2013 NP likely down 24% on weak mid-tier/high-end wines

We expect net profit to have dropped 24% in 2013, mainly due to extremely weak performance from mid-tier/high-end Chateau wines under the government’s anti-extravagance campaign and the impact of imported wine. Volumes of Castel and other premium products such as ice wine and AFIP may have dropped by 30%~40% last year, while those of mid-tier/low-end red wine, sweet wine and brandy likely remained stable. Sales are expected to decrease 17.2% over all.

GPM could drop 5ppt to 64.5% due to product mix deterioration and selling expense/sales ratio is expected to narrow to 24%.

Trends to watch

Adjustment to continue in 2014. The government’s anti-extravagance measures and imported products will continue to press on domestic winemakers in 2014. Changyu will continue to focus on helping distributors to destock, which could take another 1~2 quarters. Its three new chateaus in western China are targeting the mid-tier/high end market but may also need a while to ramp up.

More efforts to improve price-performance in 2014 but S&D expenses should remain under control. The company will pay more attention to catering for consumer needs with higher price-performance products, an adjustment that started in 2013. New low-to-mid-tier products priced below Rmb200/bottle will be favored but S&D expenses should be under strict control as in 2013.

Expansion of Changyu Pioneer franchise stores continues. More than 100+ Pioneer franchising stores have been developed to trade imported wines as of end-2013, but they contributed less than Rmb40mn of total sales. In 2014, Changyu will keep developing its Pioneer stores but could do so more slowly than currently targeted.

Valuation and recommendation (TP HK$20, HOLD)

We lower 2013/14e NP by 4.8%/10.9% given the weak Chateau wine sales. Maintain HOLD but cut end-2014 TP by 26.5% to HK$20.00 from HK$27.20 after the earnings revision.

Risks

Economic slowdown.