Investment rating and valuation: As current share price levels enter the medium - and long -term strategic allocation range, we recommend buying shares in Yanghe Brewery. The 12-month target price is RMB194.2, which corresponds to PEs of 20x and 14x in 2013 and 2014 respectively. We estimate 2012-2014 EPS to be RMB6.225, RMB9.708 and RMB13.807, representing YoY growth of 67.2%, 55.9% and 42.2%, respectively. Looking ahead, overall growth in the whit e liquor sector will slow down, and competition will intensify. As the sector transits from “capacity-expansion growth” to “market-squeezing growth”, less investment subjects will become available, while Yanghe Brewery with core competitiveness will have a sharper edge. Yanghe Brewery’s market share is hopefully expected to increase from 3.4% in 2011 to 8 -10%.
Vs. market consensus: 1) The Company’s product development is consumer demand -oriented. Advanced capacity layout is prepared for long-term growth. “Soft-style” liquors launched in 2003 are produced according to experts’ and customers’ tastes. The Company has built its production capacity continuously since 2009. In our view, it will report the largest production scale, most comprehensive supporting facility, and highest modernization level in China by the end of 2013. At the beginning of Sep 2012, the Company produced the first batch of new liquors in Laian base. Liquor quality is better than expectations. 2) Coverage of all price levels helps to streng then the ability of finding opportunities and mitigate risks. “Blue Sea” and “Jun Fang” belong to medium - and high-end products. “Blue Sky” and “Sheng Fang” belong to sub -high -end products. “Blue Dream” and “soft-style Sujiu” belong to ultra -high -end products. The prices of “Blue Dream”, “Wuliangye” and “Guojiao 1573” stay at the same level, while the prices of “Soft -style Sujiu” and “Moutai” stand at the same price level. Based on our forecast, the revenues of “Blue Dream”, “Blue Sky” and “Blue Sea” are expected to grow over 150%, over 60% and over 30%, respectively. Soft -style Sujiu’s revenue growth will be even faster, with expected 2012 revenue of over RMB400M (up 300%). “Blue Dream” is predicted to achieve enormous growth in revenue mainly due to contin uous brand reputation improvements, accumulated sales channel resources and large contributions from group purchasing. 3) The Company plays a leading role in channel operations and will launch in -depth business expansion in the country. The Company’s nationwide expansion enters the harvesting stage in 2012. Most provinces are estimated to achieve more than RMB100M in annual sales. In 2011, some key provinces and cities gained more than RMB500M (including tax and discount) in annual sales, such as Henan, Shandong, Anhui, Shanghai, Zhejiang, etc. In 2013, the Company will kick off in -depth nationwide expansion so as to achieve more than RMB100M in annual sales in cities and counties and make all efforts to generate sales of RMB300 -500M in ordinary provinces and sales of RMB1B in key provinces by the end of 2015. Additionally, it will make breakthroughs in capital operations and product category development. 4) In the future, the Company will further enhance its brand reputation and enrich its brand connotation. The Company strives to build a fashionable and modern brand image through effective communication and opinion guidance. 5) A slowdown in macro economic growth is inevitable, but the Company is hopefully expected to maintain its leading advantage by means of powerful business execution.
Catalyst for share price performance: more investors start to change their overly -pessimistic expectation on the white liquor sector.
Assumption of major risks: against the backdrop of a slowdown in macro economic growth and government policy on “transparent public spending”, the market’s opinion of liquor consumption diversifies. Understanding and acceptance by the capital market and media will be a gradual process