6 June 2019 Asia Pacific/China Equity Research Beer & Alcoholic Beverages

China Liquor Sector Research Analysts ASSUMING COVERAGE Tony Wang 852 2101 6728 [email protected] Fill more beer into the glass Michael Shen 852 2101 6711 [email protected] Figure 1: Premiumisation in China liquor is still in early stage Harriet Liu 14 100 852 2101 6591 90 New Zealand [email protected] 12 80 Australia Ireland 10 70 Denmark Australia Ireland 60 Taiw an 8 New Zealand France United Kingdom Denmark 50 United Kingdom Canada Japan 6 Belgium Canada 40 USA

Taiw an FranceBelgium Beer ASP ASP (US$/litre)Beer USA (US$/litre) ASP Spirits 30 4 China, 2018 Japan China, 2013 20 China, 2008 2 China, 2018 China, 2013 10 China, 2008 0 0 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 GDP per capita, 2018 (US$) GDP per capita, 2018 (US$)

Source: Euromonitor, Credit Suisse Research

■ Prefer beer over baijiu. Despite near-term uncertainty in macro and consumer sentiment, we believe the secular trend of ‘drinking less but spending more’ will remain intact, which should drive >10% retail sales CAGR of premium liquor over 2018-23E. By category, we prefer brewery to baijiu in the near term on higher earnings visibility, attractive valuation and more catalysts ahead, but it’s too early to call time on premium baijiu, as we do not anticipate a collapse in consumer demand for premium baijiu due to structural changes in the industry. ■ Brewery—full steam ahead. We believe Chinese brands are on the fast track of profitability improvement driven by accelerating mix upgrade (ASP to witness a 6.5% CAGR in 2018-21E), improved competitive dynamics and ongoing capacity optimisation. We also expect volume to surprise on the upside in 2H19 on potential pick-up in fixed assets investment (FAI). Other catalysts include Anheuser-Busch InBev Asia's IPO, M&As and state- owned enterprise (SOE) reform. ■ Baijiu—aroma to last longer. We reckon that near-term demand for premium baijiu could see volatility, but do not expect this to result in a collapse in the premium baijiu market (like in 2012-15 when the bubble burst), given the industry has undergone structural changes. The premium segment could continue to see the fastest growth at a CAGR of 13% in 2018-23E supported by solid demand from private sector consumption. ■ Stock picks. Our top pick in the brewery sector is Tsingtao Brewery (H) as we believe the improvement in profitability should narrow its valuation gap with CR Beer. We upgrade Tsingtao Brewery (A) from Neutral to OUTPERFORM on valuation. In the baijiu sector, we prefer Wuliangye and Luzhou Laojiao given their stronger growth momentum and attractive risk/reward. We downgrade Fen Wine from Outperform to NEUTRAL due to fierce competition in high-end baijiu segment.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

6 June 2019

Focus charts and table

Figure 3: Mid/high-end beer segments are gaining Figure 2: Chinese baijiu retail growth by segment volume shares quickly

50% 100% 37% 90% 40% 80% 30% 70%

20% 13% 60% 10% 11% 10% 10% 7% 8% 9% 10% 5% 6% 6% 50% 0% 0% 40% Total Premium High-end Mid-range Low-end 30% -10% -5% 20% -20% -17% 10%

-30% 0%

2012-15 CAGR 2015-18 CAGR 2018-23E CAGR

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019E 2020E 2021E

Premium Mid-Priced Economy Non-Alc & Others

Source: Euromonitor, National Bureau of Statistics, Company data, Credit Suisse estimates Source: Euromonitor, Credit Suisse estimates Note: definition of baijiu’s retail price bands: premium (above Rmb800/500ml), high-end (Rmb500-800/500ml); mid-range (Rmb100-500/500ml) and low-end (below Rmb100/500ml)

Figure 4: EV/EBITDA vs. ROIC by global spirits and Figure 5: EBITDA/ton comparison—Chinese players Chinese baijiu companies are much lower but improving

300 USD 296 2020E EV/EBITDA Global spirits 264 250 20 Thai Beverage Public Chinese 18 Diageo 200 199 184 16 Pernod-Ricard 171 178 165 156 14 Constellation Fen Wine Moutai 150 Luzhou Laojiao 12 131 Wuliangye 10 Yanghe 100 8 54 59 41 46 46 48 51 6 50 33 45 4 2 0 2020E ROIC Yanjing Tsingtao CRB ABI Carlsberg ABI 0 (China) (Asia) (Asia) 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% 2016 2017 2018

Source: Company data, Credit Suisse estimates Source: Company data

Figure 6: Valuation comparison table Company name Ticker Mkt Trading Price Target price Up/Down CS rating EPS chg.from P/E EPS EV/EBITDA Lead analyst cap (LC) prev. EPS (x) CAGR (x) (US$mn) 6/4/2019 Old New (%) Old New 2019E 2020E 2019E 2020E 2018-20E 2019E 2020E Baijiu Wuliangye 000858.SZ 55,738 (99.2) 97.0 130.0 31% O O 6.4% 8.0% 22.3 18.2 25.8% 14.0 11.1 Luzhou Laojiao 000568.SZ 14,398 (67.9) 65.0 86.0 27% O O 10.0% 11.3% 21.6 17.5 27.8% 14.2 11.2 Kweichow Moutai 600519.SS 159,180 (875.3) 850.0 1,065.0 22% O O 8.5% 10.9% 25.8 21.8 19.7% 16.4 13.6 Tony Wang Jiangsu Yanghe 002304.SZ 24,264 (111.2) 124.0 130.0 17% O O 0.6% -0.5% 18.2 16.3 12.5% 12.7 11.1 Shanxi Fen Wine 600809.SS 6,788 (53.8) 65.0 60.0 12% O N -3.0% -10.8% 25.6 21.6 21.4% 15.9 13.4 Brewery Tsingtao Brewery - H share 0168.HK 8,409 (45.3) 48.0 63.0 39% O O 8.1% 15.1% 29.4 24.8 19.1% 12.2 10.3 China Resource Beer 0291.HK 13,758 (33.3) 39.5 40.5 22% O O -3.9% -8.0% 32.8 26.6 23.9% 17.8 15.2 Michael Shen Tsingtao Brewery - A share 600600.SS 8,409 (45.9) 41.3 54.8 19% N O 8.1% 15.1% 33.8 28.5 19.1% 14.1 11.8 Yanjing Brewery 000729.SZ 2,624 (6.4) 5.0 5.6 -13% U U -27.2% -25.3% 88.2 77.4 14.1% 11.4 11.5 Source: Company data, Credit Suisse estimates

China Liquor Sector 2 6 June 2019

Fill more beer into the glass We prefer beer to baijiu In this report, we take a deep dive into the two largest sub-sectors in the Chinese alcohol on higher earnings industry - brewery and baijiu - to understand the demand trend, competition dynamics and visibility, attractive long-term growth prospects. Despite near-term uncertainty in macro and consumer valuation and more sentiment, we believe the secular trend of ‘drinking less but spending more’ will remain catalysts ahead intact, which should drive >10% retail sales CAGR of premium liquor over 2018-23E. By category, we prefer brewery to baijiu in the near term on higher earnings visibility, attractive valuation and more catalysts ahead, but it’s too early to call time on premium baijiu, as we do not anticipate a collapse in consumer demand for premium baijiu due to structural changes in the industry. Brewery—full steam ahead The worst of China Key trends: (1) Volume growth could surprise to the upside in the near term (+1% in beer market is likely 2H19) thanks to a potential pick-up in fixed assets investment (FAI), solid growth of over with improving catering channel and less impact from imported products. (2) There is still plenty of room profitability and more for premiumisation, which is the major driver of both ASP and profitability improvement. positive catalysts The blended ASP growth accelerated to 8.3% over 2010-18 from 3.5% over 2003-10, and ahead we expect it to witness a 6.5% CAGR over 2018-21E. (3) Chinese players are on the fast track of profitability improvement driven by accelerating mix upgrade, improved competitive dynamics and ongoing capacity optimisation. (4) The competition and expenditure would be rational given that marketing and brand building (rather than aggressive discounting) are key in the premium market and leading players (mainly foreign brands) have a profit-oriented strategy. Other key catalysts in 2019-20E include ABI Asia's IPO, M&As and SOE reform. Baijiu—aroma to last longer Premium baijiu brands Key trends: (1) After the industry-wise recovery in 2016-18, we believe the Chinese baijiu to deliver solid growth sector has entered a new growth stage, with a normalisation of overall demand and amid a macro further divergence between price segments. (2) Premium segment could continue to see slowdown on tight the fastest growth at a CAGR of 13% (8% from volume and 5% from ASP) supported by supply-demand solid demand from private sector consumption and supply constraints (especially dynamics Moutai). (3) We reckon that near-term demand for premium baijiu could see volatility, but do not expect this to result in a collapse in the premium baijiu market (like in 2012-15 when the bubble burst), given the industry has undergone structural changes. (4) As the key driver of market share gain has gradually shifted from ‘channel driven’ to ‘brand driven’, we believe companies with strong brand recognition and execution will lead market consolidation. Moreover, SOE reform could be another driver of market consolidation. Stock recommendations Top picks: Tsingtao We prefer stocks with (1) strong brand franchises and leading positions in the premium Brewery (H), Wuliangye, segment, (2) visible fundamental rebound on company specific catalysts, and (3) Luzhou Laojiao and CR undemanding valuations. In the brewery sector, Tsingtao Brewery (H) is our top pick as Beer we believe the improvement in profitability should narrow its valuation gap with CR Beer (both rated OUTPERFORM). We upgrade Tsingtao Brewery (A) to OUTPERFORM on valuation. Yanjing brewery (UNDERPERFORM) remains our least preferred name due to continuous market share loss. In the baijiu sector, we prefer premium brands Wuliangye and Luzhou Laojiao (both rated OUTPERFORM) given their stronger growth momentum and attractive valuation compared to global peers. We still like Moutai on its visible long-term growth trajectory, although we suggest investors wait for the removal of corporate governance issues. We downgrade Fen Wine from Outperform to NEUTRAL due to fierce competition in high-end baijiu segment.

China Liquor Sector 3 6 June 2019

Figure 7: Global liquor companies valuation table Company name Ticker Rating Mkt cap EV/EBITDA P/E EPS PEG ROE DivYld (x) (x) CAGR (x) Reuters CS (US$mn) 2019E 2020E 2019E 2020E 2018-20E 2019E 2019E 2020E 12MF China liquor China baijiu Kweichow Moutai 600519.SS O 159,180 16.4 13.6 25.8 21.8 19.7% 1.3 34.1% 33.5% 2.0% Wuliangye 000858.SZ O 55,738 14.0 11.1 22.3 18.2 25.8% 0.9 25.1% 26.3% 2.2% Jiangsu Yanghe 002304.SZ O 24,264 12.7 11.1 18.2 16.3 12.5% 1.5 26.0% 26.1% 3.3% Luzhou Laojiao 000568.SZ O 14,398 14.2 11.2 21.6 17.5 27.8% 0.8 25.6% 27.9% 2.9% Shanxi Fen Wine 600809.SS N 6,788 15.9 13.4 25.6 21.6 21.4% 1.2 26.8% 26.8% 2.0% Anhui Gujing Distillery 000596.SZ NR 5,650 15.2 11.5 24.6 19.5 24.3% 1.0 23.8% 24.7% 1.8% Kouzijiao 603589.SS NR 4,757 12.5 10.5 16.9 14.3 22.5% 0.7 24.3% 24.0% 2.0% King's Luck 603369.SS NR 4,250 15.6 12.0 20.3 16.2 25.4% 0.8 20.2% 21.3% 1.6% Shunxin Agriculture 000860.SZ NR 4,261 15.0 11.5 24.7 18.9 44.8% 0.6 13.6% 15.5% 1.3% Sichuan Swellfun 600779.SS NR 3,183 22.0 18.1 29.1 23.7 26.4% 1.1 36.4% 38.9% 2.4% Laobaigan Liquor 600559.SS NR 1,509 13.9 10.8 21.4 17.1 28.0% 0.8 16.0% 17.3% 2.0% Shede Spirits 600702.SS NR 1,246 14.8 11.0 19.5 15.1 28.4% 0.7 14.3% 15.9% 0.9% Xinjiang Yilite 600197.SS NR 1,085 N.A. N.A. 12.1 9.4 34.1% 0.4 20.9% 22.8% 2.7% Jiuguijiu 000799.SZ NR 1,055 14.8 10.9 24.7 18.3 33.7% 0.7 12.4% 14.7% 1.3% China Baijiu weighed avg. 15.4 12.6 23.9 20.0 21.6% 1.2 29.9% 30.1% 2.2% China brewery China Resources Beer 0291.HK O 13,758 17.8 15.2 32.8 26.6 23.9% 1.4 14.8% 16.8% 0.9% Tsingtao Brewery - H share 0168.HK O 8,409 12.2 10.3 29.4 24.8 19.1% 1.5 9.9% 11.2% 1.5% Tsingtao Brewery - A share 600600.SS O 8,409 14.1 11.8 33.8 28.5 19.1% 1.8 9.9% 11.2% 1.2% Chongqing Brewery 600132.SS NR 2,943 26.9 22.9 40.6 34.3 21.2% 1.9 36.9% 38.9% 1.7% Yanjing Brewery 000729.SZ U 2,624 11.4 11.5 88.2 77.4 14.1% 6.3 1.6% 1.8% 0.7% China brewery weighed avg. 15.9 13.6 36.9 30.9 20.7% 1.9 13.4% 14.9% 1.2% Global liquor Global spirit Diageo plc DGE.L O 101,208 19.0 17.9 25.1 23.1 8.5% 3.0 35.0% 39.3% 2.2% Pernod-Ricard SA PERP.PA O 47,498 17.8 16.0 25.5 22.5 11.3% 2.2 10.1% 11.0% 2.1% Constellation Brands Inc. STZ.N O 29,634 14.1 14.6 19.1 20.1 0.5% 35.4 17.6% 9.7% 1.7% Brown-Forman Corporation BFb.N NR 15,501 22.6 21.2 29.5 27.8 10.5% 2.8 56.0% 49.0% 1.4% Thai Beverage Public Co. Ltd. TBEV.SI O 15,410 20.3 19.2 18.3 17.4 14.7% 1.2 20.6% 19.5% 2.8% Rémy Cointreau SA RCOP.PA N 6,937 21.0 18.9 36.2 32.2 9.6% 3.8 10.6% 11.5% 1.6% Golobal spirit weighed avg. 18.5 17.4 24.5 22.8 8.6% 7.1 26.8% 27.4% 2.1% Global brewery Anheuser-Busch InBev ABI.BR O 165,045 12.5 11.5 16.4 16.4 21.9% 0.7 16.6% 13.8% 2.5% AmBev ABEV3.SA O 70,518 11.9 10.7 22.5 19.4 13.1% 1.7 21.6% 25.0% 4.0% Heineken HEIN.AS N 61,717 12.9 12.0 21.2 19.2 8.1% 2.6 15.1% 15.4% 1.9% Asahi 2502.T NR 20,338 9.4 8.7 14.3 13.5 3.7% 3.9 12.7% 12.4% 2.3% Carlsberg CARLb.CO U 20,184 12.5 12.0 22.5 20.2 11.4% 2.0 13.3% 13.9% 2.3% Kirin 2503.T NR 18,880 10.5 8.8 19.4 14.5 -6.5% N.M. 12.2% 14.0% 2.8% Global brewery weighed avg. 12.2 11.2 18.8 17.4 14.7% 1.5 16.7% 16.2% 2.7% Source: Company data, Thomson Reuters Datastream, Credit Suisse estimates for covered companies

China Liquor Sector 4 6 June 2019

Table of contents

Focus charts and table 2 Fill more beer into the glass ...... 3 Brewery—full steam ahead ...... 3 Baijiu—aroma to last longer ...... 3 Stock recommendations ...... 3

Beer—full steam ahead 6 Volume: worst is likely over with potential upside surprise near term ...... 6 On the fast track of profitability improvement ...... 8 Premiumisation: still full of steam 8 How will the competition affect pricing and promotion expense? 10 Ongoing capacity optimisation to improve margin and efficiency 13 Raw material cost is manageable 14

Baijiu—aroma to last longer 16 Walking into the ‘drink less but drink better’ stage ...... 17 Premium segment better placed for a ‘downturn’ ...... 18 Tight supply to drive premium baijiu’s ASP higher ...... 20 Brand consolidation to accelerate ...... 23 Evaluate the policy risk ...... 23

Stock recommendations 25

HOLT® view on the China Liquor Sector 30

Tsingtao Brewery (0168.HK / 168 HK) 34

Tsingtao Brewery (600600.SS) 36

China Resources Beer (Holdings) Company Limited (0291.HK / 291 HK) 38

Wuliangye Yibin Co., Ltd (000858.SZ / 000858 CH) 40

Luzhou Laojiao Co., Ltd (000568.SZ / 000568 CH) 42

Kweichow Moutai Co., Ltd (600519.SS / 600519 CH) 44

Shanxi Xinghuacun Fen Wine Factory Co., Ltd (600809.SS / 600809 CH) 46

Jiangsu Yanghe Brewery Joint-stock Co., Ltd (002304.SZ / 002304 CH) 48

Yanjing Brewery (000729.SZ / 000729 CH) 50

China Liquor Sector 5 6 June 2019

Beer—full steam ahead Four key trends Key trends: (1) Volume growth could surprise to the upside in the near term (+1% in 2H19) thanks to a potential pick-up in fixed assets investment (FAI), solid growth of catering channel and less impact from imported products. (2) There is still plenty of room for premiumisation, which is the major driver of both ASP and profitability improvement. The blended ASP growth accelerated to 8.3% over 2010-18 from 3.5% over 2003-10, and we expect it to witness a 6.5% CAGR over 2018-21E. (3) Chinese players are on the fast track of profitability improvement driven by accelerating mix upgrade, improved competitive dynamics and ongoing capacity optimisation. (4) The competition and expenditure would be rational given that marketing and brand building (rather than aggressive discounting) are key in the premium market and leading players (mainly foreign brands) have a profit-oriented strategy. Other key catalysts in 2019-20E include ABI Asia's IPO, M&As and SOE reform. Valuation method We use EV/EBITDA as the primary valuation method given Chinese players have excessive capacity and thus abnormal level of depreciation expense currently. China’s beer sector is now trading at a 14x 2020E EV/EBITDA, which is in line with its historical average. This is compared with global peers' 11x 2020E EV/EBITDA. We think the premium is justified by the stronger growth profile considering such a lower profitability. Top pick: Tsingtao We prefer stocks with (1) strong brand franchises and leading positions in the premium Brewery (H) segment, (2) visible fundamental rebound on company specific catalysts, and (3) more attractive valuations. Therefore, Tsingtao Brewery (H) is our top pick as we believe the visible turnaround triggered by enhanced execution should narrow its valuation gap with CR Beer (both rated OUTPERFORM). We upgrade Tsingtao Brewery (A) to OUTPERFORM on valuation. Yanjing Brewery (UNDERPERFORM) remains our least preferred name due to continuous market share loss. Volume: worst is likely over with potential upside surprise near term For China’s beer market, after a consecutive four-year volume decline from 2014 to 2017, we believe the worst is over. Positively, industry volume tends to be stabilised in 2018 and continues to show a mild upward trend YTD - overall industry production volume growth recovered to 0.5% in 2018 from negative 0.7% in 2017, and further recovered to 3.0% in 1Q19 and 0.8% in 4M19. Although the production volume declined 5.6% in April 2019, we think it was mainly due to the high base in April 2018 with volume up 6.1% on the purpose of re-stocking to prepare the World Cup campaign during the summer season. Overall, we forecast industry sales volume growth will improve to (1) 0.6% in 2019 (from flattish in 2018) and 0.8% CAGR over 2018-21E (from negative 2.1% over 2013-18). Although the Chinese beer market has entered the maturing stage due to the high per- capita consumption (32 liquors vs. global average of 26) and demographic shift, we expect a potential recovery in volume growth (especially for low/mid-end segments) in 2H19E on below reasons, which would likely benefit domestic players who have higher exposure to low/mid-end segments than foreign brands.

Volume tends to be ■ The negative impact from imported beer is fading away as the imported volume stabilised with near- growth decelerated to 0-10% currently from over 50% five years ago. Meanwhile, the term upside risk imported beer's contribution is very limited with only 1.5-2.5% of total volume even after the period of significant growth.

■ The fixed assets investment (FAI) growth is positively correlated to beer volume growth, especially for the mass market segment. Therefore, we believe the beer volume will be supported by FAI's recovery following government's stimulus policy this year. The FAI growth improved to 6.1% in 4M19 from 5.9% in 2018, and is expected to 6.5%-7% in 2019, by consensus.

China Liquor Sector 6 6 June 2019

■ Catering channel is one of the major sources of beer consumption, which contributes over 60% of on-trade volume and over 30% of total volume. Therefore, the structural growth of catering sales backed by life-style change and fading negative impact from anti-corruption campaign would also underpin beer volume outlook, in our view. We forecast China catering retail sales to grow 9.5% in 2019, which is the same as 2018.

Figure 8: Production volume continues to pick up Figure 9: Import beer growth normalised

18.0% 90.0% 2.5% 85.4% 15.2% 14.7% 80.0% 2.2% 71.4% 1.9% 70.0% 2.0% 13.0% 13.8% 59.4% 1.8% 65.6% 1.7% 10.7% 60.0% 10.4% 1.4% 1.5% 50.0% 8.0% 7.1% 44.0% 6.3% 40.0% 37.4% 5.5% 4.6% 0.8% 1.0% 3.0% 30.0% 3.1% 28.9% 0.8% 20.1% 0.5% 15.3% 0.4% -0.1% 20.0% 14.7% 0.5% 0.3%

10.0% 0.1% 0.2%

2007 2018 2005 2006 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -2.0% 2004 0.1% 4M19 0.1% 10.8% -1.0% -0.7% 0% 0.0% 0.0% -5.1% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 3M19

-7.0% Import as % of total (RHS) Import volume YoY growth (LHS)

Source: Wind Source: Company data, Credit Suisse estimates

Figure 10: Volume recovery backed by FAI acceleration and decent catering growth

34.0% 28.5% 30.4% 29.0% 27.2% 25.8% 26.6%

24.7% 23.8% 24.0% 24.5% 21.6% 24.3% 20.6% 19.4% 19.6% 19.0% 17.7% 18.3% 16.9% 15.7% 16.4% 16.8% 14.0% 13.6% 11.7% 13.6% 11.7% 10.8% 10.7% 10.3% 9.7% 9.5% 9.5% 9.5% 9.0% 9.0% 10.0% 5.7% 5.6% 8.1% 6.5% 5.1% 7.2% 6.5-7% 5.9% 6.1% 4.0% 5.3% 3.2% 2.6% -0.2% -0.1% 0.4% 0.6% -1.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 4M19E 2019E -1.0% -6.0% -4.7% -4.4%

Beer sales volume YoY FAI YoY Catering sales YoY

Source: Wind, Euromonitor, Credit Suisse estimates

China Liquor Sector 7 6 June 2019

On the fast track of profitability improvement Chinese players are on Compared with foreign brands in the Chinese market, domestic players' profitability is the fast track of much lower, mainly due to lower ASPs (worse product mix) and less efficient profitability production/operation (lower utilisation rates). However, we believe domestic players are on improvement the fast track of profitability improvement, considering (1) the visible premiumisation trend, (2) a rational competition environment, (3) continued capacity optimisation, and (4) manageable input cost inflation.

