3Q18 revenue misses market expectations

Changyu Pioneer Wine announced 1–3Q18 results: revenue edged up1.65% YoY to Rmb3,861mn; net profit fell 5.69% YoY to Rmb770mn.3Q18 revenue disappoints due to continued phase-out of lower-endproducts. Gross margin shrank 2.42ppt YoY to 64.53% due toconsolidation of lower-GM overseas chateaus.

Trends to watch

Steady revenue growth; watch product mix improvement. As thefirm shifted its strategic focus towards large medium/high-endproducts, revenue from low-end wine and brandy dropped in 1–3Q18, while Cabernet and high-end wine maintained solid growth. Combined wine imports in 1–3Q18 slipped 2% YoY, alleviating thecompetitive pressure on domestic wine. Changyu follows a clearstrategy of improving its brand and product quality.

Gross margin faced pressure in 2018 and may recover in 2019. Grossmargin shrank further YoY in 1–3Q18 due to consolidation oflower-GM overseas business and base effect. We expect gross marginto stabilize in 2019.

Earnings forecast

We trim our 2018 and 2019e EPS forecast by 3.3% and 5.0% fromRmb1.48 and Rmb1.53 to Rmb1.43 and Rmb1.46.

Valuation and recommendation

Changyu-B is trading at 9.7/9.5x 2018/19e P/E; maintain BUY and cutTP by 17% from HK$30 to HK$25, implying 14.3x/13.9x 2018/19e P/Eand a 48% upside. Changyu-A is trading at 20.7x/20.4x 2018/19e P/E;maintain HOLD and cut TP by 9% from Rmb38.3 to Rmb35.0,implying 24.4x/24.0x 2018/19e P/E and 18% upside.

Risks

Product mix adjustment weighs on revenue.