看好需求的防御性和成本的下降 ; 上调青岛啤酒和蒙牛乳业的评级 ( 摘要 )

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1 2009 年 2 月 2 日中国 : 日常消费品 2009 年 2 月 2 日 中国 : 日常消费品 看好需求的防御性和成本的下降 ; 上调青岛啤酒和蒙牛乳业的评级 ( 摘要 ) 投资机会我们认为, 大多数日常消费品的需求可能会在 2009 年继续增长, 尽管增速在经济疲软的大环境下会温和放缓 我们认为,2009 年日常消费品的重要投资题材包括 :(1) 需求的防御性 我们预计, 单价较低的基本日用消费品 ( 如牛奶和啤酒 ) 的需求的防御性可能会超过高档白酒和葡萄酒等可选消费品 (2) 受益于原料成本的下降 我们认为, 随着大宗农产品原材料价格纷纷从其高点回落, 大多数日常消费品公司的利润率可能会从中受益 我们的分析表明低利润率企业对原料成本的变动更为敏感 (3) 乳制品消费恢复 在遭到 2008 年 9 月三聚氰胺事件的重创之后, 乳制品需求正在不断改善, 目前回升到事件之前约 7 的水平 我们预计, 随着消费者信心的恢复, 乳制品行业的投资机会可能重现 日常消费品股票在熊市期间估值溢价较高我们的分析表明, 中国日常消费品股票相对大市的估值溢价 ( 相对香港市场的平均溢价为 59%, 相对 A 股市场为 67%) 往往会在熊市期间上升, 在牛市期间下滑 由于高盛全球经济 商品和策略研究团队维持对中国市场 2009 年上半年的谨慎看法, 我们预计日常消费品行业相对大市的较高溢价水平将得以延续 中国旺旺和青岛啤酒 H 位于我们的强力买入名单中国旺旺仍然是我们 2009 年的首选股, 原因在于其凭借独特的市场地位和较高的利润率将实现强劲增长, 而且估值与同行相比具有吸引力 我们也将青岛啤酒 H 股的评级从中性上调至买入, 并加入我们的强力买入名单, 原因是我们认为啤酒需求不太可能由 2008 年本已较低的基数水平进一步走软, 另外该公司对原料成本的降低更为敏感, 从而使得利润率水平存在潜在上行空间 我们对日常消费品股票的 12 个月目标价格的调整幅度为 -58% 评级 目标价格及盈利预测调整概要 目标价格 评级 潜在涨跌 ( 交易货币 ) 空间 公司 代码 新评级 原评级 新目标 原目标 乳制品行业蒙牛乳业 2319.HK 买入 中性 % 伊利股份 SS 中性 卖出 % 光明乳业 SS 卖出 卖出 % 啤酒行业青岛啤酒 (A) SS 中性 中性 % 青岛啤酒 (H) 0168.HK 买入 * 中性 % 燕京啤酒 SZ 中性 中性 % 葡萄酒行业张裕 (A) SZ 中性 中性 % 张裕 (B) SZ 买入 买入 % 中国食品 0506.HK 中性 中性 白酒行业贵州茅台 SS 买入 买入 % 食品加工 / 生产行业及个人护理行业 中国旺旺 0151.HK 买入 * 买入 * % 中国雨润 1068.HK 中性 中性 % 恒安 1044.HK 中性 中性 % 中国粮油控股 0606.HK 卖出 卖出 % 重要信息披露请见 : 对于我们计算目标价格所用的方法以及相关风险, 请参见我们此前发表的研究报告 * 该股位于我们的亚太强力买入名单 资料来源 : 公司数据 高华证券研究预测 将蒙牛乳业和伊利股份的评级分别上调至买入和中性乳制品需求正在逐步恢复, 消费者现在更愿意购买高档产品 我们预计, 产品结构的改善和原奶价格的走软将提高 2009 年盈利的可预见性, 这可能会有助于重建投资者信心, 并推动对蒙牛乳业的估值重估 * 全文翻译将随后提供 邓一凡 +86(10) yifan.deng@ghsl.cn 北京高华证券有限责任公司 曾梓健 +86(10) joey.zeng@ghsl.cn 北京高华证券有限责任公司 北京高华证券有限责任公司及其关联机构与本研究报告所分析的企业存在业务关系, 并且继续寻求发展这些关系 因此, 投资者应当考虑到本公司可能存在可能影响本报告客观性的利益冲突, 不应视本报告为作出投资决策的唯一因素 有关分析师的申明, 见本报告最后部分 其他重要信息披露见分析师申明之后部分, 或请与您的投资代表联系 北京高华证券有限责任公司投资研究高华证券投资研究 1