Figure 11: Unit price comparison Figure 12: EBITDA/ton comparison

900 USD 300 USD 296 812 264 800 765 250 700 618 648 658 590 600 557 570 576 200 199 184 535 548 549 171 178 500 457 165 454 445 156 427 150 400 371 373 131 328 369 320 300 100 200 54 59 41 46 48 51 50 33 46 45 100

0 0 Yanjing CRB Tsingtao Carlsberg ABI Carlsberg ABI Yanjing Tsingtao CRB ABI Carlsberg ABI (China) (China) (Asia) (Asia) (China) (Asia) (Asia)

2016 2017 2018 2016 2017 2018

Source: Company data Source: Company data

Figure 13: Financial comparison (2018)

Source: Company data, Note: (1) Tsingtao's ASP is adjusted with new accounting policy, (2) EBITDA margin excludes the impairment loss on plant closure Premiumisation: still full of steam We believe there is still plenty room of premiumisation in China’s beer market, which is the major driver of both ASP and profitability improvement. The blended ASP growth accelerated to 8.3% over 2010-18 from 3.5% over 2003-10, and we expect it to witness a 6.5% CAGR over 2018-21E on:

■ Potential ASP increase in all segments: Chinese beers’ ASPs of economy/mid- end/premium segments are much lower than similar products in other countries. Given increasing disposable income, there is still potential for ASP increase in different price ranges.

■ Consumption upgrade with more focus on product quality and consumption environment: The mid-end and premium segments only account for 31% of total volume in China, lower than 47% in Japan, 76% in the US, 94% in Singapore and 99%

China Liquor Sector 8 6 June 2019

in the UK. We expect the rising life standard to continue driving the mix shift towards mid-end/premium segments and on-trade channel.

■ Leading players' rising focus on premiumisation: Domestic players have higher exposure to economy products, compared to foreign brands in China’s market, which results in a lower ASP and profitability. However, over the past few years, we have seen an accelerating process of premiumisation aimed at improving profitability amongst local players. Taking CRB as an example, its mid-end/premium products' volume contribution rose from 40% in 2015 to 45% in 2018, following the launch of several batches of new products with retail prices higher than Rmb7/bottle (500ml).

Figure 14: Industry ASP trend Figure 15: CRB, Tsingtao and Yanjing ASP growth 14% 45 (Rnb/L) 40 Premium 12%

35 10%

30 8%

25 Mid-priced 6% 20 4% 15 Blended 2% 10 Economy 0%

5

2012

2013

2014

2015

2016

2017

2018 2019E

0 -2% 2020E

2007 2010 2017 2004 2005 2006 2008 2009 2011 2012 2013 2014 2015 2016 2018

2003 -4%

2020E 2019E 2021E

Blended ASP Premium Mid-Priced Economy CRB Tsingtao Yanjing

Source: Euromonitor, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 16: China ASP is the lowest Figure 17: China economy segment is the largest

20.0 100% 1% (USD/L) 18.7 6% 90% 18.0 24%

16.0 80% 14.0 48% 53% 14.0 70% 69% 65% 12.0 60% 45% 9.6 10.0 50% 8.2 8.0 7.4 40% 5.9 5.6 5.4 30% 6.0 39% 4.5 51% 3.9 3.4 20% 21% 4.0 2.9 3.0 31% 29% 1.9 10% 2.0 1.0 10% 8% 0% - China USA UK Japan Singapore Economy Mid-Priced Premium Premium Mid-Priced Economy China USA UK Japan Singapore

Source: Euromonitor Source: Euromonitor

China Liquor Sector 9 6 June 2019

Figure 18: Mid-end/Premium segments are gaining volume shares quickly Figure 19: On-trade channel is gaining shares

100% 52.0% 51.5% 90% 51.5% 80% 51.1% 51.2% 51.0% 70%

60% 50.5% 50.3%

50% 50.0%

40% 49.5% 49.7% 30% 49.0% 20% 48.9% 10% 48.5% 48.8% 48.5%

0% 48.0%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019E

2020E

2021E

2019E

2020E 2021E

Premium Mid-Priced Economy Non-Alc & Others Off-trade On-trade

Source: Euromonitor, Credit Suisse estimates Source: Euromonitor

Figure 20: Main product portfolio prices of top five players (Off-trade)

Source: Credit Suisse research, YHD.com; Note: Price standardized to 500ml bottle How will the competition affect pricing and promotion expense? Firstly, we think the overall competition dynamics for the beer market is one of the best among consumer staple sectors as the market is highly consolidated with top five players' market share of 71.6% in 2018 (up from 65.5% in 2009). This is only lower than 84.5% for instant noodle, but higher than 70% for liquid milk, 48.6% for packaged meat, 39.0% for soft drinks, 36.7% for infant milk formula, 22.8% for baijiu, 21.4% for condiment and 17.3% for snack.

China Liquor Sector 10 6 June 2019

Figure 22: Top five players' market share Figure 21: Overall beer market share (2018) comparison

Snack 17.3%

Condiment 21.4%

CRB Baijiu 22.8% Others 25.1% 28.4% IMF 36.7%

Soft drink 39.0%

Packaged meat 48.6% Carlsberg Tsingtao 17.3% 4.7% Yanjing Liquid milk 70.0% 8.1% ABI Beer 16.4% 71.6%

Instant noodle 84.5%

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

Source: Euromonitor Source: Euromonitor

Secondly, among economy, mid-end and premium segments, the premium market is the only one that does not show an obvious consolidation trend over the past 10 years, given the top five players' market share of 73.1% in 2018 (vs 79.1% in 2009). This is mainly attributable to the increasing investment into premiumisation for most domestic players during these years. Investors might have concerns about the tightening competition in the premium market amid the accelerating premiumisation trend in China. However, we believe competition and expenditure would be rational given (1) marketing and brand building (rather than aggressive discounting) are key in the premium market and (2) leading players (mainly foreign brands) have a premiumisation and profit-oriented strategy. In our view, Tsingtao and CRB have the best chances to gain market share in the premium segment, considering (1) the savings from capacity closure leave more buffer for channel investment, (2) potential synergy between CRB and Heineken (the fourth largest player in the premium market), and (3) Tsingtao's improved execution capability (on management change) and potential synergy from Fosun (enhanced marketing capability and more diversified portfolio if introducing foreign brands).

China Liquor Sector 11 6 June 2019

Figure 23: Premium beer market share (2018) Figure 24: Top 5 market share in each segment

85.0%

80.0% 80.0% 79.1%

Others 75.2% 26.9% 75.0% 74.6% ABI 43.1% 73.1% 72.0% 71.6% 70.0% 71.1% Kingstar 3.2% 66.6% Heineken 4.2% Tsingtao 65.0% 8.6% 65.5% Carlsberg 14% 61.5% 60.0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Overall Premium Mid-end Economy

Source: Euromonitor Source: Euromonitor

Figure 25: Mid-end beer market share (2018) Figure 26: Economy beer market share (2018)

Others CRB Others Tsingtao 25.4% 29.8% 28.0% 23.6%

Carlsberg 3.5% Yanjing Carlsberg 7.3% CRB 4.5% Tsingtao 23% 17% Zhujiang Yanjing ABI 17.0% 5.6% 15.0%

Source: Euromonitor Source: Euromonitor

Thirdly, with a continued market consolidation, we believe leading players are in a strong- enough position to defend the irrational price war initiated by small players, and thus focusing on improving profitability. This is evidenced by CRB's visible upward ASP trend since 2008, when top five players' market share had been over 50%. In addition, we also notice a series of direct price hikes by leading players since end-2018 (the first time since 2008), amid pressure from input cost inflation.

China Liquor Sector 12 6 June 2019

Figure 27: Market consolidation vs CRB’s ASP

Market consolidation vs. CRB's ASP (Rmb/ton)

3,000 Land grab stage: price competition is the Top 5 players hold strong market position 72% main weapon to quickly gain market and have the power to form a more friendly 2,800 shares from competitors competition with ASP increase 55% 2,600

2,400

2,200

2,000 16%

1,800

1,600 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E Top five player volume share CRB's ASP (LHS)

Source: Euromonitor, company data, Credit Suisse estimates

Figure 28: Direct price hikes of leading players Brand Region Product Price lift range Time Yanjing Beijing Yanjing Qingshuang Ex-factory price up 30% Dec. 2017 Zhejiang Yanjing Draft (460 ml) 15-20% Dec. 2017 Inner Mongolia Multiple products Less than 5% on average Feb. 2018 Guangxi Multiple products Less than 5% on average Feb. 2018 CRB Nationwide 9 products from low to mid-end, including Snow, ~10% Jan. 2018 Snow Draft, YCTY, Pinzun, etc Tsingtao Shandong Laoshan, Hans, Tsingtao Classic Less than 5% on average Jan. 2018 Nationwide Laoshan, Lulansha (low-end) Retail unit price up from Rmb2.0 to Rmb2.5 May. 2018 Nationwide Tsingtao brand (mid/high-end) Retail price up by Rmb2/case (c. 5%) May. 2018 AB Inbev Nationwide ABI brand less than 5% on average Feb. 2018 Nationwide Harbin brand less than 5% on average Apr. 2018 Heineken Nationwide Heineken and Tiger Brand 3.8%-4.0% Nov. 2018 Source: Company data, Credit Suisse research Ongoing capacity optimisation to improve margin and efficiency Capacity closure is one of the most effective ways to improve margin and efficiency considering a low utilisation rate in the China beer market. After a period of land grab through fast capacity expansion and M&As by leading players, we notice the industry's utilisation rate experienced a sharp decrease from 78% in 2013 to 63% in 2016, following a shrink in the overall industry volume. International beer companies such as ABInBev and Carlsberg have closed more than ten breweries in China since 2016. Later, more Chinese players started to join in, although the whole process was not easy.

■ CRB is the pioneer among domestic players. It closed 2/5/13 plants in 2016/17/18, respectively, and plans to close another 7-10 in 2019. After a series of shutdowns, the benefit is obvious with the utilisation rate and deprecation/PBT ratio improving to 53.7% and 48.8% in 2018, from 53.1% and 91.6% in 2015.

■ Tsingtao also has a clear path of capacity optimisation. The company shut down two plants located in Shanghai and Anhui in 2018 and plans to close at least 10 over the next five years (2-3 each year). As a result, its utilisation rate lift to 57% in 2018 (from 53.8% in 2017) and depreciation/PBT ratio lowered to 35.9% in 2018 (from 43.9% in 2017).

China Liquor Sector 13 6 June 2019

Figure 29: Industry utilisation rate stabilised in 2018

7,000 (10k ton) 95%

90% 90% 6,000 85% 82% 82% 5,000 81% 81% 78% 78% 80% 4,000 73% 75%

3,000 70% 65% 63% 65% 2,000 61% 61% 60% 1,000 55%

0 50% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Production volume Capacity Utilization rate

Source: Wind, Credit Suisse Research

Figure 30: CRB utilisation rate vs depreciation Figure 31: Tsingtao utilisation vs depreciation expense/profit before tax expense/profit before tax

54.0% 100.0% 58.0% 50.0% 91.6% 43.9% 57.0% 53.8% 53.7% 53.7% 90.0% 42.6% 45.0% 78.1% 56.0% 53.6% 80.0% 40.0% 35.9% 53.4% 65.9% 70.0% 32.8% 35.0% 54.0% 53.8% 53.3% 53.2% 60.0% 30.0% 53.1% 48.8% 53.0% 50.0% 52.0% 52.0% 25.0%

52.8% 40.0% 20.0% 50.6% 50.0% 52.6% 30.0% 15.0%

52.4% 20.0% 10.0% 48.0% 52.2% 10.0% 5.0%

52.0% 0.0% 46.0% 0.0% 2015 2016 2017 2018 2015 2016 2017 2018

Depreciation exp/PBT Utilization rate Depreciaiton exp/PBT Utilization rate

Source: Company data Source: Company data Raw material cost is manageable The market is concerned whether the rising malt cost will put a dampener on gross margin expansion considering the Australia barley price has been up 17% YoY in 1Q19. We believe this pressure is manageable for leading players thanks to their strong bargain power against suppliers, mix improvement and sufficient inventory (3-6 months). We did a sensitivity analysis of CRB and Tsingtao's gross margins, based on different assumptions of malt cost and ASP. Assuming malt cost up 15% and ASP grows 3-4%, our sensitivity analysis shows gross margin could improve to 36.3-36.9% from 35.7% for CRB and expand to 32.3-32.9% from 31.7% for Tsingtao in 2018, or 0.6-1.2 pp for both companies.

China Liquor Sector 14 6 June 2019

Figure 32: COGS structure for beer company Figure 33: Australia barley price

500 (AUD/ton)

450

Paper 400 Others 15% 25% 350

300 Rice Glass 4% 25% 250 Hop 7% 200

Malt 150 14% Aluminium

10% 100

1/2/2015

4/2/2015

7/2/2015

1/2/2016

4/2/2016

7/2/2016

1/2/2017

4/2/2017

7/2/2017

1/2/2018

4/2/2018

7/2/2018

1/2/2019

4/2/2019

10/2/2015

10/2/2016 10/2/2017 10/2/2018 Source: Wind, Credit Suisse research Source: The BLOOMBERG PROFESSIONALTM service

Figure 34: China cardboard paper price Figure 35: China glass price

6,000 1,900 (Rmb/ton) (Rmb/ton) 5,500 1,800

1,700 5,000

1,600 4,500 1,500 4,000 1,400 3,500 1,300

3,000 1,200

2,500 1,100

2,000 1,000

1/10/2015

4/10/2015

7/10/2015

1/10/2016

4/10/2016

7/10/2016

1/10/2017

4/10/2017

7/10/2017

1/10/2018

4/10/2018

7/10/2018

1/10/2019

4/10/2019

10/10/2015

10/10/2016

10/10/2017

10/10/2018

2015-01-10

2015-05-10

2015-09-10

2016-01-10

2016-05-10

2016-09-10

2017-01-10

2017-05-10

2017-09-10

2018-01-10

2018-05-10

2018-09-10 2019-01-10 2019-05-10

Source: Wind Source: Wind

Figure 36: CRB GPM sensitivity analysis Figure 37: Tsingtao GPM sensitivity analysis

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

China Liquor Sector 15 6 June 2019

Baijiu—aroma to last longer Premium segment will After the industry-wise recovery in 2016-18, we believe the baijiu sector in China is moving continue to outperform, into a new growth stage, with normalisation of overall demand and further divergence with retail sales CAGR between price segments. We estimate Chinese baijiu’s retail sales to deliver a healthy 6.8% of 13% in 2018-23E CAGR in 2018-23E, mainly driven by ASP CAGR of 6.0% (~3% from mix and ~3% from direct price hike). The premium segment could continue to see the fastest growth at a CAGR of 13% (8% from volume and 5% from ASP) supported by solid demand from private sector consumption and supply constraints. Structural changes in We reckon that near-term demand for premium baijiu could see volatility amid rising premium baijiu led to a uncertainty in China’s macro outlook. However, we do not expect this to result in a lower cyclicality and collapse in the premium baijiu market as in the previous cycle, given the industry has higher growth visibility undergone structural changes since the bubble burst in 2012-15: (1) retail pricing has been more affordable due to better pricing discipline; (2) rising exposure to private consumption; (3) supply discipline and better inventory management. These structural changes will lead to a lower cyclicality and higher growth visibility for leading premium baijiu companies. Companies with strong From a medium- to long-term perspective, we expect industry consolidation to accelerate, brand recognition and especially in the highly fragmented mass/low-end segment, considering low market execution to lead (volume CR5 at 22% by 2018) and much slower volume growth (0.8% CAGR in 2018-23E). industry consolidation As the key driver of market share gain has gradually shifted from ‘channel driven’ to ‘brand driven’, we believe companies with strong brand recognition and execution will lead the trend. Moreover, the SOE reform could be another driver of market consolidation. Undemanding valuation Due to differences in leverage between Chinese baijiu companies (all in net cash position) compared to global and global spirit peers (most of them in net debt position), we believe EV/EBITDA peers valuation is a more appropriate methodology to compare Chinese baijiu stocks with global peers. CS-covered baijiu companies are now trading at an average of 13x 2020E EV/EBITDA vs. global peer average of 20x, with a much higher ROIC (return on invested capital), implying their long-term value is still underappreciated. Wuliangye and Laojiao In the baijiu sector, we prefer premium brands Wuliangye and Luzhou Laojiao (both to benefit from Moutai’s rated OUTPERFORM) given their stronger growth momentum and attractive valuation supply constraint in compared to global peers. We still like Moutai on its visible long-term growth trajectory 2019-20E although suggest investors wait for the removal of corporate governance issues.

Figure 38: EV/EBITDA vs. ROIC by global spirits and Chinese baijiu companies

2020E EV/EBITDA Global spirits 20 Thai Beverage Public Chinese baijiu 18 Diageo

16 Pernod-Ricard Constellation 14 Fen Wine Moutai Luzhou Laojiao 12 Wuliangye 10 Yanghe

8

6

4

2 2020E ROIC 0 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200%

Source: Company data, Credit Suisse estimates

China Liquor Sector 16 6 June 2019

Walking into the ‘drink less but drink better’ stage Baijiu and beer have heavily dominated the Chinese alcohol market, accounting for more than 90% of alcohol consumption volume. Despite that the younger generation has a more diversified taste and more choices for alcohol products; we expect baijiu to remain as mainstream as it deeply rooted in the Chinese culture with strong preference for local consumption. However, since the population of typical baijiu drinkers (aged 30-60) is peaking (likely in 2022 or 23E) due to demographic changes, and China’s spirits consumption per capita is already higher than global average, we believe the volume growth over the next few years will be muted (0.8% volume CAGR in 2018-23E vs. 4.4% in 2015-18).

Figure 39: China alcohol consumption volume Figure 40: China alcohol drinks consumption breakdown by segments (alcohol volume) volume breakdown by segments (drink volume) 100% 100% 90% 90%

80% 80%

70% 51% 53% 70% 57% 52% 51% 51% 51% 58% 58% 58% 57% 57% 56% 55% 55% 60% 60%

84% 50% 50% 84% 86% 86% 86% 86% 85% 85% 84% 84% 84% 83% 82% 81% 81%

40% 40%

30% 30%

43% 20% 20% 41% 40% 40% 39% 40% 37% 34% 35% 35% 35% 34% 36% 36% 37% 10% 10% 11% 10% 8% 8% 8% 8% 8% 8% 8% 8% 8% 9% 10% 9% 10% 0% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2004 2006 2008 2010 2012 2014 2016 2018

Baijiu Beer RTDs Wine Others Baijiu Beer RTDs Wine Others

Note: we use 50% alcohol content for Baijiu, 7.5% for Beer, 10% for RTDs, 12.5% for Wine Source: Euromonitor, Credit Suisse estimates and 15% for Others. Source: Euromonitor, Credit Suisse estimates

Figure 41: China’s population of typical baijiu drinkers likely to peak in 2023E

700 population (million) 2018-23E CAGR: 0.8% 2023-30E CAGR: -0.8%

600

500 341 337 331 325 319 314 322 330 336 341 343 313 305 297 291 400

300

200 293 292 291 292 294 295 298 301 305 307 309 309 310 310 307 100

0 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E

Population aged 30-44 in China Population aged 45-59 in China

Source: Euromonitor, Credit Suisse estimates

China Liquor Sector 17 6 June 2019

Nevertheless, we believe there is still huge growth potential for spirit/baijiu’s ASPs in the long run, on the back of rising per-capita GDP and consumers’ shift to better quality/taste products. According to Euromonitor, China spirits ASPs have increased steadily from US$22/litre in 2008 to US$29/litre in 2018, though still at the bottom of the curve against other markets.

Figure 42: Spirits volume vs GDP per capita Figure 43: Spirits ASP vs GDP per capita

9.0 100

New Zealand

8.0 Japan 90

80 Australia 7.0 Ireland USA 70 6.0 France Germany Denmark 60 Taiwan United Kingdom 5.0 France 50 United Kingdom China, 2018 Canada Ireland Canada 4.0 Belgium China, 2013 40 USA Denmark 3.0 China, 2008 Greece Taiwan Australia 30 Belgium Global average :2.9 China, 2018 Japan 2.0 China, 2013

New Zealand (US$/litre) 2018capita,per ASP Spirits 20

Spirits consumption per capita, 2018 (litre) 2018capita,per consumption Spirits China, 2008 1.0 Singapore 10 0.0 0 0 20,000 40,000 60,000 80,000 100,000 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 GDP per capita, 2018 (US$) GDP per capita, 2018 (US$)

Source: Euromonitor, Credit Suisse estimates Source: Euromonitor, Credit Suisse estimates Premium segment better placed for a ‘downturn’ The baijiu sector has been in a recovery since 2H15 driven by increasing demand from private consumption after the sharp retail price correction in 2013-14 and fading impact from anti-corruption campaigns. The growth momentum started to weaken in 3Q18 amid China’s macro slowdown but quickly recovered in 4Q18 and 1Q19. Our channel check in March also suggested that overall baijiu demand during the Chinese New Year remained firm despite heated competition in high-end and mass segments.

