.6% 1.2% Other operating income 1,929 2,623 36.0% 2,710 3,599 32.8% Sale and distribution expense -1,978 -2,846 43.9% -2,986 -4,018 34.6% S&D as a % of Rev 5% 5% 0.8% 5.1% 5.6% 0.5% General Administrative expense -3,115 -3,692 18.5% -4,721 -5,710 21.0% G&A as a % of Rev 7.3% 7.1% -0.3% 8.1% 8.0% -0.1% Operating profit 28,589 35,835 25.3% 38,876 48,547 24.9% Operating profit margin （ % ） 67.3% 68.6% 1.2% 66.8% 68.0% 1.2% EBIT 28,454 35,573 25.0% 38,684 48,307 24.9% EBIT Margin (%) 67.0% 68.1% 1.1% 66.4% 67.7% 1.2% Net Profit 19,984 24,734 23.8% 27,079 33,823 24.9%

Net profit margin (%) 47.1% 47.3% 0.3% 46.5% 47.4% 0.9% SOURCES: CGS-CIMB RESEARCH ESTIMATES, COMPANY REPORTS

Figure 31: Summary of our sales volume, ASP and revenue forecasts for Moutai brands FY16 FY17 FY18F FY19F FY20F Moutai (MT) Brand Sales volume (tonnes) 22,918 30,206 33,832 37,503 41,966 YoY (% ） 9% 32% 12% 11% 12% ASP (Rmb per 500ml unit) 801 867 941 941 958 YoY (% ） 7% 8% 8% 0% 2% Sales revenue (Rmb m) 36,714 52,394 63,640 70,546 80,416 YoY (% ） 16% 43% 21% 11% 14% Series Brand Sales volume (tonnes) 14,027 29,903 32,000 35,200 40,480 YoY (% ） 115% 113% 7% 10% 15% ASP (Rmb per 500ml unit) 76 97 120 130 149 YoY (% ） -11% 27% 24% 8% 15% Sales revenue (Rmb m) 2,127 5,774 7,680 9,124 12,066

YoY (% ） 92% 172% 33% 19% 32% SOURCES: CGS-CIMB RESEARCH ESTIMATES, COMPANY REPORTS

Valuation and recommendation Moutai is our top pick in the baijiu sector, as we believe its strong brand recognition and unique collectable value will drive solid sales growth and stable profit margins despite the weakening economic conditions in China. Moutai is trading at 18.9x FY19F P/E, slightly below its average 12-month forward P/E of 19.4x (since 2001). We believe Moutai is undervalued by the market. As at end-Sep 2018, Moutai had net cash of Rmb101bn, which is around 10% of the company’s current market cap. Given its strong cash generation ability, with dividend payout sustained at over 50% and its dominant market position, we think Moutai should enjoy a premium P/E valuation over its peers. We derive our TP of Rmb720 using DCF methodology (WACC: 10.2%, terminal growth: 3.0%). Our TP values Moutai at 23.4x FY19F P/E, 0.5 s.d. above its average 12-month forward P/E (since 2001).

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Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

Figure 32: Moutai 12-month forward P/E (x) Figure 33: Moutai 12-month forward EV/EBITDA (x)

MT Current P/E (x): 18.9; Mean:19.4; +1STD: 28.1; -1STD: 10.7 Current EV/EBITDA (x): 11.5; Mean: 11.7; +1STD: 18.1; -1STD: 60 5.3 12M forward P/E(x) 40 12M forward EV/Ebitda 50 Mean +1 std Mean -1 std 30 +1 std 40 -1 std 30 20 20 10 10

0 0

Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18

Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

SOURCES: CGS-CIMB RESEARCH, BLOOMBERG SOURCES: CGS-CIMB RESEARCH, BLOOMBERG

Figure 34: DCF valuation (Rmb, m) FY18F FY19F FY20F FY21F FY22F FY23F FY24F FY25F FY26F FY27F FY28F EBIT 48,307 55,230 65,529 67,787 76,213 84,924 93,781 102,625 111,276 119,544 127,231 Taxes -13,901 -16,495 -17,032 -19,149 -21,338 -23,563 -25,785 -27,959 -30,036 -31,967 -32,926 EBIT, tax-affected 36,150 41,328 49,034 50,755 57,064 63,586 70,218 76,840 83,318 89,508 95,263 Add: Depreciation & amortisation 1,215 1,368 1,521 1,687 1,837 1,981 2,114 2,234 2,335 2,415 2,471 Add Changes in Working capital -2,800 -2,800 -2,800 -3,105 -3,381 -3,625 -3,848 -4,043 -4,203 -4,323 -4,398 Less Capital Expenditure -520 -2,171 -3,104 -3,552 -3,994 -4,450 -4,914 -5,378 -5,831 -6,264 -6,667 Free Cash Flow to firm 34,045 37,725 44,651 45,786 51,527 57,492 63,570 69,653 75,618 81,336 86,669 YoY growth 65% 11% 18% 3% 13% 12% 11% 10% 9% 8% 7%

Key assumptions NPV of FY18-22 Cash flow 141,235 Industry average beta 1.1 NPV of FY23-28 Cash Flow 206,447 Risk free rate 3.5% NPV of Terminal Value 465,951 Risk premium 6.5% Enterprise Value 813,633 Cost of equity 10.3% Add Net cash/(Net Debt) 97,714 Cost of Debt 4.3% Less Minority -6,975 Debt % 1.4% Equity value of firm 904,372 Tax rate 25.0% Share outstanding (m) 1,256 WACC 10.2% Target price (Rmb) 720 Terminal growth rate 3.0%

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

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Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

Figure 35: Peer comparison Company Name Bloomberg Recom Last Quoted Market P/E (x) 3yrs P/BV (x) EV/EBITDA (x) ROE (%) Dividend Yield (%) Ticker price currency cap EPS CAGR Local (US$, m) 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F Kweichow Moutai Co Ltd-A 600519 CH ADD 583.0 Rmb 106,147 21.6 18.9 15.9 19% 6.6 5.5 4.6 12.9 11.0 9.0 33.4 31.7 31.5 2.4 2.7 3.2 Jiangsu Yanghe Brewery -A 002304 CH ADD 99.4 Rmb 21,700 18.2 15.9 13.2 19% 4.4 3.9 3.4 12.5 10.6 8.5 25.9 26.0 27.3 3.2 3.6 4.4 Wuliangye Yibin Co Ltd-A 000858 CH HOLD 52.8 Rmb 29,717 16.1 14.2 12.3 20% 3.5 3.1 2.8 9.6 8.1 6.7 22.4 22.9 23.8 3.2 3.7 4.2 Luzhou Laojiao Co Ltd-A 000568 CH NR 42.5 Rmb 9,014 18.0 14.5 12.0 25% 3.7 3.2 2.8 11.8 9.7 8.1 21.0 22.9 24.1 3.6 4.5 5.3 Anhui Gujing Distillery Co-A 000596 CH NR 58.0 Rmb 3,853 18.0 14.4 12.2 28% 3.7 3.0 2.4 10.7 8.9 7.8 21.9 22.0 21.2 1.8 2.2 2.4 Shanxi Xinghuacun Fen Wine-A 600809 CH NR 38.1 Rmb 4,786 21.9 16.8 13.5 37% 5.2 4.3 3.5 14.2 11.3 9.5 24.5 26.5 27.1 2.1 2.6 3.3 Jiugui Liquor Co Ltd-A 000799 CH NR 17.7 Rmb 834 22.7 16.0 12.1 39% 2.6 2.4 2.1 12.9 9.7 7.3 12.2 15.2 18.0 1.3 1.7 1.7 Beijing Shunxin Agricult-A 000860 CH NR 35.7 Rmb 2,948 25.0 17.0 12.9 53% 2.7 2.4 2.1 15.0 10.9 9.3 11.0 14.1 15.2 1.2 1.7 1.9 Xinjiang Yilite Industry-A 600197 CH NR 13.9 Rmb 891 13.2 10.4 8.6 26% 2.3 2.0 1.6 NA NA NA 17.9 19.3 20.0 1.9 2.2 2.8 Hebei Hengshui Laobaigan-A 600559 CH NR 13.8 Rmb 1,334 22.3 15.3 12.0 63% 4.2 3.6 3.1 16.0 11.2 9.8 20.2 25.1 26.1 2.4 3.8 5.5 Shede Spirits Co Ltd-A 600702 CH NR 25.1 Rmb 1,225 23.9 16.4 11.1 75% 3.0 2.5 2.1 16.1 11.7 8.9 13.7 16.5 19.2 1.0 1.4 1.8 Sichuan Swellfun Co Ltd-A 600779 CH NR 32.6 Rmb 2,308 25.5 18.2 14.1 50% 8.4 6.9 5.6 18.3 13.9 10.9 34.3 39.8 44.8 3.0 4.3 5.9 Anhui Yingjia Distillery C-A 603198 CH NR 15.2 Rmb 1,759 14.8 12.7 12.3 14% 2.8 2.6 2.5 10.0 8.7 7.8 18.0 19.3 19.9 NA NA NA Jiangsu King'S Luck Brewer-A 603369 CH NR 15.8 Rmb 2,871 16.9 13.6 11.2 25% 3.3 2.8 2.3 11.7 9.6 8.3 19.7 21.0 21.7 1.9 2.3 2.8 Anhui Kouzi Distillery Co -A 603589 CH NR 36.0 Rmb 3,126 14.9 12.4 10.4 23% 3.5 3.0 2.5 10.5 9.1 8.3 24.0 24.8 25.0 2.4 2.9 3.0 Average in China domestic baijiu market 19.5 15.1 12.3 34% 4.0 3.4 2.9 13.0 10.3 8.6 21.3 23.1 24.3 2.2 2.8 3.4 Tingyi (Cayman Isln) Hldg Co 322 HK HOLD 10.2 HK$ 7,361 19.2 17.0 15.0 23% 2.6 2.4 2.2 6.5 6.3 5.9 13.2 13.4 14.2 2.4 2.8 3.1 Uni-President China Holdings 220 HK REDUCE 6.6 HK$ 3,648 23.3 20.1 18.2 16% 1.9 1.8 1.8 8.8 8.3 7.9 8.3 9.1 9.9 3.4 3.9 4.5 Want Want China Holdings Ltd 151 HK ADD 5.4 HK$ 8,491 18.9 17.5 15.7 6% 4.2 3.6 3.2 10.8 10.0 9.6 24.1 22.1 21.2 1.7 2.5 2.8 China Mengniu Dairy Co 2319 HK ADD 24.0 HK$ 12,062 26.8 21.6 18.6 29% 3.3 3.0 2.7 15.4 13.1 11.4 12.9 14.4 15.1 1.1 1.4 1.6 Tsingtao Brewery Co Ltd-H 168 HK REDUCE 30.7 HK$ 5,927 24.4 22.6 20.1 13% 2.0 1.9 1.8 10.6 9.7 8.6 8.5 8.6 9.1 1.2 1.3 1.5 China Resources Beer Holding 291 HK ADD 27.6 HK$ 11,561 30.1 22.6 19.5 51% 4.0 3.7 3.4 13.8 10.9 9.3 13.8 17.3 18.2 0.9 1.3 1.7 Dali Foods Group Co Ltd 3799 HK NR 5.7 HK$ 9,866 17.8 15.7 13.6 14% 4.6 4.0 3.6 11.3 9.9 8.6 26.7 27.4 28.3 3.3 3.8 4.0 Average in HK market 22.9 19.6 17.3 22% 3.2 2.9 2.7 11.0 9.7 8.8 15.4 16.1 16.6 2.0 2.4 2.7 Diageo Plc DGE LN NR 2,828.5 GBP 86,449 24.3 22.4 20.8 4% 6.7 7.3 7.9 18.7 17.4 16.4 28.4 32.2 33.0 2.3 2.4 2.5 Anheuser-Busch Inbev Sa/Nv ABI BB NR 62.0 EUR 142,459 17.6 14.7 13.1 10% 1.8 1.7 1.6 11.7 11.3 10.6 10.7 12.7 13.4 3.3 3.1 3.1 Ambev Sa ABEV3 BZ NR 15.9 BRL 63,775 20.5 18.9 16.9 26% 4.5 4.3 4.1 11.5 10.8 9.8 24.0 25.0 26.3 3.5 4.7 5.0 Constellation Brands Inc-A STZ US NR 187.3 US$ 35,604 21.9 19.8 18.2 -5% 4.6 3.1 2.8 16.4 15.0 13.7 23.1 21.8 16.8 1.1 1.6 1.7 Carlsberg As-B CARLB DC NR 713.6 DKK 16,477 20.4 19.0 17.4 71% 2.2 2.1 2.0 9.5 9.1 8.7 10.9 11.3 11.7 2.4 2.6 2.8 Molson Coors Brewing Co -B TAP US NR 62.7 US$ 13,609 12.6 12.6 12.0 -7% 1.0 0.9 0.9 9.5 9.4 9.3 8.1 7.5 7.6 2.7 3.3 4.0 Heineken Nv HEIA NA NR 78.3 EUR 51,329 19.2 17.6 16.1 13% 3.0 2.7 2.6 10.7 10.2 9.6 16.1 15.9 16.1 2.0 2.1 2.3 Asahi Group Holdings Ltd 2502 JP NR 4,380.0 JPY 18,728 13.7 13.0 12.2 5% 1.7 1.6 1.4 9.8 9.5 9.1 12.5 12.5 12.3 2.1 2.3 2.5 Kirin Holdings Co Ltd 2503 JP NR 2,400.5 JPY 19,399 13.8 13.7 13.1 -12% 2.2 2.0 1.8 10.2 9.9 9.4 16.2 15.3 15.0 2.0 2.3 2.6 Thai Beverage Pcl THBEV SP ADD 0.6 S$ 10,701 15.5 13.8 12.9 13% 2.5 2.7 2.5 16.0 15.9 14.9 16.9 16.9 17.1 2.9 3.0 3.3 Pernod Ricard Sa RI FP NR 138.6 EUR 41,868 24.2 22.4 20.6 4% 2.5 2.3 2.2 16.7 15.9 14.9 10.8 10.7 11.0 1.7 2.0 2.3 United Spirits Ltd UNSP IN NR 614.0 INR 6,210 85.1 57.3 46.1 14% 18.6 13.8 10.5 43.5 33.4 28.6 23.9 27.1 25.4 0.1 0.2 0.4 Brown-Forman Corp-Class B BF/B US NR 46.4 US$ 22,145 29.7 27.2 25.2 7% 18.5 13.4 11.3 21.9 20.8 19.6 60.2 55.4 48.9 1.3 1.4 1.5 Hite Jinro Co Ltd 000080 KS NR 17,600.0 KRW 1,091 31.2 24.0 20.7 67% 1.0 1.1 1.1 9.6 9.1 8.8 3.3 4.5 5.1 4.4 4.5 4.6 Remy Cointreau RCO FP NR 101.1 EUR 5,862 33.4 31.6 27.0 8% 3.7 3.4 3.1 21.0 19.5 17.3 11.5 11.3 12.2 1.7 1.7 1.9 Davide Campari-Milano Spa CPR IM NR 7.6 EUR 10,047 35.2 31.3 27.9 -4% 4.0 3.6 3.3 21.9 20.2 18.5 11.7 11.5 11.3 0.7 0.7 0.8 C&C Group Plc GCC ID NR 2.9 EUR 1,038 13.2 11.3 9.9 11% 1.8 1.7 1.6 11.8 9.8 9.0 12.5 14.2 15.1 5.0 5.0 5.2 Becle Sab De Cv CUERVO* MM NR 23.4 MXN 4,203 22.1 18.8 15.5 1% 1.8 1.7 1.6 13.2 11.7 10.2 7.7 9.3 10.2 2.6 2.7 3.1 Sapporo Holdings Ltd 2501 JP NR 2,390.0 JPY 1,665 22.4 22.5 21.9 -8% 1.0 1.0 1.0 11.6 11.6 11.4 4.8 4.6 4.6 1.7 1.7 1.6 Vina Concha Y Toro Sa CONCHA CI NR 1,334.8 CLP 1,470 20.7 16.5 13.6 14% 1.8 1.7 NA 13.5 11.2 9.9 8.7 10.5 11.3 1.8 2.0 3.0 Treasury Wine Estates Ltd TWE AU NR 14.2 AUD 7,338 28.9 22.5 18.6 15% 3.0 2.8 2.6 17.3 14.2 12.0 10.0 12.7 14.7 2.2 2.9 3.5

Average in International market 25.0 21.5 19.0 12% 4.2 3.6 3.3 15.5 14.1 12.9 15.8 16.3 16.1 2.3 2.5 2.8 *Not rated companies’ forecasts are based on Bloomberg consensus estimates. NOTE: AS AT 11 DEC 2018, SOURCES: CGS-CIMB RESEARCH ESTIMATES, BLOOMBERG

SWOT analysis

Figure 36: SWOT analysis Strengths Weakness 1. Strong brand recognition nationwide. 1. Moutai is indirectly controlled by the 2. Dominant position in the super-premium baijiu market. government. Any changes it makes that 3. Good wholesale distribution channel control. could affect the whole sector, such as price 4. Moutai's strong cash position gives it the ability to hikes, would need to be approved by the undertake large M&As and consolidate its market position in government first. the baijiu industry. 2. Its proposed management share incentive programme is still under discussion, and has yet to be approved by the government. Delay or non-approval of the scheme might weaken management's motivation. Opportunities Threats 1. China's baijiu industry is seeing consolidation in the 1. Besides the core brand of "53°Feitian premium segment. The market size of this premium segment Moutai, Series brands owned by Moutai will grow at a 12% CAGR over 2017-20F based on have not established concrete market Euromonitor estimates. positions in the regional markets. Given the 2. Moutai announced an investment of around Rmb8.4bn to rising competition in the middle-range baijiu boost the annual production of source fragrance for its market, sales growth of the Series brands Series brands by another 30,000 tonnes. Parked under the might slow down. strong Moutai brand umbrella, sales growth of its Series brand products should accelerate, in our view.

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

43

Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

Risks Macroeconomic slowdown: China’s baijiu consumption structure has changed and become led by private companies and individuals. If the Purchasing Managers’ Index (PMI) deteriorates, consumer confidence could be hit, dampening consumption of baijiu products. Moutai’s core brand (MT) is the top brand in China’s super-premium baijiu sector, with RSP of above Rmb600 per 500ml unit. Weakening economic conditions could have a negative impact on demand. Government policy changes: In 2001, the China government adjusted the consumption tax for the baijiu industry, resulting in a higher tax burden for baijiu companies. If the government further raises the baijiu consumption tax, demand for the liquor could be adversely affected. Board of Directors’ stability: The key members of the company’s Board of Directors are appointed by the government. Board stability may be shaken by political risk.

Company background Company overview Kweichow Moutai (Moutai) was established in 1999 and listed on the Shanghai Stock Exchange in Aug 2001. As at 26 Oct 2018, 61.77% of the company’s equity is indirectly owned by Guizhou Stated-owned Assets Supervision and Administration Commission (SASAC). It core brand “Moutai” is one of China’s super-premium liquors and it has a long-standing history that can be traced back over 400 years.