2 February 2, 2009 Prefer defensiveness and cost benefits; upgrade Tsingtao, Mengniu Source of opportunity We believe demand for most consumer staples is likely to continue to grow in 2009, albeit slowing down mildly on the back of a weak economy. In our view, the key investment themes for staples in 2009 are: (1) Defensive demand. We believe basic daily consumer goods with lower unit prices, such as milk and beer, are likely to see more defensive demand than discretionary products like premium spirits and wines. (2) Benefits from lower input costs. With commodity prices coming off their peak levels, most staples companies are likely to see margin benefits, in our view. Our analysis suggests low-margin participants are more sensitive to input costs. (3) Recovery in milk consumption. Demand for dairy products has been improving after being hit hard by the milk contamination scandal in September 2008 and is now back to about 7 of the pre-scandal level. Investment opportunities are likely to re-emerge in the dairy sector, in our view, as consumer confidence returns. Consumer staples trade at a higher premium in a bear market Our analysis suggests that China consumer staples valuation premium vs. the market (average 59% for the Hong Kong market, 67% for the A-share market) tends to increase during a bear market and shrink during a bull market. As the GS Global ECS Research team maintains its cautious market stance on China in 1H2009, we expect staples relatively high premium vs. the market to continue. SUMMARY OF CHANGES IN RATINGS, TARGET PRICES AND EARNINGS Target Price Potential Rating (in trading currencies) up / downside Company Ticker New Old New Old Milk Mengniu Dairy 2319.HK Buy Neutral % Yili Industrial SS Neutral Sell % Bright Dairy SS Sell Sell % Beer Tsingtao Brewery SS Neutral Neutral % (A) Tsingtao Brewery (H) 0168.HK Buy* Neutral % Yanjing Brewery SZ Neutral Neutral % Wine Changyu (A) SZ Neutral Neutral % Changyu (B) SZ Buy Buy % China Foods 0506.HK Neutral Neutral Spirit Kweichow Moutai SS Buy Buy % Food processing/manufacturing & personal care Want Want China 0151.HK Buy * Buy * % Yurun 1068.HK Neutral Neutral % Hengan 1044.HK Neutral Neutral % China Agri 0606.HK Sell Sell % For important disclosures, please go to For methodology and risks associated with our price targets, please see our previously published research. *Denotes stock is on our regional Conviction List. Source: Company data, Gao Hua Securities Research estimates. Want Want and Tsingtao Brewery (H) on our Conviction Buy List Want Want remains our top pick in 2009 for its robust growth with its niche position, its high margin, and its attractive valuation vs. its peers. We also upgrade Tsingtao (H) from Neutral to Buy and add it to our Conviction Buy List, as we believe demand for beer is unlikely to slow further from an already low base in 2008 and the company is more sensitive to input cost declines, offering potential upside to its margin outlook. We adjust our 12- month target prices by a range of -58%. Upgrade Mengniu Dairy to Buy and Yili Industrial to Neutral Milk demand recovery is on track, with consumers now more willing to pay for premium products. We expect a better product mix and softening raw milk price to increase visibility on 2009 earnings, which may help rebuild investor confidence and drive a re-rating on Mengniu. Yifan Deng +86(10) yifan.deng@ghsl.cn Beijing Gao Hua Securities Company Limited Joey Zeng +86(10) joey.zeng@ghsl.cn Beijing Gao Hua Securities Company Limited Beijing Gao Hua Securities Company Limited and its affiliates do and seek to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For analyst certification, see the end of the text. Other important disclosures follow the Reg AC certification, or contact your investment representative. Beijing Gao Hua Securities Company Limited Investment Research Gao Hua Securities Investment Research 1