Figure 44: A-share baijiu sector’s quarterly revenue growth

60%

50%

40% Anti-corruption campaign 30%

20%

10%

0% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q -10% 2011 2012 2013 2014 2015 2016 2017 2018 2019

-20%

Sector average

Source: Company data, Credit Suisse estimates

China Liquor Sector 18 6 June 2019

Amid rising uncertainty in China’s macro outlook from the trade dispute, we reckon that near-term demand for premium baijiu could see volatility in the near term. However, we do not expect this to result in a collapse in premium baijiu as in the previous cycle, given the industry has undergone structural changes since the bubble burst in 2012-15. As such, we expect the premium segment to continue with its fastest growth at a CAGR of 13% in 2018-23E and top premium baijiu brands to post solid revenue growth (15-20% CAGR) over the next three years.

Figure 45: Chinese baijiu retail growth by segment Figure 46: Top 3 premium brands’ top-line growth

50% 50% 37% 40% 40% 30% 30% 20% 13% 10% 11% 10%10% 7% 8% 9% 20% 10% 5% 6% 6% 0% 0% 10% Total Premium High-end Mid-range Low-end -10% -5% 0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1Q19 2019E2020E2021E -20% -17% -10% -30% -20% 2012-15 CAGR 2015-18 CAGR 2018-23E CAGR

Source: Euromonitor, National Bureau of Statistics, Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Note: Top 3 premium brands are Moutai, Note: definition of baijiu’s retail price bands: premium (above Rmb800/500ml), high-end Wuliangye and Luzhou Laojiao (Rmb500-800/500ml); mid-range (Rmb100-500/500ml) and low-end (below Rmb100/500ml)

We highlight: (1) more affordable retail prices - the retail price of Flysky Moutai/monthly disposable income per capita are at a historical average even after the strong price rally in 2016-18; (2) rising exposure to private consumption which will contribute >50% of total demand while government related demand is less than 5%; and (3) better channel inventory management (currently 1-2 months vs. ~12 months in 2011-12) as the key structural changes since the bubble burst in 2012-15. These changes should lead to a lower cyclicality and higher growth visibility for leading premium baijiu companies.

Figure 47: Moutai’s retail price vs. monthly disposable income of urban residence 2,500 Retail price (Rmb/500ml) 1.4

1.2 2,000 1.0

1,500 0.8

0.6 1,000 Average: 0.53

0.4 500 0.2

- 0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1Q19

Moutai 53º retail price (LHS) Retail price/disposable income (RHS)

Source: Company data, Credit Suisse estimates

China Liquor Sector 19 6 June 2019

Figure 48: High-net-worth individuals to grow at 8% CAGR in 2018-23E Figure 49: Premium baijiu’s demand structure

3,000 thousands 100% 90% 2,410 2,500 80% 70% 2,000 1,670 1,580 60% 50% 1,500 1,260 1,050 40% 1,000 860 730 30% 20% 500 10% 0% 0 2013 2014 2015 2016 2017 2018 2023E Before 2012 2015 2020E

Number of China's high-net-worth individuals Individuals Private companies Government

Source: BCG Note: individual with >Rmb6 mn in investable assets defined as high-net-worth Source: Credit Suisse estimates

Tight supply to drive premium baijiu’s ASP higher Despite slower volume growth (0.8% CAGR in 2018-23E vs 4.4% in 2015-18), we estimate Chinese baijiu’s retail sales to deliver a healthy 6.8% CAGR in 2018-23E driven by ASP CAGR of 6.0%. The premium segment could continue to see the fastest growth with retail sales CAGR of 13.4%, followed by mass at 9.7% and high-end at 8.2%. We expect low-end segment’s retail sales to largely remain flat during 2018-23E.

■ Premium segment (>Rmb800/500ml): Due to supply constraints at Moutai (especially in 2019-20E), we expect sales volume CAGR to moderate to 8.0% in 2018-23E from 18.4% CAGR in 2015-18. The retail price is expected to increase at a CAGR of 5.0%, supported by growing private consumption demand and tight supply-demand dynamic. Within the premium segment, we expect Wuliangye and Luzhou Laojiao’s stronger sales growth momentum (>20%) compared with Moutai (~15%) to continue in 2019- 20E. Given Moutai’s capacity constraints in 2019-20E, Wuliangye and Luzhou Laojiao are best positioned to benefit from the unmet demand for Moutai. In addition, Flysky Moutai’s tier-1 wholesale price QTD (weak season) still stays firm at >Rmb1,900/500ml due to tight supply, which leaves enough room for Wuliangye and Luzhou Laojiao to hike prices. This is evidenced by a series of price hikes (mainly high-end products) since May. For example, Wuliangye has increased ex-factory price by 13% by launching the upgraded version of its flagship product since June. Luzhou Laojiao also lifted the wholesale price by ~11% for Guojiao 1573 since 25 May. Overall, we are positive on the success of price hike at the current stage and believe this should help to underpin their revenue growth and margin.

China Liquor Sector 20 6 June 2019

Figure 50: Moutai could face supply constraints in 2019-20E

60,000

50,000 2019E 40,000 2020E 30,000

20,000

10,000

0 2012 2013 2014 2015 2016 2017 2018

Base liquor production Theoretical supply (T+5)

Source: Company data, Credit Suisse estimates

Figure 51: Premium brands except Moutai hiked ASPs in May 2019

Source: Company data, Credit Suisse estimates

■ High-end segment (Rmb500-800/500ml) should benefit from the wider price gap with premium, but is more exposed to macro risks. We project the segment to register a 5.3%/2.8% CAGR in volume and price in 2018-23E, compared to 6.6%/4.1% CAGR in 2015-18.

■ Mid-range segment (Rmb100-500/500ml): We believe mass market will be the major beneficiary of the secular consumption upgrade trend. With more premium brands penetrating this market at more affordable pricing, we expect the volume CAGR to accelerate to 6.8% in 2018-23E from 6.1% during 2015-18.

■ Low-end segment (

China Liquor Sector 21 6 June 2019

Figure 52: Retail price and volume growth projection for China baijiu 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E Retail sales (YoY) 2012-15 CAGR 2015-18 CAGR 2018-23E CAGR Total 7.1% 7.4% 0.0% 6.2% 8.0% 13.4% 9.5% 8.3% 7.2% 6.6% 6.0% 6.0% 4.5% 10.3% 6.8% - Premium 7.6% -26.5% -24.7% 1.8% 24.0% 61.9% 28.9% 14.6% 14.8% 11.8% 11.9% 13.8% -17.4% 37.3% 13.4% - High-end 7.4% -10.8% -9.0% 5.7% 8.0% 13.1% 11.8% 10.7% 9.2% 8.0% 6.9% 6.4% -5.0% 11.0% 8.2% - Mid-range 4.9% 13.8% -0.7% 5.4% 8.7% 10.9% 10.0% 11.5% 10.2% 9.6% 8.8% 8.3% 6.0% 9.9% 9.7% - Low-end 9.8% 11.3% 6.6% 7.9% 5.2% 9.2% 4.3% 2.1% 0.3% -0.2% -1.4% -1.8% 8.6% 6.2% -0.2% Volume (YoY) 2012-15 CAGR 2015-18 CAGR 2018-23E CAGR Total 7.6% 7.1% 2.8% 5.1% 3.2% 6.9% 3.1% 1.5% 1.0% 0.7% 0.5% 0.2% 4.9% 4.4% 0.8% - Premium 12.0% -7.1% -4.6% 10.7% 14.1% 25.1% 16.3% 8.1% 6.3% 7.5% 8.2% 10.2% -0.6% 18.4% 8.0% - High-end 6.9% -5.1% -4.2% 4.2% 5.0% 7.9% 6.9% 6.7% 6.0% 5.5% 4.5% 4.0% -1.8% 6.6% 5.3% - Mid-range 9.3% 11.4% -2.7% 3.2% 4.4% 6.7% 7.2% 7.5% 7.2% 7.0% 6.5% 6.0% 3.8% 6.1% 6.8% - Low-end 7.1% 6.1% 4.2% 5.5% 2.9% 6.9% 2.1% 0.0% -0.7% -1.2% -1.4% -1.8% 5.3% 3.9% -1.0% Retail ASP (YoY) 2012-15 CAGR 2015-18 CAGR 2018-23E CAGR Blended -0.5% 0.4% -2.7% 1.1% 4.7% 6.1% 6.2% 6.7% 6.2% 5.9% 5.5% 5.8% -0.4% 5.6% 6.0% - Premium -4.0% -20.8% -21.1% -0.6% 4.3% 29.3% 10.8% 6.0% 8.0% 4.0% 3.5% 3.3% -16.8% 15.9% 5.0% - High-end -10.0% -6.0% -5.0% 1.4% 2.9% 4.9% 4.6% 3.8% 3.0% 2.4% 2.3% 2.3% -3.2% 4.1% 2.8% - Mid-range -4.0% 2.2% 2.0% 2.2% 4.1% 3.9% 2.6% 3.7% 2.8% 2.4% 2.2% 2.1% 2.1% 3.5% 2.6% - Low-end 2.5% 4.9% 2.3% 2.3% 2.2% 2.2% 2.1% 2.1% 1.0% 1.0% 0.0% 0.0% 3.2% 2.2% 0.8% Mix by value (%) - Premium 10.8% 7.4% 5.6% 5.3% 6.1% 8.8% 10.3% 10.9% 11.7% 12.3% 13.0% 13.9% - High-end 4.4% 3.7% 3.3% 3.3% 3.3% 3.3% 3.4% 3.5% 3.5% 3.6% 3.6% 3.6% - Mid-range 47.7% 50.5% 50.1% 49.8% 50.1% 49.0% 49.2% 50.6% 52.1% 53.5% 54.9% 56.1% - Low-end 37.1% 38.4% 40.9% 41.6% 40.5% 39.0% 37.1% 35.0% 32.7% 30.6% 28.5% 26.4% Mix by volume (%) - Premium 0.4% 0.3% 0.3% 0.3% 0.4% 0.4% 0.5% 0.5% 0.6% 0.6% 0.6% 0.7% - High-end 0.4% 0.4% 0.3% 0.3% 0.3% 0.3% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% - Mid-range 19.1% 19.9% 18.9% 18.5% 18.7% 18.7% 19.4% 20.6% 21.8% 23.2% 24.6% 26.0% - Low-end 80.1% 79.4% 80.5% 80.8% 80.6% 80.5% 79.7% 78.5% 77.2% 75.8% 74.3% 72.8% Source: Euromonitor, National Bureau of Statistics, Company data, Credit Suisse estimates Note: definition of baijiu’s retail price bands: premium (above Rmb800/500ml), high-end (Rmb500- 800/500ml); mid-range (Rmb100-500/500ml) and low-end (below Rmb100/500ml)

China Liquor Sector 22 6 June 2019

Brand consolidation to accelerate Unlike the highly concentrated global spirits market (the combined market share of the top 5 companies in South Korea, UK, US and Japan accounts for >50% in volume terms), the China baijiu industry is still highly fragmented with top five brands accounting for only 22% of the total volume share in 2018. This is mainly because most baijiu companies are local SOEs and large taxpayers, which are major obstacles for market consolidation. However, as the key driver of market share gain has gradually shifted from ‘channel driven’ to ‘brand driven’ and the government continues to promote SOE reforms, we expect industry consolidation to accelerate over the next few years. This will mainly be in the form of: (1) exit of small or inefficient players. Small manufacturers with weak brands and low margins may close down, due to weak sales and heavy pressure from market competition; (2) further consolidation of premium brands. Leading brands have been introducing more products in the mass market. Thanks to their strong brand equity, new sales channels (e.g., e-commerce) and the consumption upgrade trend, we believe premium brands will gain share and further consolidate the market. (3) M&As. Leading players with strong brands and large cash reserves may accelerate expansion by acquiring local brands to enter local markets more quickly.

Figure 53: Volume CR 5 by country (2018) Figure 54: Market concentration by segment

100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 91.1% 40% 40% 30% 30% 50.9% 49.6% 47.5% 20% 20% 32.3% 10% 22.4% 10% 0% 0% South Korea Japan US UK Russia China Premium High-end Mid-range Low-end

CR5 Others CR3

Source: Euromonitor, Credit Suisse estimates Source: Company data, Credit Suisse estimates, Company data Evaluate the policy risk Regulatory risk has always been the biggest uncertainty for the China baijiu sector. Consumption tax hikes in 2001 and 2017 and tightening regulation on government spending clearly had negative impact on industry demand. Though we don’t see any risk from the latter considering the low demand exposure to government spending, a potential hike in consumption tax in the future could dampen the profitability of baijiu industry. In 1984, the Chinese government levied taxes on grain-produced alcohol at 50%. In 1994, the tax rate dropped from 50% to 25%, and was further lowered to 20% in 2006, followed by a sharp increase in production. In real tax practice, consumption tax is collected during the manufacturing process or on imports, and the taxable ASP is set at 50-70% of baijiu companies’ external ASP. Since 1 May 2017, the taxable ASP was adjusted to 60% and the effective consumption tax rate of our covered companies increased from ~9% in 2015 to ~12% in 2018.

China Liquor Sector 23 6 June 2019

Based on our 2019/20 earnings forecasts, the average impact on net income from a 1.0 pp increase in effective consumption tax rate is expected be around 3%. For the companies we cover, Moutai should see the least negative impact (-1.7%), followed by Wuliangye (-2.5%) and Yanghe (-3.0%). Shanxi Fen Wine could see the most impact (-5.2%) but the company’s effective tax rate is already the highest (16%) within our coverage.

Figure 55: Chinese baijiu’s production volume growth vs. government policies

Source: National Bureau of Statistics, State Administration of Taxation

Figure 57: 1% increase in effective consumption tax Figure 56: Consumption tax as % of baijiu revenue rate on 2019/20E earnings

18.0% 0.0% 16.0% Moutai Wuliangye Luzhou Yanghe Shanxi Laojiao Fenjiu 14.0% -1.0% 12.0% -2.0% 10.0% 8.0% -3.0% 6.0% 4.0% -4.0% 2.0% -5.0% 0.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 -6.0% Moutai Wuliangye Luzhou Laojiao 2019E 2020E Yanghe Shanxi Fenjiu

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

China Liquor Sector 24 6 June 2019

Stock recommendations We prefer stocks with (1) strong brand franchises and leading positions in the premium segment, (2) visible fundamental rebound on company specific catalysts, and (3) more attractive valuations. In the brewery sector, Tsingtao Brewery (H) is our top pick as we believe the improvement in profitability should narrow its valuation gap with CR Beer (both rated OUTPERFORM). We upgrade Tsingtao Brewery (A) to OUTPERFORM on valuation. Yanjing Brewery (UNDERPERFORM) remains our least preferred name due to its continuous market share loss. In the baijiu sector, we prefer premium brands Wuliangye and Luzhou Laojiao (both rated OUTPERFORM) given their stronger growth momentum and attractive valuation compared to global peers. We still like Moutai, although we suggest investors wait for the removal of corporate governance issues. We downgrade Fen Wine from Outperform to NEUTRAL due to fierce competition in high-end baijiu segment.

Figure 58: China beer 12-month forward EV/EBITDA Figure 59: Market cap-weighted forward P/E of band premium baijiu brands

30x 25x 25x 23.9x

20x 19.9x 20x 19.8X

16.7X 15x 15.8x 15x 13.4x 11.8x 10x 10x 10.1x 7.8x 5x 6.8x 5x

0x

2012 2009 2010 2011 2013 2014 2015 2016 2017 2018 2019

0x

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Premium brands' 12-month forward P/E

EV/EBITDA Mean Mean Mean-2 std Mean-2 std Mean-1 std Mean-1 std Mean+1 std Mean+2 std Mean+1 std Mean+2 std Source : The BLOOMBERG PROFESSIONALTM service, Company data Credit Suisse Source: The BLOOMBERG PROFESSIONALTM service, Credit Suisse estimates Note: estimates premium baijiu brands include Moutai, Wuliangye and Luzhou Laojiao

■ Tsingtao Brewery (0168.HK, OUTPERFORM, TP of HK$63.00), (600600.SS, upgrade to OUTPERFORM, TP of Rmb54.80) Over the past few years, Tsingtao's profitability fell behind CRB, despite a higher ASP on a more premium product portfolio. We mainly attribute this to weaker execution and less efficient operation. However, we believe positive changes are just about to happen with the help of new management and Fosun (second largest shareholder with 17.99% stake). Tsingtao (H) is now trading at a 38% discount to CRB in terms of 12-month forward EV/EBITDA (vs average of 5% since listed). The chart below shows that Tsingtao (H) even traded at a premium to CRB Mar 2009–Sep 2012 and Feb 2014–Apr 2015, on the back of better volumes or profitability momentum. However, with a continuous market share loss and operating deleverage since 2014, it reversed to a discount. Therefore, we believe the visible fundamental turnaround (market share gain and profitability improvement) under the new management with enhanced execution should help narrow the valuation discount. Our target prices of HK$63.00 for Tsingtao (H) and Rmb54.80 for Tsingtao (A) are based on 14x 2020E EV/EBITDA, which is a 10% discount to CRB's target multiple. Key catalysts could be the launch of management incentive scheme and ABInBev Asia's IPO, which would further improve market sentiment and trigger valuation re-rating, in our view.

China Liquor Sector 25 6 June 2019

Figure 60: Tsingtao (H) is trading at 38% discount to CRB (vs average of 5%)

80% Tsingtao (H)'s EV/EBITDA disount to CRB's 60%

40%

20% Average:5% 0%

-20%

31-Jul-10

31-Jul-15

30-Apr-09

31-Oct-11

30-Apr-14

31-Oct-16

30-Apr-19

30-Jan-08

30-Jun-08

31-Jan-13

30-Jun-13

31-Jan-18

30-Jun-18

30-Mar-07

28-Feb-10

31-Mar-12

28-Feb-15

31-Mar-17

30-Nov-08

31-Dec-10

30-Nov-13

31-Dec-15

30-Nov-18

30-Aug-07

30-Sep-09

31-Aug-12

30-Sep-14

31-Aug-17

31-May-11 31-May-16

-40%

-60%

-80%

Source: Company data, Credit Suisse estimates

■ CR Beer (0291.HK, OUTPERFORM, TP of HK$40.50) We are positive on CRB as we notice that its quality growth and margin expansion is well on track. Our channel check suggests that its volume would re-gain growth momentum and outpace the industry growth this year, which is mainly on the back of (1) fading negative impact of price hike, (2) pick-up of FAI growth (support for mass market consumption), (3) solid catering sales growth, and (4) accelerating growth of mid/high-end products. With a more comprehensive portfolio by acquiring Heineken China, we believe CRB can strengthen its bargaining power and quickly gain market share in the premium market. We believe that recurrent earnings will deliver a 24% CAGR over 2018-20E. Our target price of HK$40.50 is based on 16x 2020E EV/EBITDA, which is at the high-end of global peers.

■ Yanjing (000729.SS, UNDERPERFORM, TP of Rmb5.60) We are negative on Yanjing due to its continued market share loss on unfavourable product mix, low operational efficiency on weak management execution and lack of clear turnaround signal. We do not expect any meaningful turnaround in the future, despite some one-off benefits like price hike (but hurting low-end volume the most) and VAT cut. Given the nature of SOE (lack of incentive scheme currently), the relatively conservative style gives management less motivation to conduct positive changes, such as premiumisation, capacity optimisation and organisation restructuring. We believe Yanjing's growth visibility is low and forecast a 1%/14% sales/earnings CAGR over 2018-20E. Our target price of Rmb5.60 is based on 11x 2020E EV/EBITDA, which is at the historical low-end.

■ Wuliangye (000858.SZ, OUTPERFORM, TP of Rmb130.00) Wuliangye is our top pick in the China baijiu sector as we like its (1) fastest growth momentum within the premium segment thanks to Moutai’s supply constraints and distributors’ restored confidence; (2) further improvement in channel and operational efficiency and (3) valuation discount to Moutai (~14% in terms of EV/EBTIDA). We estimate a 25.8% earnings CAGR over 2018-20E vs Moutai’s 19.7%. Our DCF-based target price of Rmb130.00 implies 19.3x/15.4x 2019/20E EV/EBITDA, at a 10% discount to Moutai’s targeted multiples vs. 10-year average of 14%.

China Liquor Sector 26 6 June 2019

Figure 61: Wuliangye DCF assumptions

Source: Company data, Credit Suisse estimates

Figure 62: Moutai’s valuation premium to Wuliangye

80%

60%

40%

20%

0%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

-20%

-40%

-60%

-80% Moutai's premium (discount) vs. WLY 10-y average

Source: Company data, Credit Suisse estimates

■ Luzhou Laojiao (000568.SZ, OUTPERFORM, TP of Rmb86.00) We assume coverage on Luzhou Laojiao with an OUTPERFORM rating and target price of Rmb86.00. We believe Laojiao is another beneficiary from baijiu’s premiumisation and should further gain share thanks to Moutai’s supply constraints. In addition, we expect margin upside over 2019-20E on the back of management’s initiatives to improve channel and operational efficiency. Therefore, we estimate a 28% earnings CAGR over 2018-20E driven by 19% revenue CAGR. We lift our 2019-20E earnings by 10-11% on higher volume growth in premium baijiu segment and raise TP to Rmb86.00 (from Rmb65.00) based on DCF valuation, implying 19.2x/15.2x 2019/20E EV/EBITDA. We view Laojiao is trading attractively at 22x/18x 2019E/20E P/E with 0.8 PEG (the lowest among our coverage).

China Liquor Sector 27 6 June 2019

Figure 63: Luzhou Laojiao DCF assumptions

Source: Company data, Credit Suisse estimates

■ Kweichow Moutai (600519.SS, OUTPERFORM, TP of Rmb1,065.00) We assume coverage on Moutai with an OUTPERFORM rating and target price of Rmb1,065.00. Despite near-term uncertainty on corporate governance issues, we still like Moutai as the best-in-class quality stock from a long-term perspective. We expect the company to deliver a 17% earnings CAGR over 2018-23E, with much lower volatility compared with previous cycles. Trading at 14x 2020E EV/EBITDA (vs. global peers at 19x), we believe the current valuation is still undemanding. Our DCF-based target price of Rmb1,065 implies 20.6x/17.2x 2019/20E EV/EBITDA. We believe Moutai’s valuation premium to its domestic peers is warranted given its superior profitability and high earnings visibility.

