JIANGSU YANGHE(002304)：NEW BLOOD TO MODERNISE BAIJIU; INITIATING WITH BUY

Deutsche Bank Markets Research Rating Buy Asia China Consumer Alcohol & Tobacco Company Jiangsu Yanghe Date 26 June 2015 Initiation of Coverage New blood to modernise baijiu; initiating with Buy Reuters Bloomberg Exchange Ticker 002304.SZ 002304 CH SHZ 002304 Forecasts And Ratios Year End Dec 31 2013A 2014A2015E2016E2017ESales (CNYm) 13,379.0 13,027.014,237.016,000.417,244.6EBITDA (CNYm) 6,820.6 6,257.86,938.07,950.48,601.9Reported NPAT (CNYm) 5,002.0 4,507.54,971.25,838.96,457.2Reported EPS FD (CNY) 3.32 2.993.303.874.28DB EPS FD (CNY) 3.33 3.023.303.874.28DB EPS growth (%) -18.5 -9.49.217.510.6PER (x) 11.5 12.919.917.015.4EV/EBITDA (x) 7.5 8.713.211.09.6DPS (net) (CNY) 1.43 1.431.651.942.14Yield (net) (%) 3.7 3.72.52.93.3Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close A fashionable baijiu icon ________________________________________________________________________________________________________________Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Price at 26 Jun 2015 (CNY) 65.80Price target - 12mth (CNY) 73.4052-week range (CNY) 78.73 - 34.31Shenzhen Index 2,842 Winnie Mak Research Analyst (+852) 2203 6178 winnie.mak@db.com Price/price relative 040801201606/1312/136/1412/14Jiangsu YangheShenzhen Index (Rebased) Performance (%) 1m3m12mAbsolute -5.214.385.9Shenzhen Index -5.842.0 152.0Source: Deutsche Bank We believe the winners of the baijiu industry consolidation will be the supreme and/or fashionable brands. Yanghe (YH) is no ‘blue blood’, but it creates a mellow-style baijiu trend, makes the Blue Classic brand primarily out of successful marketing campaigns, and has thrived from being half-idle in 2002 to becoming China’s third-largest baijiu company by 2014 revenues. YH’s new Weifenzi low-alcohol baijiu, if successful, could change consumers’ perception of baijiu and reaffirm the company’s position as a trendsetter. Initiate with Buy given re-rating potential. Always differentiated − from ownership to branding and distribution Since management became the second-largest shareholder in 2002, YH’s blue ocean strategy has kept the company ahead of market trends, from creating the first baijiu brand with proper consumer communication in 2003 to Weifenzi baijiu, which can prevent cardiovascular diseases, according to the company. YH also actively manages a short distribution channel, with c.7,000 distributors (comparable to distributor size of beer companies). 13% NPAT CAGR over 2015-17E; target price (TP) RMB73.4/share We forecast a 10%/13% revenue/NPAT CAGR in 2015-17, to be supported by penetration improvements in Jiangsu (2014: 65% of sales) and the rest of China, new product developments (baijiu and wine) and operating leverage on an established 5,000-person sales team. Our DCF-based TP is RMB73.4/share (9.5% WACC and 0% TG), equivalent to 22.2x 2015E PE (more details pp3-4). Re-rating hinges on popular new products and services; initiating with Buy The stock lacks thematic catalysts, like SOE reform and earnings recovery, but is not short of re-rating potential, based on its proposed new products and services, e.g. the RTD cocktail, a new social media platform with a well-known internet company, and health and wellness products. Key downside risks: a possible overhang, as pre-IPO investors reduce their stakes, quality concerns, and insufficient efforts on corporate governance-p6. 26 June 2015 Alcohol & Tobacco Jiangsu Yanghe Page 2 Deutsche Bank AG/Hong Kong Model updated:26 June 2015 Running the numbers Asia China Alcohol & Tobacco Jiangsu Yanghe Reuters: 002304.SZ Bloomberg: 002304 CH Buy Price (26 Jun 15) CNY 65.80Target Price CNY 73.4052 Week range CNY 34.31 - 78.73Market Cap (m) CNYm 99,161 USDm 15,972 Company Profile Yanghe is China's leading local spirit brand/producer. It currently sells baijiu under Blue Classic, Daqu