3 Table of contents 2009: Stay with defensive demand and cost benefits 2 Mild demand slowdown expected during downward cycle 4 Lower input costs provide margin upside 7 Valuation: Staples trade at a higher premium in a bear market 9 Want Want: Robust growth, lower valuation, maintain on Conviction Buy List 10 Beer: Cost benefits in 2009; upgrade Tsingtao (H) to Buy add to Conviction Buy List 11 Milk: Demand recovery on track, better product mix; upgrade Mengniu to Buy and Yili to Neutral 14 Spirits and wines: More exposed to macro weakness; stay positive over the long term 17 Disclosures 33 The prices in the body of this report are based on the market close of January 29, : Stay with defensive demand and cost benefits For consumer staples companies, 2008 was characterized by erratic fluctuations in commodity prices, and concern over food safety. We believe 2009 is likely to remain challenging as a result of reduced demand due to a weaker economy. In our view, the key investment themes for staples in 2009 are: (1) Defensive demand during a down cycle. We believe basic daily consumer goods with lower unit prices are likely to see more defensive demand than discretionary products. Our analysis on some consumer staples suggests that the macro economic slowdown is likely to have only a mild impact on demand growth, while more growth volatility is likely to come from industry specific issues such as changes in taxation, product innovation, and food safety issues. (2) Benefits from lower input costs. With commodity prices coming off their peak levels over the past few months, we believe the prevailing cost pressure once the biggest concern in late 2007 and early 2008 has been released. We expect margin expansion in 2009, although increased competition may erode part of the benefit. Our analysis indicates that low-margin participants are relatively more exposed to cost benefits. (3) Recovery in milk consumption. Dairy stocks were hit hard during the milk contamination scandal in September Now that demand for milk has started to recover, we believe investment opportunities are likely to re-emerge in the dairy sector as consumer confidence returns. In terms of stock ideas, we would like to highlight that we: Maintain our Buy rating (on Conviction Buy List) on Want Want China as we believe it occupies a niche position within the consumer staples space with a defensive product portfolio, benefitting from lower input costs and an attractive valuation. Upgrade Tsingtao Brewery (H) to Buy from Neutral and add to our Conviction Buy List as we believe the benefit from lower barley costs are likely to provide margin upside and volume growth should continue given its relatively low base in 2008 due to earthquakes and defensive demand. Upgrade Mengniu Dairy to Buy from Neutral. Now that sales have recovered further in January 2009 to about 8 of the pre-scandal level, we believe the company is starting to recover from the milk contamination scandal. We expect sales to return to normal in Gao Hua Securities Investment Research 2

4 2H2009 with an improved product mix, as consumers are now more willing to pay a premium price for high-quality products. Upgrade Yili Industrial to Neutral from Sell as Yili s sales have also recovered from their trough, although we believe the company s milk powder business, which represented 19% of its sales and 22% of its gross profit in 1H2008, will need more time to fully recover. We revise our earnings estimates for dairy companies with heavier losses in 2008 given the companies profit warnings, but raise our EPS estimates by 4%-24% in 2009E-2010E for dairy companies, on the back of demand recovery and the expectation of a better product mix in future. We also adjust our EPS estimates by -5% to +3% in 2008E-2010E for beer and wine companies mainly with refreshed assumptions on raw material costs. We adjust our P/E-based 12-month target prices by a range of -58%. Exhibit 1: Summary of changes in ratings, target prices and earnings Target Price Mkt Cap Rating Current Potential up EPS revision Ticker Change (in trading currencies) Valuation Method price (LCU) / downside Company (US$mn) New Old New Old 2008E 2009E 2010E Milk Mengniu Dairy 2319.HK 1,911 Buy Neutral % 20X 09E P/E 234% 6% 7% Yili Industrial SS 1,074 Neutral Sell % 21X 09E P/E 195% 24% 21% Bright Dairy SS 699 Sell Sell % 25X 09E P/E 58% 4% 4% Beer Tsingtao Brewery (A) SS 3,528 Neutral Neutral % 28X 09E P/E 3% 2% Tsingtao Brewery (H) 0168.HK 2,499 Buy* Neutral % 23X 09E P/E 3% 2% Yanjing Brewery SZ 1,915 Neutral Neutral % 25X 09E P/E -5% -3% Wine Changyu (A) SZ 3,269 Neutral Neutral % 23X 09E P/E Changyu (B) SZ 1,992 Buy Buy % 15X 09E P/E China Foods 0506.HK 927 Neutral Neutral X 09E P/E 2% 1% 1% Spirit Kweichow Moutai SS 14,244 Buy Buy % 21.8X 09E P/E Food processing/manufacturing & personal care Want Want China 0151.HK 5,255 Buy * Buy * % 18X 09E P/E Yurun 1068.HK 1,686 Neutral Neutral % 13X 09E P/E Hengan 1044.HK 3,826 Neutral Neutral % 18X 09E P/E China Agri 0606.HK 1,617 Sell Sell % 6.6X 09E P/E For important disclosures, please go to For methodology and risks associated with our price targets, please see our previously published research. *Want Want China Holdings and Tsingtao Brewery (H) are on our Conviction Buy List. Source: Company data, Gao Hua Securities Research estimates. Gao Hua Securities Investment Research 3