Figure 64: Moutai DCF assumptions

Source: Company data, Credit Suisse estimates

■ Jiangsu Yanghe Brewery (002304.SS, OUTPERFORM, TP of Rmb130.00) We assume coverage with an OUTPERFORM rating and target price of Rmb130.00. The company is in the middle of channel recovery, especially within Jiangsu Province by monitoring destocking process and raising the guided retail price to build up distributors’ confidence. With a good track record of execution, we expect Yanghe to further expand into regions outside Jiangsu province while maintaining share in its base market, which should remove market concerns over its weak top-line momentum. With the stock trading at 11.1x 2020E EV/EBITDA, the lowest among CS-covered baijiu names, we view the risk/reward as highly attractive. Our DCF-based target price of Rmb130 implies 15x/13x 2019/20E EV/EBITDA, and suggests 17% potential upside.

China Liquor Sector 28 6 June 2019

Figure 65: Jiangsu Yanghe Brewery DCF assumptions

Source: Company data, Credit Suisse estimates ■ Shanxi Fen Wine (600809.SS, NEUTRAL, TP of Rmb60.00) Assume coverage with NEUTRAL: We are constructive on Fen Wine’s SOE reform, nationwide expansion, products mix upgrade and industry-wide price hike. However, uncertainties in end customers’ willingness towards retail price increment, more fierce competition amid the mid-end baijiu products, and slower-than-expected pace of nationwide penetration could increase earnings downside risks. We forecast a 21.4% EPS CAGR in 2019-20, which is a deceleration from 67.8% CAGR in 2016-18. Our DCF-based target price of Rmb60.00 implies 18.0x/15.3x 2019/20E EV/EBITDA. Shanxi Fen Wine is fairly trading at 22x 2020E P/E, which is in line with the weighted average of domestic baijiu peers

Figure 66: Shanxi Fen Wine DCF assumptions

Source: Company data, Credit Suisse estimates Figure 67: Valuation summary of CS covered Chinese liquor name

Company name Ticker Mkt Trading Price Target price Up/Down CS rating EPS chg.from P/E EPS EV/EBITDA Lead analyst cap (LC) prev. EPS (x) CAGR (x) (US$mn) 6/4/2019 Old New (%) Old New 2019E 2020E 2019E 2020E 2018-20E 2019E 2020E Baijiu Wuliangye 000858.SZ 55,738 (99.2) 97.0 130.0 31% O O 6.4% 8.0% 22.3 18.2 25.8% 14.0 11.1 Luzhou Laojiao 000568.SZ 14,398 (67.9) 65.0 86.0 27% O O 10.0% 11.3% 21.6 17.5 27.8% 14.2 11.2 Kweichow Moutai 600519.SS 159,180 (875.3) 850.0 1,065.0 22% O O 8.5% 10.9% 25.8 21.8 19.7% 16.4 13.6 Tony Wang Jiangsu Yanghe 002304.SZ 24,264 (111.2) 124.0 130.0 17% O O 0.6% -0.5% 18.2 16.3 12.5% 12.7 11.1 Shanxi Fen Wine 600809.SS 6,788 (53.8) 65.0 60.0 12% O N -3.0% -10.8% 25.6 21.6 21.4% 15.9 13.4 Brewery Tsingtao Brewery - H share 0168.HK 8,409 (45.3) 48.0 63.0 39% O O 8.1% 15.1% 29.4 24.8 19.1% 12.2 10.3 China Resource Beer 0291.HK 13,758 (33.3) 39.5 40.5 22% O O -3.9% -8.0% 32.8 26.6 23.9% 17.8 15.2 Michael Shen Tsingtao Brewery - A share 600600.SS 8,409 (45.9) 41.3 54.8 19% N O 8.1% 15.1% 33.8 28.5 19.1% 14.1 11.8 Yanjing Brewery 000729.SZ 2,624 (6.4) 5.0 5.6 -13% U U -27.2% -25.3% 88.2 77.4 14.1% 11.4 11.5 Source: Company data, Credit Suisse estimates

China Liquor Sector 29 6 June 2019

HOLT® view on the China Liquor Sector The HOLT methodology uses a proprietary performance measure known as Cash Flow Return on Investment (CFROI®). This is an approximation of the economic return, or an estimate of the average real internal rate of return. A firm's CFROI can be directly compared against its real cost of capital (the investors' real discount rate) to see if the firm is creating economic wealth. By removing accounting and inflation distortions the CFROI allows for global comparability across sectors, regions and time and is a more comprehensive metric than the traditional ROIC and ROE.

HOLT view on Chinese baijiu The largest baijiu companies have generally delivered more stable and higher CFROI than their smaller competitors. In line with our expectations that the premium segment is better placed for a “downturn” and will continue to outperform due to solid demand from private sector consumption and supply constraints, Wuliangye and Laojiao are expected to deliver incremental improvement in forecast returns. On the other hand, Jiangsu Yanghe embeds the most conservative market implied expectations.

Figure 68: CFROI & CFROI revisions benchmarking of Chinese baijiu distillers

TM Source: Credit Suisse HOLT Lens

On a HOLT P/B vs CFROI basis, where we look at how the market is valuing future economic returns, most Chinese brands are undervalued vs their global liquor peers, in line with our EV/EBITDA valuation that their long-term value is still underappreciated.

China Liquor Sector 30 6 June 2019

Figure 69: HOLT P/B vs CFROI for global liquor companies

TM Note: The four largest baijiu distillers are highlighted in red. Source: Credit Suisse HOLT Lens

Figure 65 reflects our forecast sales, margins and asset turns for our baijiu top pick Wuliangye from FY2018-2020E. Given Wuliangye has delivered persistent CFROI above 8% for the past five years, it is designated with eCAP award (Empirical Competitive Advantage Period). If the company is able to sustain its margin with top line growth moderated to 7% (roughly half of its FY20 level) till FY28E, this would yield a HOLT fair value of Rmb128, in line with our OUTPERFORM rating and target price of Rmb130.0.

Figure 70: Wuliangye’s HOLT scenario using CS estimates

TM Source: Credit Suisse HOLT Lens

China Liquor Sector 31 6 June 2019

HOLT view on Chinese breweries The HOLT P/B vs CFROI chart in Figure 66 shows that Chinese brewers’ economic returns are much lower than foreign brands, consistent with our view that their lower profitability is due to lower ASPs and lower utilisation rates. If our thesis that domestic players are on the fast track of profitability improvement plays out, and CR Beer and Tsingtao Beer can improve their forecast CFROI from 8.7% and 5.5%, respectively, to the global best-in-class breweries’ level of 10.7%, significant upside could be warranted.

Figure 71: HOLT P/B vs CFROI for global brewers

TM Note: The three largest brewers are highlighted in red. Source: Credit Suisse HOLT Lens

Out of the four beer companies, IBES consensus expects CR Beer to deliver the sharpest improvement in forecast CFROI over the next two years, reflecting analysts’ optimism on its premiumisation strategy and potential to further gain market share in the premium segment. In contrast, our least preferred stock Yanjing exhibits a low and declining CFROI profile.

Figure 72: CFROI & CFROI revisions benchmarking of Chinese brewers

TM Source: Credit Suisse HOLT Lens .

Figure 68 reflects a more refined valuation scenario for CR Beer. Beyond the next three years of IBES estimates, in order to justify our target price of HK$40.5, CR Beer needs to deliver around 10% top-line growth, with margins improving to 31% over the next ten years.

China Liquor Sector 32 6 June 2019

Globally, only the best-in-class peers such as ABI and AmBev have operated at a similar EBITDA margin level and sales growth over the past two decades.

Figure 73: CS analyst’s TP for CRB implies 10% top-line growth, with margins expanding to 31% by FY28E

TM Source: Credit Suisse HOLT Lens

Similarly for Tsingtao Beer (H), beyond the next three years of IBES estimates, our target price of HK$63 implies 10% top-line growth, with margin improving to 32% over the next ten years.

Figure 74: CS analyst’s TP for Tsingtao implies 10% sales growth and 32% EBITDA margin by FY28E

TM Source: Credit Suisse HOLT Lens

China Liquor Sector 33 6 June 2019

Asia Pacific/China Beer & Alcoholic Beverages

Tsingtao Brewery (0168.HK / 168 HK) Rating OUTPERFORM Price (04-Jun-19, HK$) 45.30 INCREASE TARGET PRICE Target price (HK$) (from 48.00) 63.00 Upside/downside (%) 39.1

Mkt cap (HK$/US$ mn) 65,937 / 8,409 Positive changes to close valuation gap Enterprise value (Rmb mn) 45,436 Number of shares (mn) 1,351 ■ Maintain OUTPERFORM on Tsingtao Brewery (H). Over the past few Free float (%) 94.1 years, Tsingtao's profitability fell behind CRB, despite a higher ASP on more 52-wk price range (HK$) 52.90-29.80 ADTO-6M (US$ mn) 53.8 premium product portfolio. We mainly attribute this to weaker execution and Target price is for 12 months. less efficient operations. But we believe positive changes are just about to

happen with the help of its new management and Fosun (second-largest Research Analysts

shareholder with 17.99% stake). As reforms gradually reflected, we expect a Michael Shen steady EBITDA margin improvement to 16.5% in 2019 (from 13.3% in 2018), 852 2101 6711 [email protected] and thus valuation multiple to catch up with CRB. Tony Wang ■ Enhanced execution on new management. The new CEO (on board mid- 852 2101 6728 [email protected] 2018) provides a clear path of margin expansion through several reforms, Harriet Liu including (1) capacity closure—at least 10 plants to be closed over the next 852 2101 6591 five years (two closures in 2018), (2) consistent price hikes based on a stable [email protected] market share (<5% nationwide price lift for majority products, market share gains in 2018), (3) product-mix upgrade to Tsingtao brand while eliminating low-end products, especially in the loss-making regions, and (4) channel reform—cutting distribution expense and layers, allocating good-performing managers to loss-making markets, and more closely aligning sales persons' interest with their performance. ■ Fosun brings more synergy. Tsingtao is well positioned in the consumption upgrade trend, thanks to its premium brand image. We think marketing and product portfolio is the key to be outstanding in the premium market. Therefore, we expect Tsingtao would continue to gain market share, leveraging Fosun's capability to (1) strengthen effectiveness of marketing and (2) enhance portfolio through potential introduction of foreign brand. ■ Tsingtao Brewery (H) is our top pick on its specific catalyst and attractive valuation. We lift 2019-20E earnings by 8-15%, assuming higher margin, and introduce 2021E. After changes, we look for 19% earnings CAGR over 2018-20E. We lift TP to HK$63.00 (from HK$48.00), based on 14x 2020E EV/EBITDA, which is at a 10% discount to CRB's target multiple. Share price performance Financial and valuation metrics

Year 12/18A 12/19E 12/20E 12/21E Revenue (Rmb mn) 24,248.7 25,723.0 27,287.0 28,667.7 EBITDA (Rmb mn) 3,226.0 3,678.7 4,195.9 4,728.1 EBIT (Rmb mn) 2,087.6 2,516.5 3,042.4 3,590.1 Net profit (Rmb mn) 1,531.5 1,833.0 2,172.4 2,548.1 EPS (CS adj.) (Rmb) 1.13 1.36 1.61 1.89 Chg. from prev. EPS (%) n.a. 8.1 15.1 n.a. Consensus EPS (Rmb) n.a. 1.23 1.41 1.64 EPS growth (%) 20.5 19.7 18.5 17.3 The price relative chart measures performance against the P/E (x) 35.2 29.4 24.8 21.2 MSCI CHINA F IDX which closed at 7,543.11 on 04/06/19. Dividend yield (%) 1.1 1.1 1.1 1.1 On 04/06/19 the spot exchange rate was HK$7.84/US$1 EV/EBITDA (x) 14.2 12.2 10.3 8.7

Performance 1M 3M 12M P/B (x) 3.0 2.85 2.69 2.52 Absolute (%) (12.0) 34.4 (6.8) ROE (%) 8.7 9.9 11.2 12.3 Relative (%) 2.6 47.3 15.4 Net debt/equity (%) (65.5) (66.6) (71.0) (74.6)

Source: Company data, Refinitiv, Credit Suisse estimates

China Liquor Sector 34 6 June 2019

Tsingtao Brewery (0168.HK / 168 HK) Price (04 Jun 2019): HK$45.30; Rating: OUTPERFORM; Target Price: (from HK$48.00) HK$63.00; Analyst: Michael Shen Income Statement (Rmb mn) 12/18A 12/19E 12/20E 12/21E Company Background Sales revenue 24,249 25,723 27,287 28,668 Tsingtao Brewery Company Limited produces and distributes beer Cost of goods sold 16,556 17,312 18,009 18,577 products. The company markets its products throughout China and EBITDA 3,226 3,679 4,196 4,728 around the world under the Tsingtao Beer brand name. EBIT 2,088 2,517 3,042 3,590 Net interest expense/(inc.) (497) (517) (560) (641) Blue/Grey Sky Scenario Recurring PBT 2,585 3,033 3,602 4,231 Profit after tax 1,670 2,001 2,374 2,786 Reported net profit 1,531 1,833 2,172 2,548 Net profit (Credit Suisse) 1,531 1,833 2,172 2,548 Balance Sheet (Rmb mn) 12/18A 12/19E 12/20E 12/21E Cash & cash equivalents 12,536 13,489 15,303 17,234 Current receivables 462 481 513 541 Inventories 2,651 2,652 2,759 2,845 Other current assets 2,111 2,064 2,072 2,079 Current assets 17,760 18,686 20,646 22,699 Property, plant & equip. 10,676 10,640 10,654 10,719 Investments 0 0 0 0 Intangibles 3,907 3,746 3,598 3,464 Other non-current assets 1,731 1,733 1,734 1,736 Total assets 34,075 34,805 36,633 38,618 Current liabilities 12,087 11,708 12,209 12,624 Total liabilities 15,385 15,007 15,507 15,923 Shareholders' equity 17,970 18,911 20,038 21,370 Minority interests 719 887 1,088 1,326 Total liabilities & equity 34,075 34,806 36,634 38,619 Cash Flow (Rmb mn) 12/18A 12/19E 12/20E 12/21E EBIT 2,088 2,517 3,042 3,590 Net interest (513) (517) (560) (641)

Tax paid (87) 0 0 0 Working capital 2,080 (87) 337 280 Our Blue Sky Scenario (HK$) (from 59.80) 69.00 Other cash & non-cash items 1,003 833 1,106 1,088 Our Blue Sky suggests a valuation of HK$69.0, assuming a 2% Operating cash flow 4,571 2,746 3,926 4,317 higher ASP (average selling price) on higher contribution from high- Capex (762) (982) (1,037) (1,086) end products. Free cash flow to the firm 3,810 1,764 2,889 3,230 Investing cash flow (817) (385) (398) (365) Our Grey Sky Scenario (HK$) (from 31.76) 39.00 Equity raised 0 0 0 0 Our Grey Sky suggests a valuation of HK$39.0, assuming a 2% Dividends paid (639) (780) (933) (1,103) lower ASP on higher discounting level. Financing cash flow (641) (780) (933) (1,103) Total cash flow 3,114 1,581 2,595 2,848 Share price performance Adjustments 0 0 0 0 Net change in cash 3,114 1,581 2,595 2,848 Per share 12/18A 12/19E 12/20E 12/21E Shares (wtd avg.) (mn) 1,351 1,351 1,351 1,351 EPS (Credit Suisse) (Rmb) 1.13 1.36 1.61 1.89 DPS (Rmb) 0.45 0.45 0.45 0.45 Operating CFPS (Rmb) 3.38 2.03 2.91 3.20 Earnings 12/18A 12/19E 12/20E 12/21E Growth (%) Sales revenue 1.2 6.1 6.1 5.1 EBIT 18.9 20.5 20.9 18.0 EPS 20.5 19.7 18.5 17.3 Margins (%) EBITDA 13.3 14.3 15.4 16.5 EBIT 8.6 9.8 11.1 12.5 The price relative chart measures performance against the MSCI CHINA F IDX Valuation (x) 12/18A 12/19E 12/20E 12/21E which closed at 7,543.11 on 04-Jun-2019 P/E 35.2 29.4 24.8 21.2 On 04-Jun-2019 the spot exchange rate was HK$7.84/US$1 P/B 3.00 2.85 2.69 2.52 Dividend yield (%) 1.1 1.1 1.1 1.1 EV/sales 1.9 1.7 1.6 1.4 EV/EBITDA 14.2 12.2 10.3 8.7 EV/EBIT 22.0 17.8 14.2 11.5 ROE analysis (%) 12/18A 12/19E 12/20E 12/21E ROE 8.7 9.9 11.2 12.3 ROIC 19.4 26.0 32.1 40.4 Credit ratios 12/18A 12/19E 12/20E 12/21E Net debt/equity (%) (65.5) (66.6) (71.0) (74.6) Net debt/EBITDA (x) (3.79) (3.59) (3.58) (3.58)

Source: Company data, Refinitiv, Credit Suisse estimates

China Liquor Sector 35 6 June 2019

Asia Pacific/China Beer & Alcoholic Beverages

Tsingtao Brewery (600600.SS) Rating (from NEUTRAL) OUTPERFORM Price (04-Jun-19, Rmb) 45.90 UPGRADE RATING Target price (Rmb) (from 41.30) 54.80 Upside/downside (%) 19.4

Mkt cap (Rmb/US$ mn) 58,087 / 8,409 Positive changes to close valuation gap Enterprise value (Rmb mn) 45,443 Number of shares (mn) 1,351 ■ Over the past few years, Tsingtao's profitability fell behind CRB’s, despite a Free float (%) 32.6 higher ASP on more premium product portfolio. We mainly attribute this to 52-wk price range (Rmb) 54.30-28.69 ADTO-6M (US$ mn) 53.2 weaker execution and less efficient operations. But we believe positive Target price is for 12 months. changes are just about to happen with the help of its new management and

Fosun (second-largest shareholder with 17.99% stake). As reforms gradually Research Analysts

reflected, we expect a steady EBITDA margin improvement to 16.5% in 2019 Michael Shen (from 13.3% in 2018) and thus valuation multiple to catch up with CRB. 852 2101 6711 [email protected] ■ Enhanced execution on new management. The new CEO (on board mid- Tony Wang 2018) provides a clear path of margin expansion through several reforms, 852 2101 6728 [email protected] including (1) capacity closure—at least 10 plants to be closed over the next Harriet Liu five years (two closures in 2018), (2) consistent price hikes based on a stable 852 2101 6591 market share (<5% nationwide price lift for majority products, market share [email protected] gains in 2018), (3) product-mix upgrade to Tsingtao brand while eliminating low-end products, especially in the loss-making regions, and (4) channel reform—cutting distribution expense and layers, allocating good-performing managers to loss-making markets, and more closely aligning sales persons' interest with their performance. ■ Fosun brings more synergy. Tsingtao is well positioned in the consumption upgrade trend, thanks to its premium brand image. We think marketing and product portfolio is the key to be outstanding in the premium market. Therefore, we expect Tsingtao would continue to gain market share, leveraging Fosun's capability to (1) strengthen effectiveness of marketing and (2) enhance portfolio through potential introduction of foreign brand. ■ Upgrade Tsingtao Brewery (A) to OUTPERFORM. We lift our 2019-20E earnings by 8-15%, assuming a higher margin, and introduce 2021 estimates. After changes, we look for 19% earnings CAGR over 2018-20E. We lift TP to Rmb54.80 (from Rmb41.30), based on 14x 2020E EV/EBITDA, which is at a 10% discount to CRB's target multiple. Share price performance Financial and valuation metrics

Year 12/18A 12/19E 12/20E 12/21E Revenue (Rmb mn) 24,248.7 25,723.0 27,287.0 28,667.7 EBITDA (Rmb mn) 3,226.0 3,678.7 4,195.9 4,728.1 EBIT (Rmb mn) 2,087.6 2,516.5 3,042.4 3,590.1 Net profit (Rmb mn) 1,531.5 1,833.0 2,172.4 2,548.1 EPS (CS adj.) (Rmb) 1.13 1.36 1.61 1.89 Chg. from prev. EPS (%) n.a. 8.1 15.1 n.a. Consensus EPS (Rmb) n.a. 1.25 1.46 1.7 EPS growth (%) 20.5 19.7 18.5 17.3 The price relative chart measures performance against the P/E (x) 40.5 33.8 28.5 24.3 Shanghai Shenzhen CSI300 index which closed at Dividend yield (%) 1.0 1.0 1.0 1.0 3,598.47 on 04/06/19. On 04/06/19 the spot exchange rate EV/EBITDA (x) 14.2 12.2 10.3 8.7 was Rmb6.91/US$1 P/B (x) 3.45 3.28 3.09 2.9

Performance 1M 3M 12M ROE (%) 8.7 9.9 11.2 12.3 Absolute (%) (10.0) 15.4 (9.5) Net debt/equity (%) (65.5) (66.6) (71.0) (74.6)

Relative (%) (2.0) 21.9 (4.0) Source: Company data, Refinitiv, Credit Suisse estimates

China Liquor Sector 36 6 June 2019

Tsingtao Brewery (600600.SS) Price (04 Jun 2019): Rmb45.90; Rating: (from NEUTRAL) OUTPERFORM; Target Price: (from Rmb41.3) Rmb54.8; Analyst: Michael Shen Income Statement (Rmb mn) 12/18A 12/19E 12/20E 12/21E Company Background Sales revenue 24,249 25,723 27,287 28,668 Tsingtao Brewery Company Limited produces and distributes beer Cost of goods sold 16,556 17,312 18,009 18,577 products. The company markets its products throughout China and EBITDA 3,226 3,679 4,196 4,728 around the world under the Tsingtao Beer brand name. EBIT 2,088 2,517 3,042 3,590 Net interest expense/(inc.) (497) (517) (560) (641) Blue/Grey Sky Scenario Recurring PBT 2,585 3,033 3,602 4,231 Profit after tax 1,670 2,001 2,374 2,786 Reported net profit 1,531 1,833 2,172 2,548 Net profit (Credit Suisse) 1,531 1,833 2,172 2,548 Balance Sheet (Rmb mn) 12/18A 12/19E 12/20E 12/21E Cash & cash equivalents 12,536 13,489 15,303 17,234 Current receivables 462 481 513 541 Inventories 2,651 2,652 2,759 2,845 Other current assets 2,111 2,064 2,072 2,079 Current assets 17,760 18,686 20,646 22,699 Property, plant & equip. 10,676 10,640 10,654 10,719 Investments 0 0 0 0 Intangibles 3,907 3,746 3,598 3,464 Other non-current assets 1,731 1,733 1,734 1,736 Total assets 34,075 34,805 36,633 38,618 Current liabilities 12,087 11,708 12,209 12,624 Total liabilities 15,385 15,007 15,507 15,923 Shareholders' equity 17,970 18,911 20,038 21,370 Minority interests 719 887 1,088 1,326 Total liabilities & equity 34,075 34,806 36,634 38,619 Cash Flow (Rmb mn) 12/18A 12/19E 12/20E 12/21E EBIT 2,088 2,517 3,042 3,590 Net interest (513) (517) (560) (641)