Figure 37: Moutai history Year Key milestones 1997 Kweichow Moutai Distillery was restructured into Kweichow Moutai Winery Group Co. Ltd. 1998 Kweichow Moutai Winery Group Co. Ltd. acquired Xijiu. 1999 On 20 Nov 1999, KM was founded by Kweichow Moutai Winery Co., Ltd., Kweichow Moutai Distillery Technical Development Company, Kweichow Textile Collective Industry Association, Research Institute of Tsinghua University in Shenzhen, China National,Research Institute of Food & Fermentation Industries, Beijing Sugar, Tobacco & Wine Co., Ltd, Jiangsu Sugar, Tobacco & Wine Co., Ltd. and Shanghai Jieqiang Tobacco, Sugar & Wine (Group) Co., Ltd. with a registered capital of Rmb185m. 2001 On 31 Jul 2001, Moutai was listed on the Shanghai Stock Exchange, issuing 71.5m shares and raising about Rmb2bn. 2002 Moutai acquired Xijiu's assets, including equipment, workshops, base wine and other facilities, with total investment of Rmb215m. Apr-03 Moutai proposed a share reform plan. Aug-12 Moutai jointly established a finance company and contributed Rmb400m for a 51% stake. Feb-13 Moutai was found to have violated China's anti-monopoly law for setting minimum dealers' resale prices and paid Rmb247m in penalty. Apr-13 Moutai acquired the Château Loudenne wine estate in France for €20m. Nov-13 Moutai bought Paris real estate with €8.79m Sep-14 Moutai invested Rmb250m to establish an e-commerce unit, contributing 25% to its registered capital Apr-17 Moutai denied the press report alleging it has a hidden profit of Rmb4.6bn to fund its proposed stock incentive plan

Jul-17 Moutai increased its invesment in its finance company, putting in Rmb867m SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 38: Moutai shareholding structure as at 26 Oct 2018 Guizhou SASAC (100%)

China Kweichow Moutai Winery Kweichow Moutai Distillery Public Group Group (36.02%) (61.77%) (2.21%)

Kweichow Moutai （600519.SH）

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

44

Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

Figure 39: Moutai key management profile as at 26 Oct 2018 Name Position Description LI Baofang Chairman & CEO *Since Aug 2015, Li has been Secretary of the Communist Party Committee, Vice Chairman and General Manager of Guizhou Maotai Liquor Factory (Group) Co Ltd and Director of Guizhou Maotai Liquor Co Ltd, acting as General Manager. *He was the Deputy Director of Guizhou Economic and Information Commission, Deputy Secretary of the Communist Party Leadership Group (in charge of standing work, at the level of head of the main office), Deputy Secretary of the National Defence Industry Working Committee of the Provincial Party Committee, Director of the Guizhou Economic and Information Commission, Secretary of the Party Leadership Group and Secretary of the National Defence Industry Working Committee of the Provincial Party Committee. HE Yingzi CFO He was appointed as the company's CFO in Mar 2011. He has served as the Director of Moutai Sales and Moutai Finance since Jul 2012 and Mar 2013, respectively. He was the Deputy Director of Zhonghe Zhengxing Accounting Firm (Kweichow Branch) between 2005 and 2009, and Deputy Director of Tianjian Zhengxing Accounting Firm between Mar 2011 and Dec 2009. FAN Ningping Secretary of the Fan was appointed as the Secretary of Board of Director and Assistant General Manager in May 2010. He served as the Secretary of

Board Board of Directors between Nov 1999 and May 2010. SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

45

Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

BY THE NUMBERS

P/BV vs ROE 12-mth Fwd FD Core P/E vs FD Core EPS 11.2 35.0% 30.0 Growth 69.0% 10.2 33.5% 28.0 61.5% 9.2 32.0% 26.0 54.0% 8.2 30.5% 24.0 46.5% 7.2 29.0% 22.0 39.0% 6.2 27.5% 20.0 31.5% 5.2 26.0% 18.0 24.0% 4.2 24.5% 16.0 16.5% 3.2 23.0% 14.0 9.0% Jan-14A Jan-15A Jan-16A Jan-17A Jan-18F Jan-19F Jan-14A Jan-15A Jan-16A Jan-17A Jan-18F Jan-19F

Rolling P/BV (x) (lhs) ROE (rhs) 12-mth Fwd Rolling FD Core P/E (x) (lhs) FD Core EPS Growth (rhs)

Profit & Loss

(Rmbm) Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F Total Net Revenues 40,032 60,927 74,979 84,198 98,100 Gross Profit 30,113 46,583 58,276 65,699 76,996 Operating EBITDA 25,168 39,992 49,763 56,838 67,290 Depreciation And Amortisation -936 -1,108 -1,215 -1,368 -1,521 Operating EBIT 24,232 38,884 48,547 55,470 65,769 Financial Income/(Expense) 33 56 80 98 121 Pretax Income/(Loss) from Assoc. 0 0 0 0 0 Non-Operating Income/(Expense) -308 -200 -240 -240 -240 Profit Before Tax (pre-EI) 24,038 38,821 48,468 55,409 65,731 Exceptional Items Pre-tax Profit 23,958 38,740 48,387 55,328 65,650 Taxation -6,027 -9,734 -12,158 -13,901 -16,495 Exceptional Income - post-tax Profit After Tax 17,931 29,006 36,230 41,426 49,155 Minority Interests -1,212 -1,927 -2,407 -2,752 -3,266 Preferred Dividends FX Gain/(Loss) - post tax Other Adjustments - post-tax Net Profit 16,718 27,079 33,823 38,674 45,890 Recurring Net Profit 16,779 27,140 33,883 38,735 45,950

Fully Diluted Recurring Net Profit 16,779 27,140 33,883 38,735 45,950

Cash Flow

(Rmbm) Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F EBITDA 25,168 39,992 49,763 56,838 67,290 Cash Flow from Invt. & Assoc. Change In Working Capital 19,162 -8,318 -520 -2,171 -3,104 (Incr)/Decr in Total Provisions Other Non-Cash (Income)/Expense Other Operating Cashflow -4,839 -640 -12,318 -14,043 -16,614 Net Interest (Paid)/Received 0 0 0 0 0 Tax Paid Cashflow From Operations 39,491 31,034 36,925 40,623 47,572 Capex -1,019 -1,125 -2,800 -2,800 -2,800 Disposals Of FAs/subsidiaries Acq. Of Subsidiaries/investments Other Investing Cashflow Cash Flow From Investing -1,019 -1,125 -2,800 -2,800 -2,800 Debt Raised/(repaid) Proceeds From Issue Of Shares Shares Repurchased Dividends Paid -8,351 -8,905 -13,817 -17,256 -19,732 Preferred Dividends Other Financing Cashflow 16 6 0 0 0 Cash Flow From Financing -8,335 -8,899 -13,817 -17,256 -19,732 Total Cash Generated 30,137 21,009 20,308 20,567 25,040 Free Cashflow To Equity 38,472 29,909 34,125 37,823 44,772

Free Cashflow To Firm 38,472 29,909 34,125 37,823 44,772 SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

46

Food & Beverages │China Kwechow Moutai Co. Ltd │December 11, 2018

BY THE NUMBERS… cont’d

Balance Sheet

(Rmbm) Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F Total Cash And Equivalents 66,855 87,869 108,177 128,744 153,784 Total Debtors 2,082 2,285 2,714 2,978 3,362 Inventories 20,622 22,057 23,467 25,123 27,895 Total Other Current Assets 621 38 38 38 38 Total Current Assets 90,181 112,249 134,396 156,882 185,078 Fixed Assets 14,453 15,244 16,910 18,422 19,782 Total Investments 90 62 62 62 62 Intangible Assets 3,532 3,459 3,378 3,297 3,217 Total Other Non-Current Assets 4,679 3,596 3,596 3,596 3,596 Total Non-current Assets 22,754 22,361 23,946 25,378 26,657 Short-term Debt 10,779 10,463 10,463 10,463 10,463 Current Portion of Long-Term Debt Total Creditors 26,242 28,112 29,431 29,179 29,231 Other Current Liabilities Total Current Liabilities 37,020 38,575 39,893 39,641 39,694 Total Long-term Debt Hybrid Debt - Debt Component Total Other Non-Current Liabilities 16 16 16 16 16 Total Non-current Liabilities 16 16 16 16 16 Total Provisions 0 0 0 0 0 Total Liabilities 37,036 38,590 39,909 39,657 39,709 Shareholders' Equity 72,894 91,452 111,457 132,875 159,033 Minority Interests 3,004 4,568 6,975 9,727 12,993

Total Equity 75,899 96,020 118,432 142,602 172,026

Key Ratios

Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F Revenue Growth 19.0% 49.8% 22.6% 11.7% 16.1% Operating EBITDA Growth 9.7% 58.9% 24.4% 14.2% 18.4% Operating EBITDA Margin 64.8% 68.7% 69.7% 71.3% 72.7% Net Cash Per Share (Rmb) 44.6 61.6 77.8 94.2 114.1 BVPS (Rmb) 58.0 72.8 88.7 105.8 126.6 Gross Interest Cover N/A N/A N/A N/A N/A Effective Tax Rate 25.2% 25.1% 25.1% 25.1% 25.1% Net Dividend Payout Ratio 50.8% 50.9% 50.9% 50.9% 50.9% Accounts Receivables Days 44.25 6.39 7.12 7.58 7.47 Inventory Days 712.8 543.0 497.4 479.4 459.7 Accounts Payables Days 35.45 25.86 22.80 22.60 21.85 ROIC (%) 69% 197% 262% 269% 271% ROCE (%) 30.6% 40.4% 41.4% 39.5% 39.3%

Return On Average Assets 18.0% 23.5% 24.7% 24.3% 24.9%

Key Drivers

Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F ASP (% chg, main prod./serv.) 6.6% 8.3% 8.4% 0.0% 1.9% Unit sales grth (%, main prod./serv.) 9.1% 31.8% 12.0% 10.9% 11.9% Util. rate (%, main prod./serv.) N/A N/A N/A N/A N/A ASP (% chg, 2ndary prod./serv.) -10.9% 27.4% 24.3% 8.0% 15.0% Unit sales grth (%,2ndary prod/serv) 115.2% 113.2% 7.0% 10.0% 15.0% Util. rate (%, 2ndary prod/serv) N/A N/A N/A N/A N/A ASP (% chg, tertiary prod/serv) N/A N/A N/A N/A N/A Unit sales grth (%,tertiary prod/serv) N/A N/A N/A N/A N/A Util. rate (%, tertiary prod/serv) N/A N/A N/A N/A N/A Unit raw mat ASP (%chg,main) N/A N/A N/A N/A N/A Total Export Sales Growth (%) N/A N/A N/A N/A N/A

Export Sales/total Sales (%) N/A N/A N/A N/A N/A SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

47

INITIATION

Company Note | Alpha series Food & Beverages │ China │ December 11, 2018

China Jiangsu Yanghe Brewery ADD Strong distribution network Consensus ratings*: Buy 28 Hold 0 Sell 1 ■ We initiate coverage on Yanghe with an Add call for its strong distribution Current price: Rmb99.35 network and huge growth potential outside of its home market of Jiangsu. Target price: Rmb120.0 Previous target: N/A ■ Yanghe’s efficient marketing capabilities and diversified product profile make Up/downside: 20.8% it a more defensive baijiu player during an economic slowdown, in our view. CIMB / Consensus: -11.6% ■ We expect Yanghe to achieve sales and net profit CAGR of 17% and 19%, respectively, over FY17-20F. Reuters: 002304.SZ

Bloomberg: 002304 CH Market cap: US$21,662m New market expansion is a near-term catalyst Rmb149,719m Expanding beyond its home market of Jiangsu Province is a key revenue growth driver, Average daily turnover: US$90.01m in our view. We expect sales from non-Jiangsu markets to post 22% CAGR over FY17- Rmb619.1m 20F and its sales contribution to rise from 47% in FY17 to 53% in FY20F. In FY17, Current shares o/s: 1,507m Jiangsu Yanghe Brewery Co Ltd (Yanghe) was present in 455 markets outside of Free float: 21.5% Jiangsu, and targets to add another 40 in FY18F. *Source: Bloomberg

Key changes in this note Diversified product profile to make Yanghe more defensive Yanghe has a more diversified product profile relative to peers, covering the low-mid- N/A end, premium and super premium sectors with retail prices from Rmb600/bottle. We believe Yanghe’s diversified product portfolio can better meet the

Price Close Relative to SHCOMP (RHS) mix upgrade needs in lower tier cities and make the company more defensive. 158 151.0 138 136.0 Unique distribution model to support solid revenue growth 118 121.0

98 106.0 Yanghe’s wide, flat and efficient distribution network is its key competitive advantage, in

78 91.0 30 our view. In FY17, sales contribution from its top 5 customers accounted for just 3.5% of 20 total revenue, much lower than the 6.4% contribution from Moutai’s top 5 customers and 10

Vol m Vol 10.9% from Wuliangye’s. In FY17, Yanghe had 5,036 salespeople and over Dec-17 Mar-18 Jun-18 Sep-18 30,000 ground promoters to collaborate with more than 8,000 distributors. We Source: Bloomberg expect Yanghe to achieve a revenue CAGR of 17% for FY17-20F.

Price performance 1M 3M 12M Dominant position in Jiangsu and successful price hikes Absolute (%) 4.6 -8.4 -10.5 Yanghe dominates its home market of Jiangsu, recording 43% market share in terms of Relative (%) 4.8 -5.7 11.4 revenue, much higher than No.2 player Jingshiyuan’s (今世缘) 12% in 2017. With the

Major shareholders % held continuous mix upgrades and price hikes, we expect Yanghe’s revenue in Jiangsu to Jiangsu Yanghe Group 34.2 deliver a 13% CAGR over FY17-20F. Yanghe is also one of the few baijiu companies to Jiangsu Blue Alliance Co.Ltd 21.4 have completed SOE reform, in an effort to better align the interests of management, distributors and shareholders. Insert Initiate coverage with an Add rating and DCF-based TP of Rmb120 We initiate coverage on Yanghe with an Add rating and DCF-based TP of Rmb120 (WACC: 10.4%). Yanghe is trading at 15.9x FY19F P/E, 0.6 s.d. below its historical average of 18.6x since listing. Our TP implies 19.2x FY19F P/E, 0.1 s.d. above its historical average forward P/E. Downside risks include a worse-than-expected slowdown in baijiu consumption in China and difficulties in expanding into non-Jiangsu markets.

Analyst(s) Financial Summary Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F Revenue (Rmbm) 17,183 19,918 24,392 27,335 32,033 Operating EBITDA (Rmbm) 8,514 9,530 11,629 13,272 15,822 Net Profit (Rmbm) 5,827 6,627 8,174 9,365 11,274 Core EPS (Rmb) 3.94 4.43 5.45 6.24 7.51 Core EPS Growth 9.1% 12.5% 23.0% 14.5% 20.3% FD Core P/E (x) 25.22 22.41 18.22 15.91 13.23 DPS (Rmb) 2.10 2.55 3.15 3.60 4.34 Lei YANG, CFA Dividend Yield 2.11% 2.57% 3.17% 3.63% 4.37% EV/EBITDA (x) 17.30 15.53 12.54 10.62 8.50 T (86) 21 6162 9676 P/FCFE (x) 103.9 55.0 25.1 15.6 12.7 E [email protected] Net Gearing (9.4%) (5.9%) (11.5%) (22.7%) (34.2%) FeiFei SUN P/BV (x) 5.75 5.07 4.42 3.89 3.38 T (86) 21 6162 5750 ROE 24.2% 24.0% 25.9% 26.0% 27.3% E [email protected] % Change In Core EPS Estimates CIMB/consensus EPS (x) 0.99 0.95 0.97

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN Powered by the THE UNITED STATES IT IS DISTRIBUTED BY CGS-CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. EFA Platform

Food & Beverages │China Jiangsu Yanghe Brewery │December 11, 2018

Strong distribution network Investment Summary New market expansion is a near-term catalyst Successfully expanding beyond its home market of Jiangsu Province is a key revenue growth driver and re-rating catalyst, in our view. We expect Yanghe’s sales from the non-Jiangsu markets to post 22% CAGR over FY17-20F and for sales contribution from this segment to rise from 47% in FY17 to 53% in FY20F, mainly driven by sales volume increases from expansion in market coverage. Yanghe targets new markets with annual sales of over Rmb8m at the county level or Rmb15m at the city level. In FY17, Yanghe had 455 markets under coverage outside of Jiangsu Province and it is targeting to penetrate another 40 new markets in FY18F, to reach 495 in total by year-end. Yanghe has been relentless in building its strong distribution network to support the new markets, and has set up 316 sales offices (as at 31 Oct 2018). Of these, 39% are located in the five provinces of Henan, Shandong, Anhui, Hubei and Zhejiang, in which it is particularly focused. We expect Yanghe to replicate its success story in Jiangsu in these new markets, thanks to its strong branding, diversified product portfolio and effective channel management. In 2014, in a bid to cope with the baijiu industry restructuring cycle, Yanghe adopted its “New Jiangsu Market” strategy to develop the markets outside of Jiangsu Province. This resulted in the allocation of more resources and investment capital to expand in these new markets. The “New Jiangsu Market” strategy also identified five focus regions – namely the provinces of Henan, Shandong, Anhui, Hubei and Zhejiang – which are all geographically close to Jiangsu Province and thus relatively easier for Yanghe to promote, sell and distribute its products to.

Figure 1: Number of non-Jiangsu markets under Yanghe’s Figure 2: Breakdown of office locations by home market vs. new coverage markets (as at 31 Oct 2018) – Yanghe has set up 316 offices as part of its efforts to expand into non-Jiangsu markets

600

495 500 455 395 400

297 300

200

100

0 FY15 FY16 FY17 FY18F

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

49

Food & Beverages │China Jiangsu Yanghe Brewery │December 11, 2018

Figure 3: Detailed market analysis on Yanghe’s new focus markets of Henan, Shandong, Hubei, Anhui and Zhejiang, based on our estimates (as at 31 Oct 2018) Province Regional Populatio Individual Estimated Baijiu Yanghe's estimated The major baijiu Comments on baijiu markets production as % n (m) disposable market size (Rmb market share in consumption price range of total output in income (Rmb) bn) each province in in the market 2017 term of sales revenue Henan 10.5% 96 20,170 30-35 7-10% Low-end and mid-range Low market peneration rate for baijiu. Total local brands' market share in terms of sales revenue, is less than 30%. The mid-range and premium market are occupied by non-local brands. Shandong 8.9% 100 26,930 30 5-7% Low-end and mid-range Local brands are small and fragmented, and focus on the low-end markets, so the barrier to entry is low for non-local brands. Major competitors in the mid-range and premium markets are Wuliangye (000858CH), Luzhou Laojiao (000568CH), Jiannanchun (剑南春), Moutai Source series (600519CH). Hubei 5.0% 59 23,757 20-25 <5% Low-end and mid-range Local brands are quite strong players, top 3 are respectively Baiyunbian with over 15% market share in term of sales revenue, Jingjiu with 10% and Daohuaxiang with 7% in 2017. The combined market share of Moutai, Wuliangye and Yanghe in terms of sales revenue is less than 10%. The low- end and mid-range markets are dominated by local brands; most non-local brands are in the premium and super-premium markets.

Anhui 3.8% 63 21,863 22-25 7-10% Low-end and mid-range It is quite competitive market with high barrier to entry for non-local brands. Anhui baijiu market is more mature than its peers; the well-known local brands such as Gujingong (000596CH), Kouzijiao (603589CH) have a strong market position. Zhejiang 0.1% 57 42,046 15-20 <5% Premium & super premium No well-known local baijiu brands and low barrier to entry. Moutai, Wuliangye, Jiangnanchun have good brand recognition in the premium

market. SOURCES: CGS-CIMB RESEARCH, WIND, JIUYEJIA.COM, NEWS.QQ.COM,JIANIANWANG

Figure 4: We expect the proportion of revenue from non-Jiangsu Figure 5: We expect the revenue from non-Jiangsu markets to markets to increase to 53% by FY20F deliver 22% CAGR over FY17-20F

100%

(Rmb m) 20,000 30% 80% 40% 45% 47% 48% 50% 53% 15,000 60% 25%

10,000 40% 20% 5,000 20% 0 15% FY15 FY16 FY17 FY18F FY19F FY20F 0% FY15 FY16 FY17 FY18F FY19F FY20F Sales revenue from non- Jiangsu markets YoY (%, RHS) % of sales from Jiangsu market % of sales from non-Jiangsu market

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Unique distribution model to support solid sales growth We believe that Yanghe’s wide, flat and efficient distribution network is its key competitive advantage as the model, to a certain extent, reduces the company’s reliance on the large wholesalers that most other baijiu manufacturers depend on. In FY17, Yanghe’s top 5 customers accounted for just 3.5% of its total revenue, considerably lower than the 6.4% from Moutai’s (600519 CH, Add, TP: Rmb720) top 5 customers and 10.9% for Wuliangye (000858 CH, Hold, Rmb55). By leveraging this strong distribution network, Yanghe has developed its core Blue Classic brand (which subdivides into three series that targets different market segments: Blue Dream for premium to super premium market, Blue Sky for mid- to high-priced market, and Blue Sea for low- to mid-range market) into a nationwide brand since 2003. We expect Yanghe to achieve a sales CAGR of 17% in FY17-20F, driven by its strong channels, successful mix upgrades and penetration into new markets. In FY17, Yanghe had 5,036 salespeople in its distribution network and over 30,000 ground promoters to support and collaborate with its 8,000+ distributors. To effectively manage and motivate its large staff, especially front-line salespeople, Yanghe utilises the Amoeba model, which is a unique management method created by Inamori and has been utilised by around 700 companies, including Kyocera Corp (6971 JP, Not Rated), KDDI Corp (9433 JP, Not Rated)

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and Japan Airlines (9201 JP, Not Rated) where Inamori led the successful turnaround initiative for all three companies. In the Amoeba model, every employee plays an important role and voluntarily participates in managing unit to arrive at the level of “Management by All” (Source:global.Kyocera.com) . Using this model, its strong sales teams with their formidable distribution networks have played a major role in both penetrating the Jiangsu Province market and expanding into new markets. We believe Yanghe will have the ability to replicate the success story of its home market in its new markets. For example, in FY17, Yanghe achieved over 30% yoy revenue growth in the Shandong market to reach Rmb1.9bn in revenue. According to Yanghe’s management, in 1H18, Shandong was the fastest-growing market among Yanghe’s non-Jiangsu markets and it expects the province to deliver sales growth of over 30% yoy in FY18F.

Figure 6: Yanghe’s sales personnel numbers far exceed those of Moutai and Wuliangye

No. of salespeople 6000

5000

4000

3000

2000

1000

0 FY12 FY13 FY14 FY15 FY16 FY17 Yanghe Moutai Wuliangye

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Innovation and creativity are important elements embedded in Yanghe’s culture that have driven the company to continually transform its distribution network and achieve strong growth, in our view. In 2003, when Yanghe launched the core Blue Classic brand, it also implemented its unique distribution model, which is a kind of “go-to-market” model usually adopted by large, fast-moving consumer goods outfits. This model uses a flat distribution network, allowing Yanghe to collaborate with its distributors more effectively, so that it can better cover the retail points to reach end-customers. Understanding its target consumers’ needs and identifying the most suitable products to meet them are key success factors that have assisted Yanghe in establishing nationwide brand awareness for its Blue Classic brand. This “go-to-market” model has also helped Yanghe achieve the highest revenue growth among its key peers over the past decade, 27% CAGR over FY07-17. Also, during the baijiu industry adjustment period of 2013-15, Yanghe fared relatively better than most of its peers (in terms of revenue CAGR), except for Moutai (600519 CH, Add, TP: Rmb720) and Anhui Gujing Distillery (000596 CH, Not rated), and revenue CAGR declined by 2% in the period compared to Wuliangye’s 7% fall and Luzhou Laojiao’s (000568 CH, Not Rated) 16% decline.

