Company Note Food & Beverages│China│October 31, 2019 Insert Insert China Wuliangye Yibin ADD (no change) Strong execution ability to drive long-term growth Consensus ratings*: Buy 33 Hold 5 Sell 2 ■ 3Q19 sales grew 27% yoy, with net profit up 35% yoy, both stronger than we Current price: Rmb132.1 expected, driven mainly by ASP and volume growth from new Wuliangye launches. ■ Wuliangye has proven to the market that its brand image and distribution network Target price: Rmb165.0 have consistently improved this year. Previous target: Rmb164.0 ■ We forecast that Wuliangye will continue to deliver 18% yoy sales growth in FY20F. Up/downside: 24.9% ■ Maintain Add with new DCF-based TP of Rmb165. CGI / Consensus: 7.1% Successful launch of new Wuliangye led to strong 3Q19 results Reuters: 000858.SZ Wuliangye achieved 27% yoy sales growth to Rmb37bn in 9M19 and its net profit was up Bloomberg: 000858 CH by 31% yoy to Rmb12bn. Of which, 3Q19 sales grew by 27% yoy to Rmb10bn with net Market cap: US$72,648m profit up by 35% yoy to Rmb3.2bn, both stronger than market and our estimates. We th Rmb512,683m believe the strong growth was mainly due to successful launch of 8 generation Average daily turnover: US$464.9m Wuliangye in June 2019 which drove up both ASP and volume growth in 3Q19. We Rmb3,312m estimate that 20,300t of the high-end Wuliangye brand were sold 20,300t in 9M19, and Current shares o/s: 3,882m c.5,000t of the new generation Wuliangye sold in 3Q19, 78% of our estimate for FY19F. As at the end of 3Q19, advance payments from customers had risen 140% yoy and 35% Free float: 36.1% *Source: Bloomberg qoq to Rmb 5.9bn, reflecting strong advance stocking demand from distributors to prepare for Chinese New Year. The first-tier wholesaler price of 52°Wuliangye currently Key changes in this note remains at Rmb930–940 per bottle, higher than Rmb840-850 per bottle in the beginning FY19F EPS increased by 1.7%. of 2019. FY20F EPS increased by 1.7%. FY21F EPS increased by 1.1%. Margin improvement through product structure premiumization The 3Q19 GPM was up by 2.7%pts to 60.4%, mainly because of product structure Price Close Relative to SHCOMP (RHS) premiumization. We expect the GPM to improve by 1.5%pts yoy in FY19F. As Wuliangye launched a large marketing campaign for new Wuliangye products in 3Q19, the S&D 138.0 289 expenses ratio increased by 2.2%pts, but was partially offset by good control of G&A 88.0 185 expenses. Its 3Q19 net profit margin improved by 1.8%pts to 32.2%. We forecast that 38.0 81 FY19F net profit will grow by 30% yoy to Rmb17.4bn with net profit margin expansion of 100 80 1.4%pts to 34.8%. 60 40 20 Vol m Vol Sales growth expected to remain strong in FY20F 10月-18 1月-19 5月-19 8月-19 Since 2019, Wuliangye has made clear marketing strategy to strengthen Wuliangye brand image and concentrate on its high-end Wuliangye brand, particular on its star Source: Bloomberg product -52°Wuliangye. On the other hand, Wuliangye has been outspoken to stabilize Price performance 1M 3M 12M their distribution network and protect its distributors with a reasonable channel profit Absolute (%) 1.8 9.4 174.3 margin to reinforce distributors’ confidence in the Wuliangye