Jiangsu Yanghe:In line with expectation,consumption upgrade-driven acceleration

What's changed

Jiangsu Yanghe pre-announced FY16 revenue/NP of Rmb17.2bn/5.8bn, up7.1% / 8.3% yoy, and in line with our estimates. 4Q16 revenue/NP were up6% / 6% yoy, respectively.

Implications

(1) We estimate the Jiangsu market grew about 1% yoy in 2016 becauseSky Blue and Ocean Blue are already mature and penetration is high. Weestimate revenue for markets outside Jiangsu grew 23.6% yoy, as thecompany expands very quickly in these markets.

(2) We think the company’s growth in 2017 could accelerate. Our recentchannel checks (See Strong demand and product mix upgrade drive upmargins, Buy, Feb 27) suggest that demand was strong during the SpringFestival. High end product Dream Blue had sales growth of 50%+, withprovinces outside Jiangsu having higher growth rates than Jiangsu. Wethink this outperformance is driven by consumption upgrade, withdemand from both business entertainment and private consumption. Webelieve the company’s persistent marketing efforts have begun to bearfruit, and its strong brand image will continue to boost expansion. OceanBlue and Sky Blue sales were stable in the Jiangsu market and maintained10-20% growth yoy outside Jiangsu in many regions.

(3) We forecast 1Q17 topline growth will accelerate to low teen levels, withrevenue growth in Jiangsu recovering to mid-single digits and 25%+outside Jiangsu.

Valuation

We fine-tune 2016-21E EPS by up to 1.7% and our 12-month target price isnow Rmb90.17 (from Rmb90.32), still based on 18X P/E applied to 2021E EPSand discounted back to 2017E using 8.7% sector COE. Maintain Buy rating asvaluation is still low (19X 2017E PE vs. spirit sector average of 24X).

Key risks

Tougher competition in Jiangsu Province and slower industry recovery.

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