Tax paid (87) 0 0 0 Working capital 2,080 (87) 337 280 Our Blue Sky Scenario (Rmb) (from 50.80) 60.80 Other cash & non-cash items 1,003 833 1,106 1,088 Our Blue Sky suggests a valuation of Rmb60.8, assuming a 2% Operating cash flow 4,571 2,746 3,926 4,317 higher ASP (average selling price) on higher contribution from high- Capex (762) (982) (1,037) (1,086) end products. Free cash flow to the firm 3,810 1,764 2,889 3,230 Investing cash flow (817) (385) (398) (365) Our Grey Sky Scenario (Rmb) (from 27.00) 34.30 Equity raised 0 0 0 0 Our Grey Sky suggests a valuation of Rmb34.3, assuming a 2% Dividends paid (639) (780) (933) (1,103) lower ASP on higher discounting level. Financing cash flow (641) (780) (933) (1,103) Total cash flow 3,114 1,581 2,595 2,848 Share price performance Adjustments 0 0 0 0 Net change in cash 3,114 1,581 2,595 2,848 Per share 12/18A 12/19E 12/20E 12/21E Shares (wtd avg.) (mn) 1,351 1,351 1,351 1,351 EPS (Credit Suisse) (Rmb) 1.13 1.36 1.61 1.89 DPS (Rmb) 0.45 0.45 0.45 0.45 Operating CFPS (Rmb) 3.38 2.03 2.91 3.20 Earnings 12/18A 12/19E 12/20E 12/21E Growth (%) Sales revenue 1.2 6.1 6.1 5.1 EBIT 18.9 20.5 20.9 18.0 EPS 20.5 19.7 18.5 17.3 Margins (%) EBITDA 13.3 14.3 15.4 16.5 EBIT 8.6 9.8 11.1 12.5 The price relative chart measures performance against the Shanghai Valuation (x) 12/18A 12/19E 12/20E 12/21E Shenzhen CSI300 index which closed at 3,598.47 on 04-Jun-2019 P/E 40.5 33.8 28.5 24.3 On 04-Jun-2019 the spot exchange rate was Rmb6.91/US$1 P/B 3.45 3.28 3.09 2.90 Dividend yield (%) 1.0 1.0 1.0 1.0 EV/sales 1.9 1.7 1.6 1.4 EV/EBITDA 14.2 12.2 10.3 8.7 EV/EBIT 22.0 17.8 14.2 11.5 ROE analysis (%) 12/18A 12/19E 12/20E 12/21E ROE 8.7 9.9 11.2 12.3 ROIC 19.4 26.0 32.1 40.4 Credit ratios 12/18A 12/19E 12/20E 12/21E Net debt/equity (%) (65.5) (66.6) (71.0) (74.6) Net debt/EBITDA (x) (3.79) (3.59) (3.58) (3.58)

Source: Company data, Refinitiv, Credit Suisse estimates

China Liquor Sector 37 6 June 2019

Asia Pacific/China Beer & Alcoholic Beverages

China Resources Beer (Holdings)

Company Limited (0291.HK / 291 HK) Rating OUTPERFORM Price (04-Jun-19, HK$) 33.25 INCREASE TARGET PRICE Target price (HK$) (from 39.50) 40.50 Upside/downside (%) 21.8

Mkt cap (HK$/US$ mn) 107,869 / 13,757 Long-term story intact Enterprise value (Rmb mn) 93,053 Number of shares (mn) 3,244 ■ We are positive on CRB as we notice its quality growth and margin expansion Free float (%) 47.7 are well on track. Meanwhile, the company fully completed the transaction of 52-wk price range (HK$) 38.95-24.35 ADTO-6M (US$ mn) 26.0 acquiring Heineken China during end-April, which reinforces market Target price is for 12 months. confidence of its future development in the premium market.

Research Analysts ■ Volume is recovering. CRB experienced an 8% YoY volume decline in 2H18

Michael Shen due to a 10% price hike on average for the majority of its products and 852 2101 6711 lukewarm economy. Our channel check suggests that its volume has [email protected] regained the growth momentum and outperformed the industry growth this Tony Wang year, mainly on the back of (1) fading negative impact of price hike, (2) pick- 852 2101 6728 [email protected] up of FAI growth (support for mass market consumption), (3) solid catering Harriet Liu sales growth, and (4) accelerating growth of mid-/high-end products. 852 2101 6591 [email protected] ■ Heineken is the key of premiumisation. In addition to capacity closure, premiumisation is the most effective way to lift ASP and margin. Though CRB has launched several batches of high-end products these years, we think the key to success in the premium market is to leverage on Heineken, given its strong brand awareness among consumers. With a more comprehensive portfolio (foreign + Chinese brands), we believe it could help strengthen CRB's bargain power and quickly gain market share in the premium market. ■ Maintain OUTPERFORM. We cut 2019-20E earnings by 3-8% assuming higher selling expense to support new product development, and introduce 2021 forecasts. After rolling over valuation base to 2020, we lift TP to HK$40.50 (from HK$39.50), which is based on 16x 2020E EV/EBITDA (high- end of global peers). Share price performance Financial and valuation metrics

Year 12/18A 12/19E 12/20E 12/21E Revenue (Rmb mn) 31,867.0 33,473.1 35,160.1 36,932.2 EBITDA (Rmb mn) 4,419.0 5,168.1 5,966.0 6,648.0 EBIT (Rmb mn) 2,766.0 3,581.6 4,395.0 5,059.7 Net profit (Rmb mn) 2,332.2 2,894.9 3,578.6 4,138.6 EPS (CS adj.) (Rmb) 0.72 0.89 1.1 1.28 Chg. from prev. EPS (%) n.a. (3.9) (8.0) n.a. Consensus EPS (Rmb) n.a. 0.66 0.96 1.18 EPS growth (%) 27.3 24.1 23.6 15.6 The price relative chart measures performance against the P/E (x) 40.7 32.8 26.6 23.0 MSCI CHINA F IDX which closed at 7,543.11 on 04/06/19. Dividend yield (%) 0.4 0.7 1.0 1.2 On 04/06/19 the spot exchange rate was HK$7.84/US$1 EV/EBITDA (x) 21.2 17.8 15.2 13.3

Performance 1M 3M 12M P/B (x) 5.04 4.67 4.27 3.87 Absolute (%) (8.4) 5.2 (11.2) ROE (%) 12.5 14.8 16.8 17.7 Relative (%) 6.1 18.1 11.0 Net debt/equity (%) (6.4) (14.6) (20.6) (25.8)

Source: Company data, Refinitiv, Credit Suisse estimates

China Liquor Sector 38 6 June 2019

China Resources Beer (Holdings) Company Limited (0291.HK / 291 HK) Price (04 Jun 2019): HK$33.25; Rating: OUTPERFORM; Target Price: (from HK$39.50) HK$40.50; Analyst: Michael Shen Income Statement (Rmb mn) 12/18A 12/19E 12/20E 12/21E Company Background Sales revenue 31,867 33,473 35,160 36,932 CR Beer is the leading brewry company in China, and their main Cost of goods sold 20,669 21,389 22,081 22,824 brand "Snow" is the No.1 beer brand all over the world in terms of EBITDA 4,419 5,168 5,966 6,648 sales volume. EBIT 2,766 3,582 4,395 5,060 Net interest expense/(inc.) (67) (51) (125) (181) Blue/Grey Sky Scenario Recurring PBT 1,532 2,595 3,711 4,613 Profit after tax 2,340 2,895 3,579 4,139 Reported net profit 2,332 2,895 3,579 4,139 Net profit (Credit Suisse) 2,332 2,895 3,579 4,139 Balance Sheet (Rmb mn) 12/18A 12/19E 12/20E 12/21E Cash & cash equivalents 1,925 3,566 5,210 6,981 Current receivables 906 608 628 649 Inventories 5,379 5,566 5,746 5,940 Other current assets 240 240 240 240 Current assets 8,450 9,980 11,824 13,809 Property, plant & equip. 19,632 19,408 19,547 19,976 Investments 0 0 0 0 Intangibles 8,514 8,493 8,408 8,323 Other non-current assets 2,675 2,675 2,675 2,675 Total assets 39,271 40,556 42,455 44,784 Current liabilities 18,370 17,815 17,785 17,761 Total liabilities 20,361 20,180 20,163 20,157 Shareholders' equity 18,867 20,332 22,249 24,584 Minority interests 62 62 62 62 Total liabilities & equity 39,271 40,556 42,455 44,784 Cash Flow (Rmb mn) 12/18A 12/19E 12/20E 12/21E EBIT 2,766 3,582 4,395 5,060 Net interest (63) (51) (125) (181)

Tax paid (881) (779) (1,039) (1,246) Working capital 542 54 (236) (249) Our Blue Sky Scenario (HK$) (from 47.00) 42.00 Other cash & non-cash items 2,804 2,624 2,380 2,216 Our Blue Sky Scenario suggests a valuation of HK$42.0, assuming Operating cash flow 5,168 5,430 5,374 5,600 a 2% higher ASP (average selling price) thanks to higher Capex (1,641) (2,377) (2,496) (2,622) contribution from high-end products Free cash flow to the firm 3,527 3,053 2,878 2,977 Investing cash flow (1,014) (2,275) (2,320) (2,390) Our Grey Sky Scenario (HK$) (from 38.00) 28.90 Equity raised 0 0 0 0 Our Grey Sky Scenario suggests a valuation of HK$28.9, assuming Dividends paid (529) (351) (756) (1,033) a 2% lower ASP on higher discounting level. Financing cash flow (3,454) (525) (786) (1,054) Total cash flow 700 2,629 2,268 2,156 Share price performance Adjustments 0 0 0 0 Net change in cash 700 2,629 2,268 2,156 Per share 12/18A 12/19E 12/20E 12/21E Shares (wtd avg.) (mn) 3,244 3,244 3,244 3,244 EPS (Credit Suisse) (Rmb) 0.72 0.89 1.10 1.28 DPS (Rmb) 0.12 0.20 0.29 0.36 Operating CFPS (Rmb) 1.59 1.67 1.66 1.73 Earnings 12/18A 12/19E 12/20E 12/21E Growth (%) Sales revenue 7.2 5.0 5.0 5.0 EBIT 6.8 29.5 22.7 15.1 EPS 27.3 24.1 23.6 15.6 Margins (%) EBITDA 13.9 15.4 17.0 18.0 EBIT 8.7 10.7 12.5 13.7 The price relative chart measures performance against the MSCI CHINA F IDX Valuation (x) 12/18A 12/19E 12/20E 12/21E which closed at 7,543.11 on 04-Jun-2019 P/E 40.7 32.8 26.6 23.0 On 04-Jun-2019 the spot exchange rate was HK$7.84/US$1 P/B 5.04 4.67 4.27 3.87 Dividend yield (%) 0.4 0.7 1.0 1.2 EV/sales 2.9 2.7 2.6 2.4 EV/EBITDA 21.2 17.8 15.2 13.3 EV/EBIT 33.9 25.7 20.6 17.5 ROE analysis (%) 12/18A 12/19E 12/20E 12/21E ROE 12.5 14.8 16.8 17.7 ROIC 9.6 14.3 18.0 20.5 Credit ratios 12/18A 12/19E 12/20E 12/21E Net debt/equity (%) (6.4) (14.6) (20.6) (25.8) Net debt/EBITDA (x) (0.27) (0.58) (0.77) (0.95)

Source: Company data, Refinitiv, Credit Suisse estimates

China Liquor Sector 39 6 June 2019

Asia Pacific/China Beer & Alcoholic Beverages

Wuliangye Yibin Co., Ltd (000858.SZ / 000858 CH) Rating OUTPERFORM Price (04-Jun-19, Rmb) 99.19 ASSUMING COVERAGE Target price (Rmb) (from 97.00) 130.00 Upside/downside (%) 31.1

Mkt cap (Rmb/US$ mn) 385,017 / 55,741 Stronger momentum to drive further re-rating Enterprise value (Rmb mn) 332,551 Number of shares (mn) 3,882 ■ We assume coverage of Wuliangye with OUTPERFORM and TP of Free float (%) 43.1 Rmb130.00. Wuliangye is our top pick in the China baijiu sector as we like its 52-wk price range (Rmb) 110-47.49 ADTO-6M (US$ mn) 437.1 (1) fastest growth momentum within the premium segment, thanks to Moutai’s Target price is for 12 months. supply constraints and restored distributors’ confidence; (2) further

improvement in channel and operational efficiency; and (3) valuation discount Research Analysts

to Moutai (~13% in terms of EV/EBTIDA). We estimate 25.8% Tony Wang revenue/earnings CAGR over 2018-20E vs Moutai’s 19.7%. 852 2101 6728 [email protected] ■ Enhance brand positioning and channel profitability to bear fruit. Given Michael Shen Moutai’s capacity constraints in 2019-20E, we believe Wuliangye is best 852 2101 6711 [email protected] positioned to benefit from the unmet demand for Moutai. As the company’s Harriet Liu flagship product retail price to Moutai’s is at a historical low of 0.47, we think 852 2101 6591 management’s initiatives to enhance its brand positioning and promote [email protected] distributors’ profitability will bear fruit in 2H19. The current wholesale price of the seventh-generation flagship product stands at Rmb890 per bottle, already on par with the ex-factory price of eighth-generation to be launched in June. ■ Channel reform is the next leg of the story. With the visible improvement in channel profitability, we believe the company’s sales target in 2019E (25k t for flagship product) could be easily achieved. We also remain positive on Wuliangye’s channel reform (a more flattish distribution network and digitalization) and product strategy (streamline its product portfolio), which should underpin a sustainable growth from 2020 and onwards. ■ Valuation discount to Moutai to narrow. We lift our 2019-20E earnings by 6-8% on higher margin assumptions, and lift TP to Rmb130.00 (from Rmb97.00) based on DCF valuation, which implies 19.3x/15.4x 2019/20E EV/EBITDA, at 10% discount to Moutai’s targeted multiples vs 10-year average of 14%. . Share price performance Financial and valuation metrics

Year 12/18A 12/19E 12/20E 12/21E Revenue (Rmb mn) 34,121.7 43,205.4 51,748.3 59,750.0 EBITDA (Rmb mn) 17,994.7 23,353.0 28,641.6 33,610.9 EBIT (Rmb mn) 17,431.7 22,704.3 27,950.5 32,874.8 Net profit (Rmb mn) 13,384.0 17,282.1 21,189.8 24,926.3 EPS (CS adj.) (Rmb) 3.45 4.45 5.46 6.42 Chg. from prev. EPS (%) n.a. 6.4 8.0 n.a. Consensus EPS (Rmb) n.a. 4.33 5.16 6.24 EPS growth (%) 35.3 29.1 22.6 17.6 The price relative chart measures performance against the P/E (x) 28.8 22.3 18.2 15.4 Shanghai Shenzhen CSI300 index which closed at Dividend yield (%) 1.7 2.2 2.8 3.2 3,598.47 on 04/06/19. On 04/06/19 the spot exchange rate EV/EBITDA (x) 18.7 14.0 11.1 9.0 was Rmb6.91/US$1 P/B (x) 6.06 5.19 4.44 3.81

Performance 1M 3M 12M ROE (%) 22.9 25.1 26.3 26.5 Absolute (%) (3.1) 28.8 21.3 Net debt/equity (%) (75.2) (74.6) (75.3) (76.7)

Relative (%) 4.9 35.3 26.8 Source: Company data, Refinitiv, Credit Suisse estimates

China Liquor Sector 40 6 June 2019

Wuliangye Yibin Co., Ltd (000858.SZ / 000858 CH) Price (04 Jun 2019): Rmb99.19; Rating: OUTPERFORM; Target Price: (from Rmb97.00) Rmb130.00; Analyst: Tony Wang Income Statement (Rmb mn) 12/18A 12/19E 12/20E 12/21E Company Background Sales revenue 34,122 43,205 51,748 59,750 Wuliangye Yibin Co., Ltd headquartered in Yibin, Sichuan Province, Cost of goods sold 10,487 12,477 14,238 15,867 is one of the leading manufacturers of mid-to-high end Chinese EBITDA 17,995 23,353 28,642 33,611 spirits. The company distributes its products all over the domestic EBIT 17,432 22,704 27,951 32,875 market, and exports to overseas markets. Net interest expense/(inc.) (1,085) (1,227) (1,374) (1,564) Recurring PBT 18,607 24,115 29,528 34,662 Blue/Grey Sky Scenario Profit after tax 14,038 18,134 22,235 26,101 Reported net profit 13,384 17,282 21,190 24,926 Net profit (Credit Suisse) 13,384 17,282 21,190 24,926 Balance Sheet (Rmb mn) 12/18A 12/19E 12/20E 12/21E Cash & cash equivalents 48,960 57,163 67,932 81,140 Current receivables 17,134 22,691 27,177 31,380 Inventories 11,795 14,357 16,774 18,693 Other current assets 221 280 335 387 Current assets 78,110 94,490 112,219 131,600 Property, plant & equip. 5,665 5,733 5,893 6,133 Investments 0 0 0 0 Intangibles 414 426 435 441 Other non-current assets 1,905 2,041 2,196 2,372 Total assets 86,094 102,690 120,742 140,547 Current liabilities 20,708 25,768 30,227 34,525 Total liabilities 20,975 26,035 30,494 34,792 Shareholders' equity 63,487 74,170 86,719 101,051 Minority interests 1,632 2,484 3,530 4,704 Total liabilities & equity 86,094 102,690 120,742 140,547 Cash Flow (Rmb mn) 12/18A 12/19E 12/20E 12/21E EBIT 17,432 22,704 27,951 32,875 Net interest 0 0 0 0 Tax paid 0 0 0 0

Working capital 0 0 0 0 Other cash & non-cash items 263 519 541 566 Our Blue Sky Scenario (Rmb) (from 110.00) 155.00 Operating cash flow 17,694 23,223 28,492 33,441 Our blue sky scenario valuation of Rmb155 is based on 35% 2019E Capex (381) (735) (866) (989) EBITDA growth (vs. base case of 28%), 22.5x 2019E EV/EBITDA Free cash flow to the firm 17,313 22,488 27,626 32,452 (vs. base case of 19.3x). Investing cash flow (381) (735) (866) (989) Equity raised 0 0 0 0 Our Grey Sky Scenario (Rmb) (from 74.00) 77.00 Dividends paid (5,410) (6,599) (8,641) (10,595) Our grey sky scenario valuation of Rmb77 is based on 23% 2019E Financing cash flow (3,596) (6,599) (8,641) (10,595) EBITDA growth (vs. base case of 28%), 11.0x 2019E EV/EBITDA Total cash flow 13,717 15,889 18,985 21,857 (vs. base case of 19.3x). Adjustments 0 0 0 0 Net change in cash 13,717 15,889 18,985 21,857 Share price performance Per share 12/18A 12/19E 12/20E 12/21E Shares (wtd avg.) (mn) 3,882 3,882 3,882 3,882 EPS (Credit Suisse) (Rmb) 3.45 4.45 5.46 6.42 DPS (Rmb) 1.70 2.23 2.73 3.21 Operating CFPS (Rmb) 4.56 5.98 7.34 8.62 Earnings 12/18A 12/19E 12/20E 12/21E Growth (%) Sales revenue 27.8 26.6 19.8 15.5 EBIT 41.2 30.2 23.1 17.6 EPS 35.3 29.1 22.6 17.6 Margins (%) EBITDA 52.7 54.1 55.3 56.3 EBIT 51.1 52.5 54.0 55.0 Valuation (x) 12/18A 12/19E 12/20E 12/21E P/E 28.8 22.3 18.2 15.4 The price relative chart measures performance against the Shanghai P/B 6.06 5.19 4.44 3.81 Shenzhen CSI300 index which closed at 3,598.47 on 04-Jun-2019 Dividend yield (%) 1.7 2.2 2.8 3.2 On 04-Jun-2019 the spot exchange rate was Rmb6.91/US$1 EV/sales 9.8 7.6 6.1 5.1 EV/EBITDA 18.7 14.0 11.1 9.0 EV/EBIT 19.3 14.4 11.3 9.2 ROE analysis (%) 12/18A 12/19E 12/20E 12/21E ROE 22.9 25.1 26.3 26.5 ROIC 87.0 95.8 100.7 105.5 Credit ratios 12/18A 12/19E 12/20E 12/21E Net debt/equity (%) (75.2) (74.6) (75.3) (76.7) Net debt/EBITDA (x) (2.72) (2.45) (2.37) (2.41)

Source: Company data, Refinitiv, Credit Suisse estimates

China Liquor Sector 41 6 June 2019

Asia Pacific/China Beer & Alcoholic Beverages

Luzhou Laojiao Co., Ltd (000568.SZ / 000568 CH) Rating OUTPERFORM Price (04-Jun-19, Rmb) 67.90 ASSUMING COVERAGE Target price (Rmb) (from 65.00) 86.00 Upside/downside (%) 26.7

Mkt cap (Rmb/US$ mn) 99,457 / 14,399 Price hike and efficiency lift are key drivers Enterprise value (Rmb mn) 89,831 Number of shares (mn) 1,465 ■ We assume coverage of Luzhou Laojiao with OUTPERFORM and TP of Free float (%) 47.5 Rmb86.00. We see Laojiao as another beneficiary of baijiu’s premiumisation 52-wk price range (Rmb) 81.00-35.60 ADTO-6M (US$ mn) 121.3 and further gaining share, thanks to Moutai’s supply constraints. We also Target price is for 12 months. expect margin upside over 2019-20E on management’s initiatives to improve

channel and operational efficiency. Therefore, we estimate 28% earnings Research Analysts

CAGR over 2018-20E on the back of 19% revenue CAGR. Tony Wang 852 2101 6728 ■ Beneficiary of other premium brands’ price hikes. Given Moutai’s capacity [email protected] constraints and Wuliangye’s price hikes, we expect Laojiao to benefit by Michael Shen hiking prices as well as gaining share in the fast-growing premium segment. 852 2101 6711 [email protected] On 25 May, Laojiao instructed its distributors to lift the wholesale price by Harriet Liu ~11% for Guojiao 1573. We are positive on the success of price hike at the 852 2101 6591 current stage and believe this would help underpin its revenue growth and [email protected] margin.