5 Exhibit 2: Valuation comparison Price as of close January 29, 2009 P/E (x) EV/EBITDA (x) GS Stock Last day Mkt cap Company name rating Ticker Price (US$mn) 08E 09E 10E 08E 09E 10E 08E 09E 10E 08E 09E 10E 08E 09E 10E 08E 09E 10E Dairy products Mengniu Dairy Buy 2319.HK ,911 n.m n.m (191.8) (18.9) Yili Industrial Neutral SS ,074 n.m n.m (4719.3) (33.6) Bright Dairy Sell SS n.m n.m (299.1) (20.0) P/B (x) EPS growth (%) ROE (%) Dividend yield (%) Beer Tsingtao Brewery (H) Buy* 0168.HK , Tsingtao Brewery (A) Neutral SS , Yanjing Brewery Neutral SZ , Chinese spirits Kweichow Moutai Buy SS , Wuliangye NC SZ , Luzhou Laojiao NC SZ , Grape wine China Foods Neutral 0506.HK (16.7) Yantai Changyu Pioneer Wine (B) Buy SZ , Yantai Changyu Pioneer Wine (A) Neutral SZ , Food processing/manufacturing & personal care China Yurun Food Group Neutral 1068.HK , Want Want China Holdings Buy* 0151.HK , Tingyi NC 0322.HK , Uni-President China Holdings NC 0220.HK , n.m (5.0) n.m China Agri-Industries Holding Sell 0606.HK , (45.5) Hengan International Neutral 1044.HK , Average *Want Want China Holdings and Tsingtao Brewery (H) are on our Conviction Buy List. For important disclosures, please go to Source: Datastream, I/B/E/S, Bloomberg, Company data, Gao Hua Securities Research estimates, Goldman Sachs Research estimates. Mild demand slowdown expected during downward cycle International experience: Weaker growth in a macro downturn Our checks on the growth profile of some international consumer staples companies in the US and Asia suggest that their growth levels fell below the long-term average level during the economic downturn in the late 1990s and early 2000s. Exhibit 3: Revenue growth dropped in Revenue growth of Coca Cola Exhibit 4: Revenue growth dropped in Revenue growth of Procter and Gamble 25% % 15% 1 Revenue 1 5% CAGR=6% Revenue CAGR=7% 5% -5% -1 Grow th slow ed dow n Grow th slow ed dow n -15% % Source: Bloomberg. Source: Bloomberg. Gao Hua Securities Investment Research 4

6 Exhibit 5: Revenue growth slowed since 1999 Revenue growth of Asahi Exhibit 6: Revenue growth dropped in Revenue growth of Nong Shim 14% 12% 1 8% 25% 2 15% 6% 1 Revenue CAGR=9% 4% 2% Revenue CAGR=3% 5% Grow th slow ed dow n -2% -5% -4% -6% Grow th slow ed dow n Source: Bloomberg. Source: Bloomberg. China: Mild impact from a macro cycle Historical data suggests more volatility from industry specific issues In China, demand growth for staples slowed slightly during the Asia financial crisis, while the growth level varied across the sector due to the different development stages for each sub-sector. Moreover, we believe more significant growth volatility is likely to come from industry specific issues such as changes in taxation, product innovation, and food safety concerns. Exhibit 7: Beer volume growth slowed amid a weak macro environment in the late 1990s... China beer industry volume growth Exhibit 8:...a similar situation for Chinese spirits China spirits industry volume growth 25% Beer volume % yoy China GDP - % yoy 25% Spirit volume % yoy (LHS) China GDP - % yoy (RHS) % % 5% Mild slowdown -5% -15% % Impact from earthquake and bad weather -25% -35% Economic slowdown Fake spirit scandal Change in statistic method Policy change:higher consumption tax E E Source: China Light Industrial Association, CEIC. Source: China Light Industrial Association, CEIC. Gao Hua Securities Investment Research 5