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Figure 7: Yanghe achieved the highest revenue CAGR in FY07-17 Figure 8: Revenue proportion from top 5 customers and performed better than key peers (except for Moutai and Guijing) during the baijiu industry’s adjustment period

25% 30% 27% 23% 19% 20% 20% 15% 14% 13% 8% 10% 7% 7% 15% 10.9% 0% 10% -2% 6.4% -10% -7% 5% -14% -19% -20% -16% 3.5% 0% -30% FY12 FY13 FY14 FY15 FY16 FY17 Yanghe Moutai Wuliangye Luzhou Laojiao Fen jiu Gujing Swellfun Revenue CAGR of FY12-15 in the baijiu adjustment period 10-year revenue CAGR over FY07-17 Yanghe Moutai Wuliangye

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS, WIND SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 9: Yanghe’s unique distribution model (as at Oct 2018) Yanghe + wholesalers

Distributors for Restaurants Distributors for Supermarkets Distributors for Tabacco & Distributors for group-

Restaurants & Hotels Supermarkets Tabacco & Liquor Group-purchasing

Salespeople and marketing people from Yanghe and wholesaler

Yanghe office points

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

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Figure 10: Yanghe’s unique distribution model vs. the wholesaler model widely used in China’s baijiu industry Yanghe's unique distribution model China baijiu industry's wholesale model Description *A "Go-to-market" model. * Baijiu companies typically use wholesaler networks * Yanghe develops new markets for distributors and comprising multiple tiers of third parties to reach target takes charge of brand promotion, product display and customer segments. other services. * Wholesalers bear all resposibilities for marketing, * Distributors are responsible for basic functions such promotion and distribtution in their territories. as the market management in their respective territories, logistics, warehouse and cash flow. * Front-line salespeople are managed and evaluated by Yanghe using the Amoeba operating model. Distributors' Distributors have minimal bargaining power, and * Wholesalers have fairly strong bargaining power and margin earn fairly low channel distribution margins. earn high channel distribution margins. * Given that each party in the wholesaler pyramid model wants a piece of the profits, baijiu companies frequently offer discounts and promotions to retailers and consumers. Advantage * Yanghe has access to valuable and targeted point- *Wholesalers have sufficient cash flow and established of-sale information that enables the company to local distribution networks that enable them to provide make intelligent decisions about pricing, promotions the baijiu companies with rapid and extensive coverage in and shelf space. many cities at low expense. * Yanghe can easily promote new, small-volume SKUs throughout its own distribution network. Disadvantage * Yanghe needs to invest significant human resources * Baijiu companies have minimal information about and capital to build its own distribution network to product sales, pricing and distribution, as it is difficult to reach target customers. track wholesalers' sales to the products to retailers. Baijiu companies lack information, such as consumer purchasing behaviour, demographics), that could help them better compete with rivals. * Baijiu companies focus on pushing products through the distribution channels, which could eaasliy cause the wholesalers to hold too much inventory. * Wholesalers tend to focus on high-volume products and neglect new, small-volume SKUs.

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS ,BOOZ&COMPANY, SOHU.COM

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Dominant position in Jiangsu and successful price hikes According to the analysis from Leading Industry Research, Yanghe had the largest market share of 43% in terms of revenue in Jiangsu Province’s baijiu market in 2017, significantly above the second-largest player Jingshiyuan’s (JSY, 今世缘, 6003369 CH, Not Rated);) 12% market share. This reflects Yanghe’s dominant position in its home market of Jiangsu Province. With continuous mix upgrades and price hikes, we expect Yanghe’s sales in the Jiangsu market to record 13% CAGR in FY17-20F.

Figure 11: Snapshot of Yanghe’s core brands - Blue Classic brand & Yanghe brand

Note: Retail selling price (RSP) as of 18 Oct 2018 in JD.com SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 12: Snapshot of Yanghe’s core brands - Shuangou brand

Note: Retail selling price (RSP) as of 18 Oct 2018 in JD.com SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

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In 2017, Yanghe executed three price hikes for Blue Sea (targets low to mid- range market) and Blue Sky (mid to high-priced market) products and two price hikes for Blue Dream (premium to super premium market). In Jan- Nov 2018 the company has implemented two retail price hikes for all products under the Blue Classic Brand.

Figure 13: Yanghe’s price hikes during the baijiu industry recovery period (Jan 2016- Aug 2018) Date Product series under Blue Classic brand Implemented price hikes Feb 2016 Blue Sea, Blue Sky Ex-factory price hikes for Blue Sea and Blue Sky of Rmb2 and Rmb4 per unit, respectively. Jan 2017 Blue Sea, Blue Sky Ex-factory price hikes for Blue Sea and Blue Sky of Rmb2 and Rmb3 per unit, respectively. Jan 2017 Blue Dream Ex-factory price hikes for M3, M6 and M9 of Rmb10, Rmb20 and Rmb30 per unit, resepctively. Jun 2017 Blue Sea, Blue Sky Retail selling price (RSP) of Blue Sea raised by Rmb10 per unit, Blue Sky by Rmb20 per unit; the wholesale price for Blue Sea increased by Rmb2.5 per unit and for Blue Sky raised by Rmb8 per unit. Oct 2017 Blue Sea, Blue Sky The wholesale price for Blue Sea raised by Rmb40/package, for Blue Sky by Rmb90/package; and the retail selling prices increased by the same percentage Feb 2018 Blue Sea, Blue Sky Ex-factory price hikes for Blue Sea and Blue Sky of Rmb4 and Rmb6 per unit, respectively. Feb 2018 Blue Dream Ex-factory price hikes of Rmb10 per unit for M3, Rmb20 per unit for M6 and Rmb60 per unit for M9. Jul 2018 Blue Sea, Blue Sky Ex-factory price hikes of Rmb4 per unit for Blue Sea, Rmb6 per unit for Blue Sky. Retail selling price hikes for Blue Sea of Rmb60/package and for Blue Sky of Rmb100/package. Jul 2018 Blue Dream Ex-factory price hikes of Rmb5 per unit for both M3 and M6, Rmb10 for M9; Retail selling price hikes for M3 of Rmb110/package, for M6 of Rmb140/package, for M9 of Rmb600/package.

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS. SOHU.COM

During the baijiu recovery cycle of 2016-17, when consumers upgraded their consumption behaviour, Yanghe took the opportunity to increase the ex-factory prices and retail selling prices of its core brands of Blue Classic (蓝色经典) and Shuanggou (双沟). The Blue Classic brand was first launched in 2003, covering the mid- to high-end baijiu markets, while the Shuanggou brand, with hundreds of years of history, mostly targets the low-to mid-range markets. Yanghe also used the occasion to initiate a consumption mix upgrade, moving its emphasis away from its low-mid range products such as Blue Sea (海之蓝) and Blue Sky (天之蓝) to its more premium product Blue Dream (梦之蓝). Yanghe has since launched four products under the Blue Dream (梦之蓝) series, i.e. M1, M3, M6 and M9, representing different pricing and market positions. Including the Blue Sea and Blue Sky series, Yanghe has now effectively divided the baijiu market into many sub-sectors in order to meet the different needs of its customers and help drive a mix upgrade. Yanghe’s FY17 revenue in Jiangsu province grew to over Rmb10bn, close to the level seen in 2012 before the baijiu industry’s structural change that followed the Chinese government’s anti-corruption measures. In 1H18, Yanghe’s revenue from Jiangsu Province grew by 20% yoy to Rmb7.5bn. In Jun 2018, Yanghe announced it had upgraded its Blue Sea and Blue Sky products to offer more aged baijiu and an improved “soft-taste” (a type of baijiu using Yanghe’s proprietary brewing technology) in a bid to attract new consumers who demanded greater “softness” and a better after-taste in their baijiu (Source: economy.china.com).

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Figure 14: Detailed analysis of Yanghe’s home market Jiangsu Figure 15: Yanghe’s revenue in Jiangsu province Province Jiangsu Province Price band changes Yanghe key product Market competition analysis in consumption changes (Rmb m) North region Fromupgrade low-end to mid From Blue Ocean/Sky High barriers to entry relative to non-local range to M3, M6 brands and dominated by local brands Yanghe 16,000 25% & JSY 14,000 20% South region From mid range to From Blue Sky to M6, Low barriers to entry, quite competitive market premium & super M9 between Sichuan brands (Luzhou Laojiao, 12,000 15% premium Wuliangye), Anhui Brands (Gujinggongjiu) and local brands （Yanghe & JSY) 10,000 10%

8,000 5%

6,000 0%

4,000 -5% FY15 FY16 FY17 FY18F FY19F FY20F Sales revenue from Jiangsu market YoY (%)

SOURCES: CGS-CIMB RESEARCH, LEADING INDUSTRY RESEARCH SOURCES: CGS-CIMB RESEARCH ESTIMATES, COMPANY REPORTS

Blue Classic has become a national brand In 2003, Yanghe introduced its Blue Classic (蓝色经典) brand with its unique “soft-taste”; the liquor has since been well-accepted by consumers. Based on our estimates, revenue from the Blue Classic brand was Rmb13.4bn in FY17, accounting for 70% of Yanghe’s baijiu revenue (Rmb19.2bn) that year. Yanghe’s brand value went up by 50% yoy, ranking it in the top 3 most valuable spirits league by Brand Finance in 2017. Given that Yanghe’s advertising and promotion expense ratio is lower than Wuliangye’s in FY12-17, this reflects the higher efficiency of Yanghe’s distribution network, in our view. Yanghe’s Blue Dream (梦之蓝) under its Blue Classic brand is also often selected to be served at prestigious national political and business events. For example, in May 2017, Blue Dream was served at the Belt and Road Forum for International Cooperation event. In Jun 2018, Yanghe Blue Dream M9 was designated as the baijiu of choice for the Shanghai Cooperation Qingdao Summit.

Figure 16: Yanghe’s revenue breakdown by product segment Figure 17: Baijiu’s revenue breakdown by brand (FY17) (FY17)

Blue Classic Brand Blue Sky 70% 20%

Other Brands Blue Dream 30% 22% Blue Sea 28%

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 18: Yanghe’s brand value up by 50%, ranking it among the Figure 19: Yanghe’s advertising and promotion expense ratio is top 3 in 2017’s most valuable spirits league lower than Wuliangye’s, higher than Moutai’s.

Rank Brand name Domicile Brand value (US$ m) YoY （%） Advertising & Promotion Expense as a % of baijiu revenue 1 Moutai China 11,548 60% 20% 2 Johnnie Walker UK 4,548 -2%

3 Yanghe China 4,281 50% 15% 4 Jack Daniel's US 3,055 22%

5 Hennessy France 2,711 -6% 10% 6 Luzhou Laojiao China 2,509 73% 7 Bacardi US 2,185 15% 5% 8 Smirnoff UK 2,033 0% 9 Wuliangye China 1,975 86% 0% 10 Absolut France 1,759 22% FY12 FY13 FY14 FY15 FY16 FY17 Yanghe Moutai Wuliangye

SOURCES: CGS-CIMB RESEARCH, BRAND FINANCE SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

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Company profile Continued innovation to build strong brand recognition Innovation of “soft-taste” as a new standard for China’s baijiu industry Traditionally, three fragrance types have been used to define China’s baijiu market, namely: 1) sauce fragrance (e.g. Moutai’s products), 2) strong fragrance (e.g. Wuliangye), and 3) light fragrance [e.g. Shanxi Xinhuacun Fen Wine Factory (600809 CH, Not Rated)]. Yanghe’s baijiu is a special type of strong fragrance. However, at the end of 1999, Yanghe introduced a totally new concept known as a “soft-taste” type baijiu, based on its unique texture. In 2003, Yanghe launched the Blue Classic (蓝色经典) brand with this unique “soft-taste”, which has since been well received by consumers. In 2008, the “soft-taste” type of baijiu was included in the national standard by Geographical Indicator Product (地理标志产品) as a special type of baijiu. Its brewing technology is quite different from other fragrances since its low temperature is the key to pit entry, fermentation and distillation, and results in a liquor with smaller molecular structures and that is water soluble, lending a flavour that is sweet and mellow while also being healthier. The “soft-taste” creation has since become Yanghe’s most well-known brand feature and its core strategic intellectual asset. Thanks to this innovation, Yanghe’s brand value rose by 50% yoy in 2017, placing it in the top 3 most valuable spirits league by Brand Finance that year. Multiple core brands in operation Yanghe has three major brands, namely the Blue Classic (蓝色经典) brand, Yanghe (洋河) brand, and Shuanggou (双沟) brand (Figures 11-12). Based on our estimates, revenue from the Blue Classic brand was Rmb13.4bn in FY17, accounting for 70% of Yanghe’s total baijiu revenue (Rmb19.2bn). The Yanghe (洋河) brand caters to the low-end market, while the Shuanggou (双沟) brand targets the low- to mid-range markets; both brands each contributed less than 10% of its total baijiu revenue as at FY17 based our estimates. Customer-oriented culture The Blue Classic (蓝色经典) brand appeals to customers on an emotional level, in our view, with the brand using the lure of sea, sky and dreams to target its predominantly male end-consumer. This modern brand positioning has been quite successful in differentiating Yanghe from the more traditional baijiu brands like Moutai and Wuliangye that usually promote themselves as part of the country’s longstanding history and culture. It also reflects Yanghe’s more consumer-oriented philosophy, differentiating it from other premium brands and improving customer awareness. Dividing the premium market into more specific sub-segments to appeal to different customer needs Yanghe has launched a number of different products under the Blue Dream, Blue Sky and Blue Sea series at varying price points to better meet different customer needs and to cover the whole spectrum of super-premium, premium and mid-range segments. These segments contributed 31%, 29% and 40%, respectively, of Blue Classic brand’s revenue (equivalent to 22%, 20% and 28%, respectively, of Yanghe’s total baijiu revenue) in FY17, based our estimates. The baijiu industry’s recovery cycle since 2016 and associated consumption upgrade has given Yanghe the opportunity to further subdivide its premium and super-premium baijiu markets into four price levels, via four of its Blue Dream products, namely M3, M6, M9 and Handmade class, all except M1 (which aims to the mid-range market). We believe this allowed Yanghe to not only ride the premiumisation trend using multi-price levels but also opened up further growth potential for its Blue Dream series through a dynamic pricing strategy. This diversification is another major differentiating factor separating Yanghe and its key rivals Moutai and Wuliangye, which utilise just one single product to capture the premium market (Moutai with 53°Feitian Moutai and Wuliangye with 52° Wuliangye). In the event the premiumisation trend slows down, we believe

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Yanghe will be more resilient than its peers due to its more diversified product portfolio. We expect the sales proportion of Blue Dream under the Blue Classic brand to rise to 40% in FY20F (equivalent to 32% of Yanghe’s total baijiu revenue as at FY20F). Product mix upgrades in the home market of Jiangsu Province Yanghe was established in Suqian city in Jiangsu Province in 1949, where its brewery plants are currently located within an expansive estate of some 10 square kilometers that boasts three rivers, two lakes and a wetland area. Jiangsu Province is also Yanghe’s core market, contributing Rmb10.2bn in revenue or 53% of its total sales in FY17. Premiumisation trend in Jiangsu During the nationwide consumption upgrade cycle, Jiangsu Province stood out for its faster economic growth and more robust business activities. In addition, the disposal income per capita in Jiangsu Province in 2016 was Rmb32,070, 35% higher than the national average of Rmb23,821. We expect Yanghe to benefit from the large mix upgrade potential in Jiangsu Province, its home market.

Figure 20: Yanghe had a 43% market share in the Jiangsu Province market in 2017 in terms of revenue

SOURCES: CGS-CIMB RESEARCH, LEADING INDUSTRY RESEARCH

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SOE reform to better motivate management Yanghe is one of the few baijiu companies to have completed the stated-owned enterprise (SOE) reform process to improve corporate governance, supplement capital and enhance operational efficiency. We believe the SOE reform has better aligned the interests of Yanghe’s management, shareholders and large distributors, as well as made its management system more efficient and responsive to the market. As such, we believe Yanghe will continue to pursue product innovation and maintain sustainable sales growth in the baijiu industry, supported by its good corporate governance and competent management. Yanghe’s management team, through Jiangsu Blue Alliance, indirectly owns a 21.44% equity stake in the company as at 26 Oct 2018.

Figure 21: Yanghe’s SOE reform process Figure 22: Yanghe is the first baijiu company to have completed the SOE reform process Year Yanghe's SOE reform process Year to complete Company Management shareholding Comments 2006 Yanghe 21.44% Completed reform in 2006 2002 Yanghe was established by Jiangsu Yanghe Group that is wholly owned 2018 Fenjiu 0.02% Introduced strategic investor China Resources Co. Ltd by Suqian State-owned Assets Supervision and Administration in Feb 2018 Commission (SASAC), six distributors, institutional investors and 14 2018 Wuliangye 0.01% Announced in Aug 2015 and completed the private senior management members. Jiangsu Yanghe Group and the placement in Apr 2018 management held equity interest of 51.1% and 8.41%, respectively, in 2018 Luzhou Liaojiao 0.04% Completed the private placement in Sep 2018 Yanghe. NA Moutai 0 Under discussion and no specific timeline to complete

2006 Yanghe issued 22m new shares to Blue Sky Trading and Blue Sea Trading, both of which are controlled by the management team. At that time, the local government's equity stake was diluted to 38.61% and the management team's equity stake increased to 30.79%.

2009 Yanghe issued another 45m new shares, which were listed on the Shenzhen Stock Exchange at Rmb60/share. After listing, the local government and management team held equity interest of 34.05% and 27.72%, respectively. 2018 Local government owns 34.16% equity interest in Yanghe, and Yanghe's management team, through Blue Alliance, holds 21.44%.

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

From Yanghe’s recent M&A activity, we believe we can clearly see the company’s enthusiasm in seeking product innovation and national expansion in an effort to grow revenue in the non-Jiangsu markets with the right products. The acquisition of two distilleries in Guizhou province to produce sauce flavour baijiu and the investment in Chile’s VSPT Wine Group (VSPT CI, Not Rated) for wine products, show management’s ambitions in expanding Yanghe’s product profile, in our view.

Figure 23: Yanghe’s major M&A activities (as at Oct 2018) Year Major M&A Apri-10 & Jan-11 Acquired the whole equity interest in Shuanggou Distillery. Mar-13 Acquired Hubei Lihuachun Distillery for Rmb3m Jan-14 Acquired 100% equity interest in Ningxiang Guluochun Distillery for Rmb2m Mar-14 Acquired a 100% equity interest in Haerbin Binzhou Distillery for Rmb2m Dec-14 Acquired 10% equity interest in Suning Consumer Finance Co. for Rmb30m Jun-16 Acquired 100% equity interest in Guizhou Guijiu Distillery in Guizhou province for Rmb190m Aug-17 Acquired 100% equity interest in Hougongfang Yinbing Distillery in Guizhou province

Jan-18 Acquired a 12.5% equity interest in VSPT Wine Group for US$66m SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Financial performance review and outlook Yanghe resumed its strong revenue and net profit growth trends in 9M18. Its 9M18 revenue grew by 24.2% yoy to Rmb21.0bn, while net profit rose 26.1% yoy to Rmb7.0bn. In the near term, for Yanghe’s home market of Jiangsu province, we expect sales growth to slow down due to macroeconomic factors. We expect revenue in the Jiangsu market to post 13% CAGR over FY17-20F. We believe non-Jiangsu markets will be the near-term catalysts for Yanghe despite the current weaker consumption sentiment. Yanghe has devoted a large amount of resources to the non-Jiangsu markets, particularly the five focus

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regions of Henan, Shandong, Anhui, Zhejiang and Hubei since 2014. After over three years of hard work, these five markets are already starting to bear fruit YTD. We expect Yanghe to see 22% sales CAGR over FY17-20F from the non- Jiangsu markets.

