Wuliangye Yibin:Switch to high gear

Q1results: high growth despite a high base; Buy

    Solid volume performance amid price hikeWuliangye reported a very strong set of results for 1Q17, recording 15% gross revenue growth and 24% net profit growth and beating investors expectations. As 1Q16was the strongest quarter last year with 30% yoy net profit growth, we believe this strong start sends a strong signal to the market that Wuliangye's management interests are now aligned with shareholders’ after the verbal approval of the company's SOE reform proposal in December 2016.

    Solid volume performance amid price hikesWuliangye’s 15% revenue growth in 1Q has dispelled investors’ previous concern over sizeable volume decline amid aggressive price increases in 2016. As the baijiu market continuous to recover and demand for super-premium baijiu climbs, Wuliangye has been able to keep volume flat with an effective c.15% yoy ASP hike in 1Q. With no further price hike this year, we see 10-15% a reasonable range for Wuliangye’s full-year 2017revenue growth.Operating leverage starts to show its powerWith the successful re-pricing of the flagship product and cuts in distributor subsidies, Wuliangye’s GP margin improved 80bps to 68.1% and EBIT margin expanded 3.8ppt in 1Q (both yoy), which drove net profit up 24%. We believe this trend will continue throughout 2017. Advance payment from distributors of RMB6.2bn was marginally lower than the RMB6.3bn on 31Dec. 2016, as 2Q is typically a light season, and there were some increases in account receivables mostly related to sales of non-alcoholic products. Such minor negatives did not change the nature of the strong 1Q result.Lift price target to RMB55.00on 13.4x FY18E EV/EBITDAWe revise upwards FY17E and FY18E EPS by 1% and 5% respectively, and roll over our valuation base to FY18, using the same target valuation of 13.4x EV/EBITDA. For details, please refer to page 5. We maintain our Buy rating with a revised target price of RMB55.