7 Exhibit 9: Liquid milk was less impacted by macro headwinds given a more stable level of demand... China liquid milk industry volume growth Exhibit 10:...a similar situation for soft drinks China soft drinks industry volume growth Liquid milk volume % yoy (LHS) High growth with introduction of UHT milk China GDP - % yoy (RHS) 2005 Milk contamination scandal E % 3 25% 2 15% 1 5% Soft drinks volume % yoy (LHS) Minimal impact from macro cycle China GDP - % yoy (RHS) E Source: Dairy Association of China, CEIC. Source: Euromonitor, CEIC. Individual company growth profiles could also differ from established industry trends due to the particular growth strategies adopted at that time. For example, Tsingtao (H), through aggressive expansion and an intense period of M&A, achieved 48% volume growth CAGR during , when the beer market as a whole saw growth slow to only 5% CAGR. The company s growth profile has been in line with the industry since 2003, when it was less active on the M&A front. Exhibit 11: Tsingtao Brewery (H) growth vs. the sector Beer volume % yoy Tsingtao Brewery volume growth yoy % Tsingtao volume CAGR=48% Beer market volume CAGR=5% Source: Company data, China Light Industries Association. Long-term trend unchanged; more challenges for premium segments in 2009 We noticed that growth more or less slowed down across each sub-sector in late 2008, implying that 2009 would be a challenging year. However, we believe that the long-term growth trend will continue, with further increases in income levels. Gao Hua Securities Investment Research 6

8 We believe high-end spirits and wines are more exposed to the current macro slowdown than say beer/soft drinks, as their consumption is more closely associated with business or trade activities. Feedback from our channel checks also indicates that premium spirits sales slowed down from late 2008; some correction in retail prices also took place during this time. We believe basic consumer staples such as milk, meat, and personal care products are likely to achieve more stable demand during a downturn as they form part of daily consumption habits. Exhibit 12: Relative defensiveness under the consumer staples universe Personal care products Meat Milk Snack foods Soft drinks Beer low-end spirit High-end wine high-end spirit Staples Discretionary Source: Gao Hua Securities Research. Lower input costs provide margin upside Key raw material prices are likely to be lower in 2009 With sharp increases in commodity prices since late 2007, cost inflation was the main concern in consumer staples names in early However, since 2H2008 the situation has reversed, as most commodity prices have declined from their previous highs. Although the GS Global ECS Research team expects global soft commodity prices to experience some moderate strength over the next 12 months, we expect 2009 average prices to be lower than they were in Exhibit 13: Most key raw materials have fallen significantly from their peak levels... Price movement of key inputs Exhibit 14: domestic CPI has also declined markedly from previous highs China Consumer Price Index Palm oil Sugar Pulp Milk powder Hog Barley Raw milk Peaked at Feb-08-57% Peaked at Jan-06-43% Peaked at May-08-31% Peaked at May-08-27% Peaked at Mar-08-23% Peaked at May-08-18% Peaked at Feb-08 Source: Bloomberg, China Nanning Sugar Market, Dairy Association of China, CEIC, Gao Hua Securities Research. -1 Gao Hua Securities Investment Research Source: CEIC. Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