Figure 24: Yanghe’s 9M18 earnings performance review (Rmb m) 9M17 9M18 YoY (%) FY17 FY18F YoY (%) Revenue 16,878 20,966 24.2% 19,918 24,392 22.5% Gross Profit 9,950 11,941 20.0% 12,085 14,311 18.4% Gross profit margin (%) 58.9% 57.0% -2.0% 60.7% 58.7% -2.0% Other operating income 363 722 98.6% 660 882 33.7% Sale and distribution expense -1,605 -1,982 23.5% -2,387 -2,820 18.1% S&D as a % of Rev 9.5% 9.5% -0.1% 12.0% 11.6% -0.4% General Administrative expense -1,299 -1,318 1.4% -1,532 -1,510 -1.4% G&A as a % of Rev 7.7% 6.3% -1.4% 7.7% 6.2% -1.5% Operating profit 7,408 9,362 26.4% 8,825 10,863 23.1% Operating profit margin （ % ） 43.9% 44.7% 0.8% 44.3% 44.5% 0.2% EBIT 7,419 9,382 26.5% 8,814 10,878 23.4% EBIT Margin (%) 44.0% 44.7% 0.8% 44.3% 44.6% 0.3% Net Profit 5,582 7,039 26.1% 6,627 8,174 23.3% Net profit margin (%) 33.1% 33.6% 0.5% 33.3% 33.5% 0.2%

SOURCES: CGS-CIMB RESEARCH ESTIMATES, COMPANY REPORTS

Figure 25: Yanghe’s forecast summary FY16 FY17 FY18F FY19F FY20F Sales volume (tonnes) 198,199 215,951 241,865 258,795 289,851 YoY (%) -5% 9% 12% 7% 12% ASP (Rmb per tonne) 83,246 88,831 97,714 102,600 107,730 YoY (%) 14% 7% 10% 5% 5% Sales Revenue (Rmb m) 17,183 19,918 24,392 27,335 32,033 YoY (%) 7% 16% 22% 12% 17% Sales revenue in Home market - Jiangsu province 9,201 10,229 12,516 13,513 14,924 YoY (%) -3% 11% 22% 8% 10% Sales Revenue in non-Jiangsu markets 7,582 9,239 11,417 13,354 16,632

YoY (%) 22% 22% 24% 17% 25% SOURCES: CGS-CIMB RESEARCH ESTIMATES, COMPANY REPORTS

SWOT analysis

Figure 26: SWOT analysis Strengths Weaknesses 1. Nationwide recognition of "Blue Classic" brand, having been 1. The "Blue Classic" brand has been in the market for a shorter time featured at numerous high-profile political and business events. In than Moutai, Wuliangye and Luzhou Laojiao. We expect Yanghe to take Sep 2016, Blue Dream was awarded the status of "G20 Hangzhou some time to consolidate its market position in consumers' minds. Summit Selected Products", while in May 2017, Blue Dream was 2. Unlike Moutai and Wuliangye, which have distributors and customers served at the Belt and Road Forum for International Cooperation. In approaching them due to their strong brand positions with a Jun 2018, Blue Dream M9 was served at the Shanghai Cooperation longstanding history over hundreds of years; Yanghe needs to push its Qingdao Summit. products to distributors and customers and its unique-soft taste lauched 2. Competent management team with strong execution ability. The only over 15 years, this makes Yanghe more vulnerable on the brand SOE reform process has aligned the interests of management, recognition. For example, in 2013, Yanghe faced a crisis of trust as distributors and shareholders. media reports alleged that the company used low-end base liquor to 3. Proven success of its unique distribution network in its home produce its high-end products. market can be replicated in new markets.

Opportunities Threats 1. China baijiu industry's premium segment is undergoing 1. Increasing competition in non-Jiangsu markets as regional baijiu consolidation. The segment's market size will expand by 12% companies have upgraded their products in the premium segment in CAGR over 2017-20F, based on Euromonitor estimates. order to capture a larger slice of the regional markets.

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

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Food & Beverages │China Jiangsu Yanghe Brewery │December 11, 2018

Risks Macroeconomic slowdown: China’s baijiu consumption structure has changed over the years to the extent that consumption is now led by private companies and individuals. As such, PMI has become a more important determinant of baijiu demand; a lower-than-expected PMI could dampen both consumer confidence and consumption capacity. Nevertheless, Yanghe’s resilient product portfolio and wide distribution network should help it to better weather the impact of an economic slowdown than some of its peers, in our view. Government policy changes: In 2001, the Chinese government adjusted the consumption tax on the baijiu industry, which resulted in a higher tax burden for baijiu companies. This year, there were concerns that the government would raise the VAT rate on baijiu. If a VAT hike materialises in the future, we believe it would have an adverse impact on baijiu consumption, which might lead to another adjustment cycle. Downside risks: include a further slowdown in baijiu consumption in China and difficulties in expanding into non-Jiangsu markets.

Valuation and recommendation We initiate coverage on Yanghe with an Add rating We initiate coverage on Yanghe with an Add rating and DCF-based TP of Rmb120 (WACC: 10.4%). Yanghe is currently trading at 15.9x FY19F P/E (0.6 s.d. below its historical average since listing in 2009 of 18.6x). Our TP implies 19.2x FY19F P/E, only 0.1 s.d. above its historical average forward P/E since listing. Yanghe’s current P/E is 5% above the average FY19F P/E of 15.1x for China’s domestic baijiu market (Figure30). Our TP implies a 27% premium over this average FY19F P/E. As Yanghe has nurtured its non-Jiangsu markets for over three years now, these markets have started bearing fruit in 2018 and would continue in the near term, in our views. We forecast revenue from the non-Jiangsu markets to post 22% CAGR in FY17-20F. In addition, we believe Yanghe’s diversified premium product portfolio should allow for more precise targeting of the different consumer markets with their varying levels of premiumisation. Also, Yanghe’s strong execution ability and unique distribution network will help it to better control its operating leverage, in our view.

Figure 27: DCF valuation, based on our estimates (Rmb, m) FY18F FY19F FY20F FY21F FY22F FY23F FY24F FY25F FY26F FY27F FY28F EBIT 10,878 12,426 14,879 16,367 17,486 18,303 18,969 19,464 19,772 19,879 19,782 Taxes -2,750 -3,150 -3,792 -4,123 -4,405 -4,611 -4,779 -4,904 -4,981 -5,008 -4,984 EBIT, tax-affected 8,129 9,276 11,086 12,243 13,080 13,691 14,190 14,560 14,790 14,871 14,798 Add: Depreciation & amortisation 765 861 958 1,054 1,138 1,218 1,291 1,355 1,409 1,452 1,481 Add Changes in Working capital -1,465 894 1,089 1,198 1,313 1,425 1,532 1,631 1,720 1,796 1,857 Less Capital Expenditure -1,500 -1,500 -1,500 -1,615 -1,744 -1,866 -1,978 -2,077 -2,160 -2,225 -2,269 Free Cash Flow to firm 5,929 9,532 11,633 12,880 13,787 14,468 15,035 15,470 15,760 15,894 15,866 YoY growth -18% 61% 22% 11% 7% 5% 4% 3% 2% 1% 0%

Key assumptions NPV of FY18-22F Cash flow 53,761 Industry average beta 1.072 NPV of FY23-28F Cash Flow 44,194 Risk free rate 3.5% NPV of Terminal Value 81,745 Risk premium 6.5% Enterprise Value 179,701 Cost of equity 10.4% Add Net cash/(Net Debt) 1,262 Cost of Debt 4.3% Less Minority 31 Debt % 0.0% Equity value of firm 180,993 Tax rate 25.0% Share outstanding (m) 1,507 WACC 10.4%

Target price (Rmb) 120 Terminal growth rate 3.0% SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

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Food & Beverages │China Jiangsu Yanghe Brewery │December 11, 2018

Figure 28: Yanghe’s 12-month forward P/E (x) Figure 29: Yanghe’s 12-month forward EV/EBITDA (x) Current P/E (x): 15.9; Mean:18.6; +1STD: 23.2; -1STD: 13.9 Current EV/EBITDA (x): 12.8; Mean: 14.0; +1STD: 17.4; -1STD: 10.6 35 25 12M forward P/E(x) Mean 12M forward EV/Ebitda Mean 30 +1 std -1 std 20 +1 std -1 std 25

20 15

15 10 10

5 5

Sep-16 Sep-18 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-17

Nov-10 Nov-13 Nov-14 Nov-17 Nov-09 Nov-11 Nov-12 Nov-15 Nov-16 Nov-18

Mar-11 Mar-13 Mar-15 Mar-17 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18

May-10 May-13 May-17 May-12 May-14 May-15 May-16 May-18 May-11 SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS, BLOOMBERG SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS, BLOOMBERG

Figure 30: Peer comparison Company Name Bloomberg Recom Last Quoted Market P/E (x) 3yrs P/BV (x) EV/EBITDA (x) ROE (%) Dividend Yield (%) Ticker price currency cap EPS CAGR Local (US$, m) 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F Kweichow Moutai Co Ltd-A 600519 CH ADD 583.0 Rmb 106,147 21.6 18.9 15.9 19% 6.6 5.5 4.6 12.9 11.0 9.0 33.4 31.7 31.5 2.4 2.7 3.2 Jiangsu Yanghe Brewery -A 002304 CH ADD 99.4 Rmb 21,700 18.2 15.9 13.2 19% 4.4 3.9 3.4 12.5 10.6 8.5 25.9 26.0 27.3 3.2 3.6 4.4 Wuliangye Yibin Co Ltd-A 000858 CH HOLD 52.8 Rmb 29,717 16.1 14.2 12.3 20% 3.5 3.1 2.8 9.6 8.1 6.7 22.4 22.9 23.8 3.2 3.7 4.2 Luzhou Laojiao Co Ltd-A 000568 CH NR 42.5 Rmb 9,014 18.0 14.5 12.0 25% 3.7 3.2 2.8 11.8 9.7 8.1 21.0 22.9 24.1 3.6 4.5 5.3 Anhui Gujing Distillery Co-A 000596 CH NR 58.0 Rmb 3,853 18.0 14.4 12.2 28% 3.7 3.0 2.4 10.7 8.9 7.8 21.9 22.0 21.2 1.8 2.2 2.4 Shanxi Xinghuacun Fen Wine-A 600809 CH NR 38.1 Rmb 4,786 21.9 16.8 13.5 37% 5.2 4.3 3.5 14.2 11.3 9.5 24.5 26.5 27.1 2.1 2.6 3.3 Jiugui Liquor Co Ltd-A 000799 CH NR 17.7 Rmb 834 22.7 16.0 12.1 39% 2.6 2.4 2.1 12.9 9.7 7.3 12.2 15.2 18.0 1.3 1.7 1.7 Beijing Shunxin Agricult-A 000860 CH NR 35.7 Rmb 2,948 25.0 17.0 12.9 53% 2.7 2.4 2.1 15.0 10.9 9.3 11.0 14.1 15.2 1.2 1.7 1.9 Xinjiang Yilite Industry-A 600197 CH NR 13.9 Rmb 891 13.2 10.4 8.6 26% 2.3 2.0 1.6 NA NA NA 17.9 19.3 20.0 1.9 2.2 2.8 Hebei Hengshui Laobaigan-A 600559 CH NR 13.8 Rmb 1,334 22.3 15.3 12.0 63% 4.2 3.6 3.1 16.0 11.2 9.8 20.2 25.1 26.1 2.4 3.8 5.5 Shede Spirits Co Ltd-A 600702 CH NR 25.1 Rmb 1,225 23.9 16.4 11.1 75% 3.0 2.5 2.1 16.1 11.7 8.9 13.7 16.5 19.2 1.0 1.4 1.8 Sichuan Swellfun Co Ltd-A 600779 CH NR 32.6 Rmb 2,308 25.5 18.2 14.1 50% 8.4 6.9 5.6 18.3 13.9 10.9 34.3 39.8 44.8 3.0 4.3 5.9 Anhui Yingjia Distillery C-A 603198 CH NR 15.2 Rmb 1,759 14.8 12.7 12.3 14% 2.8 2.6 2.5 10.0 8.7 7.8 18.0 19.3 19.9 NA NA NA Jiangsu King'S Luck Brewer-A 603369 CH NR 15.8 Rmb 2,871 16.9 13.6 11.2 25% 3.3 2.8 2.3 11.7 9.6 8.3 19.7 21.0 21.7 1.9 2.3 2.8 Anhui Kouzi Distillery Co -A 603589 CH NR 36.0 Rmb 3,126 14.9 12.4 10.4 23% 3.5 3.0 2.5 10.5 9.1 8.3 24.0 24.8 25.0 2.4 2.9 3.0 Average in China domestic baijiu market 19.5 15.1 12.3 34% 4.0 3.4 2.9 13.0 10.3 8.6 21.3 23.1 24.3 2.2 2.8 3.4 Tingyi (Cayman Isln) Hldg Co 322 HK HOLD 10.2 HK$ 7,361 19.2 17.0 15.0 23% 2.6 2.4 2.2 6.5 6.3 5.9 13.2 13.4 14.2 2.4 2.8 3.1 Uni-President China Holdings 220 HK REDUCE 6.6 HK$ 3,648 23.3 20.1 18.2 16% 1.9 1.8 1.8 8.8 8.3 7.9 8.3 9.1 9.9 3.4 3.9 4.5 Want Want China Holdings Ltd 151 HK ADD 5.4 HK$ 8,491 18.9 17.5 15.7 6% 4.2 3.6 3.2 10.8 10.0 9.6 24.1 22.1 21.2 1.7 2.5 2.8 China Mengniu Dairy Co 2319 HK ADD 24.0 HK$ 12,062 26.8 21.6 18.6 29% 3.3 3.0 2.7 15.4 13.1 11.4 12.9 14.4 15.1 1.1 1.4 1.6 Tsingtao Brewery Co Ltd-H 168 HK REDUCE 30.7 HK$ 5,927 24.4 22.6 20.1 13% 2.0 1.9 1.8 10.6 9.7 8.6 8.5 8.6 9.1 1.2 1.3 1.5 China Resources Beer Holding 291 HK ADD 27.6 HK$ 11,561 30.1 22.6 19.5 51% 4.0 3.7 3.4 13.8 10.9 9.3 13.8 17.3 18.2 0.9 1.3 1.7 Dali Foods Group Co Ltd 3799 HK NR 5.7 HK$ 9,866 17.8 15.7 13.6 14% 4.6 4.0 3.6 11.3 9.9 8.6 26.7 27.4 28.3 3.3 3.8 4.0 Average in HK market 22.9 19.6 17.3 22% 3.2 2.9 2.7 11.0 9.7 8.8 15.4 16.1 16.6 2.0 2.4 2.7 Diageo Plc DGE LN NR 2,828.5 GBP 86,449 24.3 22.4 20.8 4% 6.7 7.3 7.9 18.7 17.4 16.4 28.4 32.2 33.0 2.3 2.4 2.5 Anheuser-Busch Inbev Sa/Nv ABI BB NR 62.0 EUR 142,459 17.6 14.7 13.1 10% 1.8 1.7 1.6 11.7 11.3 10.6 10.7 12.7 13.4 3.3 3.1 3.1 Ambev Sa ABEV3 BZ NR 15.9 BRL 63,775 20.5 18.9 16.9 26% 4.5 4.3 4.1 11.5 10.8 9.8 24.0 25.0 26.3 3.5 4.7 5.0 Constellation Brands Inc-A STZ US NR 187.3 US$ 35,604 21.9 19.8 18.2 -5% 4.6 3.1 2.8 16.4 15.0 13.7 23.1 21.8 16.8 1.1 1.6 1.7 Carlsberg As-B CARLB DC NR 713.6 DKK 16,477 20.4 19.0 17.4 71% 2.2 2.1 2.0 9.5 9.1 8.7 10.9 11.3 11.7 2.4 2.6 2.8 Molson Coors Brewing Co -B TAP US NR 62.7 US$ 13,609 12.6 12.6 12.0 -7% 1.0 0.9 0.9 9.5 9.4 9.3 8.1 7.5 7.6 2.7 3.3 4.0 Heineken Nv HEIA NA NR 78.3 EUR 51,329 19.2 17.6 16.1 13% 3.0 2.7 2.6 10.7 10.2 9.6 16.1 15.9 16.1 2.0 2.1 2.3 Asahi Group Holdings Ltd 2502 JP NR 4,380.0 JPY 18,728 13.7 13.0 12.2 5% 1.7 1.6 1.4 9.8 9.5 9.1 12.5 12.5 12.3 2.1 2.3 2.5 Kirin Holdings Co Ltd 2503 JP NR 2,400.5 JPY 19,399 13.8 13.7 13.1 -12% 2.2 2.0 1.8 10.2 9.9 9.4 16.2 15.3 15.0 2.0 2.3 2.6 Thai Beverage Pcl THBEV SP ADD 0.6 S$ 10,701 15.5 13.8 12.9 13% 2.5 2.7 2.5 16.0 15.9 14.9 16.9 16.9 17.1 2.9 3.0 3.3 Pernod Ricard Sa RI FP NR 138.6 EUR 41,868 24.2 22.4 20.6 4% 2.5 2.3 2.2 16.7 15.9 14.9 10.8 10.7 11.0 1.7 2.0 2.3 United Spirits Ltd UNSP IN NR 614.0 INR 6,210 85.1 57.3 46.1 14% 18.6 13.8 10.5 43.5 33.4 28.6 23.9 27.1 25.4 0.1 0.2 0.4 Brown-Forman Corp-Class B BF/B US NR 46.4 US$ 22,145 29.7 27.2 25.2 7% 18.5 13.4 11.3 21.9 20.8 19.6 60.2 55.4 48.9 1.3 1.4 1.5 Hite Jinro Co Ltd 000080 KS NR 17,600.0 KRW 1,091 31.2 24.0 20.7 67% 1.0 1.1 1.1 9.6 9.1 8.8 3.3 4.5 5.1 4.4 4.5 4.6 Remy Cointreau RCO FP NR 101.1 EUR 5,862 33.4 31.6 27.0 8% 3.7 3.4 3.1 21.0 19.5 17.3 11.5 11.3 12.2 1.7 1.7 1.9 Davide Campari-Milano Spa CPR IM NR 7.6 EUR 10,047 35.2 31.3 27.9 -4% 4.0 3.6 3.3 21.9 20.2 18.5 11.7 11.5 11.3 0.7 0.7 0.8 C&C Group Plc GCC ID NR 2.9 EUR 1,038 13.2 11.3 9.9 11% 1.8 1.7 1.6 11.8 9.8 9.0 12.5 14.2 15.1 5.0 5.0 5.2 Becle Sab De Cv CUERVO* MM NR 23.4 MXN 4,203 22.1 18.8 15.5 1% 1.8 1.7 1.6 13.2 11.7 10.2 7.7 9.3 10.2 2.6 2.7 3.1 Sapporo Holdings Ltd 2501 JP NR 2,390.0 JPY 1,665 22.4 22.5 21.9 -8% 1.0 1.0 1.0 11.6 11.6 11.4 4.8 4.6 4.6 1.7 1.7 1.6 Vina Concha Y Toro Sa CONCHA CI NR 1,334.8 CLP 1,470 20.7 16.5 13.6 14% 1.8 1.7 NA 13.5 11.2 9.9 8.7 10.5 11.3 1.8 2.0 3.0 Treasury Wine Estates Ltd TWE AU NR 14.2 AUD 7,338 28.9 22.5 18.6 15% 3.0 2.8 2.6 17.3 14.2 12.0 10.0 12.7 14.7 2.2 2.9 3.5

Average in International market 25.0 21.5 19.0 12% 4.2 3.6 3.3 15.5 14.1 12.9 15.8 16.3 16.1 2.3 2.5 2.8 *Not rated companies’ forecasts are based on Bloomberg consensus estimates. NOTE: AS AT 11 DEC 2018, SOURCES: CGS-CIMB RESEARCH ESTIMATES, BLOOMBERG

62

Food & Beverages │China Jiangsu Yanghe Brewery │December 11, 2018

Company background Jiangsu Yanghe Brewery Co. Ltd manufactures and distributes baijiu for China’s domestic markets. As Yanghe’s home market, Jiangsu Province contributes over 50% of its revenue (as at FY17). Yanghe’s major brands include Yanghe Blue Classic, Shuanggou and Sujiu.

Figure 31: Yanghe’s milestones (as at Oct 2018) Year Yanghe's milestones 1949 Jiangsu Yanghe Brewery Factory was founded 1997 Jiangsu Yanghe Brewery Factory was restructured as Jiangsu Yanghe Group 2002 Yanghe Group and other shareholders founded Jiangsu Yanghe Brewery Joint-Stock Co. 2003 Launched Yanghe " Blue Classic" with its unique soft-taste 2009 Listed on Shenzhen Stock Exchange 2010-11 Acquired the whole equity interest of Jiangsu Shuanggou Distillery 2013 Acquired Hubei Lihuachun Distillery and opened online flagship stores in Tmall and JD.com

2014 Acquired the whole equity interest in Ningxiang Guluochun, Haerbin Binzhou Distillery, respectively. 2016 Acquired the whole equity interest in Guizhou Guijiu Distillery 2017 Acquired 100% equity interest in Hougongfang Yinbing Distillery in Guizhou province

2018 Acquired a 12.5% equity interest in VSPT Wine Group for US$66m SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 32: Yanghe’s key management (as at Oct 2018) Name Position Experience WANG yao Chairman Mr Wang is Yanghe's chairman and Sujiu Group Trading company's chairman. Previously, he was in charge of the production unit in in Yanghe Brewing factory and Yanghe Group Colour Printing Co. Before that, Mr Wang was appointed as the deputy general manager, general manager and vice chairman of Shuanggou.