■ Focus on channel and operations efficiency. We see ample room for Laojiao to improve efficiency in the future. In 2018, Laojiao's selling expense amounted to be 29.6% (up from 11.6% in 2014), vs Wuliangye's 11.1% and Yanghe's 10.6%. We think this high expense ratio is mainly due to (1) an extra channel subsidy to motivate distributors on lower channel profitability and (2) less efficient operation on lower output sales forces. But we think things could change positively, as (1) successful price hike would improve channel profitability, thereby cutting subsidy level, and (2) management is likely to align staff's interest more closely with performance to improve efficiency. Therefore, we model 19%/28% sales/earnings CAGR over 2018- 20E, with margin expansion mainly driven by mix upgrade, price hike, and improved operation efficiency. ■ Valuation. We lift our 2019-20E earnings by 10-11% on higher volume growth in premium baijiu segment and raise TP to Rmb86 (from Rmb65) based on DCF valuation, implying 19.2x/15.2x 2019/20E EV/EBITDA. We view Laojiao is trading attractively at 22x/18x 2019E/20E P/E with 0.8 PEG. Share price performance Financial and valuation metrics

Year 12/18A 12/19E 12/20E 12/21E Revenue (Rmb mn) 11,449.6 13,749.2 16,125.9 18,294.6 EBITDA (Rmb mn) 4,841.0 6,310.5 7,877.4 9,204.9 EBIT (Rmb mn) 4,677.0 6,142.3 7,597.1 8,801.3 Net profit (Rmb mn) 3,485.6 4,599.1 5,695.2 6,602.9 EPS (CS adj.) (Rmb) 2.38 3.14 3.89 4.51 Chg. from prev. EPS (%) n.a. 10.0 11.3 n.a. Consensus EPS (Rmb) n.a. 3.08 3.79 4.62 EPS growth (%) 32.2 31.9 23.8 15.9 The price relative chart measures performance against the P/E (x) 28.5 21.6 17.5 15.1 Shanghai Shenzhen CSI300 index which closed at Dividend yield (%) 2.3 3.2 4.0 4.6 3,598.47 on 04/06/19. On 04/06/19 the spot exchange rate EV/EBITDA (x) 18.6 14.2 11.2 9.4 was Rmb6.91/US$1 P/B (x) 5.91 5.19 4.6 4.1

Performance 1M 3M 12M ROE (%) 21.9 25.6 27.9 28.8 Absolute (%) (12.8) 26.7 (2.4) Net debt/equity (%) (54.7) (51.2) (49.4) (51.9)

Relative (%) (4.8) 33.2 3.1 Source: Company data, Refinitiv, Credit Suisse estimates

China Liquor Sector 42 6 June 2019

Luzhou Laojiao Co., Ltd (000568.SZ / 000568 CH) Price (04 Jun 2019): Rmb67.90; Rating: OUTPERFORM; Target Price: (from Rmb65.00) Rmb86.00; Analyst: Tony Wang Income Statement (Rmb mn) 12/18A 12/19E 12/20E 12/21E Company Background Sales revenue 11,450 13,749 16,126 18,295 Luzhou Laojiao is one of leading manufacture of Chinese spirits in Cost of goods sold 2,934 3,097 3,361 3,660 Sichuan. The Company's leading product is is famous for being EBITDA 4,841 6,311 7,877 9,205 brewed in an environment with a unique clay composition that gives EBIT 4,677 6,142 7,597 8,801 the spirit its famous aroma and palette. Net interest expense/(inc.) (215) (264) (299) (342) Recurring PBT 4,874 6,398 7,895 9,148 Blue/Grey Sky Scenario Profit after tax 3,510 4,622 5,724 6,636 Reported net profit 3,486 4,599 5,695 6,603 Net profit (Credit Suisse) 3,486 4,599 5,695 6,603 Balance Sheet (Rmb mn) 12/18A 12/19E 12/20E 12/21E Cash & cash equivalents 9,367 9,972 10,859 12,780 Current receivables 2,565 3,226 3,779 4,284 Inventories 3,230 3,410 3,700 4,030 Other current assets 331 378 437 470 Current assets 15,494 16,986 18,775 21,564 Property, plant & equip. 1,030 2,658 4,357 5,343 Investments 2,091 2,241 2,391 2,541 Intangibles 232 233 233 233 Other non-current assets 3,758 3,345 2,665 1,834 Total assets 22,605 25,463 28,422 31,515 Current liabilities 5,415 5,921 6,376 6,820 Total liabilities 5,481 5,987 6,441 6,885 Shareholders' equity 16,828 19,157 21,633 24,249 Minority interests 160 183 211 244 Total liabilities & equity 22,605 25,463 28,422 31,515 Cash Flow (Rmb mn) 12/18A 12/19E 12/20E 12/21E EBIT 4,364 5,729 7,148 8,310 Net interest 0 0 0 0 Tax paid 0 0 0 0

Working capital 0 0 0 0 Other cash & non-cash items (66) (1,469) (1,741) (1,843) Our Blue Sky Scenario (Rmb) (from 80.00) 95.00 Operating cash flow 4,298 4,259 5,407 6,467 Our blue sky scenario valuation of Rmb95 is based on 38% 2019E Capex (1,468) (1,385) (1,300) (559) EBITDA growth (vs. base case of 32%), 20.2x 2019E EV/EBITDA Free cash flow to the firm 2,829 2,874 4,107 5,908 (vs. base case of 19.2x). Investing cash flow (1,465) (1,385) (1,301) (559) Equity raised 0 0 0 0 Our Grey Sky Scenario (Rmb) (from 60.00) 57.00 Dividends paid (1,912) (2,270) (3,219) (3,987) Our grey sky scenario valuation of Rmb57 is based on 20% 2019E Financing cash flow (1,917) (2,270) (3,219) (3,987) EBITDA growth (vs. base case of 32%), 13.2x 2019E EV/EBITDA Total cash flow 916 604 887 1,921 (vs. base case of 19.2x). Adjustments 0 0 0 0 Net change in cash 916 604 887 1,921 Share price performance Per share 12/18A 12/19E 12/20E 12/21E Shares (wtd avg.) (mn) 1,465 1,465 1,465 1,465 EPS (Credit Suisse) (Rmb) 2.38 3.14 3.89 4.51 DPS (Rmb) 1.55 2.20 2.72 3.16 Operating CFPS (Rmb) 2.93 2.91 3.69 4.42 Earnings 12/18A 12/19E 12/20E 12/21E Growth (%) Sales revenue 26.4 20.1 17.3 13.4 EBIT 36.4 31.3 23.7 15.8 EPS 32.2 31.9 23.8 15.9 Margins (%) EBITDA 42.3 45.9 48.8 50.3 EBIT 40.8 44.7 47.1 48.1 Valuation (x) 12/18A 12/19E 12/20E 12/21E P/E 28.5 21.6 17.5 15.1 The price relative chart measures performance against the Shanghai P/B 5.91 5.19 4.60 4.10 Shenzhen CSI300 index which closed at 3,598.47 on 04-Jun-2019 Dividend yield (%) 2.3 3.2 4.0 4.6 On 04-Jun-2019 the spot exchange rate was Rmb6.91/US$1 EV/sales 7.9 6.5 5.5 4.7 EV/EBITDA 18.6 14.2 11.2 9.4 EV/EBIT 19.3 14.6 11.7 9.8 ROE analysis (%) 12/18A 12/19E 12/20E 12/21E ROE 21.9 25.6 27.9 28.8 ROIC 48.9 54.4 56.2 58.4 Credit ratios 12/18A 12/19E 12/20E 12/21E Net debt/equity (%) (54.7) (51.2) (49.4) (51.9) Net debt/EBITDA (x) (1.93) (1.58) (1.38) (1.39)

Source: Company data, Refinitiv, Credit Suisse estimates

China Liquor Sector 43 6 June 2019

Asia Pacific/China Beer & Alcoholic Beverages

Kweichow Moutai Co., Ltd (600519.SS / 600519 CH) Rating OUTPERFORM Price (04-Jun-19, Rmb) 875.30 ASSUMING COVERAGE Target price (Rmb) (from 850.00) 1,065 Upside/downside (%) 21.7

Mkt cap (Rmb/US$ mn) 1,099,550 / 159,189 Better placed to navigate through the storm Enterprise value (Rmb mn) 976,530 Number of shares (mn) 1,256 ■ We assume coverage of Moutai with OUTPERFORM and TP of Free float (%) 34.7 Rmb1,065. Despite near-term uncertainty on corporate governance issue, we 52-wk price range (Rmb) 975-524 ADTO-6M (US$ mn) 519.4 still like Moutai as the best-in-class quality stock from a long-term perspective. Target price is for 12 months. We expect the company to deliver 17% earnings CAGR over 2018-23E, with

much lower volatility than in previous cycles. Trading at 14x 2020E Research Analysts

EV/EBITDA (vs global peers at 19x), we believe the current valuation is still Tony Wang undemanding. 852 2101 6728 [email protected] ■ Long-term growth trajectory intact, with lower volatility. We believe the Michael Shen tight supply-demand situation with Moutai, China’s most recognised premium 852 2101 6711 [email protected] baijiu brand, will last longer given the fast-growing demand (>8% per annum) Harriet Liu and limited supply (production volume to grow 3% CAGR in 2018-23E to 56k 852 2101 6591 t), which underpins a sustainable ASP increase. Moreover, with the strong [email protected] growth of tailor-made products and series products targeting the mass segment as well as better channel management, we believe Moutai could deliver a more resilient growth, even amidst an industry slowdown. ■ Await removal of corporate governance overhang. The market has been increasingly concerned over Moutai’s corporate governance since its state- owned parent group set up a sales-arm on 5 May, which could potentially jeopardise Moutai's ability to raise ASPs. We are still await for more clarity from the management, but think a worst-case scenario is unlikely to happen, as Chairmen Li has pledged that the group won’t hurt the interests of minority shareholders. In our base case, we model ex-factory price of Moutai-branded products to increase 9%/11% in 2019E/20E on the back of rising contribution of tailor-made products and direct sales from its self-owned channels. ■ Valuation premium to sustain. We lift our 2019-20E earnings by 8-11% on higher ASP and gross margin assumptions, and raise our TP by 25% to Rmb1,065 (from Rmb850) based on DCF valuation. Our TP implies 20.6x/17.3x 2019/20E EV/EBITDA, in line with global spirit peers, premium to global peers for its superior profitability and high earnings visibility. Share price performance Financial and valuation metrics

Year 12/18A 12/19E 12/20E 12/21E Revenue (Rmb mn) 62,349.9 73,481.2 85,577.0 98,402.0 EBITDA (Rmb mn) 49,081.1 58,660.8 68,529.6 78,884.5 EBIT (Rmb mn) 47,905.8 57,429.0 67,165.8 77,467.0 Net profit (Rmb mn) 35,203.6 42,674.1 50,407.8 58,410.2 EPS (CS adj.) (Rmb) 28.02 33.97 40.13 46.5 Chg. from prev. EPS (%) n.a. 8.5 10.9 n.a. Consensus EPS (Rmb) n.a. 33.92 40.02 47.44 EPS growth (%) 30.0 21.2 18.1 15.9 The price relative chart measures performance against the P/E (x) 31.2 25.8 21.8 18.8 Shanghai Shenzhen CSI300 index which closed at Dividend yield (%) 1.7 2.0 2.4 2.8 3,598.47 on 04/06/19. On 04/06/19 the spot exchange rate EV/EBITDA (x) 20.1 16.4 13.6 11.4 was Rmb6.91/US$1 P/B (x) 9.74 8.01 6.72 5.68

Performance 1M 3M 12M ROE (%) 34.5 34.1 33.5 32.7 Absolute (%) (10.1) 14.0 11.9 Net debt/equity (%) (95.5) (95.1) (95.2) (95.6)

Relative (%) (2.1) 20.5 17.4 Source: Company data, Refinitiv, Credit Suisse estimates

China Liquor Sector 44 6 June 2019

Kweichow Moutai Co., Ltd (600519.SS / 600519 CH) Price (04 Jun 2019): Rmb875.30; Rating: OUTPERFORM; Target Price: (from Rmb850.00) Rmb1,065; Analyst: Tony Wang Income Statement (Rmb mn) 12/18A 12/19E 12/20E 12/21E Company Background Sales revenue 62,350 73,481 85,577 98,402 Kweichow Moutai Co., Ltd is one of the leading manufactures of Cost of goods sold 6,523 6,932 7,404 8,377 Chinese spirits. The Company's spirit products are distilled from EBITDA 49,081 58,661 68,530 78,885 sorghum and wheat. The brand "Feitian Moutai" is the best known EBIT 47,906 57,429 67,166 77,467 Chinese spirits brand in China. Net interest expense/(inc.) (3,428) (4,121) (5,097) (6,183) Recurring PBT 50,828 61,017 71,729 83,117 Blue/Grey Sky Scenario Profit after tax 37,830 45,641 53,797 62,337 Reported net profit 35,204 42,674 50,408 58,410 Net profit (Credit Suisse) 35,204 42,674 50,408 58,410 Balance Sheet (Rmb mn) 12/18A 12/19E 12/20E 12/21E Cash & cash equivalents 112,075 137,683 166,191 199,313 Current receivables 958 998 1,097 1,203 Inventories 23,507 24,688 26,980 31,672 Other current assets 1,322 1,234 1,319 1,492 Current assets 137,862 164,603 195,587 233,679 Property, plant & equip. 17,203 19,002 20,296 20,938 Investments 0 0 0 0 Intangibles 3,499 3,469 3,438 3,408 Other non-current assets 1,283 919 556 193 Total assets 159,847 187,993 219,878 258,218 Current liabilities 42,438 43,208 45,257 49,772 Total liabilities 42,438 43,208 45,257 49,772 Shareholders' equity 112,839 137,249 163,695 193,593 Minority interests 4,570 7,537 10,926 14,853 Total liabilities & equity 159,847 187,993 219,878 258,218 Cash Flow (Rmb mn) 12/18A 12/19E 12/20E 12/21E EBIT 47,906 57,429 67,166 77,467 Net interest (3,428) (4,121) (5,097) (6,183) Tax paid 12,998 15,376 17,932 20,779

Working capital 2,025 (375) (437) (467) Other cash & non-cash items 1,530 1,584 1,716 1,770 Our Blue Sky Scenario (Rmb) (from 900.00) 1,200 Operating cash flow 61,030 69,893 81,280 93,366 Our Blue Sky Scenario suggests a valuation of Rmb1,200, 30% Capex (1,607) (2,989) (2,617) (2,018) 2019E EPS growth (vs. base case 20% ) and 21.6x 2019E Free cash flow to the firm 59,424 66,903 78,663 91,348 EV/EBITDA (vs. base case 20.9x). Investing cash flow (1,640) (2,989) (2,617) (2,018) Equity raised 0 0 0 0 Our Grey Sky Scenario (Rmb) (from 740.00) 710.00 Dividends paid (16,441) (18,264) (23,961) (28,512) Our Grey Sky Scenario suggests a valuation of Rmb710, 15% Financing cash flow (16,441) (18,264) (23,961) (28,512) 2019E EPS growth (vs. base case 20% ) and 13.5x 2019E Total cash flow 42,949 48,640 54,701 62,836 EV/EBITDA (vs. base case 20.9x). Adjustments 0 0 0 0 Net change in cash 42,949 48,640 54,701 62,836 Share price performance Per share 12/18A 12/19E 12/20E 12/21E Shares (wtd avg.) (mn) 1,256 1,256 1,256 1,256 EPS (Credit Suisse) (Rmb) 28.02 33.97 40.13 46.50 DPS (Rmb) 14.54 17.83 21.27 24.88 Operating CFPS (Rmb) 48.58 55.64 64.70 74.32 Earnings 12/18A 12/19E 12/20E 12/21E Growth (%) Sales revenue 25.2 17.9 16.5 15.0 EBIT 32.4 19.9 17.0 15.3 EPS 30.0 21.2 18.1 15.9 Margins (%) EBITDA 78.7 79.8 80.1 80.2 EBIT 76.8 78.2 78.5 78.7 Valuation (x) 12/18A 12/19E 12/20E 12/21E P/E 31.2 25.8 21.8 18.8 The price relative chart measures performance against the Shanghai P/B 9.74 8.01 6.72 5.68 Shenzhen CSI300 index which closed at 3,598.47 on 04-Jun-2019 Dividend yield (%) 1.7 2.0 2.4 2.8 On 04-Jun-2019 the spot exchange rate was Rmb6.91/US$1 EV/sales 15.8 13.1 10.9 9.1 EV/EBITDA 20.1 16.4 13.6 11.4 EV/EBIT 20.6 16.7 13.9 11.6 ROE analysis (%) 12/18A 12/19E 12/20E 12/21E ROE 34.5 34.1 33.5 32.7 ROIC 528.8 690.8 648.6 661.6 Credit ratios 12/18A 12/19E 12/20E 12/21E Net debt/equity (%) (95.5) (95.1) (95.2) (95.6) Net debt/EBITDA (x) (2.28) (2.35) (2.43) (2.53)

Source: Company data, Refinitiv, Credit Suisse estimates

China Liquor Sector 45 6 June 2019

Asia Pacific/China Beer & Alcoholic Beverages

Shanxi Xinghuacun Fen Wine Factory

Co., Ltd (600809.SS / 600809 CH) Rating (from OUTPERFORM) NEUTRAL [V] Price (04-Jun-19, Rmb) 53.80 ASSUMING COVERAGE Target price (Rmb) (from 65.00) 60.00 Upside/downside (%) 11.5

Mkt cap (Rmb/US$ mn) 46,888 / 6,788 SOE reform bears fruit but fairly priced Enterprise value (Rmb mn) 45,489 Number of shares (mn) 871.53 ■ Assume coverage, with rating downgrade to NEUTRAL. We are Free float (%) 28.5 constructive on Fen Wine’s SOE reform, nationwide expansion, product-mix 52-wk price range (Rmb) 66.61-31.46 ADTO-6M (US$ mn) 58.0 upgrade and industry-wide price hike. But uncertainties in end-customers’ Target price is for 12 months. willingness towards retail price increment, more fierce competition amid mid- [V] = Stock Considered Volatile (see Disclosure Appendix) end baijiu products, and slower-than-expected nationwide penetration could

Research Analysts increase earnings downside risks. We forecast a 21.4% EPS CAGR in 2019-

Tony Wang 20, which is a deceleration from 67.8% CAGR in 2016-18. We view the stock 852 2101 6728 fairly valued at ~23x NTM P/E, which is in line with its domestic peers. [email protected]

Michael Shen ■ More SOE reform likely to come. With the backdrop of Double Hundred 852 2101 6711 Reform Action announced by China’s government, Fen Wine's SOE reform is [email protected] well under way. In February 2018, its largest shareholder, Shanxi SASAC, Harriet Liu transferred 11.5% shares to CRE Yang Company Ltd (subsidiary of China 852 2101 6591 [email protected] Resource Group). After the transaction, Shanxi SASAC's stake dipped from 70.0% to 58.5%. We think more SOE reform is likely to be implemented to further diversify the holding structure, through various ways such as launching scheme and introducing strategic investors and quality distributors. ■ Expand nationwide with product-mix upgrade and price hike. We expect this regional leader to continue its expansion. (2018/1Q19 sees sales growth YoY outside Shanxi +63.6%/+43.9% vs +37.4%/+11.6% within Shanxi). We forecast 2019 top line/bottom line growth 24.9%/24.2% (vs 2018: 47.5%/54.0%) on its strong performance from mid-to-high-end brands such as Qinghua. We see Fen Wine further upgrading its product-mix, together with the baijiu industry trend of retail price hike, aiming to obtain more shares in the mid-to-high baijiu market. ■ Valuation. We lower our 2019-20E earnings by 3-11% on fierce competition in high-end baijiu segment, and lower TP to Rmb60.00 (from Rmb65.00) based on DCF valuation. Fen Wine share is trading at 22x 2020E P/E, which is in line with the weighted average of domestic baijiu peers. Share price performance Financial and valuation metrics

Year 12/18A 12/19E 12/20E 12/21E Revenue (Rmb mn) 7,586.3 9,476.3 11,409.6 13,105.0 EBITDA (Rmb mn) 2,441.8 2,855.5 3,357.1 3,735.8 EBIT (Rmb mn) 2,177.0 2,701.7 3,202.3 3,576.8 Net profit (Rmb mn) 1,466.7 1,821.8 2,160.5 2,521.7 EPS (CS adj.) (Rmb) 1.69 2.1 2.5 2.91 Chg. from prev. EPS (%) n.a. (3.0) (10.8) n.a. Consensus EPS (Rmb) n.a. 2.23 2.77 3.33 EPS growth (%) 54.0 24.2 18.6 16.7 The price relative chart measures performance against the P/E (x) 31.8 25.6 21.6 18.5 Shanghai Shenzhen CSI300 index which closed at Dividend yield (%) 1.4 1.8 2.1 2.4 3,598.47 on 04/06/19. On 04/06/19 the spot exchange rate EV/EBITDA (x) 18.7 15.9 13.4 11.9 was Rmb6.91/US$1 P/B (x) 7.5 6.31 5.34 4.53

Performance 1M 3M 12M ROE (%) 25.3 26.8 26.8 26.5 Absolute (%) (6.3) (2.4) (17.8) Net debt/equity (%) (20.0) (19.8) (20.2) (20.5)

Relative (%) 1.7 4.1 (12.3) Source: Company data, Refinitiv, Credit Suisse estimates

