FY12 results review

Changyu reported 2012 NP of Rmb1,701mn (-10.8% YoY) andrevenue of Rmb5,644mn (-6.4% YoY). The sluggish performancewas caused by the negative impact of the government crackdown onlavish spending, imported wines and the “pesticide incident” in3Q12. Sales of Castel (-18% YoY) and Cabernet (-7% YoY) werehit the hardest. Brandy sales +13.4% to reach Rmb859mn.Gross margin squeezed 0.6ppt to 69.5% due to raw material priceincrease, product mix downgrade and deleveraging on smaller salesvolume. SG&A exp./sales ratio expanded 1.3ppts to 30.2% mainlydue to marketing and promotion investment (especially in 3Q12)and higher staff costs. Final dividend was Rmb754mn (44.3%payout ratio).

Factors to watch

Earnings could halt decline in 1Q although sales could still postnegative growth thanks to cost controls. 1Q sales could still facepressure given that the central government’s anti-corruptioncampaign could still affect sales of high-end wines in the N-T andindustry competition is still fierce. Margin-wise, we expect a lowerSG&A exp./sales ratio considering some one-off marketingexpenses to tackle negative news in 3Q12 and expenses related tothe Changyu’s 120th anniversary last year.

Expect mild recovery from 2Q. Going forwards, we expect fastertop line growth in coming quarters considering the improvingeconomic environment and 2H’s easier base. Brandy couldcontribute more sales in FY13, while the launch of three newChateau wines are expected to compensate for the weak Castelsales. The company’s efforts to improve product value-for-moneycould be also positive to sales volume. For 2013, we expect 6%/7%sales/earnings given still tough competitive landscape. Grossmargin is expected to squeeze due to lower mix but could be offsetby decrease in SG&A/sales ratio.

Valuation and recommendations

We maintain our BUY rating given the company’s recovery outlookfrom 2013 and cheap valuation. We cut FY13/14e earnings by7%/11% and trim our end-2013 TP from HK$57.7 to HK$52.8. TheB-share is trading at 10.7x 2013e EPS vs. its historical average of18.3x and the F&B average of 21.3x. Risks includelower-than-expected industry growth.