ZHONG Yu Vice Chairman Mr Zhong is Yanghe's vice chairman and president. He previously headed the technology centre, Yanghe branch and Siyang branch of Shuanggou. ZHOU Xinhua Director Mr Zhou is Yanghe's director, vice chairman and chief engineer. In the past, he held a number of position in Yanghe group, including technician , leader of quality inspection unit and head of the production & storage department. Later, Mr Zhou served as Yanghe's deputy general manager and deputy chief engineer and vice chairman. CONG Xuenian Director, Board Secretary , CFO Mr Cong currently holds multiple positionss in Yanghe, including director, vice chairman, board secretary and head of finance. Previously, he was a general

ledger (GL) accountant, finance director and chief accountant of Yanghe. SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 33: Yanghe’s shareholding structure (as at Oct 2018)

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

63

Food & Beverages │China Jiangsu Yanghe Brewery │December 11, 2018

BY THE NUMBERS

P/BV vs ROE 12-mth Fwd FD Core P/E vs FD Core EPS 7.30 26.50% 27.0 Growth 25.0% 6.80 26.06% 25.0 23.0% 6.30 25.63% 23.0 21.0% 5.80 25.19% 21.0 19.0% 5.30 24.75% 19.0 17.0% 4.80 24.31% 4.30 23.88% 17.0 15.0% 3.80 23.44% 15.0 13.0% 3.30 23.00% 13.0 11.0% Jan-14A Jan-15A Jan-16A Jan-17A Jan-18F Jan-19F Jan-14A Jan-15A Jan-16A Jan-17A Jan-18F Jan-19F

Rolling P/BV (x) (lhs) ROE (rhs) 12-mth Fwd Rolling FD Core P/E (x) (lhs) FD Core EPS Growth (rhs)

Profit & Loss

(Rmbm) Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F Total Net Revenues 17,730 20,578 25,274 28,217 32,915 Gross Profit 11,218 12,745 15,194 17,057 19,998 Operating EBITDA 8,514 9,530 11,629 13,272 15,822 Depreciation And Amortisation -795 -727 -775 -871 -968 Operating EBIT 7,718 8,803 10,853 12,401 14,854 Financial Income/(Expense) 9 34 35 77 174 Pretax Income/(Loss) from Assoc. 0 0 0 0 0 Non-Operating Income/(Expense) 34 11 25 25 25 Profit Before Tax (pre-EI) 7,907 8,918 10,972 12,562 15,111 Exceptional Items Pre-tax Profit 7,761 8,848 10,913 12,503 15,052 Taxation -1,956 -2,229 -2,750 -3,150 -3,792 Exceptional Income - post-tax Profit After Tax 5,805 6,619 8,164 9,353 11,260 Minority Interests 22 8 10 12 14 Preferred Dividends FX Gain/(Loss) - post tax Other Adjustments - post-tax Net Profit 5,827 6,627 8,174 9,365 11,274 Recurring Net Profit 5,936 6,680 8,218 9,409 11,318

Fully Diluted Recurring Net Profit 5,936 6,680 8,218 9,409 11,318

Cash Flow

(Rmbm) Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F EBITDA 8,514 9,530 11,629 13,272 15,822 Cash Flow from Invt. & Assoc. Change In Working Capital 1,352 236 -1,465 894 1,089 (Incr)/Decr in Total Provisions Other Non-Cash (Income)/Expense Other Operating Cashflow -2,460 -2,881 -2,700 -3,058 -3,604 Net Interest (Paid)/Received 0 0 0 0 0 Tax Paid Cashflow From Operations 7,405 6,885 7,464 11,109 13,307 Capex -5,964 -4,161 -1,500 -1,500 -1,500 Disposals Of FAs/subsidiaries Acq. Of Subsidiaries/investments Other Investing Cashflow Cash Flow From Investing -5,964 -4,161 -1,500 -1,500 -1,500 Debt Raised/(repaid) Proceeds From Issue Of Shares Shares Repurchased Dividends Paid -2,714 -3,169 -3,843 -4,740 -5,430 Preferred Dividends Other Financing Cashflow -984 -248 0 0 0 Cash Flow From Financing -3,697 -3,417 -3,843 -4,740 -5,430 Total Cash Generated -2,256 -693 2,121 4,869 6,377 Free Cashflow To Equity 1,441 2,724 5,964 9,609 11,807

Free Cashflow To Firm 1,441 2,724 5,964 9,609 11,807 SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

64

Food & Beverages │China Jiangsu Yanghe Brewery │December 11, 2018

BY THE NUMBERS… cont’d

Balance Sheet

(Rmbm) Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F Total Cash And Equivalents 2,457 1,751 3,873 8,741 15,118 Total Debtors 342 365 394 433 495 Inventories 12,222 12,862 13,365 13,480 14,042 Total Other Current Assets 10,304 13,549 13,549 13,549 13,549 Total Current Assets 25,325 28,527 31,181 36,203 43,204 Fixed Assets 7,970 8,250 9,033 9,721 10,312 Total Investments 21 2 2 2 2 Intangible Assets 1,911 1,930 1,881 1,832 1,783 Total Other Non-Current Assets 3,578 4,550 4,550 4,550 4,550 Total Non-current Assets 13,479 14,732 15,466 16,105 16,647 Short-term Debt Current Portion of Long-Term Debt Total Creditors 12,437 13,439 12,507 13,555 15,268 Other Current Liabilities Total Current Liabilities 12,437 13,439 12,507 13,555 15,268 Total Long-term Debt 0 0 0 0 0 Hybrid Debt - Debt Component Total Other Non-Current Liabilities 330 324 324 324 324 Total Non-current Liabilities 330 325 325 325 325 Total Provisions 0 0 0 0 0 Total Liabilities 12,767 13,763 12,831 13,879 15,593 Shareholders' Equity 26,053 29,515 33,846 38,471 44,315 Minority Interests -16 -20 -31 -42 -57

Total Equity 26,037 29,495 33,816 38,429 44,259

Key Ratios

Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F Revenue Growth 7.0% 15.9% 22.5% 12.1% 17.2% Operating EBITDA Growth 12.4% 11.9% 22.0% 14.1% 19.2% Operating EBITDA Margin 49.5% 47.8% 47.7% 48.6% 49.4% Net Cash Per Share (Rmb) 1.63 1.16 2.57 5.80 10.03 BVPS (Rmb) 17.29 19.59 22.46 25.53 29.41 Gross Interest Cover N/A N/A N/A N/A N/A Effective Tax Rate 25.2% 25.2% 25.2% 25.2% 25.2% Net Dividend Payout Ratio 53.0% 57.4% 57.6% 57.6% 57.7% Accounts Receivables Days 2.69 3.52 3.41 3.33 3.27 Inventory Days 656.0 584.4 474.8 439.0 389.9 Accounts Payables Days 277.9 254.2 155.1 112.2 110.9 ROIC (%) 42.4% 37.1% 38.9% 41.2% 49.7% ROCE (%) 32.1% 32.1% 34.6% 34.7% 36.5%

Return On Average Assets 16.4% 16.2% 18.2% 18.9% 19.9%

d Key Drivers

Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F ASP (% chg, main prod./serv.) 13.6% 6.7% 10.0% 5.0% 5.0% Unit sales grth (%, main prod./serv.) -5.2% 9.0% 12.0% 7.0% 12.0% Util. rate (%, main prod./serv.) N/A N/A N/A N/A N/A ASP (% chg, 2ndary prod./serv.) N/A N/A N/A N/A N/A Unit sales grth (%,2ndary prod/serv) N/A N/A N/A N/A N/A Util. rate (%, 2ndary prod/serv) N/A N/A N/A N/A N/A ASP (% chg, tertiary prod/serv) N/A N/A N/A N/A N/A Unit sales grth (%,tertiary prod/serv) N/A N/A N/A N/A N/A Util. rate (%, tertiary prod/serv) N/A N/A N/A N/A N/A Unit raw mat ASP (%chg,main) N/A N/A N/A N/A N/A Total Export Sales Growth (%) N/A N/A N/A N/A N/A

Export Sales/total Sales (%) N/A N/A N/A N/A N/A SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

65

INITIATION

Company Note | Alpha series Food & Beverages │China │December 11, 2018

a d China Wuliangye Yibin HOLD Need to improve distribution network Consensus ratings*: Buy 31 Hold 2 Sell 0 ■ We initiate coverage on Wuliangye Yibin Co Ltd (WLY) with a Hold rating. Current price: Rmb52.82 ■ WLY’s distribution network lags behind its peers’, in our view. It is undergoing Target price: Rmb55.00 channel reform, but reform impact in the medium term is a concern to us. Previous target: N/A ■ We forecast total revenue and net profit CAGR of 17% and 20% in FY17-20F, Up/downside: 4.1% CIMB / Consensus: -31.7% driven by channel expansion. ■ WLY’s 14.2x FY19F P/E looks attractive to us, as it is 0.6 s.d below its Reuters: 000858.SZ historical average P/E of 22.4x since 2000 Bloomberg: 000858 CH Market cap: US$29,664m Distribution network lags behind Moutai’s and Yanghe’s Rmb205,027m WLY’s distribution network is not as extensive as Moutai’s (Moutai has 3,546 Average daily turnover: US$210.9m distributors vs. WLY’s 1,136 as at end-Oct 2018). Yanghe’s (8,000+ distributors Rmb1,445m Current shares o/s: 3,796m as at end-Oct 2018) unique go-to market distribution model grants the company Free float: 36.1% strong control over its network, while WLY’s traditional wholesale model makes it *Source: Bloomberg more reliant on first-layer distributors, in our view. Moutai’s first-layer wholesaler’s profit margin (first-layer wholesale price vs. ex-factory price) of 78% is much higher than Key changes in this note WLY’s 4% (as at end-Nov 2018). We expect WLY to further strengthen its market position N/A and provide distributors with higher margins to better incentivise them in FY19-20F.

Price Close Relative to SHCOMP (RHS) Channel reforms should help enhance market penetration 103.0 134.0 Driven by channel reform, the proportion of revenue from WLY’s top 5 distributors 83.0 117.3 declined from 24% in FY14 to 11% in FY17. WLY also launched the “Ten thousand

63.0 100.7 stores project” in 2017, with the aim of increasing the number of retail points and its

43.0 84.0 80 distribution network reach. WLY proactively controlled its sales volume growth in 3Q18 in 60 order to support retail prices. Based on our channel checks, WLY’s first-layer distributor 40 20

Vol m Vol price has been maintained at Rmb820/bottle (since Aug 2018), while its retail selling price Dec-17 Mar-18 Jun-18 Sep-18 of Rmb1,059/bottle is even higher than the 2Q/3Q18 price of Rmb840/bottle. WLY’s Source: Bloomberg channel inventory stands at 1.0-1.5 months now. We expect the current tight channel inventory to provide support to WLY’s revenue growth in the near term. Price performance 1M 3M 12M Absolute (%) 5.6 -13.4 -26.5 Mid-range brands to see a 3-year sales CAGR of 25% Relative (%) 5.8 -10.7 -4.6 Besides its core high-end brand, Wuliangye, WLY also grew its mid-range brands by adopting a “4+4” brands strategy (four nationwide brands combined with four regional Major shareholders % held Yibin State-owned Asset Operation Co. brands) in 2017. We expect sales for its Series brands to grow at a CAGR of 25% over Ltd 35.2 FY17-20F through product mix upgrades and further channel penetration.

Initiate coverage with a Hold rating and DCF-based TP of Rmb55 Insert We initiate coverage on WLY with a Hold rating. Although its current P/E valuation looks attractive to us, we await more details on the impact of channel reform in the medium term. WLY is trading at 14.2x FY19 P/E (0.6 s.d below its historical average P/E of 22.4x since 2000). Upside risks are: 1) better-than-expected sales volume growth, and 2) price hikes in 2019-20F. Downside risks are: 1) weaker macroeconomic growth dragging down demand, and 2) intensifying competition from close rivals.

Financial Summary Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F Analyst(s) Revenue (Rmbm) 24,544 30,187 38,642 42,902 48,712 Operating EBITDA (Rmbm) 9,004 12,979 16,931 19,399 22,577 Net Profit (Rmbm) 6,785 9,674 12,620 14,403 16,697 Core EPS (Rmb) 1.79 2.55 3.25 3.71 4.30 Core EPS Growth 9.6% 42.4% 27.5% 14.1% 15.9% FD Core P/E (x) 29.47 20.70 16.05 14.22 12.27 DPS (Rmb) 0.90 1.33 1.70 1.94 2.24 Dividend Yield 1.71% 2.52% 3.21% 3.66% 4.25% EV/EBITDA (x) 18.54 12.42 9.63 8.11 6.70 Lei YANG, CFA P/FCFE (x) 17.38 20.96 20.52 14.89 13.12 T (86) 21 6162 9676 Net Gearing (71.9%) (74.2%) (71.7%) (72.9%) (73.7%) E [email protected] P/BV (x) 4.26 3.76 3.45 3.09 2.76 FeiFei SUN ROE 15.1% 19.3% 22.4% 22.9% 23.8% T (86) 21 6162 5750 % Change In Core EPS Estimates CIMB/consensus EPS (x) 0.99 0.93 0.90 E [email protected] SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN Powered by the THE UNITED STATES IT IS DISTRIBUTED BY CGS-CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. EFA Platform

Food & Beverages │China Wuliangye Yibin │December 11, 2018

Need to improve distribution network Investment summary Improving its brand image in the premium baijiu market Following the recent recovery in the baijiu sector, Wuliangye (WLY) has been aggressively lifting its ex-factory price to maximise revenue growth due to strong demand and to ensure positive channel margins for tier-1 wholesalers. This aggressive pricing strategy has proven to be successful and led to high earnings growth. In 9M18, WLY reported 33% yoy revenue growth, which was the highest among the premium baijiu companies, and 36% yoy net profit growth.

WLY proactively controlled its sales volume growth in 3Q18 in order to support retail selling prices. Based on our channel checks, WLY’s first-layer distributor price has been maintained at Rmb820/bottle, while its retail selling price of Rmb1,059/bottle is even higher than its 2Q18 price of Rmb840/bottle. We also expect the current tight channel inventory to provide a certain level of support to WLY’s revenue growth in FY19F. WLY’s current channel inventory is around 1- 1.5 months, vs. the normalised level of 2-3 months. We believe WLY has successfully improved its brand image in the premium baijiu market and expect yoy revenue growth of 28%, 11% and 13.5% in FY18F, FY19F and FY20F, respectively.

Figure 1: In 9M18, WLY achieved the highest revenue growth Figure 2: WLY has recovered from the troughs of revenue growth among premium baijiu companies and net profit growth in FY14

40% 38% 36% 35% 33%

30% 27% 26% 24% 24% 25% 23%

20%

15%

10%

5%

0% Moutai Wuliangye Luzhou Liaojiao Yanghe

9MFY18 Revenue growth YoY (%) 9MFY18 Net profit growth YoY (%)

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH ESTIMATES, COMPANY REPORTS

Figure 3: Ex-factory price hikes for 52° Wuliangye since the recovery of the baijiu industry in 2016 (Rmb/500ml unit) 900

+Rmb20/unit +Rmb50/unit +Rmb60/unit Rmb789/unit 800 +Rmb50/unit (+6.8%) (+3.0%) (+8.8%) (+8.2%） no sales rebates with sales rebate since Q22016 700 of Rmb30/unit

Rmb609/unit 600

500

400 Dec-14 Aug-15 Mar-16 Sep-16 Dec-17 Since Apr 2018

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

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WLY’s distribution network lags behind Moutai’s and Yanghe’s, although channel reform is ongoing Although WLY’s distribution network is nationwide, it has fewer distributors in each province relative to Moutai (600519 CH, Add, TP: Rmb720) (as at end-Oct 2018), which indicates, in our view, that WLY’s distribution network is not as extensive as Moutai’s, and that its brand is not as highly recognised by customers as Moutai’s. To a certain extent, we believe WLY has less control over its distributors and retail points. Its traditional wholesale model means that sales volume is quite dependent on the sales performance of its first-layer wholesalers. WLY started its distribution channel reform in 2016. It has adopted more proactive sales and distribution policies with the aim of diversifying its distribution channels in order to reduce its reliance on large first-layer wholesalers. The revenue proportion from its top 5 customers/wholesalers declined to 11% in FY17 from 24% in FY14 and we expect this proportion to decline to the optimal level of around 5% (in our view) over the next three to five years given the ongoing channel reforms. WLY has also eliminated unqualified distributors and recruited more capable ones to enhance its control over retail selling prices and channel inventories in 2017.

Figure 4: Number of distributors in each province - WLY vs. Moutai (as at end-Oct 2018)

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 5: Revenue proportion from top 5 customers Figure 6: WLY has the lowest number of distributors among its premium peers, which implies that WLY has more layers of hierarchy in its distribution network (as at end-Oct 2018) Number of Salespeople Number of Distributors Moutai 684 3,546 Wuliangye 576 1,136 Yanghe 5,036 over 8,000 Luzhou Laojiao 588, with over 8,000 sales 3,000 persons in its 4 sales companies

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

WLY also launched its new marketing strategy plan, the “Ten thousand stores project” in mid-2017, with the aim of expanding its distribution network coverage. It completed the first phase of this plan, adding over 7,000 retail points across 46 key cities in China by end-FY17. Also, the number of WLY exclusive stores increased by over 400 to 1,200 by end-2017. In 1H18, WLY did not open any exclusive stores in new locations and only renovated existing stores. The company targets to open 200-300 exclusive stores in 2H18F.

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We expect the Series brands to become a dual-engine for revenue growth in the long term WLY has streamlined its product portfolio in the Series Brand, and is focusing on its “4+4” Series brand strategy (four nationwide brands plus four regional brands). During the 2017 annual shareholders’ meeting, management announced that WLY aims to create another brand with annual sales of over Rmb2bn-3bn. In FY17, revenue from WLY’s Series brands segment grew by 38% yoy to Rmb6.7bn, representing 24% of WLY’s baijiu revenue in that year. WLY’s management has officially guided that the revenue from the Series brands segment to exceed Rmb10bn in FY18F. We expect WLY’s channel reform to help its Series brands to better penetrate lower-tier cities and to facilitate product mix upgrade in these areas over next three years. We estimate WLY’s Series brands to deliver a revenue CAGR of 25% over FY17-20F.

Figure 7: WLY’s revenue breakdown by brand in FY17 Figure 8: Moutai’s revenue breakdown by brand in FY17

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 9: Wuliangye Series brands’ sales growth, based on our estimates

SOURCES: CGS-CIMB RESEARCH ESTIMATES, COMPANY REPORTS

Relatively low margins compared to peers for first-layer wholesalers makes WLY more vulnerable to economic downturn Given the weak market demand, brand loyalty from first-layer wholesalers and large distributors is key to sales volume for WLY, in our view. Moutai’s first-layer wholesaler’s current profit margin of 78% is much higher than WLY distributors’ profit margin of 4% based on our tracking data. Despite thin margins, we believe WLY’s first-layer wholesalers can still make solid profits due to strong demand when market conditions are positive. However, when market demand is low due to weak economic activity, we believe the retail selling price (RSP) of 52°Wuliangye could decline and lead to lower profit margins for distributors. Unlike Yanghe (002304 CH, Add, TP:

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Food & Beverages │China Wuliangye Yibin │December 11, 2018

Rmb120) and Luzou Laojia (000568 CH, Not Rated) who are responsible for the development of new markets and have their own salespeople to promote their products in target markets, WLY’s distributors need to bear a higher proportion of the marketing expenses by themselves. We expect WLY to further strengthen its market position and provide distributors with higher profit margins to incentivise distributors to increase sales in the near term. Channel profits are equal to the retail selling price minus the first-layer wholesale price. The first-layer wholesaler profit equals the first-layer wholesale price minus the ex-factory price.

Figure 10: WLY’s first-layer wholesale distributors earn thin profit Figure 11: The distribution channel profit breakdown for 52° margins for 52°Wuliangye compared to Moutai’s 53°Feitian Wuliangye (Rmb/500ml unit) based on our estimates (as at end- Nov 2018)

250% Channel profit derived In Nov 2018, the first layer wholesale from first layer wholesale 200% distributors' margin for 53°Feitian MT was 1100 price =Rmb239 74% pts greater than that of 52°Wuliangye 1000 150% 900 First layer wholesale profit =Rmb31 100% 789 800 50% 700 0% 600

-50% 500

Jul-12 Jul-15 Jul-17 Jul-09 Jul-10 Jul-11 Jul-13 Jul-14 Jul-16 Jul-18

Jan-10 Jan-14 Jan-11 Jan-12 Jan-13 Jan-15 Jan-16 Jan-17 Jan-18 Jan-09 400 The first layer wholesale distributors' margin on 53° Feitian MT Ex-factory price First layer wholesaler profit Channel profit derived from The first layer wholesale distributors' margin on 52°Wuliangye first layer wholesale price

SOURCES: CGS-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH ESTIMATES

Figure 12: WLY’s first-layer wholesalers earn lower profits than Moutai’s and Luzhou Laojiao’s (Rmb/500ml unit)

2500

1988 2000 1720

1500 1059 969 1000 879 789 820 770 640

500

0 53° Feitian Moutai 52°Wuliangye Luzhou Laojiao Cellar 1573

Ex-factory price First layer wholesale price Retail selling price

SOURCES: CGS-CIMB RESEARCH ESTIMATES, JD.COM

Company profile Pricing strategy for its core premium product - 52° Wuliangye WLY’s flagship product, 52°Wuliangye, has strong brand recognition in China, similar to 53° Feitian Moutai. It contributed over 60% of WLY’s revenue in FY17, based on our estimates. A key task for WLY’s management team is to determine the ex-factory price and sales volume targets for 52°Wuliangye to reach an optimised supply and demand, in order to stabilise its retail selling price and maximise profits. In 2013-15, China’s baijiu industry went through an adjustment period, when the premium baijiu segment was adversely affected by anti-corruption measures.

