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Yantai Changyu Pioneer Wine-A:UBS Evidence Lab reveals a strong brand but execution risk could cap near-term growth

发布时间:2016-06-17    研究机构:瑞银证券

Leading wine producer in China; initiating with a Neutral rating

We believe Changyu could benefit from a structural industry recovery and afragmented landscape due to its competitive advantages in brand recognition andnationwide distribution channels. However, we see execution risk exists regarding itsshift to a more diversified product mix strategy. The stock is trading at 24/3x 2017PE/PB, in line with industry peers and slightly higher than its historical average.

Changyu could benefit from an industry recovery and consolidation

UBS Evidence Lab survey showed Changyu has high brand awareness, purchasing andloyalty. Our proprietary survey also found greater wine consumption intent, led by midtiercity penetration and wealthy, mature male respondents. We forecast rising massmarketwine consumption to drive robust volume growth, while its average selling price(ASP) could be flattish, with consumption upgrade trend offset by intensifyingcompetition. Despite Changyu's high brand recognition, it only has 3% market share inthe mid- to low-end wine segment. We estimate the mid- to low-end segmentaccounts for 90% of total industry sales volume and is occupied by small players.

Meanwhile, a number of overseas companies are entering an adjustment period tobuild brands and channels in China, which suggests Changyu could benefit fromsizeable consolidation potential, given its competitive brand and channel advantages.

Execution risk could cap near-term growth

We believe Changyu could face execution risk as: 1) it is changing its growth model byshifting towards a more diversified product mix strategy from one driven by highmarginproducts, suggesting potential conflicts of interest in resource re-allocation; and2) our economic analysis on imported wine suggests that Jiebaina (Changyu's bestsellingproduct) and its mid- to low-end products could face intensifying competition,while UBS Evidence Lab showed consumers generally believe international brands havebetter quality and are willing to pay a 20-30% premium. We forecast Changyu willslightly gain market share in the wine segment in the next 3 years, mainly due to midtolow-end products. We expect Changyu's margin to continue declining, mainly due toa product mix downgrade and further brand/channel investment.

Valuation: Rmb40.09 DCF-based price target and Neutral rating

We believe Changyu is fairly valued compared with its historical average and industrypeers. We forecast 2016-18 EPS at 1.58/1.66/1.75. Our DCF-based price target ofRmb40.09 (WACC 7.0%) implies 25x/24x 2016/17E PE.

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