9 Margin sensitivity: Low-margin participants likely to benefit most We believe most consumer staples companies are likely to see input prices decline in Our static sensitivity analysis suggests that beer and milk companies are more sensitive to input cost movements than premium spirits or wine companies, given their lower margins and relatively higher cost on raw materials. Exhibit 15: Revenue/profit composition for major sub-sectors of consumer staples Total revenue = 10 (%) Raw materials Packaging Other COGS Operating expenses and taxation Net profit Spirits (Kw eichow Moutai) 7% 5% 49% 39% Grape juice Packaging Wine (Changyu) 17% 12% 9% 4 23% Milk pow der & palm oil Packaging Snack foods (Want Want) 13% 22% 27% 19% 18% Petrochemic al material Pulp Personal care (Hengan) 19% 25% 17% 22% 18% Raw milk Packaging Milk (Mengniu) 31% 2 27% 18% 4% Barley Packaging Beer (Tsingtao) 1 34% 24% 28% 4% Source: Company data, Gao Hua Securities Research. Low-margin businesses such as beer and milk companies are generally associated with intense competition, less differentiated products, and low pricing power. As a consequence, these participants are more likely to allocate the input cost benefit to promotions and marketing campaigns, in our view. Our analysis on Tsingtao indicates that real margin movements have actually been less volatile in reality. Looking into 2009, we still expect most consumer staples companies to benefit from margin improvements due to lower input costs; although to a lesser extent than what the sensitivity analysis would suggest. Gao Hua Securities Investment Research 8

10 Exhibit 16: Tsingtao s gross margin and import barley prices Exhibit 17: Tsingtao s theoretical gross margin change vs. barley cost and ASP movements Tsingtao gross margin (%) (RHS) Barley price yoy % change (LHS) 6 33% % yoy change in avg. barley cost (%) * 17.3 (4.9) 25.0 (6.7) 9.1 (7.6) % 3 yoy change in ASP (%) (0.5) Theoretical change in gross margin (ppts) ** (3.0) (1.9) % 28% 27% Reported change in gross margin (ppts) (2.1) (0.8) (0.7) Reported change in operating margin (ppts) *** (0.1) 2.5 (0.5) (0.2) E * We use import price for barley here ** Assuming no change in other costs *** Operating margins before provisions on PP&E and goodwill Source: CEIC, Company data, Gao Hua Securities Research estimates. Source: Company data, CEIC, Gao Hua Securities Research estimates. Valuation: Staples trade at a higher premium in a bear market China consumer staples have been trading at a premium to the index on the back of their strong and stable growth profiles. Our study on historical valuations on the companies listed in Hong Kong and China both suggest that the valuation premium tends to shrink in bull markets (late 2006-mid 2007) but expand during bear markets (from 3Q2007). The GS Global ECS Research team still maintains its cautious stance on the market for 2009, especially 1H2009. As a consequence, we expect staples to remain at a relatively high premium vs. the index. Exhibit 18: Valuation premium of Hong Kong-listed staples 40X Premium to MSCI China HK-listed consumer staples avg. forward P/E Premium of staples tends to shrink in bull market X 9 H-share staple avg premium = 59% 6 20X 3...and tends to expand in bear market. 10X Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Source: Factset, Datastream, Gao Hua Securities Research. Gao Hua Securities Investment Research 9

11 Exhibit 19: Valuation premium of A-share staples 60X Premium to CSI 300 A-share consumer staples avg. forward P/E X A-share staples avg. premium = 67% Premium of staples tends to shrink in bull market X...and tends to expand in bear market X Feb-03 May-03 Aug-03 Nov-03 Feb-04 May-04 Aug-04 Nov-04 Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Source: Factset, Datastream, Gao Hua Securities Research. Want Want: Robust growth, lower valuation, maintain on Conviction Buy List We reiterate our Buy rating (Conviction Buy List) on Want Want on the back of: (1) the company s more defensive business nature with a unique consumer group, i.e. children; (2) high margin and potential benefit from lower prices on raw materials; and (3) more attractive valuation versus its peers. The stock is trading at 15X 2009E, compared with 20.7X for Tingyi, 18X for Hengan, and 17.7X for Mengniu. Based on our recent communication with the company, Want Want s business remained in good shape in December 2008, while purchases from its distributors remained active, in preparation for Chinese New Year. The company s beverage business (mainly children s milk products) continues to recover from its trough in September-November due to the milk scandal and government requirements on relabeling. Want Want s expansion of its distribution network and sales team since 2007 has driven strong growth in 1H2008 (volume up 30+% for rice crackers). We believe the company will continue to enjoy these benefits in We expect 25% top-line growth in 2009 with margin expansion from lower raw material costs. Valuation. Our 12-month target price of HK$3.64 (up from HK$3.50) is based on 18X 2009E P/E, implying 5 premium to 12X for MSCI China, the GS Global ECS Research team s target for 2009, which compares with a historical average premium of 61%. Key risks. Key risks to our target price and investment view include unexpected movement in input costs and worse-than-expected competition resulting in higher selling expenses. Gao Hua Securities Investment Research 10