brand and the company. Relative (%) 1 9.5 161.8 Driven by a continuous product mix upgrade and channel reform, we expect Wuliangye will achieve 17.8% and 16.5% yoy sales growth in FY20F and FY21F, respectively. Major shareholders % held Yibin State-owned Asset Operation Maintain Add with a higher DCF-based TP of Rmb165 Co. Ltd 35.2 We revised up FY19F–21F EPS by 1.1%–1.7%, reflecting Wuliangye’s stronger-than- expected sales growth and successful product structure premiumization. We maintain our ADD rating for Wuliangye, as the current management team has a clear strategy to Insert further improve the Wuliangye brand image and strong execution ability in reforming its distribution network. Downside risks include 1) a significant fall in Moutai’s average retail price, capping Wuliangye’s price increase potential; and 2) a macroeconomic slowdown, which would have a heavy negative impact on super-premium baijiu consumption. Positive catalysts include 1) stronger-than-expected volume growth, and 2) better expense ratio control. Financial Summary Dec-17A Dec-18A Dec-19F Dec-20F Dec-21F Revenue (Rmbm) 30,187 40,030 50,073 58,987 68,722 Operating EBITDA (Rmbm) 12,979 18,144 23,615 28,761 34,428 Net Profit (Rmbm) 9,674 13,384 17,432 21,129 25,200 Core EPS (Rmb) 2.55 3.45 4.49 5.45 6.50 Core EPS Growth 42.4% 35.3% 30.1% 21.2% 19.3% FD Core P/E (x) 51.75 37.83 29.39 24.25 20.33 Analysts DPS (Rmb) 1.33 1.70 2.21 2.68 3.20 Lei Yang Dividend Yield 1.01% 1.29% 1.68% 2.03% 2.42% T (86) 21 6162 9676 EV/EBITDA (x) 35.61 25.65 19.50 15.73 12.85 P/FCFE (x) 52.42 42.30 36.00 26.17 21.69 E [email protected] Net Gearing (74.2%) (75.2%) (73.0%) (73.7%) (74.6%) Sun Feifei P/BV (x) 9.40 8.08 7.09 6.17 5.35 T (86) 21 6162 5750 ROE 19.3% 22.9% 25.7% 27.2% 28.2% E [email protected] % Change In Core EPS Estimates CGI/consensus EPS (x) 1.00 0.98 0.98 SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG Powered by the EFA Platform Food & Beverages│China Wuliangye Yibin│October 31, 2019 Strong execution ability to drive long-term growth Figure 1: Wuliangye’s quarterly financial performance review (Rmb m) Q118 Q218 Q318 Q418 Q119 Q219 Q319 yoy FY18 FY19F yoy 9M18 9M19 yoy Revenue 13,898 7,524 7,829 10,780 17,590 9,561 9,951 27% 40,030 50,073 25% 29,250 37,102 27% YoY (%) 37% 38% 23% 31% 27% 27% 27% 33% 25% 33% 27% Gross Profit 8,217 4,359 4,515 6,544 10,878 5,348 6,010 33% 23,635 30,315 28% 17,091 22,236 30% Other operating income 10 57 16 129 25 77 9 -47% 212 200 -6% 84 110 31% Sale and distribution expense -1,003 -1,153 -921 -701 -1,274 -1,376 -1,393 51% -3,778 -4,626 22% -3,077 -4,043 31% General Administrative expense -595 -587 -532 -711 -799 -506 -548 3% -2,425 -2,782 15% -1,714 -1,853 8% Operating profit 6,629 2,677 3,055 5,284 8,830 3,543 4,077 33% 17,644 23,107 31% 12,361 16,451 33% Net Profit 4,971 2,139 2,384 3,890 6,475 2,719 3,208 35% 13,384 17,432 30% 9,494 12,402 31% YoY (%) 38% 55% 20% 44% 30% 27% 35% 38% 30% 36% 31% Margins ppt chg ppt chg ppt chg GPM incl: sales tax 59.1% 57.9% 57.7% 60.7% 61.8% 55.9% 60.4% 2.7% 59.0% 60.5% 1.5% 58.4% 59.9% 1.5% Sales tax 14.1% 14.2% 17.5% 14.0% 13.9% 14.3% 13.4% -4.1% 14.8% 14.8% 0.0% 15.0% 13.9% -1.2% S&D expense ratio 7.2% 15.3% 