Key findings from channel checks in Shanghai and Shenzhen

We visited Moutai's distributors in Shenzhen and Shanghai in the last two weeks.Key findings are as below:

Retail price declined from Rmb1550/bottle in July to Rmb1330-1350in the past two weeks in both Shenzhen and Shanghai. This is likelymainly due to increasing supply from Moutai from August 15 andimplementation of 30% sales on the e-commerce platform policy. Theretail price of other customized Moutai which the company didn't enforcea price control kept rising. For example, the 350ml Moutai's retail priceincreased from Rmb1000/bottle in January to Rmb2000/bottle currently.

Sales volume: The Shanghai distributor indicated that it has used up itsfull year procurement quota in 2017, and is currently beginning to usethe 1Q18 quota. This implies that the distributors' actual sales volumein first nine month has achieved its full year target. T o recap, Mr . WangChonglin, director of Moutai group sales company, said that the companywould sell 5600 tons Feitian Moutai and 600 tons of customized Moutaibetween 8/15 to 9/30.

Channel stockings: The Shanghai distributor believed there are somedemands from channel restockings, especially for private owneddistributors and wholesalers. However the Shenzhen distributor indicateda different current purchase behavior - with consumers typically buyingMoutai in cases, while normally buying Moutai in bottles - we think thisalso implies consumers are stocking up.

Impacts from "restricting drinking liquor" policy from some localgovernments announced recently. Both Shenzhen and Shanghaidistributors feel the impact is limited, because they think 1) this is nota new regulation given there is already a similar regulation from 2012;2) the public sector's purchase portion is already low, which is less than30% according to the Shanghai distributor .

Impacts from Moutai Cloud E-commerce platform (Moutai Yunshang).The distributors indicate that the real impacts will depend on how strictMoutai will monitor the sales volume on the platform. Though distributorsare required to put 30% of volume on the platform to sell at Rmb1299,many distributors are able to buy back the liquor and re-distribute athigher price.

Fighting with channel stocking; maintaining Buy on near-term strong growth

We believe channel stocking is the main driver of strong demand for Moutaifrom 2017, and we think management is also aware of this driver . Moutai'srecent measures (suggesting price limit, increasing supply and launching MoutaiY unshang) also show its determination to stabilize the retail price and managechannel stocking. In the near-term, we think these measures will prolong the restocking cycle and drive its ex-factory sales volume, while future de-stocking riskwould still depend on the execution of management. We maintain Buy with TP ofRmb550. Downside risk is faster than expected channel de-stocking.

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