Kweichow Moutai:Implications from Moutai Group's strong 1H17results

Moutai Group: sales and earnings growth accelerate QoQ in 2Q17

    On July 10, Moutai Group (the controlling shareholder of list-co Kweichou Moutai)indicated that sales (VAT included) increased 31% yoy to RMB31bn and profitbefore tax ("PBT") increased 24% yoy to RMB16bn in 1H17, according to newsrelease from its official website. This news implies Moutai Group's sales/earningsgrowth is accelerating from 24%/13% in 1Q17 to 40%/36% in 2Q17.

    According to the news, the strong growth has been mainly driven by 1) goodgrowth from high-end customized liquor and lower-end sub-brands; 2) overseassale; and 3) strong demand for main stream "Feitian Moutai". It indicates Moutai'smain products are still short of supply even in traditional slack season postChinese New Year holidays. Further, we believe this is also driven by distributors'channel re-stockings with expectations of retail price hikes (refer to our report"The restocking cycle is just beginning " published on June 22).

    Implications for the Listco: 1H17 growth tracks ahead of market consensus

    The listco Kweichou Moutai ("Moutai")'s sales/earnings growth trend tracksclosely with Moutai Group (refer to 1) since 2012, and the listco's sales accountsfor 93% of Moutai Group's total revenue in 2016. We believe it indicates thatlistco's sales/earnings growth also speed up QoQ in 2Q17. The sales/earningsgrowth of Moutai group in 1H17 is higher than market forecasts at 20%/25% forthe listco in 2017.

    We reiterate Buy on the stock. We expect above-mentioned drivers, especially thechannel restocking, to drive its sales growth in the near term. Our TP at Rmb550is based on DCF approach (factoring in 9.5% WACC and a 2% terminal growthrate). Main downside risks: shorter-than-expected restocking cycle; governmentpolicy changes; food safety incidents.