11.8% 6.5% 7.2% 14.4% 14.0% 2.2% 9.4% 9.2% -0.2% 10.5% 10.9% 0.4% G&A expense ratio 4.3% 7.8% 6.8% 6.6% 4.5% 5.3% 5.5% -1.3% 6.1% 5.6% -0.5% 5.9% 5.0% -0.9% Operating profit margin (%) 47.7% 35.6% 39.0% 49.0% 50.2% 37.1% 41.0% 2.0% 44.1% 46.1% 2.1% 42.3% 44.3% 2.1% Net profit margin (%) 35.8% 28.4% 30.5% 36.1% 36.8% 28.4% 32.2% 1.8% 33.4% 34.8% 1.4% 32.5% 33.4% 1.0% SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG Figure 2: Earnings revision FY19F FY20F FY21F (Rmb m) Old New Change Old New Change Old New Change Sales 49,187 50,073 1.8% 58,065 58,987 1.6% 68,251 68,722 0.7% Sales growth 23% 25% 2.2% 18% 18% -0.2% 18% 17% -1.0% GPM 61% 61% 0.0% 62% 62% 0.0% 62.0% 62.0% 0.0% OPM 46% 46% 0.0% 48% 48% 0.1% 49% 49% 0.2% Net profit 17,141 17,432 1.7% 20,772 21,129 1.7% 24,936 25,200 1.1% Net profit growth 28% 30% 2.2% 21% 21% 0.0% 20% 19% -0.8% SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG Figure 3: DCF valuation (Rmb, m) FY19F FY20F FY21F FY22F FY23F FY24F FY25F FY26F FY27F FY28F FY29F Recur operating income 23,107 28,246 33,906 44,065 50,653 57,970 65,763 73,947 82,409 91,014 99,608 Taxes -5,950 -7,211 -8,601 -10,818 -12,436 -14,232 -16,146 -18,155 -20,232 -22,345 -24,455 Operating income, tax-affected 17,157 21,035 25,305 33,247 38,217 43,737 49,618 55,792 62,176 68,669 75,153 Add: Depreciation & amortisation 508 515 522 568 612 654 687 710 721 716 695 Add Changes in Working capital -4,350 -2,885 -3,117 -3,631 -4,213 -4,758 -5,326 -5,905 -6,487 -7,058 -7,606 Less Capital Expenditure -200 -200 -200 -200 -200 -200 -200 -200 -200 -200 -200 Free Cash Flow to firm 13,115 18,464 22,510 29,983 34,417 39,433 44,779 50,397 56,210 62,127 68,041 YoY growth 17% 41% 22% 33% 15% 15% 14% 13% 12% 11% 10% Key assumptions NPV of FY19-23F Cash flow 81,874 Industry average beta 1.08 NPV of FY24-29F Cash Flow 149,819 Risk free rate 3.4% NPV of Terminal Value 362,148 Risk premium 6.3% Enterprise Value 593,840 Cost of equity 10.2% Add Net cash/(Net Debt) 48,546 Cost of Debt 3.7% Less Minority -1,632 Debt % 0.1% Equity value of firm 640,754 Tax rate 25.0% Share outstanding (m) 3,882 WACC 10.2% Target price (Rmb) 165 Terminal growth rate 3.0% SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG 2 Food & Beverages│China Wuliangye Yibin│October 31, 2019 Figure 4: Peer comparison Company Name Bloomberg Recom Target Last Quoted Market cap P/E (x) P/BV (x) EV/EBITDA (x) ROE (%) Dividend Yield (%) Ticker price price currency Local Local (US$, m) 2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F 2019F 2020F Kweichow Moutai Co Ltd-A 600519 CH ADD 1328 1180.0 Rmb 210,770 34.4 29.0 10.8 8.9 21.7 18.3 34.5 33.7 1.5 1.8 Jiangsu Yanghe Brewery -A 002304 CH HOLD 108 100.8 Rmb 21,597 19.1 17.4 4.1 3.7 11.5 10.6 23.6 23.4 3.3 3.6 Wuliangye Yibin Co Ltd-A 000858 CH ADD 165 132.1 Rmb 72,898 29.4 24.3 7.1 6.2 19.5 15.7 25.7 27.2 1.7 2.0 Luzhou Laojiao Co Ltd-A 000568 CH ADD 122 87.2 Rmb 18,161 26.7 21.6 6.9 6.2 19.7 15.7 26.5 29.6 2.4 3.0 Chongqing Brewery Co-A 000568 CH NR NA 43.3 Rmb 2,980 38.9 37.4 16.1 14.9 26.6 24.0 43.9 42.7 2.0 2.1 Anhui Gujing Distillery Co-A 000596 CH NR NA 110.4 Rmb 6,937 25.3 20.3 5.6 4.5 14.9 12.1 23.5 24.0 1.2 1.6 Shanxi Xinghuacun Fen Wine-A