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During this period, the ex-factory price for 52°Wuliangye was close to or even higher than its first-layer wholesale price, which negatively affected its distributors’ margins. We expect WLY to further strengthen its market position and provide distributors with higher margins to incentivise them to increase sales in FY19-20F. Until the beginning of 2017, WLY took advantage of the recovery in the industry to adjust its pricing strategy, leveraging strong demand in tandem with controlling market supply volumes. It successfully de-stocked its channel inventory, and eventually restored and improved its brand image in the premium baijiu market. WLY has implemented various measures to strengthen its pricing system through 1) price hikes: since 2015, WLY has raised its ex-factory price for 52° Wuliangye four times, from Rmb609/500ml unit in 2015 to Rmb659 in Aug 2016, Rmb679 in Mar 2017, Rmb739 in Dec 2017 and Rmb789/500ml unit in 1H18; 2) eliminating sales rebates: it eliminated sales rebates to its distributors in 2Q16 to force distributors to increase quality and sales. In 1Q13-2Q16, WLY’s distributors’ profit came from sales rebates given by WLY to reward the distributor for achieving WLY’s sales volume targets. To obtain the high sales rebates, the majority of WLY’s first-layer wholesalers sold 52°Wuliangye at a lower retail price than the ex-factory price, which led to oversupply in the market that dragged down 52°Wuliangye’s retail selling price close to the ex-factory price; channel profits (retail selling price minus the first-layer wholesale price) shrank to losses (Figure 13); 3) controlling supply volumes to boost retail selling prices: as at end-2016, WLY’s management announced it would cut the supply volume for 52°Wuliangye by at least 25% to stabilise its retail selling price. It continued its aggressive pricing strategy to raise the ex-factory price at a reasonable pace to drive up the wholesale price and retail selling price. Eventually, channel profit margins derived from the first-layer wholesale price reached above 20% (channel profit margins = retail selling price/first-layer wholesale price – 1). In the long term, we believe WLY’s pricing strategy will be similar to Moutai’s, as Moutai is considered the leader in the super-premium baijiu market with over 63% market share vs. WLY’s 26% market share in terms of revenue (as at end-Dec 2017). Too aggressive a pricing strategy could adversely affect WLY’s sales volumes, especially in a weak macro economy, in our view.

Figure 13: 52°Wuliangye’s ex-factory price, first-layer wholesale price and retail selling price (Rmb/500ml unit) 1300

1200 Ex-factory price ≥ the first-layer wholesale price, even the retail 1100 selling price at most time 1000

900

800

700

600

500

400

Jul-10 Jul-12 Jul-15 Jul-11 Jul-13 Jul-14 Jul-16 Jul-17 Jul-18

Jan-11 Jan-13 Jan-16 Jan-10 Jan-12 Jan-14 Jan-15 Jan-17 Jan-18

Ex-factory price The first layer wholesale price Retail selling price

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS, WIND

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Figure 14: WLY’s and Moutai’s first-layer wholesale prices appear Figure 15: 52°Wuliangye ex-factory price is 19% lower than 53° to be moving in line with China PMI since 2016 Feitian Moutai as at Nov 2018 (Rmb/500ml unit)

58 100% 1000 19% ex-factory price gap between 80% Wuliangye and Moutai in Nov 56 900 2018 60% 54 800 40% 52 20% 700 50 0% 600 48 -20% 500 46 -40%

44 -60% 400

Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

Jan-10 Jan-11 Jan-14 Jan-15 Jan-18 Jan-09 Jan-12 Jan-13 Jan-16 Jan-17

Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

Jan-10 Jan-11 Jan-12 Jan-14 Jan-15 Jan-16 Jan-18 Jan-13 Jan-17 53°Feitian Moutai ex-factory price 52° Wuliangye ex-factory price China PMI (LHS) 52° Wuliangye wholesale price YoY (%, RHS)

53°Feitian Moutai wholesale price YoY (%, RHS)

SOURCES: CGS-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH, WIND, COMPANY REPORTS

Diversified product portfolio Like Moutai, in addition to its core premium brand Wuliangye, WLY also has its Series brands that targets the mid- to low-end baijiu market. Series brands contributed 24% of total revenue in FY17, higher than Moutai’s Series Brand sales contribution (which was 10%). WLY aims to make the Series brands an engine of revenue growth, and has streamlined its Series brands product portfolio from 130 products to 49 products in 2017. It is promoting a “4+4” marketing strategy (four national brands plus four regional brands). During its 2017 annual shareholders’ meeting. Management announced that WLY aims to create a new brand with annual sales of Rmb2bn-3bn For the Series brands, WLY currently has two methods of brand management: 1) it has a general agent in the region to manage the brand’s operations, such as WL Spring (五粮春), and WL Mellow (五粮醇) and 2) WLY self-manages certain brands, such as Jianzhuang (尖庄), WL Family (五粮人家), You (友酒).

Figure 16: WLY’s brand segments (as at end-Nov 2018)

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

In addition, to ensure the effective and efficient operations of its large Series brands portfolio, WLY has set up three independent subsidiaries which hold accountability on the profitability of the specific Series brands. 1) WL Tou Tequ brand Sales & Marketing Co manages the WL Touqu and WL Tequ brands, which are in the price range of Rmb200-300/500ml unit. 2) WL Mellow brand Sales & Marketing Co only distributes the WL Mellow brand which was introduced in the market in 1994 and is a sole general distributor of Fujian Shaowu Sugar and Wine Co Ltd (source: Jianiang.com). Sales from WL

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Food & Beverages │China Wuliangye Yibin │December 11, 2018

Mellow have increased from Rmb31m in 1995 to above Rmb1bn in FY17, based on our estimate. 3) WLY liquor series brands Sales & Marketing Co distributes and manages the rest of the brands (which we estimate to be around 60 brands under WLY’s general distribution system), except for the three brands above.

Figure 17: Three independent subsidiaries managing WLY liquor series brands (as at end- Nov 2018)

SOURCES: JD.COM, CGS-CIMB RESEARCH, COMPANY REPORTS

Distribution channel reform to enhance market penetration WLY started to reform its distribution channels in 2016. The company has adopted more proactive sales and distribution policies and reduced its reliance on its top distributors (since 2016). The revenue proportion from its top 5 distributors has declined from 24% in FY14 to 11% in FY17. We expect the proportion to continue to fall to the optimal level of around 5% (in our view) over the next three to five years, which is similar to Moutai, after WLY completes the distribution channel transformation process. Like Moutai, WLY also eliminated unqualified distributors and recruited new and more capable ones to diversify its distribution network in 2017, so that the company can have more control over retail selling prices and channel inventories. In Jun 2017, WLY announced the termination of contracts with six distributors that violated its regional sales policy. In Jul-Aug 2017, WLY announced that it would reduce market supply volumes for another 36 distributors who also violated the regional sales policy (source: xinhuanet.com).

On the flip side, WLY has also carried out its new distribution coverage plan, the “Ten thousand stores project”, in the middle of 2017, with the aim of increasing its retail sales points coverage and distribution network penetration. WLY has completed the first phase of this plan, with over 7,000 retail sales points through collaborating with its distributors, across 46 key cities in China by end-FY17. Also, the number of WLY exclusive stores has increased by over 400 to arrive at 1,200 stores by end-2017. In 1H18, WLY did not open exclusive stores and only renovated existing stores. The company targets to open 200-300 exclusive

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stores in 2H18F. We expect the total number of WLY’s exclusive stores to catch up with Moutai’s 1,423 in the medium term. WLY hired IBM consultants in Apr 2018 to build a new IT system based on big data analysis of end-consumers (source: Jiemian.com). At the same time, it successfully launched an online and offline combined model, i.e. WLY online e- store app, plus physical stores called “WLY e-store” that can process e-store orders in selected areas. Consumers can place orders in “WLY e-store” app, and the orders will be passed to the nearby physical e-store based on customer required delivering address; and the physical e-store will courier the products to the customers.

Figure 18: WLY e-store

SOURCES: CGS-CIMB RESEARCH, WWW.NEWS.CN

SOE reforms WLY’s private placement to issue 85.67m new shares was approved by the China Securities Regulatory Commission (CSRC) on 20 Apr 2018. The private placement involves the shareholding of WLY’s employees and its core distributors. Based on the share subscription calculation, the employee share ownership is estimated at around 0.61%, and that of core distributors is estimated at a maximum of 0.5%. Strategic investors including Taikang Capital Management, Huaan Fund and Kailan Airui have proposed to subscribe to 0.62%, 0.24% and 0.24%, respectively (source: WLY announcements on 12 Dec 2016 and 15 Jul 2017). Yibin State-owned Assets Supervision and Administration Commission’s (SASAC) indirect shareholding has been reduced by 1.24% to 54.83%. We think it is a meaningful step for WLY’s SOE reform. The introduction of shareholding of core distributors aligns the interests of core distributors and WLY and strengthens the relationships within distribution channels, which could improve S&D expense in the long term. The shareholding of WLY employees also provides initiatives to deliver a better sales performance and further improve operating efficiency, in our view. If large distributors can benefit from the potential share price increase in the future, we believe this would improve brand loyalty to WLY and even in economic downturns, we think they may be more willing to accept thinner channel margins. Earnings forecasts In 9M18, WLY reported 33% yoy revenue growth which was the highest among the premium baijiu companies, and 36% yoy net profit growth. Volume: We expect WLY to achieve revenue CAGR of 17% over FY17-20F, mainly driven by baijiu sales volume growth in the super-premium segment. We expect the Wuliangye brand’s sales volumes to increase by a CAGR of 12% and the low- and mid-range Series brands’ sales volumes to rise by a CAGR of 17% in FY17-20F.

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Food & Beverages │China Wuliangye Yibin │December 11, 2018

ASP: We forecast ASP for the premium segment and the low- and mid-priced segment to increase at a CAGR of 2% and CAGR of 7%,over FY17-20F, respectively. We estimate non-baijiu revenue including plastic products, printings, glass bottles and other, representing c.5% of WLY’s revenue in FY17, to stay flat. Gross margin: We expect WLY’s blended gross margin (GM) to decline by 302bp from 60.4% in FY17 to 57.4% in FY20F, as we expect the revenue proportion of the low- and mid-range segment to increase from 24% in FY17 to 29% in FY20F. SG&A ratio: We expect its SG&A ratio to improve by 711bp to 12.4% in FY20F from 19.5% in FY17, as the first-layer wholesale price of 52°Wuliangye has normalised (higher than the ex-factory price). With a recovery in the premium baijiu market, the higher retail selling price support channel margins of above 20%, in our view. We also expect the marketing and promotion expenses ratio to decline in FY18-20F. Net profit growth: We expect WLY to deliver a 20% net profit CAGR over FY17-20F.

Figure 19: WLY’s historical 9M18 performance review and forecasts, based on our estimates (Rmb m) 9M17 9M18 YoY(%) FY17 FY18F YoY(%) Revenue 21,978 29,250 33.1% 30,187 38,642 28.0% Gross Profit 13,297 17,091 28.5% 18,242 22,376 22.7% Gross profit margin (%) 60.5% 58.4% -2.1% 60.4% 57.9% -2.5% Other operating income 22 84 274.2% 142 130 -8.5% Sale and distribution expense -2,697 -3,077 14.1% -3,625 -3,903 7.7% S&D as a % of Rev 12.3% 10.5% -1.7% 12.0% 10.1% -1.9% General Administrative expense -1,613 -1,714 6.3% -2,269 -2,170 -4.3% G&A as a % of Rev 7.3% 5.9% -1.5% 7.5% 5.6% -1.9% Operating profit 9,010 12,361 37.2% 12,490 16,433 31.6% Operating profit margin （ % ） 41.0% 42.3% 1.3% 41.4% 42.5% 1.2% EBIT 9,055 12,396 36.9% 13,522 17,507 29.5% EBIT Margin (%) 41.2% 42.4% 1.2% 44.8% 45.3% 0.5% Net Profit 6,965 9,494 36.3% 9,674 12,620 30.5%

Net profit margin (%) 31.7% 32.5% 0.8% 32.0% 32.7% 0.6% SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 20: Sales volume forecasts by brand (tonnes), based on Figure 21: Revenue forecasts by brand (Rmb m), based on our our estimates estimates

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Company background Wuliangye Yibin Co Ltd (WLY) was established in 1997, and listed on the Shenzhen Stock Exchange in Mar 1998. It is indirectly owned by the State- owned Assets Supervision and Administration Commission of Yibin which has a 54.44% stake (as at end-Oct 2018). WLY’s headquarters are located in Yibin city

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Food & Beverages │China Wuliangye Yibin │December 11, 2018

in Sichuan Province and its core brand, Wuliangye, is one of China’s leading premium baijiu brands with a longstanding history of over 600 years. In FY17, WLY derives 76% of its revenue from its premium/super premium brand, Wuliangye, and its flagship product, 52°Wuliangye, contributes over 60%, based on our estimates. WLY is estimated to have 26% market share of China’s super-premium baijiu market in terms of revenue in 2017, based on our estimates.

Figure 22: WLY’s ownership structure (as at end-Oct 2018)

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 23: Key milestones Date Milestone Mar 1998 Listed on the Shenzhen Stock Exchange. May 2002 Invested to build fruit liquor production capacity. Jul 2008 Acquired 4 companies involved in packaging, manufacturing of glass and moulds, as well as the supply chains of Sichuan Yibin PUSH Group (Unlisted) and Sichuan Yibin Global Glass Manufacturing (Unlisted) to solve related-party transaction issues. Oct 2008 Signed a 30-year cooperation agreement with Juren Investment Co Ltd to enter the health wine market in China nationwide. Jul 2012 Established 7 marketing centres to transform its brand management model to the regional market management model. Oct 2012 Jointly established WLY Finance Co. Ltd with a subsidiary of Agricultural Bank of China (1288 HK, Add, TP: HK$4.90). Wuliangye invested Rmb720m for a 36% stake in the finance company. Aug 2013 Acquired Yongbufengli (Unlisted), a liquor company, for Rmb255m.

Jun 2014 Formed a strategic partnership with JD.com (JD US, Hold, TP: US$23.60) for ecommerce sales for the next three years. The partnership could expand into financial investment, according to the company. Jul 2014 Acquire 51% stake in Henan Wuguchun Liquor (Unlisted) for Rmb255m.

Dec 2014 Invested Rmb45m for a 45% stake in a JV company with 3 institutional investors to sell customised baijiu. Mar 2015 Established 4 sales and marketing companies to manage the Series brands individually.

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

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Figure 24: WLY’s key management Name Title Experience LIU Zhongguo Chairman of Wuliangye Group Mr Liu was appointed as the Chairman and the Deputy Party Secretary in 2011 and was also the general manager of Wuliangye Yibin Co Ltd since Jun 2011. He has been the chairman of Wuliangye sales company and general manager of Yibin Wuliangye Supply & Marketing company . He started his career with Wuliangye in 1993. LI Shuguang Chairman of Wuliangye Yibin Co Mr Li was appointed as the Chairman and Deputy Party Ltd Secretary of Wuliangye Yibin Co Ltd in Mar 2017. He was the deputy director and member of the Party committee of Sichuan Economic and Information Committee in 2012 and 2017. LUO Wei CFO, Deputy General Manager Mr Luo was appointed as the Deputy General Manager and CFO in Mar 2014. He was the Director and General Manager of Yibin Airport Co in 2012-14. PENG Zhifu Secretary of the Board, Deputy Mr Peng was appointed as the Deputy General Manager in

General Manager Apr 1998 and the Secretary of the Board in Jul 2014. SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

SWOT analysis

Figure 25: SWOT analysis for WLY Strengths Weaknesses 1. Strong brand recognition nationwide. 1. Wuliangye is indirectly controlled by the government; and its price hikes must 2. Has over 26% market share in the premium baijiu market in 2017, based on our be approved by the government beforehand. estimates. 2. Wuliangye's distribution channel margin is signifcantly lower than top player, 3. Strong cash position would enable Wuliangye to carry out large M&As and Moutai's. If China's economic environment worsens, Wuliangye may not be able consolidate its market position in the baijiu industry. to offer sufficient incentives to persuade distributors to stick with the company.

Opportunities Threats 1. China's baijiu industry is undergoing consolidation, especially the premium 1. In line with the consumption upgrade trend, many baijiu companies have segment. The market size of the premium segment will expand by a 12% CAGR in upgraded their products to the premium price range; with Yanghe and Luzhou FY17-20F, based on Euromonitor estimates. Laojiao achieving good 9MFY18 results in the premium baijiu market. We think 2. Under the Wuliangye's strong brand umbrella, we expect the sales growth for Wuliangye's market share in the premium market may shrink in the future though its Series brand products to accelerate. because the thin channel margins might not retain its distributors to stay in Wuliangye's distribution network if Wuliangye could not stablise its retail selling price. 2. China's low-end baijiu sales volume has been declining over 2016-17, which poses a threat to Wuliangye's Series brands that target the low-end and mid- range markets. Competition in the mid-priced baijiu market is also intense. Wuliangye's Series brands have not gained a strong position in either the low-end or mid-range markets yet. Hence, we think Wuliangye's Series brands may see

slower sales growth in 2018-20F than other rising brands. SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Risks Macroeconomic slowdown: Within China’s baijiu industry, private companies and individuals now lead consumption (source: www.chyxx.com). If the economic environment deteriorates, business activity related to consumption may be affected, in our view. WLY’s wholesale model means that sales volume tends to be more reliant on business activities, and individual consumption may not be as critical to driving revenue growth. Government policy change: In 2001, the Chinese government adjusted the consumption tax for the baijiu industry, which resulted in a higher tax burden for baijiu companies. In 2018, to date, there have been concerns that the Chinese government may raise VAT for baijiu companies. If this hike materialises in the future, it would have an adverse impact on baijiu consumption, which could lead to another adjustment cycle, in our view. Unsuccessful marketing strategy for its Series Brands: in recent years, WLY has invested in marketing to expand its Series Brands’ market coverage geographically. However, if the brand’s performance is weaker than expected, we believe this could hurt the company’s flagship brand value and long-term sustainability.

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Valuation and recommendation We initiate coverage on WLY with a Hold rating. Although WLY’s valuation looks attractive to us, we are still waiting to see WLY’s channel reform bear fruit. WLY’s new chairman, Li Shuguang, joined the company in Mar 2017 and proposed the new marketing strategy of “opening ten thousand stores” in China to help expand WLY’s distribution network. We derive our TP of Rmb55 using a DCF methodology (WACC: 14.5%, terminal growth: 3.0%). WLY is now trading at 14.2x FY19F P/E, 0.6 s.d. below its historical average P/E of 22.4x since 2000. Based on our TP, WLY’s P/E would remain at this level in FY19F. As at end-Sep 2018, WLY holds net cash of Rmb40.6bn, which is around 20% of WLY’s current market cap of Rmb205.0bn.

