Still needs more time before next price hike

Investors' questions focus on whether Wuliangye will raise its ex-factory prices.Management did not rule out the possibility of an increase in time, especiallyafter Moutai's price hike. However, it thinks that more time is needed, given thatchannel profit has only been stable for one year. The company's priority currentlyis to maintain channel profit margins and to strengthen the retail price stability.

Target 30% yoy sales growth in 2018

Management is confident it can reach its target. Key sales drivers will be: 1)mainstream Wuliangye to grow by 18% from 17,000 tons in 2017 to 30,000 tonsin 2018; 2) price increase through raising the portion of "out of plan" volume from10% in 2017 to 50% in 2018, implying a 5% price increase; and 3) incrementalsales of mass market sub brands to RMB10bn in 2018 C it targets to build upone sub brand with RMB2bn sales, and 2-3 sub brands with RMB1bn sales bythe end of 2020.

Toincrease channel penetration through its "10 thousand project"

Management aims to increase its penetration through a “hundreds of cities,thousands of counties, and ten thousand stores” program. By the end of 2017,it had built up 7,000 core POS and 1,000 Wuliangye specialty stores. It targetsto increase to 8,000 core POS and 1,500 specialty stores in 2018. The channelexpansion will be a key driver for its 30% growth target. Meanwhile, throughinstalling IT systems at the retail end, the company will have stronger control inchannel inventory and better understanding of the market.

Our view: don't leave the party too early

We like Wuliangye for its lower risk in channel de-stocking, especially afterMoutai price increase and with the approach of Chinese New Year. We expect thecompany to enter a secular growth period in 2018-19, and its earnings to register29% CAGR in 2018-20E, driven by management’s strong incentives for growthand expanding the high end liquor market after the increase in Moutai price. Wereiterate our Buy rating with TP of RMB98 based on DCF approach. Downsiderisk: channel de-stocking in the high-end liquor sector; food safety; worse-thanexpected macro FAI slow down.

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