China Liquor Sector 46 6 June 2019

Shanxi Xinghuacun Fen Wine Factory Co., Ltd (600809.SS / 600809 CH) Price (04 Jun 2019): Rmb53.80; Rating: (from OUTPERFORM) NEUTRAL [V]; Target Price: (from Rmb65.00) Rmb60.00; Analyst: Tony Wang Income Statement (Rmb mn) 12/18A 12/19E 12/20E 12/21E Company Background Sales revenue 7,586 9,476 11,410 13,105 Shanxi Fen Wine is engaged in the distilling and distribution of liquor Cost of goods sold 3,170 3,885 4,621 5,281 products, principally in Shanxi province.The company is mainly EBITDA 2,442 2,856 3,357 3,736 engaged in the production and sale of Fen liquor, Zhuyeqing liquor EBIT 2,177 2,702 3,202 3,577 and the related series liquor products. Net interest expense/(inc.) (27) (36) (43) (53) Recurring PBT 2,202 2,728 3,235 3,630 Blue/Grey Sky Scenario Profit after tax 1,560 1,938 2,298 2,683 Reported net profit 1,467 1,822 2,161 2,522 Net profit (Credit Suisse) 1,467 1,822 2,161 2,522 Balance Sheet (Rmb mn) 12/18A 12/19E 12/20E 12/21E Cash & cash equivalents 1,296 1,538 1,869 2,249 Current receivables 3,740 4,712 5,671 6,513 Inventories 3,156 3,832 4,684 5,498 Other current assets 823 849 875 898 Current assets 9,015 10,931 13,099 15,159 Property, plant & equip. 1,904 1,854 1,821 1,802 Investments 13 13 13 13 Intangibles 233 230 227 226 Other non-current assets 662 662 662 662 Total assets 11,828 13,690 15,823 17,862 Current liabilities 5,309 5,882 6,537 6,865 Total liabilities 5,326 5,898 6,553 6,882 Shareholders' equity 6,214 7,387 8,727 10,277 Minority interests 267 384 522 683 Total liabilities & equity 11,808 13,669 15,802 17,841 Cash Flow (Rmb mn) 12/18A 12/19E 12/20E 12/21E EBIT 2,150 2,666 3,159 3,524 Net interest 0 0 0 0 Tax paid 0 0 0 0

Working capital 0 0 0 0 Other cash & non-cash items 468 357 358 363 Our Blue Sky Scenario (Rmb) (from 74.00) 70.00 Operating cash flow 2,618 3,023 3,518 3,886 Our Blue Sky Scenario suggests a valuation of Rmb70.0, assuming Capex (75) (100) (120) (138) a 28% 2019E EBITDA growth (vs. base case of 24%), and19.2x Free cash flow to the firm 2,543 2,924 3,397 3,748 2019E EV/EBITDA. (vs. base case of 18x ). Investing cash flow (361) (100) (120) (138) Equity raised 0 0 0 0 Our Grey Sky Scenario (Rmb) (from 60.00) 47.90 Dividends paid (560) (649) (820) (972) Our Grey Sky Scenario suggests a valuation of Rmb47.9, assuming Financing cash flow (776) (655) (820) (972) a 18% 2019E EBITDA growth (vs. base case of 24%), and14.2x Total cash flow 1,482 2,268 2,578 2,776 2019E EV/EBITDA. (vs. base case of 18x ). Adjustments 0 0 0 0 Net change in cash 1,482 2,268 2,578 2,776 Share price performance Per share 12/18A 12/19E 12/20E 12/21E Shares (wtd avg.) (mn) 866 866 866 866 EPS (Credit Suisse) (Rmb) 1.69 2.10 2.50 2.91 DPS (Rmb) 0.75 0.95 1.12 1.31 Operating CFPS (Rmb) 3.02 3.49 4.06 4.49 Earnings 12/18A 12/19E 12/20E 12/21E Growth (%) Sales revenue 48.1 24.9 20.4 14.9 EBIT 56.1 24.1 18.5 11.7 EPS 54.0 24.2 18.6 16.7 Margins (%) EBITDA 32.2 30.1 29.4 28.5 EBIT 28.7 28.5 28.1 27.3 Valuation (x) 12/18A 12/19E 12/20E 12/21E P/E 31.8 25.6 21.6 18.5 The price relative chart measures performance against the Shanghai P/B 7.50 6.31 5.34 4.53 Shenzhen CSI300 index which closed at 3,598.47 on 04-Jun-2019 Dividend yield (%) 1.4 1.8 2.1 2.4 On 04-Jun-2019 the spot exchange rate was Rmb6.91/US$1 EV/sales 6.0 4.8 3.9 3.4 EV/EBITDA 18.7 15.9 13.4 11.9 EV/EBIT 20.9 16.8 14.1 12.5 ROE analysis (%) 12/18A 12/19E 12/20E 12/21E ROE 25.3 26.8 26.8 26.5 ROIC 33.0 34.2 34.1 33.5 Credit ratios 12/18A 12/19E 12/20E 12/21E Net debt/equity (%) (20.0) (19.8) (20.2) (20.5) Net debt/EBITDA (x) (0.53) (0.54) (0.56) (0.60)

Source: Company data, Refinitiv, Credit Suisse estimates

China Liquor Sector 47 6 June 2019

Asia Pacific/China Beer & Alcoholic Beverages

Jiangsu Yanghe Brewery Joint-stock

Co., Ltd (002304.SZ / 002304 CH) Rating OUTPERFORM Price (04-Jun-19, Rmb) 111.22 ASSUMING COVERAGE Target price (Rmb) (from 124.00) 130.00 Upside/downside (%) 16.9

Mkt cap (Rmb/US$ mn) 167,607 / 24,266 Dream series is the key to win Enterprise value (Rmb mn) 163,958 Number of shares (mn) 1,507 ■ We assume coverage with OUTPERFORM and TP of Rmb130.00. Yanghe Free float (%) 25.7 is in the middle of a channel recovery, especially within Jiangsu Province, by 52-wk price range (Rmb) 150-84.80 ADTO-6M (US$ mn) 118.2 monitoring destocking process and raising the guided retail price to build up Target price is for 12 months. distributors’ confidence. With the good track record of execution, we expect

Yanghe to further expand outside Jiangsu Province, while maintaining shares Research Analysts

in its base market, which should remove market concerns over its weak top Tony Wang line momentum. With the stock trading at 11.1x 2020E EV/EBITDA, the 852 2101 6728 [email protected] lowest among CS-covered baijiu names, we view the risk-reward as highly Michael Shen attractive. 852 2101 6711 [email protected] ■ Focus on Dream series and new market. Thanks to the stock incentive Harriet Liu plan, Yanghe is equipped with efficient management to set strategy and 852 2101 6591 monitor the execution. To upgrade product-mix, management positions [email protected] Yanghe Dream (over Rmb300/bottle) as the major profit-generating series, targeting to achieve over 30% sales growth in 2019 (vs 2018: 50%). Higher- end product sales like M6 will exceed M3 in 2019, in our view. Price increment in Dream series, especially M9, can help Yanghe achieve its brand- building target. The company aims sales outside Jiangsu to contribute over 50% in 2019 (vs 49% in 2018) by promoting high-end series such as Dream. ■ Double-digit growth triggered by channel reform. Management guides a growing retail price of Sea, Sky and Dream series, and closely monitors channel destocking. We expect selling and distribution expense to slightly increase for assisting Jiangsu Province’s distributors. However, due to management’s efficient execution, we believe the overall SG&A ratio can remain stable at ~18%. ■ Valuation. Our DCF-based TP of Rmb130.00 (previously Rmb124.00) implies 15x/13x 2019/20E EV/EBITDA, suggesting 17% potential upside. Share price performance Financial and valuation metrics

Year 12/18A 12/19E 12/20E 12/21E Revenue (Rmb mn) 20,389.9 22,949.0 25,235.7 27,527.6 EBITDA (Rmb mn) 11,418.0 12,905.2 14,244.9 15,412.4 EBIT (Rmb mn) 10,660.6 12,200.2 13,567.3 14,759.8 Net profit (Rmb mn) 8,115.2 9,224.5 10,264.4 11,175.8 EPS (CS adj.) (Rmb) 5.39 6.12 6.81 7.42 Chg. from prev. EPS (%) n.a. 0.6 (0.5) n.a. Consensus EPS (Rmb) n.a. 6.18 7.07 8.08 EPS growth (%) 22.5 13.7 11.3 8.9 The price relative chart measures performance against the P/E (x) 20.7 18.2 16.3 15.0 Shanghai Shenzhen CSI300 index which closed at Dividend yield (%) 2.9 3.3 3.7 4.0 3,598.47 on 04/06/19. On 04/06/19 the spot exchange rate EV/EBITDA (x) 14.4 12.7 11.1 10.1 was Rmb6.91/US$1 P/B (x) 4.98 4.49 4.04 3.65

Performance 1M 3M 12M ROE (%) 25.7 26.0 26.1 25.6 Absolute (%) (5.5) (7.0) (21.3) Net debt/equity (%) (10.8) (9.9) (22.6) (25.9)

Relative (%) 2.6 (0.5) (15.8) Source: Company data, Refinitiv, Credit Suisse estimates

China Liquor Sector 48 6 June 2019

Jiangsu Yanghe Brewery Joint-stock Co., Ltd (002304.SZ / 002304 CH) Price (04 Jun 2019): Rmb111.22; Rating: OUTPERFORM; Target Price: (from Rmb124.00) Rmb130.00; Analyst: Tony Wang Income Statement (Rmb mn) 12/18A 12/19E 12/20E 12/21E Company Background Sales revenue 20,390 22,949 25,236 27,528 Jiangsu Yanghe Brewery Joint-stock Company Ltd one of leading Cost of goods sold 6,353 6,932 7,465 8,127 manufacture of Chinese spirits. The Company's products include EBITDA 11,418 12,905 14,245 15,412 white spirits, top-graded gifts liquor, and liquor for daily EBIT 10,661 12,200 13,567 14,760 consumption. Net interest expense/(inc.) (65) (82) (105) (131) Recurring PBT 10,839 12,332 13,722 14,941 Blue/Grey Sky Scenario Profit after tax 8,115 9,224 10,264 11,176 Reported net profit 8,115 9,224 10,264 11,176 Net profit (Credit Suisse) 8,115 9,224 10,264 11,176 Balance Sheet (Rmb mn) 12/18A 12/19E 12/20E 12/21E Cash & cash equivalents 3,615 3,696 9,357 11,891 Current receivables 296 389 428 467 Inventories 13,892 18,992 18,408 22,265 Other current assets 18,071 18,081 18,083 18,086 Current assets 35,875 41,158 46,277 52,709 Property, plant & equip. 7,987 7,682 7,405 7,152 Investments 2,723 2,723 2,723 2,723 Intangibles 2,059 2,059 2,059 2,059 Other non-current assets 920 920 920 920 Total assets 49,564 54,542 59,383 65,563 Current liabilities 15,628 16,926 17,669 19,388 Total liabilities 15,939 17,228 17,963 19,672 Shareholders' equity 33,645 37,334 41,440 45,910 Minority interests (20) (20) (20) (20) Total liabilities & equity 49,564 54,542 59,383 65,563 Cash Flow (Rmb mn) 12/18A 12/19E 12/20E 12/21E EBIT 10,661 12,200 13,567 14,760 Net interest 0 0 0 0 Tax paid 0 0 0 0

Working capital 1,191 (5,087) 651 (3,766) Other cash & non-cash items (2,795) (2,273) (3,305) (2,797) Our Blue Sky Scenario (Rmb) (from 140.00) 151.40 Operating cash flow 9,057 4,840 10,914 8,197 Our Blue Sky Scenario suggests a valuation of Rmb151.4, assuming Capex (471) (400) (400) (400) a 2019E EBITDA growth 17% (vs. base case of 14%), and 16.8x Free cash flow to the firm 8,586 4,440 10,514 7,797 2019E EV/EBITDA (vs. base case of 14.5x). Investing cash flow (3,349) 775 907 1,042 Equity raised 0 0 0 0 Our Grey Sky Scenario (Rmb) (from 110.00) 80.00 Dividends paid (3,843) (5,535) (6,159) (6,705) Our Grey Sky Scenario suggests a valuation of Rmb80.0, assuming Financing cash flow (3,841) (5,535) (6,159) (6,705) a 2019E EBITDA growth 10% (vs. base case of 14%), and 9.3x Total cash flow 1,866 80 5,662 2,533 2019E EV/EBITDA (vs. base case of 14.5x). Adjustments 0 0 0 0 Net change in cash 1,866 80 5,662 2,533 Share price performance Per share 12/18A 12/19E 12/20E 12/21E Shares (wtd avg.) (mn) 1,507 1,507 1,507 1,507 EPS (Credit Suisse) (Rmb) 5.39 6.12 6.81 7.42 DPS (Rmb) 3.20 3.67 4.09 4.45 Operating CFPS (Rmb) 6.01 3.21 7.24 5.44 Earnings 12/18A 12/19E 12/20E 12/21E Growth (%) Sales revenue 8.7 12.6 10.0 9.1 EBIT 21.7 14.4 11.2 8.8 EPS 22.5 13.7 11.3 8.9 Margins (%) EBITDA 56.0 56.2 56.4 56.0 EBIT 52.3 53.2 53.8 53.6 Valuation (x) 12/18A 12/19E 12/20E 12/21E P/E 20.7 18.2 16.3 15.0 The price relative chart measures performance against the Shanghai P/B 4.98 4.49 4.04 3.65 Shenzhen CSI300 index which closed at 3,598.47 on 04-Jun-2019 Dividend yield (%) 2.9 3.3 3.7 4.0 On 04-Jun-2019 the spot exchange rate was Rmb6.91/US$1 EV/sales 8.0 7.1 6.3 5.7 EV/EBITDA 14.4 12.7 11.1 10.1 EV/EBIT 15.4 13.4 11.7 10.6 ROE analysis (%) 12/18A 12/19E 12/20E 12/21E ROE 25.7 26.0 26.1 25.6 ROIC 27.6 28.7 30.9 33.4 Credit ratios 12/18A 12/19E 12/20E 12/21E Net debt/equity (%) (10.8) (9.9) (22.6) (25.9) Net debt/EBITDA (x) (0.32) (0.29) (0.66) (0.77)

Source: Company data, Refinitiv, Credit Suisse estimates

China Liquor Sector 49 6 June 2019

Asia Pacific/China Beer & Alcoholic Beverages

Yanjing Brewery (000729.SZ / 000729 CH) Rating UNDERPERFORM Price (04-Jun-19, Rmb) 6.43 INCREASE TARGET PRICE Target price (Rmb) (from 5.00) 5.60 Upside/downside (%) -12.9

Mkt cap (Rmb/US$ mn) 18,123 / 2,624 Organic turnaround still far away Enterprise value (Rmb mn) 17,406 Number of shares (mn) 2,819 ■ We are negative on Yanjing due to its continued market share loss on its Free float (%) 38.3 unfavourable product-mix, low operations efficiency on weak management 52-wk price range (Rmb) 8.46-5.44 ADTO-6M (US$ mn) 22.1 execution, and lack of clear turnaround signals. Target price is for 12 months. ■ Unfavourable product-mix results in market share loss. Among the major

Research Analysts Chinese players, Yanjing has the least-favourable product-mix, as over 80%

Michael Shen of its volume comes from low-end products (vs CRB's 55% and Tsingtao's 852 2101 6711 50%). As a result, the company faces big pressure amid accelerating [email protected] consumption upgrade trend across the industry, resulting in a market share Tony Wang loss from 11.5% in 2011 to 8.1% in 2018. We think this trend is unlikely to 852 2101 6728 [email protected] reverse in the short-term. Harriet Liu ■ Earnings visibility still low. We do not expect any meaningful turnaround in 852 2101 6591 [email protected] the future, despite some one-off benefits like price hike (but hurting low-end volume the most) and VAT cut. Given the nature of SOE (lack of incentive scheme currently), the relatively conservative style inhibits management’s motivation to conduct positive changes such as premiumisation, capacity optimisation and organisation restructuring. Therefore, we think its growth visibility is low, and forecast 1%/14% sales/earnings CAGR over 2018-20E. ■ Maintain UNDERPERFORM. We cut 2019-20E earnings by 25-27%, assuming lower ASP, and introduce 2021 forecasts. After rolling over valuation base to 2020, we lift TP to Rmb5.60 (from Rmb5.00), which is based on 11x 2020E EV/EBITDA—the historical low-end.

Share price performance Financial and valuation metrics

Year 12/18A 12/19E 12/20E 12/21E Revenue (Rmb mn) 10,214.0 10,210.2 10,402.0 10,597.8 EBITDA (Rmb mn) 1,401.2 1,499.1 1,508.3 1,590.5 EBIT (Rmb mn) 392.0 462.4 504.9 559.7 Net profit (Rmb mn) 179.9 205.4 234.0 269.9 EPS (CS adj.) (Rmb) 0.06 0.07 0.08 0.1 Chg. from prev. EPS (%) n.a. (27.2) (25.3) n.a. Consensus EPS (Rmb) n.a. 0.09 0.11 0.16 EPS growth (%) 11.5 14.2 14.0 15.3 The price relative chart measures performance against the P/E (x) 100.8 88.2 77.4 67.1 Shanghai Shenzhen CSI300 index which closed at Dividend yield (%) 0.3 0.3 0.4 0.4 3,598.47 on 04/06/19. On 04/06/19 the spot exchange rate EV/EBITDA (x) 12.6 11.4 11.5 10.5 was Rmb6.91/US$1 P/B (x) 1.4 1.38 1.36 1.35

Performance 1M 3M 12M ROE (%) 1.4 1.6 1.8 2.0 Absolute (%) (12.9) (3.2) (23.6) Net debt/equity (%) (10.0) (13.5) (12.5) (16.1)

Relative (%) (4.8) 3.3 (18.1) Source: Company data, Refinitiv, Credit Suisse estimates

China Liquor Sector 50 6 June 2019

Yanjing Brewery (000729.SZ / 000729 CH) Price (04 Jun 2019): Rmb6.43; Rating: UNDERPERFORM; Target Price: (from Rmb5.00) Rmb5.60; Analyst: Michael Shen Income Statement (Rmb mn) 12/18A 12/19E 12/20E 12/21E Company Background Sales revenue 10,214 10,210 10,402 10,598 Beijing Yanjing Brewery Co., Ltd. operates in the brewery industry. Cost of goods sold 6,973 6,921 7,018 7,104 The company's products include beer, spring water, beer raw EBITDA 1,401 1,499 1,508 1,591 materials, feeds, yeast, and other related products. EBIT 392 462 505 560 Net interest expense/(inc.) (11) 7 1 2 Blue/Grey Sky Scenario Recurring PBT 410 429 478 532 Profit after tax 224 245 274 310 Reported net profit 180 205 234 270 Net profit (Credit Suisse) 180 205 234 270 Balance Sheet (Rmb mn) 12/18A 12/19E 12/20E 12/21E Cash & cash equivalents 2,139 2,642 2,524 3,084 Current receivables 201 229 207 236 Inventories 3,941 3,740 4,049 3,835 Other current assets 303 302 304 306 Current assets 6,584 6,913 7,084 7,461 Property, plant & equip. 10,143 10,102 10,064 10,028 Investments 301 301 301 301 Intangibles 1,229 1,229 1,229 1,229 Other non-current assets 99 99 99 99 Total assets 18,357 18,644 18,777 19,118 Current liabilities 4,398 4,502 4,431 4,543 Total liabilities 4,416 4,520 4,449 4,561 Shareholders' equity 12,976 13,120 13,283 13,472 Minority interests 870 910 950 990 Total liabilities & equity 18,262 18,549 18,682 19,024 Cash Flow (Rmb mn) 12/18A 12/19E 12/20E 12/21E EBIT 363 442 484 544 Net interest 0 0 0 0

Tax paid 0 0 0 0 Working capital (242) 281 (367) 291 Our Blue Sky Scenario (Rmb) (from 6.50) 7.00 Other cash & non-cash items 743 781 794 783 Our Blue Sky Scenario suggets a valuation of Rmb7.0, assuming a Operating cash flow 864 1,505 911 1,618 2% higher ASP (average selling price) thanks to higher contribution Capex (800) (800) (799) (799) from high-end products. Free cash flow to the firm 64 705 112 819 Investing cash flow (756) (750) (750) (745) Our Grey Sky Scenario (Rmb) (from 4.10) 5.10 Equity raised 0 0 0 0 Our Grey Sky Scenario suggets a valuation of Rmb5.1, assuming a Dividends paid (54) (62) (70) (81) 2% lower ASP on higher discounting level. Financing cash flow 225 (55) (69) (78) Total cash flow 333 699 91 795 Share price performance Adjustments 0 0 0 0 Net change in cash 333 699 91 795 Per share 12/18A 12/19E 12/20E 12/21E Shares (wtd avg.) (mn) 2,819 2,819 2,819 2,819 EPS (Credit Suisse) (Rmb) 0.06 0.07 0.08 0.10 DPS (Rmb) 0.02 0.02 0.02 0.03 Operating CFPS (Rmb) 0.31 0.53 0.32 0.57 Earnings 12/18A 12/19E 12/20E 12/21E Growth (%) Sales revenue 2.5 (0.0) 1.9 1.9 EBIT 83.4 18.0 9.2 10.9 EPS 11.5 14.2 14.0 15.3 Margins (%) EBITDA 13.7 14.7 14.5 15.0 EBIT 3.8 4.5 4.9 5.3 The price relative chart measures performance against the Shanghai Valuation (x) 12/18A 12/19E 12/20E 12/21E Shenzhen CSI300 index which closed at 3,598.47 on 04-Jun-2019 P/E 100.8 88.2 77.4 67.1 On 04-Jun-2019 the spot exchange rate was Rmb6.91/US$1 P/B 1.40 1.38 1.36 1.35 Dividend yield (%) 0.3 0.3 0.4 0.4 EV/sales 1.7 1.7 1.7 1.6 EV/EBITDA 12.6 11.4 11.5 10.5 EV/EBIT 44.9 37.1 34.3 30.0 ROE analysis (%) 12/18A 12/19E 12/20E 12/21E ROE 1.4 1.6 1.8 2.0 ROIC 2.0 2.3 2.5 2.8 Credit ratios 12/18A 12/19E 12/20E 12/21E Net debt/equity (%) (10.0) (13.5) (12.5) (16.1) Net debt/EBITDA (x) (0.99) (1.26) (1.18) (1.47)

Source: Company data, Refinitiv, Credit Suisse estimates

China Liquor Sector 51 6 June 2019

Companies Mentioned (Price as of 04-Jun-2019) AmBev (ABEV3.SA, R$17.35) Anheuser-Busch InBev (ABI.BR, €74.3) Asahi Group Holdings (2502.T, ¥4,790) Brown Forman Corporation (BFb.N, $51.78) Carlsberg (CARLb.CO, Dkr864.6) China Resources Beer (Holdings) Company Limited (0291.HK, HK$33.25, OUTPERFORM, TP HK$40.5) ChongqingBrewery (600132.SS, Rmb42.0) Constellation Brands (STZ.N, $184.44) Diageo (DGE.L, 3298.0p) GU JING (000596.SZ, Rmb101.75) Heineken (HEIN.AS, €95.14) JGJC (000799.SZ, Rmb22.43) Jiangsu Yanghe Brewery Joint-stock Co., Ltd (002304.SZ, Rmb111.22, OUTPERFORM, TP Rmb130.0) King's Luck (603369.SS, Rmb23.4) Kirin Holdings (2503.T, ¥2,320) Kouzijiao (603589.SS, Rmb54.76) Kweichow Moutai Co., Ltd (600519.SS, Rmb875.3, OUTPERFORM, TP Rmb1065.0) Laobaigan Liquor (600559.SS, Rmb15.1) Luzhou Laojiao Co., Ltd (000568.SZ, Rmb67.9, OUTPERFORM, TP Rmb86.0) Pernod-Ricard (PERP.PA, €156.3) Remy Cointreau (RCOP.PA, €120.5) SCSF (600779.SS, Rmb45.0) Shanxi Xinghuacun Fen Wine Factory Co., Ltd (600809.SS, Rmb53.8, NEUTRAL[V], TP Rmb60.0) Shede Spirits (600702.SS, Rmb25.51) Shunxin Agr (000860.SZ, Rmb39.68) Thai Beverage (TBEV.SI, S$0.84) Tsingtao Brewery (0168.HK, HK$45.3, OUTPERFORM, TP HK$63.0) Tsingtao Brewery (600600.SS, Rmb45.9, OUTPERFORM, TP Rmb54.8) Wuliangye Yibin Co., Ltd (000858.SZ, Rmb99.19, OUTPERFORM, TP Rmb130.0) YLT (600197.SS, Rmb17.0) Yanjing Brewery (000729.SZ, Rmb6.43, UNDERPERFORM, TP Rmb5.6)

Disclosure Appendix Analyst Certification Tony Wang, Michael Shen and Harriet Liu each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for China Resources Beer (Holdings) Company Limited (0291.HK)

0291.HK Closing Price Target Price Date (HK$) (HK$) Rating 06-Jul-16 14.90 17.50 N 18-Nov-16 16.52 * 21-Mar-17 18.66 18.20 N 09-Oct-17 21.95 27.70 O * 08-Jan-18 30.35 34.50 22-Mar-18 34.70 39.50 28-Jun-18 36.25 42.50 20-Aug-18 34.05 43.50 23-Oct-18 28.10 * 26-Nov-18 28.25 40.00 O NEUTRAL OUTPERFORM 20-Mar-19 32.90 39.50 * Asterisk signifies initiation or assumption of coverage.