Figure 26: DCF valuation, based on our estimates (Rmb, m) FY18F FY19F FY20F FY21F FY22F FY23F FY24F FY25F FY26F FY27F FY28F EBIT 16,483 18,944 22,116 24,933 27,858 30,843 33,837 36,779 39,605 42,248 44,641 Taxes -4,270 -4,873 -5,649 -6,109 -6,825 -7,557 -8,290 -9,011 -9,703 -10,351 -10,937 EBIT, tax-affected 12,214 14,071 16,467 18,825 21,032 23,287 25,547 27,768 29,902 31,898 33,704 Add: Depreciation & amortisation 498 505 512 564 596 622 642 654 658 653 639 Add Changes in Working capital -3,572 -1,549 -2,091 -2,046 -2,271 -2,498 -2,650 -2,783 -2,894 -2,979 -3,035 Less Capital Expenditure -200 -200 -200 -219 -237 -254 -269 -283 -294 -303 -309 Free Cash Flow to firm 8,940 12,827 14,687 17,125 19,121 21,158 23,270 25,356 27,372 29,269 31,000 YoY growth 2% 43% 15% 17% 12% 11% 10% 9% 8% 7% 6%

Key assumptions NPV of FY18-22F Cash flow 45,391 Industry average beta 1.08 NPV of FY23-28F Cash Flow 56,703 Risk free rate 3.4% NPV of Terminal Value 71,262 Risk premium 10.4% Enterprise Value 173,355 Cost of equity 14.6% Add Net cash/(Net Debt) 43,285 Cost of Debt 3.7% Less Minority -1,878 Debt % 0.3% Equity value of firm 214,762 Tax rate 25.0% Share outstanding (m) 3,882 WACC 14.5% Target price (Rmb) 55 Terminal growth rate 3.0%

SOURCES: CGS-CIMB RESEARCH ESTIMATES, BLOOMBERG

Figure 27: WLY’s 12-month forward P/E (x) Figure 28: WLY’s 12-month forward EV/EBITDA (x)

Current P/E (x): 14.2; Mean:22.4; +1STD: 36.8; -1STD: 8.0 Current EV/EBITDA (x): 8.5; Mean: 12.6; +1STD: 22.3; -1STD: 2.8

60 12M forward PE(x) 30 12M forward EV/Ebitda Mean Mean 50 +1 std +1 std -1 std -1 std 40 20

30

20 10

10

0 0

Mar-02 Mar-06 Mar-10 Mar-14 Mar-18 Mar-03 Mar-04 Mar-05 Mar-07 Mar-08 Mar-09 Mar-11 Mar-12 Mar-13 Mar-15 Mar-16 Mar-17

Feb-01 Feb-05 Feb-06 Feb-10 Feb-11 Feb-16 Feb-00 Feb-02 Feb-03 Feb-04 Feb-07 Feb-08 Feb-09 Feb-12 Feb-13 Feb-14 Feb-15 Feb-17 Feb-18

SOURCES: CGS-CIMB RESEARCH ESTIMATES, BLOOMBERG SOURCES: CGS-CIMB RESEARCH ESTIMATES, BLOOMBERG

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Figure 29: Peer comparison Company Name Bloomberg Recom Last Quoted Market P/E (x) 3yrs P/BV (x) EV/EBITDA (x) ROE (%) Dividend Yield (%) Ticker price currency cap EPS CAGR Local (US$, m) 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F Kweichow Moutai Co Ltd-A 600519 CH ADD 583.0 Rmb 106,147 21.6 18.9 15.9 19% 6.6 5.5 4.6 12.9 11.0 9.0 33.4 31.7 31.5 2.4 2.7 3.2 Jiangsu Yanghe Brewery -A 002304 CH ADD 99.4 Rmb 21,700 18.2 15.9 13.2 19% 4.4 3.9 3.4 12.5 10.6 8.5 25.9 26.0 27.3 3.2 3.6 4.4 Wuliangye Yibin Co Ltd-A 000858 CH HOLD 52.8 Rmb 29,717 16.1 14.2 12.3 20% 3.5 3.1 2.8 9.6 8.1 6.7 22.4 22.9 23.8 3.2 3.7 4.2 Luzhou Laojiao Co Ltd-A 000568 CH NR 42.5 Rmb 9,014 18.0 14.5 12.0 25% 3.7 3.2 2.8 11.8 9.7 8.1 21.0 22.9 24.1 3.6 4.5 5.3 Anhui Gujing Distillery Co-A 000596 CH NR 58.0 Rmb 3,853 18.0 14.4 12.2 28% 3.7 3.0 2.4 10.7 8.9 7.8 21.9 22.0 21.2 1.8 2.2 2.4 Shanxi Xinghuacun Fen Wine-A 600809 CH NR 38.1 Rmb 4,786 21.9 16.8 13.5 37% 5.2 4.3 3.5 14.2 11.3 9.5 24.5 26.5 27.1 2.1 2.6 3.3 Jiugui Liquor Co Ltd-A 000799 CH NR 17.7 Rmb 834 22.7 16.0 12.1 39% 2.6 2.4 2.1 12.9 9.7 7.3 12.2 15.2 18.0 1.3 1.7 1.7 Beijing Shunxin Agricult-A 000860 CH NR 35.7 Rmb 2,948 25.0 17.0 12.9 53% 2.7 2.4 2.1 15.0 10.9 9.3 11.0 14.1 15.2 1.2 1.7 1.9 Xinjiang Yilite Industry-A 600197 CH NR 13.9 Rmb 891 13.2 10.4 8.6 26% 2.3 2.0 1.6 NA NA NA 17.9 19.3 20.0 1.9 2.2 2.8 Hebei Hengshui Laobaigan-A 600559 CH NR 13.8 Rmb 1,334 22.3 15.3 12.0 63% 4.2 3.6 3.1 16.0 11.2 9.8 20.2 25.1 26.1 2.4 3.8 5.5 Shede Spirits Co Ltd-A 600702 CH NR 25.1 Rmb 1,225 23.9 16.4 11.1 75% 3.0 2.5 2.1 16.1 11.7 8.9 13.7 16.5 19.2 1.0 1.4 1.8 Sichuan Swellfun Co Ltd-A 600779 CH NR 32.6 Rmb 2,308 25.5 18.2 14.1 50% 8.4 6.9 5.6 18.3 13.9 10.9 34.3 39.8 44.8 3.0 4.3 5.9 Anhui Yingjia Distillery C-A 603198 CH NR 15.2 Rmb 1,759 14.8 12.7 12.3 14% 2.8 2.6 2.5 10.0 8.7 7.8 18.0 19.3 19.9 NA NA NA Jiangsu King'S Luck Brewer-A 603369 CH NR 15.8 Rmb 2,871 16.9 13.6 11.2 25% 3.3 2.8 2.3 11.7 9.6 8.3 19.7 21.0 21.7 1.9 2.3 2.8 Anhui Kouzi Distillery Co -A 603589 CH NR 36.0 Rmb 3,126 14.9 12.4 10.4 23% 3.5 3.0 2.5 10.5 9.1 8.3 24.0 24.8 25.0 2.4 2.9 3.0 Average in China domestic baijiu market 19.5 15.1 12.3 34% 4.0 3.4 2.9 13.0 10.3 8.6 21.3 23.1 24.3 2.2 2.8 3.4 Tingyi (Cayman Isln) Hldg Co 322 HK HOLD 10.2 HK$ 7,361 19.2 17.0 15.0 23% 2.6 2.4 2.2 6.5 6.3 5.9 13.2 13.4 14.2 2.4 2.8 3.1 Uni-President China Holdings 220 HK REDUCE 6.6 HK$ 3,648 23.3 20.1 18.2 16% 1.9 1.8 1.8 8.8 8.3 7.9 8.3 9.1 9.9 3.4 3.9 4.5 Want Want China Holdings Ltd 151 HK ADD 5.4 HK$ 8,491 18.9 17.5 15.7 6% 4.2 3.6 3.2 10.8 10.0 9.6 24.1 22.1 21.2 1.7 2.5 2.8 China Mengniu Dairy Co 2319 HK ADD 24.0 HK$ 12,062 26.8 21.6 18.6 29% 3.3 3.0 2.7 15.4 13.1 11.4 12.9 14.4 15.1 1.1 1.4 1.6 Tsingtao Brewery Co Ltd-H 168 HK REDUCE 30.7 HK$ 5,927 24.4 22.6 20.1 13% 2.0 1.9 1.8 10.6 9.7 8.6 8.5 8.6 9.1 1.2 1.3 1.5 China Resources Beer Holding 291 HK ADD 27.6 HK$ 11,561 30.1 22.6 19.5 51% 4.0 3.7 3.4 13.8 10.9 9.3 13.8 17.3 18.2 0.9 1.3 1.7 Dali Foods Group Co Ltd 3799 HK NR 5.7 HK$ 9,866 17.8 15.7 13.6 14% 4.6 4.0 3.6 11.3 9.9 8.6 26.7 27.4 28.3 3.3 3.8 4.0 Average in HK market 22.9 19.6 17.3 22% 3.2 2.9 2.7 11.0 9.7 8.8 15.4 16.1 16.6 2.0 2.4 2.7 Diageo Plc DGE LN NR 2,828.5 GBP 86,449 24.3 22.4 20.8 4% 6.7 7.3 7.9 18.7 17.4 16.4 28.4 32.2 33.0 2.3 2.4 2.5 Anheuser-Busch Inbev Sa/Nv ABI BB NR 62.0 EUR 142,459 17.6 14.7 13.1 10% 1.8 1.7 1.6 11.7 11.3 10.6 10.7 12.7 13.4 3.3 3.1 3.1 Ambev Sa ABEV3 BZ NR 15.9 BRL 63,775 20.5 18.9 16.9 26% 4.5 4.3 4.1 11.5 10.8 9.8 24.0 25.0 26.3 3.5 4.7 5.0 Constellation Brands Inc-A STZ US NR 187.3 US$ 35,604 21.9 19.8 18.2 -5% 4.6 3.1 2.8 16.4 15.0 13.7 23.1 21.8 16.8 1.1 1.6 1.7 Carlsberg As-B CARLB DC NR 713.6 DKK 16,477 20.4 19.0 17.4 71% 2.2 2.1 2.0 9.5 9.1 8.7 10.9 11.3 11.7 2.4 2.6 2.8 Molson Coors Brewing Co -B TAP US NR 62.7 US$ 13,609 12.6 12.6 12.0 -7% 1.0 0.9 0.9 9.5 9.4 9.3 8.1 7.5 7.6 2.7 3.3 4.0 Heineken Nv HEIA NA NR 78.3 EUR 51,329 19.2 17.6 16.1 13% 3.0 2.7 2.6 10.7 10.2 9.6 16.1 15.9 16.1 2.0 2.1 2.3 Asahi Group Holdings Ltd 2502 JP NR 4,380.0 JPY 18,728 13.7 13.0 12.2 5% 1.7 1.6 1.4 9.8 9.5 9.1 12.5 12.5 12.3 2.1 2.3 2.5 Kirin Holdings Co Ltd 2503 JP NR 2,400.5 JPY 19,399 13.8 13.7 13.1 -12% 2.2 2.0 1.8 10.2 9.9 9.4 16.2 15.3 15.0 2.0 2.3 2.6 Thai Beverage Pcl THBEV SP ADD 0.6 S$ 10,701 15.5 13.8 12.9 13% 2.5 2.7 2.5 16.0 15.9 14.9 16.9 16.9 17.1 2.9 3.0 3.3 Pernod Ricard Sa RI FP NR 138.6 EUR 41,868 24.2 22.4 20.6 4% 2.5 2.3 2.2 16.7 15.9 14.9 10.8 10.7 11.0 1.7 2.0 2.3 United Spirits Ltd UNSP IN NR 614.0 INR 6,210 85.1 57.3 46.1 14% 18.6 13.8 10.5 43.5 33.4 28.6 23.9 27.1 25.4 0.1 0.2 0.4 Brown-Forman Corp-Class B BF/B US NR 46.4 US$ 22,145 29.7 27.2 25.2 7% 18.5 13.4 11.3 21.9 20.8 19.6 60.2 55.4 48.9 1.3 1.4 1.5 Hite Jinro Co Ltd 000080 KS NR 17,600.0 KRW 1,091 31.2 24.0 20.7 67% 1.0 1.1 1.1 9.6 9.1 8.8 3.3 4.5 5.1 4.4 4.5 4.6 Remy Cointreau RCO FP NR 101.1 EUR 5,862 33.4 31.6 27.0 8% 3.7 3.4 3.1 21.0 19.5 17.3 11.5 11.3 12.2 1.7 1.7 1.9 Davide Campari-Milano Spa CPR IM NR 7.6 EUR 10,047 35.2 31.3 27.9 -4% 4.0 3.6 3.3 21.9 20.2 18.5 11.7 11.5 11.3 0.7 0.7 0.8 C&C Group Plc GCC ID NR 2.9 EUR 1,038 13.2 11.3 9.9 11% 1.8 1.7 1.6 11.8 9.8 9.0 12.5 14.2 15.1 5.0 5.0 5.2 Becle Sab De Cv CUERVO* MM NR 23.4 MXN 4,203 22.1 18.8 15.5 1% 1.8 1.7 1.6 13.2 11.7 10.2 7.7 9.3 10.2 2.6 2.7 3.1 Sapporo Holdings Ltd 2501 JP NR 2,390.0 JPY 1,665 22.4 22.5 21.9 -8% 1.0 1.0 1.0 11.6 11.6 11.4 4.8 4.6 4.6 1.7 1.7 1.6 Vina Concha Y Toro Sa CONCHA CI NR 1,334.8 CLP 1,470 20.7 16.5 13.6 14% 1.8 1.7 NA 13.5 11.2 9.9 8.7 10.5 11.3 1.8 2.0 3.0 Treasury Wine Estates Ltd TWE AU NR 14.2 AUD 7,338 28.9 22.5 18.6 15% 3.0 2.8 2.6 17.3 14.2 12.0 10.0 12.7 14.7 2.2 2.9 3.5

Average in International market 25.0 21.5 19.0 12% 4.2 3.6 3.3 15.5 14.1 12.9 15.8 16.3 16.1 2.3 2.5 2.8 *Not rated companies’ forecasts are based on Bloomberg consensus estimates. NOTE: AS AT 11 DEC 2018 SOURCES: CGS-CIMB RESEARCH ESTIMATES, BLOOMBERG

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Food & Beverages │China Wuliangye Yibin │December 11, 2018

BY THE NUMBERS

P/BV vs ROE 12-mth Fwd FD Core P/E vs FD Core EPS 6.50 24.0% 28.0 Growth 49.0% 6.00 23.0% 26.0 44.0% 5.50 22.0% 24.0 39.0% 5.00 21.0% 4.50 20.0% 22.0 34.0% 4.00 19.0% 20.0 29.0% 3.50 18.0% 18.0 24.0% 3.00 17.0% 16.0 19.0% 2.50 16.0% 2.00 15.0% 14.0 14.0% 1.50 14.0% 12.0 9.0% Jan-14A Jan-15A Jan-16A Jan-17A Jan-18F Jan-19F Jan-14A Jan-15A Jan-16A Jan-17A Jan-18F Jan-19F

Rolling P/BV (x) (lhs) ROE (rhs) 12-mth Fwd Rolling FD Core P/E (x) (lhs) FD Core EPS Growth (rhs)

Profit & Loss

(Rmbm) Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F Total Net Revenues 24,571 30,329 38,772 43,052 48,862 Gross Profit 15,315 18,384 22,506 24,865 28,114 Operating EBITDA 9,004 12,979 16,931 19,399 22,577 Depreciation And Amortisation -539 -495 -498 -505 -512 Operating EBIT 8,465 12,484 16,433 18,894 22,066 Financial Income/(Expense) 766 891 944 945 941 Pretax Income/(Loss) from Assoc. 0 0 0 0 0 Non-Operating Income/(Expense) 107 17 50 50 50 Profit Before Tax (pre-EI) 9,363 13,411 17,441 19,903 23,071 Exceptional Items Pre-tax Profit 9,337 13,392 17,427 19,889 23,057 Taxation -2,281 -3,306 -4,270 -4,873 -5,649 Exceptional Income - post-tax Profit After Tax 7,057 10,086 13,158 15,016 17,408 Minority Interests -272 -412 -538 -614 -712 Preferred Dividends FX Gain/(Loss) - post tax Other Adjustments - post-tax Net Profit 6,785 9,674 12,620 14,403 16,697 Recurring Net Profit 6,804 9,688 12,630 14,413 16,707

Fully Diluted Recurring Net Profit 6,804 9,688 12,630 14,413 16,707

Cash Flow

(Rmbm) Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F EBITDA 9,004 12,979 16,931 19,399 22,577 Cash Flow from Invt. & Assoc. Change In Working Capital 4,070 -742 -3,572 -1,549 -2,091 (Incr)/Decr in Total Provisions Other Non-Cash (Income)/Expense Other Operating Cashflow -1,378 -2,471 -3,276 -3,878 -4,658 Net Interest (Paid)/Received 0 0 0 0 0 Tax Paid Cashflow From Operations 11,697 9,766 10,084 13,972 15,829 Capex -307 -216 -200 -200 -200 Disposals Of FAs/subsidiaries Acq. Of Subsidiaries/investments Other Investing Cashflow 146 15 0 0 0 Cash Flow From Investing -161 -201 -200 -200 -200 Debt Raised/(repaid) Proceeds From Issue Of Shares Shares Repurchased Dividends Paid -3,212 -3,618 -6,582 -7,512 -8,709 Preferred Dividends Other Financing Cashflow 18 -22 0 0 0 Cash Flow From Financing -3,194 -3,639 -6,582 -7,512 -8,709 Total Cash Generated 8,342 5,926 3,301 6,259 6,920 Free Cashflow To Equity 11,536 9,565 9,884 13,772 15,629

Free Cashflow To Firm 11,536 9,565 9,884 13,772 15,629 SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

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BY THE NUMBERS… cont’d

Balance Sheet

(Rmbm) Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F Total Cash And Equivalents 34,666 40,592 43,893 50,152 57,072 Total Debtors 10,310 11,932 14,065 15,546 17,565 Inventories 9,257 10,558 12,004 12,810 13,893 Total Other Current Assets 272 198 147 149 151 Total Current Assets 54,505 63,280 70,109 78,657 88,682 Fixed Assets 5,432 5,293 5,009 4,718 4,420 Total Investments 796 864 864 864 864 Intangible Assets 404 401 387 373 359 Total Other Non-Current Assets 1,038 1,085 1,085 1,085 1,085 Total Non-current Assets 7,670 7,643 7,345 7,040 6,729 Short-term Debt Current Portion of Long-Term Debt Total Creditors 12,596 13,323 13,280 14,020 15,033 Other Current Liabilities 1,092 2,645 2,645 2,645 2,645 Total Current Liabilities 13,688 15,968 15,924 16,664 17,678 Total Long-term Debt Hybrid Debt - Debt Component Total Other Non-Current Liabilities 281 280 280 280 280 Total Non-current Liabilities 281 280 280 280 280 Total Provisions 0 0 0 0 0 Total Liabilities 13,969 16,248 16,205 16,945 17,958 Shareholders' Equity 47,077 53,334 59,371 66,262 74,249 Minority Interests 1,129 1,340 1,878 2,492 3,203

Total Equity 48,206 54,674 61,249 68,753 77,453

Key Ratios

Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F Revenue Growth 13.3% 23.0% 28.0% 11.0% 13.5% Operating EBITDA Growth 10.8% 44.1% 30.5% 14.6% 16.4% Operating EBITDA Margin 36.7% 43.0% 43.8% 45.2% 46.3% Net Cash Per Share (Rmb) 9.13 10.69 11.31 12.92 14.70 BVPS (Rmb) 12.40 14.05 15.30 17.07 19.13 Gross Interest Cover N/A N/A N/A N/A N/A Effective Tax Rate 24.4% 24.7% 24.5% 24.5% 24.5% Net Dividend Payout Ratio 50.4% 52.1% 52.1% 52.1% 52.1% Accounts Receivables Days 137.6 126.9 116.8 120.6 119.6 Inventory Days 355.1 302.7 253.1 249.0 235.5 Accounts Payables Days 74.40 95.74 86.95 84.80 84.49 ROIC (%) 49% 96% 122% 113% 123% ROCE (%) 20.0% 26.0% 30.0% 30.5% 31.5%

Return On Average Assets 11.0% 13.8% 16.5% 17.3% 18.2%

Key Drivers

Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F ASP (% chg, main prod./serv.) -6.1% 14.1% -2.9% 2.9% 3.4% Unit sales grth (%, main prod./serv.) 8.3% 21.0% 33.4% 8.0% 10.1% Util. rate (%, main prod./serv.) N/A N/A N/A N/A N/A ASP (% chg, 2ndary prod./serv.) N/A N/A N/A N/A N/A Unit sales grth (%,2ndary prod/serv) N/A N/A N/A N/A N/A Util. rate (%, 2ndary prod/serv) N/A N/A N/A N/A N/A ASP (% chg, tertiary prod/serv) N/A N/A N/A N/A N/A Unit sales grth (%,tertiary prod/serv) N/A N/A N/A N/A N/A Util. rate (%, tertiary prod/serv) N/A N/A N/A N/A N/A Unit raw mat ASP (%chg,main) N/A N/A N/A N/A N/A Total Export Sales Growth (%) N/A N/A N/A N/A N/A

Export Sales/total Sales (%) N/A N/A N/A N/A N/A SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

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Navigating China Food & Beverages │December 11, 2018

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Further, CGS-CIMB, CIMB, their respective affiliates and their respective related corporations (including CGIFHL, CIMBG and their respective related corporations) do and seek to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory, underwriting or placement services for or relating to such company(ies) as well as solicit such investment, advisory or other services from any entity mentioned in this report. CGS-CIMB, CIMB or their respective affiliates (including CGIFHL, CIMBG and their respective related corporations) may enter into an agreement with the company(ies) covered in this report relating to the production of research reports. 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Information barriers and other arrangements may be established where necessary to prevent conflicts of interests arising. However, the analyst(s) may receive compensation that is based on his/their coverage of company(ies) in the performance of his/their duties or the performance of his/their recommendations and the research personnel involved in the preparation of this report may also participate in the solicitation of the businesses as described above. In reviewing this research report, an investor should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additional information is, subject to the duties of confidentiality, available on request. Reports relating to a specific geographical area are produced by the corresponding CGS-CIMB entity as listed in the table below. 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Country CGS-CIMB Entity Regulated by Hong Kong CGS-CIMB Securities (Hong Kong) Limited Securities and Futures Commission Hong Kong India CGS-CIMB Securities (India) Private Limited Securities and Exchange Board of India (SEBI) Indonesia PT CGS-CIMB Sekuritas Indonesia Financial Services Authority of Indonesia Singapore CGS-CIMB Research Pte. Ltd. Monetary Authority of Singapore South Korea CGS-CIMB Securities (Hong Kong) Limited, Korea Branch Financial Services Commission and Financial Supervisory Service Thailand CGS-CIMB Securities (Thailand) Co. Ltd. Securities and Exchange Commission Thailand

Reports relating to Malaysia are produced by CIMB as listed in the table below:

Country CIMB Entity Regulated by Malaysia CIMB Investment Bank Berhad Securities Commission Malaysia

Other Significant Financial Interests: (i) As of December 10, 2018 CGS-CIMB / CIMB has a proprietary position in the securities (which may include but not limited to shares, warrants, call warrants and/or any other derivatives) in the following company or companies covered or recommended in this report: (a) - (ii) Analyst Disclosure: As of EFAGenReportDate|, the analyst(s) who prepared this report, and the associate(s), has / have an interest in the securities (which may include but not limited to shares, warrants, call warrants and/or any other derivatives) in the following company or companies covered or recommended in this report: (a) -

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Hong Kong: This report is issued and distributed in Hong Kong by CGS-CIMB Securities (Hong Kong) Limited (“CHK”) which is licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities), Type 4 (advising on securities) and Type 6 (advising on corporate

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finance) activities. Any investors wishing to purchase or otherwise deal in the securities covered in this report should contact the Head of Sales at CGS-CIMB Securities (Hong Kong) Limited. The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CHK has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only to clients of CHK. CHK does not make a market on other securities mentioned in the report. None of the analyst(s) or the associates serve as an officer of the listed corporation mentioned in this report. CIMB does not have an officer serving in any of the listed corporation mentioned in this report CIMB does not receive any compensation or other benefits from any of the listed corporation mentioned, relating to the production of research reports.

