3Q19 results miss our forecast

Changyu Pioneer Wine announced that revenue dropped 8.7% YoY toRmb3,526mn in 1–3Q19, and net profit attributable to shareholdersfell 5.3% YoY to Rmb729mn (Rmb1.06/sh).

Revenue decreased 6.2% YoY to Rmb968mn in 3Q19, and net profitattributable to shareholders dropped 6.2% YoY to Rmb126mn(Rmb0.18/sh). Revenue and net profit attributable to shareholdersboth miss our estimates, as the drop in sales volume of wine wassteeper than our expectation.

Trends to watch

The wine industry continued to contract, weighing on Changyu’smain business. Data from the National Bureau of Statistics (NBS)shows that China’s wine imports dropped 11.5% YoY in 1–3Q19, andits wine production volume fell 10.4% YoY during the same period.

We do not think imported liquor and brandy businesses willimprove the firm’s fundamentals. We estimate that imported liquorrevenue will rise 2% YoY in 2019, and 3% YoY in 2020, equal to just21.6% and 22.3% of the firm’s overall revenue.

We are upbeat on the firm’s growth potential, the value of its saleschannels, and its ability to cultivate brands. Despite decreasedrevenues, we expect the firm’s net profit margin to remain 20.8% in2019 and 21% in 2020. We believe the high margins will support itsgrowth.

Financials and valuation

We cut our 2019 net profit forecast 3.8% to Rmb985mn, and our2020 estimate5.9% to Rmb979mn, given that sales volume of itsmain brand misses our estimate. A-shares are trading at 19.5x 2019eand 19.2x 2020e P/E. We maintain our NEUTRAL rating for A-sharesand keep our target price at Rmb32.8 (22.8x 2019e and 22.9x 2020eP/E, 12.7% upside), given the valuation rollover. B-shares are tradingat 9.8x 2019e and 9.8x 2020e P/E. We maintain our OUTPERFORMrating for B-shares and target price of HK$19.8 (12.3x 2019e and12.4x 2020e P/E, 26.1% upside). Risks: The sales volume of winecould continue to drop if demand keeps weakening.