China Liquor Sector 52 6 June 2019

3-Year Price and Rating History for Jiangsu Yanghe Brewery Joint-stock Co., Ltd (002304.SZ)

002304.SZ Closing Price Target Price Date (Rmb) (Rmb) Rating 11-Jul-16 77.48 90.00 O 18-Nov-16 67.58 * 31-Jan-17 70.22 89.00 O 27-Feb-17 80.53 99.00 09-Oct-17 100.00 124.00 * 08-Jan-18 126.32 124.00 N 23-Oct-18 109.90 * 05-Nov-18 97.66 124.00 O * Asterisk signifies initiation or assumption of coverage. OUTPERFORM NEUTRAL

3-Year Price and Rating History for Kweichow Moutai Co., Ltd (600519.SS)

600519.SS Closing Price Target Price Date (Rmb) (Rmb) Rating 11-Jul-16 315.14 380.00 O 18-Nov-16 310.00 * 16-Jan-17 341.47 410.00 O 27-Feb-17 357.20 425.00 25-Apr-17 418.89 495.00 09-Oct-17 527.77 615.00 * 26-Oct-17 605.09 690.00 08-Jan-18 752.13 740.00 N 16-Jul-18 754.68 880.00 O 23-Oct-18 641.74 * OUTPERFORM NEUTRAL 29-Oct-18 549.09 830.00 O * 02-Jan-19 598.98 850.00 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Luzhou Laojiao Co., Ltd (000568.SZ)

000568.SZ Closing Price Target Price Date (Rmb) (Rmb) Rating 27-Jun-16 30.19 32.00 N 17-Nov-16 33.37 32.00 * 19-Apr-17 43.51 46.00 09-Oct-17 56.38 71.00 O * 08-Jan-18 68.45 71.00 N 16-Jul-18 58.72 65.00 23-Oct-18 42.60 * 05-Nov-18 39.59 65.00 O * Asterisk signifies initiation or assumption of coverage. NEUTRAL OUTPERFORM

China Liquor Sector 53 6 June 2019

3-Year Price and Rating History for Shanxi Xinghuacun Fen Wine Factory Co., Ltd (600809.SS)

600809.SS Closing Price Target Price Date (Rmb) (Rmb) Rating 15-Aug-16 22.28 23.00 N 18-Nov-16 22.40 * 31-Jan-17 24.74 23.00 N 01-May-17 31.01 33.00 09-Oct-17 53.98 67.00 O * 25-Oct-17 54.88 71.00 23-Oct-18 36.80 * 05-Nov-18 33.84 65.00 O * Asterisk signifies initiation or assumption of coverage. NEUTRAL OUTPERFORM

3-Year Price and Rating History for Tsingtao Brewery (0168.HK)

0168.HK Closing Price Target Price Date (HK$) (HK$) Rating 30-Aug-16 26.40 31.00 N 18-Nov-16 30.55 * 20-Feb-17 34.75 34.00 N 03-Apr-17 35.30 37.00 09-Oct-17 30.85 31.40 * 08-Jan-18 45.50 48.59 27-Apr-18 39.40 47.00 09-Jul-18 43.20 48.00 O 23-Oct-18 32.65 * 05-Nov-18 32.85 48.00 O NEUTRAL OUTPERFORM * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Tsingtao Brewery (600600.SS)

600600.SS Closing Price Target Price Date (Rmb) (Rmb) Rating 30-Aug-16 29.73 27.12 N 18-Nov-16 30.84 * 20-Feb-17 33.44 32.00 N 03-Apr-17 32.76 34.00 09-Oct-17 31.10 26.61 U * 08-Jan-18 42.02 41.30 N 27-Apr-18 40.69 37.80 U 09-Jul-18 44.35 41.30 N 23-Oct-18 31.90 * 05-Nov-18 32.92 41.30 N NEUTRAL UNDERPERFORM * Asterisk signifies initiation or assumption of coverage.

China Liquor Sector 54 6 June 2019

3-Year Price and Rating History for Wuliangye Yibin Co., Ltd (000858.SZ)

000858.SZ Closing Price Target Price Date (Rmb) (Rmb) Rating 11-Jul-16 37.34 45.00 O 18-Nov-16 34.46 * 16-Jan-17 35.45 45.00 O 27-Feb-17 39.39 50.00 30-Mar-17 42.73 52.00 27-Apr-17 46.00 58.00 09-Oct-17 58.54 72.00 * 26-Oct-17 65.06 77.00 08-Jan-18 82.20 100.00 30-Apr-18 67.98 107.00 OUTPERFORM

23-Oct-18 58.00 * 29-Oct-18 48.87 97.00 O * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Yanjing Brewery (000729.SZ)

000729.SZ Closing Price Target Price Date (Rmb) (Rmb) Rating 18-Nov-16 7.60 7.40 N * 27-Apr-17 7.02 5.80 U 09-Oct-17 6.52 5.40 * 08-Jan-18 7.13 5.70 09-Jul-18 6.39 6.15 N 23-Oct-18 5.71 * 05-Nov-18 5.76 5.00 U * Asterisk signifies initiation or assumption of coverage.

NEUTRAL UNDERPERFORM

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and Asia st ocks (excluding Japan and Australia), ratings are based on a stock’s total return relative to the average total return of the rele vant country or regional benchmark (India - S&P BSE Sensex Index); prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to it s current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

China Liquor Sector 55 6 June 2019

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 46% (32% banking clients) Neutral/Hold* 39% (28% banking clients) Underperform/Sell* 13% (22% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors. Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit- suisse.com/sites/disclaimers-ib/en/managing-conflicts.html . Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice or to be used by anyone to provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional. Credit Suisse has decided not to enter into business relationships with companies that Credit Suisse has determined to be involved in the development, manufacture, or acquisition of anti-personnel mines and cluster munitions. For Credit Suisse's position on the issue, please see https://www.credit-suisse.com/media/assets/corporate/docs/about-us/responsibility/banking/policy-summaries-en.pdf . The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

Target Price and Rating Valuation Methodology and Risks: (12 months) for China Resources Beer (Holdings) Company Limited (0291.HK) Method: Our target price of HK$40.5 is based on 16x FY20 EV/EBITDA which is the high end of global peers. We have an OUTPERFORM rating as we are positive that CRB's quality growth and margin expansion are well on track. With a more comprehensive portfolio by acquiring Heineken China, we believe CRB can strengthen its bargaining power and quickly gain market share in the premium market. Risk: Downside risks to our HK$40.5 target price and OUTPERFORM rating for China Resources Beer (Holdings) include: (1) uncertainty in minority interest buyback; (2) transition of consumer behaviour of alcoholic drinks and (3) fierce competition. Target Price and Rating Valuation Methodology and Risks: (12 months) for Jiangsu Yanghe Brewery Joint-stock Co., Ltd (002304.SZ) Method: Our DCF (discounted cash flow)-based target price of Rmb130 for Jiangsu Yanghe Brewery Joint-stock Co., Ltd implies 14.9x/13.1x 2019/20E EV/EBITDA. We have a OUTPERFORM rating considering its nationwide expansion. Risk: Downside risks to our target price of Rmb130 and OUTPERFORM rating for Jiangsu Yanghe include: (1) Food safety and unfavorable industrial policies; (2) increased competition in mid-end products in various regions from local peers; and (3) a transition of consumer preferences for alcoholic drinks. Target Price and Rating Valuation Methodology and Risks: (12 months) for Kweichow Moutai Co., Ltd (600519.SS) Method: We believe a company like Moutai which has a unique brand and strong bargaining power due to supply shortage should be traded at 25- 30x PE or 15-20x EV/EBITDA, which are at the high end of global consumer companies’ trading range. Our DCF based TP of Rmb1,065 implies 20.6x/17.3x 2019/20E EV/EBITDA . We give OUTPERFORM rating given its continued market share gaining. Risk: Downside risks to our target price of Rmb1,065 and OUTPERFORM rating for Kweichow Moutai Co., Ltd include: (1) food safety and unfavorable industrial policies; (2) a transition of consumer preference for alcoholic drinks (the 20-35 age group has grown up with a strong preference for healthy lifestyles and has lower disposable income); and (3) the sales recovery is weaker than expected. Target Price and Rating Valuation Methodology and Risks: (12 months) for Luzhou Laojiao Co., Ltd (000568.SZ)

China Liquor Sector 56 6 June 2019

Method: Our DCF (discounted cash flow)-based target price of Rmb86.00 implies 19.2x/15.2x 2019/20E EV/EBITDA. We believe Laojiao is another beneficiary from baijiu’s premiumisation and to further gain share thanks to Moutai’s supply constraints; we thus rate the stock OUTPERFORM. Risk: Downside risks to our target price of Rmb86.00 and OUTPERFORM rating for Luzhou Laojiao Co., Ltd. include: 1) Price pressure from major competitor 2) sales recovery weaker than expectation and 3) food safety incedents or unfavourable industry policies. Target Price and Rating Valuation Methodology and Risks: (12 months) for Shanxi Xinghuacun Fen Wine Factory Co., Ltd (600809.SS) Method: Our Rmb60 target price for Shanxi Xinghuacun Fen Wine Factory Co., Ltd is based on DCF, which implied 18.0x/15.3x 2019/20E EV/EBITDA. Considering its SOE reform, nationwide expansion while uncertainties in end customers' willingness towards retail price increment and fierce competition, we have a NEUTRAL rating on the stock. Risk: Downside risks to our target price of Rmb60 and NEUTRAL rating for Shanxi Xinghuacun Fen Wine Factory Co., Ltd include: (1) a weak recovery of sales and earnings of its mid- to high-end products; (2) weak sales outside of Shanxi province; and (3) competition from national brands; upside risks include: (1) favored government policies; and (2) positive results from SOE reform. Target Price and Rating Valuation Methodology and Risks: (12 months) for Tsingtao Brewery (0168.HK) Method: Our target price of HK$63.0 for Tsingtao Brewery (H share) is based on 14x FY20E EV/EBITDA, which is a 10% discount to the domestic leader. We give OUTPERFORM rating given its attractive valuation and we believe positives changes are just about to happen with the help of new management and Fosun (second largest shareholder with 17.99% stake). Risk: Risks to our HK$63.0 target price and OUTPERFORM rating for Tsingtao Brewery include: (1) changes in consumer behaviour; (2) food safety and unfavourable industry policies; (3) industry growth slowdown; and (4) higher-than-expected channel investment on stiff competition. Target Price and Rating Valuation Methodology and Risks: (12 months) for Tsingtao Brewery (600600.SS) Method: Our target price of Rmb54.8 for Tsingtao Brewery-A share is based on 14x 2020E EV/EBITDA, a 10% discount to market leader CRB's target multiple. We rate OUTPERFORM rating on its positive changes. Risk: Main risks to our Rmb54.8 target price and OUTPERFORM rating for Tsingtao Brewery include (1) changes in consumer behaviour; (2) food safety and unfavourable industry policies; (3) industry growth slowdown; and (4) higher-than-expected channel investment on stiff competition. Target Price and Rating Valuation Methodology and Risks: (12 months) for Wuliangye Yibin Co., Ltd (000858.SZ) Method: Our DCF (discounted cash flow)-based target price of Rmb130.00 for Wuliangye Yibin implies 19.3x/15.4x 2019/20E EV/EBITDA, at 5% discount to Moutai’s targeted valuation vs. 10-year average of 4%. We maintain OUTPERFORM rating due to its (1) fastest growth momentum within premium segment thanks to Moutai ’ s supply constraints and restored distributors ’ confidence; (2) further improvement in channel and operational efficiency and (3) valuation discount to Moutai (~13% in terms of EV/EBTIDA). Risk: Risks to our target price of Rmb130.00 and OUTPERFORM rating for Wuliangye include: (1) competition from major competitors and a slowdown in sales and earnings growth in the weak season; (2) new product sales coming in lower than expected; (3) food safety and unfavourable industrial policies, which may put downward pressure on valuations; (4) the transition of consumer preferences in alcoholic drinks and (5) execution risk due to worse market environment. Target Price and Rating Valuation Methodology and Risks: (12 months) for Yanjing Brewery (000729.SZ) Method: Our target price of Rmb5.60 for Yangjing Brewery is based on 11x 2020E EV/EBITDA (historical low-end). We have a UNDERPERFORM rating due to continued market share loss. Risk: Risks to our target price of Rmb5.60 and UNDERPERFORM rating for Yanjing Brewery is better than expected management execution and favored government policies and macro economic environment.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names Credit Suisse currently has, or had within the past 12 months, the following as investment banking client(s): 000729.SZ, STZ.N, DGE.L, HEIN.AS Credit Suisse provided investment banking services to the subject company (000729.SZ, STZ.N, DGE.L, HEIN.AS) within the past 12 months. Within the last 12 months, Credit Suisse has received compensation for non-investment banking services or products from the following issuer(s): DGE.L

China Liquor Sector 57 6 June 2019

Credit Suisse has managed or co-managed a public offering of securities for the subject company (000729.SZ, DGE.L) within the past 12 months. Within the past 12 months, Credit Suisse has received compensation for investment banking services from the following issuer(s): STZ.N, DGE.L, HEIN.AS Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0291.HK, 000729.SZ, STZ.N, TBEV.SI, BFb.N, DGE.L, RCOP.PA, HEIN.AS) within the next 3 months. Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non-investment- banking, securities-related: DGE.L Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non-investment- banking, non securities-related: DGE.L Credit Suisse acts as a market maker in the shares, depositary receipts, interests or units issued by, and/or any warrants or options on these shares, depositary receipts, interests or units of the following subject issuer(s): 0291.HK. Credit Suisse or a member of the Credit Suisse Group is a market maker or liquidity provider in the securities of the following subject issuer(s): ABEV3.SA, ABI.BR, BFb.N, CARLb.CO, 0291.HK, STZ.N, DGE.L, HEIN.AS, 002304.SZ, 600519.SS, 000568.SZ, PERP.PA, RCOP.PA, 600809.SS, TBEV.SI, 0168.HK, 600600.SS, 000858.SZ, 000729.SZ A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (000729.SZ, STZ.N, DGE.L, HEIN.AS) within the past 12 months. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=434387&v=3omty6p18871j9vlo2xo2xvsj . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Investors should note that income from such securities and other financial instruments, if any, may fluctuate and that price or value of such securities and instruments may rise or fall and, in some cases, investors may lose their entire principal investment. For Thai listed companies mentioned in this report, the independent 2018 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: Thai Beverage () As at the date of this report, Credit Suisse has financial interests that aggregate to an amount equal to or more than 1% of the market capitalization of (0168.HK). This research report is authored by: Credit Suisse (Hong Kong) Limited ...... Tony Wang ; Michael Shen ; Harriet Liu To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the FINRA 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse (Hong Kong) Limited ...... Tony Wang ; Michael Shen ; Harriet Liu Important Credit Suisse HOLT Disclosures The HOLT methodology does not assign ratings or a target price to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default variables and incorporated into the algorithms available in the HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. These adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variables may also be adjusted to produce alternative warranted prices, any of which could occur. The warranted price is an algorithmic output applied systematically across all companies based on historical levels and volatility of returns. Additional information about the HOLT methodology is available on request. CFROI, CFROE, HOLT, HOLT Lens, HOLTfolio, "Clarity is Confidence" and "Powered by HOLT" are trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse. © 2019 Credit Suisse Group AG and its subsidiaries and affiliates. All rights reserved. Important disclosures regarding companies that are the subject of this report are available by calling +1 (877) 291-2683. The same important disclosures, with the exception of valuation methodology and risk discussions, are also available on Credit Suisse’s disclosure website at https://rave.credit-suisse.com/disclosures . For valuation methodology and risks associated with any recommendation, price target, or rating referenced in this report, please refer to the disclosures section of the most recent report regarding the subject company.

China Liquor Sector 58 6 June 2019

This report is produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who-we-are This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates.The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in European Union (except Switzerland): by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Germany: Credit Suisse (Deutschland) Aktiengesellschaft regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). United States and Canada: Credit Suisse Securities (USA) LLC; Switzerland: Credit Suisse AG; Brazil: Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; Mexico: Banco Credit Suisse (México), S.A., Institución de Banca Múltiple, Grupo Financiero Credit Suisse (México) and Casa de Bolsa Credit Suisse (México), S.A. de C.V., Grupo Financiero Credit Suisse (México) ("Credit Suisse Mexico"). This document has been prepared for information purposes only and is exclusively distributed in Mexico to Institutional Investors. Credit Suisse Mexico is not responsible for any onward distribution of this report to non-institutional investors by any third party. The authors of this report have not received payment or compensation from any entity or company other than from the relevant Credit Suisse Group company employing them; Japan: by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau ( Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; Hong Kong: Credit Suisse (Hong Kong) Limited; Australia: Credit Suisse Equities (Australia) Limited; Thailand: Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok10500, Thailand, Tel. +66 2614 6000; Malaysia: Credit Suisse Securities (Malaysia) Sdn Bhd; Singapore: Credit Suisse AG, Singapore Branch; India: Credit Suisse Securities (India) Private Limited (CIN no.U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India as Research Analyst (registration no. INH 000001030) and as Stock Broker (registration no. INZ000248233), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777; South Korea: Credit Suisse Securities (Europe) Limited, Seoul Branch; Taiwan: Credit Suisse AG Taipei Securities Branch; Indonesia: PT Credit Suisse Sekuritas Indonesia; Philippines:Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Additional Regional Disclaimers Australia: Credit Suisse Securities (Europe) Limited ("CSSEL") and Credit Suisse International ("CSI") are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority ("FCA") and the Prudential Regulation Authority under UK laws, which differ from Australian Laws. CSSEL and CSI do not hold an Australian Financial Services Licence ("AFSL") and are exempt from the requirement to hold an AFSL under the Corporations Act (Cth) 2001 ("Corporations Act") in respect of the financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act) (hereinafter referred to as “Financial Services”). This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's professional clients and eligible counterparties as defined by the FCA, and wholesale clients as defined under section 761G of the Corporations Act. Credit Suisse (Hong Kong) Limited ("CSHK") is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act in respect of providing Financial Services. Investment banking services in the United States are provided by Credit Suisse Securities (USA) LLC, an affiliate of Credit Suisse Group. CSSU is regulated by the United States Securities and Exchange Commission under United States laws, which differ from Australian laws. CSSU does not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act in respect of providing Financial Services. Credit Suisse Asset Management LLC (CSAM) is authorised by the Securities and Exchange Commission under US laws, which differ from Australian laws. CSAM does not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act in respect of providing Financial Services. This material is provided solely to Institutional Accounts (as defined in the FINRA rules) who are Eligible Contract Participants (as defined in the US Commodity Exchange Act). Credit Suisse Equities (Australia) Limited (ABN 35 068 232 708) ("CSEAL") is an AFSL holder in Australia (AFSL 237237). Malaysia: Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. Singapore: This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore Branch to overseas investors (as defined under the Financial Advisers Regulations). Credit Suisse AG, Singapore Branch may distribute reports produced by its foreign entities or affiliates pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact Credit Suisse AG, Singapore Branch at +65-6212-2000 for matters arising from, or in connection with, this report. By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore Branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the “FAA”), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore Branch may provide to you. EU: This report has been produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. This material is issued and distributed in the U.S. by CSSU, a member of NYSE, FINRA, SIPC and the NFA, and CSSU accepts responsibility for its contents. Clients should contact analysts and execute transactions through a Credit Suisse subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials,management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. No information or communication provided herein or otherwise is intended to be, or should be construed as, a recommendation within the meaning of the US Department of Labor’s final regulation defining "investment advice" for purposes of the Employee Retirement Income Security Act of 1974, as amended and Section 4975 of the Internal Revenue Code of 1986, as amended, and the information provided herein is intended to be general information, and should not be construed as, providing investment advice (impartial or otherwise). Copyright © 2019 CREDIT SUISSE AG and/or its affiliates. All rights reserved. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

China Liquor Sector 59