India: This report is issued and distributed in India by CGS-CIMB Securities (India) Private Limited (“CGS-CIMB India”) which is registered with the National Stock Exchange of India Limited and BSE Limited as a trading and clearing member under the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992. In accordance with the provisions of Regulation 4(g) of the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013, CGS-CIMB India is not required to seek registration with the Securities and Exchange Board of India (“SEBI”) as an Investment Adviser. CGS-CIMB India is registered with SEBI as a Research Analyst pursuant to the SEBI (Research Analysts) Regulations, 2014 ("Regulations"). This report does not take into account the particular investment objectives, financial situations, or needs of the recipients. It is not intended for and does not deal with prohibitions on investment due to law/jurisdiction issues etc. which may exist for certain persons/entities. Recipients should rely on their own investigations and take their own professional advice before investment. The report is not a “prospectus” as defined under Indian Law, including the Companies Act, 2013, and is not, and shall not be, approved by, or filed or registered with, any Indian regulator, including any Registrar of Companies in India, SEBI, any Indian stock exchange, or the Reserve Bank of India. No offer, or invitation to offer, or solicitation of subscription with respect to any such securities listed or proposed to be listed in India is being made, or intended to be made, to the public, or to any member or section of the public in India, through or pursuant to this report. The research analysts, strategists or economists principally responsible for the preparation of this research report are segregated from the other activities of CGS-CIMB India and they have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues, client feedback and competitive factors. Research analysts', strategists' or economists' compensation is not linked to investment banking or capital markets transactions performed or proposed to be performed by CGS-CIMB India or its affiliates.

C GS-CIMB India has not received any investment banking related compensation from the companies mentioned in the report in the past 12 months. CGS-CIMB India has not received any compensation from the companies mentioned in the report in the past 12 months. Indonesia: This report is issued and distributed by PT CGS-CIMB Sekuritas Indonesia (“CGS-CIMB Indonesia”). The views and opinions in this research report are our own as of the date hereof and are subject to change. CGS-CIMB Indonesia has no obligation to update its opinion or the information in this research report. Neither this report nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens wherever they are domiciled or to Indonesian residents except in compliance with applicable Indonesian capital market laws and regulations. This research report is not an offer of securities in Indonesia. The securities referred to in this research report have not been registered with the Financial Services Authority (Otoritas Jasa Keuangan) pursuant to relevant capital market laws and regulations, and may not be offered or sold within the territory of the Republic of Indonesia or to Indonesian citizens through a public offering or in circumstances which constitute an offer within the meaning of the Indonesian capital market law and regulations. Ireland: CGS-CIMB is not an investment firm authorised in the Republic of Ireland and no part of this document should be construed as CGS-CIMB acting as, or otherwise claiming or representing to be, an investment firm authorised in the Republic of Ireland. Malaysia: This report is distributed in Malaysia by CIMB solely for the benefit of and for the exclusive use of our clients. Recipients of this report are to contact CIMB, at 17th Floor Menara CIMB No. 1 Jalan Stesen Sentral 2, Kuala Lumpur Sentral 50470 Kuala Lumpur, Malaysia, in respect of any matters arising from or in connection with this report. CIMB has no obligation to update, revise or reaffirm its opinion or the information in this research reports after the date of this report. New Zealand: In New Zealand, this report is for distribution only to persons who are wholesale clients pursuant to section 5C of the Financial Advisers Act 2008. Singapore: This report is issued and distributed by CGS-CIMB Research Pte Ltd (“CGS-CIMBR”). CGS-CIMBR is a financial adviser licensed under the Financial Advisers Act, Cap 110 (“FAA”) for advising on investment products, by issuing or promulgating research analyses or research reports, whether in electronic, print or other form. Accordingly CGS-CIMBR is a subject to the applicable rules under the FAA unless it is able to avail itself to any prescribed exemptions. Recipients of this report are to contact CGS-CIMB Research Pte Ltd, 50 Raffles Place, #16-02 Singapore Land Tower, Singapore in respect of any matters arising from, or in connection with this report. CGS-CIMBR has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only. If you have not been sent this report by CGS-CIMBR directly, you may not rely, use or disclose to anyone else this report or its contents. If the recipient of this research report is not an accredited investor, expert investor or institutional investor, CGS-CIMBR accepts legal responsibility for the contents of the report without any disclaimer limiting or otherwise curtailing such legal responsibility. If the recipient is an accredited investor, expert investor or institutional investor, the recipient is deemed to acknowledge that CGS-CIMBR is exempt from certain requirements under the FAA and its attendant regulations, and as such, is exempt from complying with the following : (a) Section 25 of the FAA (obligation to disclose product information); (b) Section 27 (duty not to make recommendation with respect to any investment product without having a reasonable basis where you may be reasonably expected to rely on the recommendation) of the FAA; (c) MAS Notice on Information to Clients and Product Information Disclosure [Notice No. FAA-N03]; (d) MAS Notice on Recommendation on Investment Products [Notice No. FAA-N16];

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(e) Section 36 (obligation on disclosure of interest in securities), and (f) any other laws, regulations, notices, directive, guidelines, circulars and practice notes which are relates to the above, to the extent permitted by applicable laws, as may be amended from time to time, and any other laws, regulations, notices, directive, guidelines, circulars, and practice notes as we may notify you from time to time. In addition, the recipient who is an accredited investor, expert investor or institutional investor acknowledges that a CGS-CIMBR is exempt from Section 27 of the FAA, the recipient will also not be able to file a civil claim against CGS-CIMBR for any loss or damage arising from the recipient’s reliance on any recommendation made by CGS-CIMBR which would otherwise be a right that is available to the recipient under Section 27 of the FAA, the recipient will also not be able to file a civil claim against CGS-CIMBR for any loss or damage arising from the recipient’s reliance on any recommendation made by CGS-CIMBR which would otherwise be a right that is available to the recipient under Section 27 of the FAA. CGS-CIMBR, its affiliates and related corporations, their directors, associates, connected parties and/or employees may own or have positions in securities of the company(ies) covered in this research report or any securities related thereto and may from time to time add to or dispose of, or may be materially interested in, any such securities. Further, CGS-CIMBR, its affiliates and its related corporations do and seek to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory, underwriting or placement services for or relating to such company(ies) as well as solicit such investment, advisory or other services from any entity mentioned in this report. As of December 10, 2018, CGS-CIMBR does not have a proprietary position in the recommended securities in this report. CGS-CIMBR does not make a market on other securities mentioned in the report. South Korea: This report is issued and distributed in South Korea by CGS-CIMB Securities (Hong Kong) Limited, Korea Branch (“CGS-CIMB Korea”) which is licensed as a cash equity broker, and regulated by the Financial Services Commission and Financial Supervisory Service of Korea. In South Korea, this report is for distribution only to professional investors under Article 9(5) of the Financial Investment Services and Capital Market Act of Korea (“FSCMA”). Spain: This document is a research report and it is addressed to institutional investors only. The research report is of a general nature and not personalised and does not constitute investment advice so, as the case may be, the recipient must seek proper advice before adopting any investment decision. This document does not constitute a public offering of securities. CGS-CIMB is not registered with the Spanish Comision Nacional del Mercado de Valores to provide investment services. Sweden: This report contains only marketing information and has not been approved by the Swedish Financial Supervisory Authority. The distribution of this report is not an offer to sell to any person in Sweden or a solicitation to any person in Sweden to buy any instruments described herein and may not be forwarded to the public in Sweden. Switzerland: This report has not been prepared in accordance with the recognized self-regulatory minimal standards for research reports of banks issued by the Swiss Bankers’ Association (Directives on the Independence of Financial Research). Thailand: This report is issued and distributed by CGS-CIMB Securities (Thailand) Co. Ltd. (“CGS-CIMB Thailand”) based upon sources believed to be reliable (but their accuracy, completeness or correctness is not guaranteed). The statements or expressions of opinion herein were arrived at after due and careful consideration for use as information for investment. Such opinions are subject to change without notice and CGS-CIMB Thailand has no obligation to update its opinion or the information in this research report. CGS-CIMB Thailand may act or acts as Market Maker, and issuer and offerer of Derivative Warrants and Structured Note which may have the following securities as its underlying securities. Investors should carefully read and study the details of the derivative warrants in the prospectus before making investment decisions. AAV, ADVANC, AMATA, AOT, AP, BANPU, BBL, BCH, BCP, BCPG, BDMS, BEAUTY, BEM, BGRIM, BJC, BH, BLA, BLAND, BPP, BTS, CBG, CENTEL, CHG, CK, CKP, COM7, CPALL, CPF, CPN, DELTA, DTAC, EA, EGCO, EPG, ERW, ESSO, GGC, GFPT, GLOBAL, GLOW, GPSC, GUNKUL, HANA, HMPRO, INTUCH, IRPC, ITD, IVL, KBANK, KCE, KKP, KTB, KTC, LH, LPN, MAJOR, MEGA, MINT, MTLS, ORI, PRM, PSH, PSL, PTG, PTT, PTTEP, PTTGC, QH, RATCH, ROBINS, RS, SAWAD, SCB, SCC, SGP, SIRI, SPALI, SPRC, STA, STEC, SUPER, TASCO, TCAP, THAI, THANI, TISCO, TKN, TMB, TOA, TOP, TPIPL, TPIPP, TRUE, TTW, TU, TVO, UV, WHA, WHAUP, WORK. Corporate Governance Report: The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. CGS-CIMB Thailand does not confirm nor certify the accuracy of such survey result.

Score Range: 90 - 100 80 – 89 70 - 79 Below 70 or No Survey Result Description: Excellent Very Good Good N/A

United Arab Emirates: The distributor of this report has not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the United Arab Emirates. This report is strictly private and confidential and has not been reviewed by, deposited or registered with UAE Central Bank or any other licensing authority or governmental agencies in the United Arab Emirates. This report is being issued outside the United Arab Emirates to a limited number of institutional investors and must not be provided to any person other than the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to lead to the sale of investments under any subscription agreement or the conclusion of any other contract of whatsoever nature within the territory of the United Arab Emirates. United Kingdom and European Economic Area (EEA): In the United Kingdom and European Economic Area, this material is also being distributed by CGS-CIMB Securities (UK) Limited (“CGS-CIMB UK”). CGS-CIMB UK is authorized and regulated by the Financial Conduct Authority and its registered office is at 27 Knightsbridge, London, SW1X7YB. The material distributed by CGS-CIMB UK has been prepared in accordance

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with CGS-CIMB’s policies for managing conflicts of interest arising as a result of publication and distribution of this material. This material is for distribution only to, and is solely directed at, selected persons on the basis that those persons: (a) are eligible counterparties and professional clients of CGS-CIMB UK; (b) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Order”), (c) fall within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations etc”) of the Order; (d) are outside the United Kingdom subject to relevant regulation in each jurisdiction, material(all such persons together being referred to as “relevant persons”). This material is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this material relates is available only to relevant persons and will be engaged in only with relevant persons. Where this material is labelled as non-independent, it does not provide an impartial or objective assessment of the subject matter and does not constitute independent “research” (cannot remove research from here under the applicable rules of the Financial Conduct Authority in the UK. Consequently, any such non-independent material will not have been prepared in accordance with legal requirements designed to promote the independence of research (cannot remove research from here) and will not subject to any prohibition on dealing ahead of the dissemination of research. Any such non-independent material must be considered as a marketing communication. United States: This research report is distributed in the United States of America by CGS-CIMB Securities (USA) Inc, a U.S. registered broker- dealer and a related company of CGS-CIMB Research Pte Ltd, PT CGS-CIMB Sekuritas Indonesia, CGS-CIMB Securities (Thailand) Co. Ltd, CGS- CIMB Securities (Hong Kong) Limited, CGS-CIMB Securities (India) Private Limited, and is distributed solely to persons who qualify as “U.S. Institutional Investors” as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors whose ordinary business activities involve investing in shares, bonds, and associated securities and/or derivative securities and who have professional experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CGS-CIMB Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CGS-CIMB Securities (USA) Inc. CGS-CIMB Securities (USA) Inc. does not make a market on other securities mentioned in the report. CGS-CIMB Securities (USA) Inc. has not managed or co-managed a public offering of any of the securities mentioned in the past 12 months. CGS-CIMB Securities (USA) Inc. has not received compensation for investment banking services from any of the company mentioned in the past 12 months. CGS-CIMB Securities (USA) Inc. neither expects to receive nor intends to seek compensation for investment banking services from any of the company mentioned within the next 3 months. Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. Distribution of stock ratings and investment banking clients for quarter ended on 30 September 2018 759 companies under coverage for quarter ended on 30 September 2018 Rating Distribution (% ) Investment Banking clients (% ) Add 60.5% 4.2% Hold 25.8% 2.4% Reduce 13.7% 0.4%

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2017, Anti-Corruption 2017 AAV – Very Good, n/a, ADVANC – Excellent, Certified, AEONTS – Good, n/a, AMATA – Very Good, n/a, ANAN – Excellent, n/a, AOT – Excellent, Declared, AP – Excellent, Declared, ASK – Very Good, Declared, ASP – Very Good, Certified, BANPU – Excellent, Certified, BAY – Excellent, Certified, BBL – Very Good, Certified, BCH – Good, Declared, BCP - Excellent, Certified, BCPG – Very Good, n/a, BEM – Very Good, n/a, BDMS – Very Good, n/a, BEAUTY – Good, n/a, BEC – Very Good, n/a, , BGRIM – not available, n/a, BH - Good, n/a, BJC – Very Good, Declared, BJCHI – Very Good, Declared, BLA – Very Good, Certified, BPP – Good, n/a, BR - Good, Declared, BTS - Excellent, Certified, CBG – Good, n/a, CCET – Good, n/a, CENTEL – Very Good, Certified, CHG – Very Good, Declared, CK – Excellent, n/a, COL – Very Good, Declared, CPALL – not available, Declared, CPF – Excellent, Declared, CPN - Excellent, Certified, DELTA - Excellent, n/a, DEMCO – Excellent, Certified, DIF – not available, n/a, DTAC – Excellent, Certified, EA – Very Good, n/a, ECL – Very Good, Certified, EGCO - Excellent, Certified, EPG – Very Good, n/a, GFPT - Excellent, Declared, GGC – not available, Declared, GLOBAL – Very Good, Declared, GLOW – Very Good, Certified, GPSC – Excellent, Declared, GRAMMY - Excellent, n/a, GUNKUL – Excellent, Declared, HANA - Excellent, Certified, HMPRO - Excellent, Certified, ICHI – Excellent, n/a, III – not available, n/a, INTUCH - Excellent, Certified, IRPC – Excellent, Certified, ITD – Very Good, n/a, IVL - Excellent, Certified, JAS – not available, Declared, JASIF – not available, n/a, JUBILE – Good, Declared, KAMART – not available, n/a, KBANK - Excellent, Certified, KCE - Excellent, Certified, KGI – Very Good, Certified, KKP – Excellent, Certified, KSL – Very Good, Certified, KTB - Excellent, Certified, KTC – Excellent, Certified, LH - Very Good, n/a, LPN – Excellent, Certified, M – Very Good, n/a, MACO – Very Good, n/a, MAJOR – Very Good, n/a, MAKRO – Very Good, Declared, MALEE – Very Good, n/a, MBKET – Very Good, Certified, MC – Very Good, Declared, MCOT – Excellent, Certified, MEGA – Very Good, n/a, MINT - Excellent, Certified, MTLS – Very Good, Declared, NYT – Excellent, n/a, OISHI – Very Good, n/a, PLANB – Excellent, Declared, PLAT – Very Good, Certified, PSH – Excellent, Certified, PSL - Excellent, Certified, PTT - Excellent, Certified, PTTEP - Excellent, Certified, PTTGC - Excellent, Certified, QH – Excellent, Certified, RATCH – Excellent, Certified, ROBINS – Excellent, Certified, RS – Very Good, n/a, SAMART - Excellent, n/a, SAPPE - Good, n/a, SAT – Excellent, Certified, SAWAD – Very Good, n/a, SC – Excellent, Declared, SCB - Excellent, Certified, SCBLIF – not available, n/a, SCC – Excellent, Certified, SCN – Very Good, Declared, SCCC - Excellent, Declared, SIM - Excellent, n/a, SIRI – Very Good, Declared, SPA - Good, n/a, SPALI - Excellent, n/a, SPRC – Excellent, Declared, STA – Very Good, Declared, STEC – Excellent, n/a, SVI – Excellent, Certified, TASCO – Very Good, n/a, TCAP – Excellent, Certified, THAI – Very Good, n/a, THANI – Very Good, Certified, THCOM – Excellent, Certified, THRE – Very Good, Certified, THREL – Excellent, Certified, TICON – Very Good, Declared, TIPCO – Very Good, Certified,

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TISCO - Excellent, Certified, TK – Very Good, n/a, TKN – Very Good, Declared, TMB - Excellent, Certified, TNR – Good, n/a, TOP - Excellent, Certified, TPCH – Good, n/a, TPIPP – not available, n/a, TRUE – Excellent, Declared, TTW – Very Good, n/a, TU – Excellent, Declared, TVO – Excellent, Declared, UNIQ – not available, Declared, VGI – Excellent, Declared, WHA – not available, Declared, WHART – not available, n/a, WORK – not available, n/a. Companies participating in Thailand’s Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of October 28, 2016) are categorized into: - Companies that have declared their intention to join CAC, and - Companies certified by CAC

Recommendation Framework Stock Ratings Definition: Add The stock’s total return is expected to exceed 10% over the next 12 months. Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months. Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months. The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.

Sector Ratings Definition: Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation. Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation. Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.

Country Ratings Definition: Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark. Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark. Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

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Navigating China Food & Beverages │December 11, 2018

International Network

Asia

China Hong Kong India Unit 802 AZIA Center 25/F, The Gloucester Tower CIMB Securities (India) Private Limited 1233 Lujiazui Ring Road The Landmark, 15 Queen’s Road 603 , Platina Pudong New District Central, Hong Kong G Block ; Bandra Kurla Complex Shanghai 200120 T: +852 2868-0380 Bandra (East) T: +86 (21) 6194-0212 / +86 (21) 6194-0218 F: +852 2537-1928 Mumbai 400 051, India T: +91 (22) 6602-5252

Indonesia Malaysia Singapore The Indonesia Stock Exchange Building Level 17, Menara CIMB 50 Raffles Place Tower II, 20th Floor Jalan Stesen Sentral 2 #01-01 Jl. Jend. Sudirman, Kav. 52-53 Kuala Lumpur Sentral Singapore Land Tower (S048623) Jakarta 12190 50470 Kuala Lumpur. T: +65 6225-1228 T: +62 (21) 515-1330 T: +60 (3) 2261 8888 F: +65 6224-6906 F: +62 (21) 515-1335 F: +60 (3) 2261 8899

South Korea Sri Lanka CIMB Securities Limited, Korea Branch Level 33, West Tower 15F, S-Tower, 116 Shinmun-ro 1-ga World Trade Center Jongro-gu, Seoul 110-700 Echelon Square T: +82 (2) 6730-6000 Colombo 01 F: +82 (2) 6730-6183

Thailand Vietnam 132 Sindhorn Tower 3, 12th Floor CIMB Securities International Ltd. Wireless Road, Lumpini, Pathumwan 90 Pasteur Street Bangkok 10330 District 1, HCMC T: +66 (2) 841-9000 Vietnam F: +66 (2) 657-9240 T: +84 839146925 F: +84 839 146924

Philippines Sri Lanka SB Equities, Inc. John Keells Stock Brokers (Pvt) Ltd (a strategic partner with CIMB Securities) (a strategic partner with CIMB Securities) 18F Security Bank Centre 130 Glennie Street 6776 Ayala Ave. Colombo 00200 Makati 0719 T: +94 (0) 11 230 6271 T: +63 (2) 891-1243 / +63 (2) 891-1258 F: +94 (0) 11 234 2068 F: +63 (2) 813-3349

Europe Americas

United Kingdom USA (2719607) (52-1971703) 27 Knightsbridge 7 Times Square #1605 London, SW1X 7YB New York, NY 10036 T: +44 (20) 7201-2199 T: +1 (212) 616 8600 F: +44 (20) 7201-2191 F: +1 (212) 616 8639

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