Entering secular growth cycle

After Wuliangye's 130% share price hike in past 12 month, market has increasingconcerns on whether there is still upside. Our view is positive. We expect thecompany to enter a secular growth period in 2018-19, and its earnings to growat 29% CAGR in 2018-20, driven by management’s strong incentives for growthand expanding high end liquor market after Moutai raising price. We revise upour target price to Rmb98, implying 27x 2018 P/E. We reiterate Buy.Management has strong incentive to drive sales and improve efficiencyDuring 1218 distributor meeting, Wuliangye management indicates to achievegross sales of Rmb40bn in 2018 and Rmb60bn in 2020 (vs Rmb30bn in 2017E).Management will invest in channel penetration, brand building and productsstreamlining to drive sales growth. Helped by completion of management sharesincentive schemes and strong support from Wuliangye group, we believe thecompany could achieve its target.

Moutai’s price hike to release more market for Wuliangye

On Dec 29, Moutai announced to raise ex-factory price by 18% to Rmb969/bottle,and set retail price at Rmb1499/bottle. As a result, the ex-factory price gap ofMoutai over Wuliangye expands from 10% to 30%. We believe Wuliangye is thebiggest beneficiary of the price hike, helped by the expanding high end liquormarket room released by Moutai.We reiterate Buy; revising up TP to Rmb98We are revising up our earnings forecast by 13%-42% for 2018-2020 to factor in abetter volume growth, mix upgrade, and margin expansion, and revise up targetprice by 40% to Rmb98 based on DCF model. We are changing our valuationmethodology from EV/EBITDA to DCF as we believe DCF model can incorporatelong-term growth and solid cash flow. Downside risk: channel de-stocking inhigh-end liquor sector; food safety; worse than expected macro FAI slow down.

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