Luzhou Laojiao:Announces private placement to fund mid-/high-end spirit project

Luzhou Laojiao has announced a private placement of no more than137.2mn shares, to raise up to Rmb3bn. The deal is still pending approvalfrom Sichuan province SASAC, shareholders of the company and CSRC.

(1) Luzhou Laojiao intends for the private placement to fund its spiritbrewery technology renovation project, which has two phases and aplanned total investment of Rmb7.1bn. Phase I of the project requires aRmb3.34bn investment, Rmb3bn of which is set to come from proceeds ofthe abovementioned placement. The company expects Phase I to becompleted by Dec. 2020.

(2) Phase I of the technology renovation project is slated to add 35k tonsproduction capacity of high-quality base spirit for the company, equivalentto about 18% of 2015 sales volume. This would increase the revenue shareof mid- and high-end spirits, and optimize the company’s product mix.

Automated production level would also be improved.

(3) In 2013-2015, mid- and high-end spirits combined accounted for 58%,28%, and 46%, respectively, of Luzhou Laojiao’s revenue. Followingcompletion of the project, the company intends to gradually reduce lowendproduct capacity, while increasing the quality and competitiveness ofits products.

The deal, if completed, would increase the total number of shares byc. 9.8%, from 1,402mn to no more than 1,539mn. Our Neutral rating andestimates on the stock remain unchanged. Our 12-m TP of Rmb25.39 is stillbased on 18X P/E applied to 2020E EPS and discounted back to 2016E onan 8.7% sector COE. Key risks: Faster-/slower-than-expected recovery inspirit sales.