Key takeaways

We visited Guyuelongshan’s headquarters and key distributors, andbelieve that the market environment is better than expected.

Guyuelongshan performed well in Anhui province. Based onchannel checks, we estimate sales revenue in Anhui will increasemore than 40% to Rmb70–80mn in 2017 with faster growth inHefei and northern Anhui. Consumption of yellow rice wineimproved significantly.

The company is determined to expand across the nation, andwill continue to work hard on 1–2 key new provinces in 2018.

The price hikes in 2016 and 2017 paid off. Ex-plant prices andretail prices have picked up 5–10%.

We are more upbeat on the yellow rice wine sector in 2018 givenrapid demand growth outside Zhejiang and Shanghai. Yellow ricewine should benefit from consumption upgrading of mass-marketalcoholic drinks. In addition, we expect modest price hikes to drivegrowth in the coming years as costs of raw materials and labor rise.

Guyuelongshan’s revenue growth to accelerate with possible upsidesurprises. First, sector concentration is low. Second, it enjoys brandinfluence across China and strong market positioning. It shouldbenefit more than its peers from nationwide expansion andconsumption upgrading. Third, the company is determined to expandacross the nation and develop key products and clients.

Upgrading product mix and modest price hikes to improve grossmargin and profitability. In addition to consumption upgrading, wealso expect nationwide expansion to enhance its product mix giventhe higher-end product portfolio outside Zhejiang.

Recommendation

We raise 2017 & 2018 revenue forecasts by 4.0% and 8.3% toRmb1.682bn and Rmb1.891bn. We raise our EPS forecast by 2.9% and8.6% to Rmb0.17 and Rmb0.20, and introduce a 2019 forecast atRmb0.25. Lift TP 7.6% to Rmb12.80 （5.5x 2018e P/S）。 Maintain BUY.

Risks

Disappointing expansion outside Zhejiang and revenue growth.