12 Exhibit 20: Want Want: Valuation premium 22X Want Want's fwd P/E prem/(disc) % to MSCI CN P/E (RHS) Want Want's fwd P/E (LHS) 12 21X 10 20X 19X 8 18X 6 17X Want Want avg premium = 61% 4 16X 15X 2 14X May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Source: Factset, Datastream, Gao Hua Securities Research. Beer: Cost benefits in 2009; upgrade Tsingtao (H) to Buy add to Conviction Buy List The beer industry had a difficult year in 2008 partially due to earthquakes in May and unfavorable weather conditions in the summer, all of which negatively affected crop production. The industry recorded only 6% volume growth in 1-11M 2008, down from 12% in We expect the weak macro environment to have some impact on demand, although we still expect 6%-8% volume growth in 2009E coming from a low base in Most beer companies raised their ASP by 8%-1 between late 2007 and early 2008, on the back of higher production costs. However, barley costs have since dropped from their previous highs, implying further upside for margins. Gao Hua Securities Investment Research 11

13 Exhibit 21: Monthly beer volume growth in China (%) High growth in late 07 as 3 distributors accumulated inventory before price hikes. 25% 2 15% Volume growth recovery 1 5% -5% -1 Poor volume growth in 2Q08 due to the quake and weather Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Source: CEIC. Exhibit 22: Retail price of beer (Rmb/bottle) 3.6 Retail Price: Beer: 630ml: Major Sales Item Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Source: CEIC. Gao Hua Securities Investment Research 12

14 Exhibit 23: Import price of barley Exhibit 24: Global price of barley ('000 tons) Volume (left scale) Price (right scale) (Rmb/ton) 350 3,400 (CAD/ton) Jan-03 May-03 Source: CEIC. Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 3,000 2,600 2,200 1,800 1,400 1, Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Source: Bloomberg. Upgrade Tsingtao Brewery (H) to Buy, add to Conviction Buy List. We expect Tsingtao s ASP to improve by 9% in 2008, on the back of price hikes at the beginning of 2008 and continuous product mix optimization (flagship brand contribution increased to 42% in 1Q2008-3Q2008 from 38% in 2007). Given lower production costs and the risk of demand weakness, we expect competition in the beer market to increase, although we do not expect ASP to improve in That said, we still expect a 140bp improvement in gross margins in 2009E, assuming a 2 decline in the cost of barley and hops, a 1 increase in the cost of rice, while all other production costs remain the same. As a consequence, we believe there could be further upside to margins. We estimate earnings growth of 28% in 2009E. We expect the coming FY2008 results to reflect further declines in the price of imported barley (lagged from global price) while solid sector volume growth should drive stock performance. Asahi to acquire 19.99% stake from ABI; Neutral to listco. On January 23, 2009, Asahi Breweries (2502.T) announced that it plans to acquire 262mn Tsingtao H-shares (19.99% stake) from Anheuser-Busch InBev (ABI.BR). The total consideration is US$667mn, or HK$19.8 per share, implying a 36% premium to the previous closing price and 14X 2008E EV/EBITDA. According to Goldman Sachs analysts in Europe and Japan, the deal is part of ABI s US$7bn assets disposal plan and is in line with Asahi s overseas expansion strategy. After the transaction, Asahi will become the No.2 shareholder, following Tsingtao Brewery Group (30.71% stake), while ABI would maintain its 7% stake in the company. We believe the transfer of shares will have no direct impact on Tsingtao listco. ABI (previously A-B before the merger with InBev in 2008), a strategic shareholder since 1993, has never really been involved in Tsingtao s daily operations. We believe the situation is likely to continue with Asahi. The premium price also reflects the global breweries positive long-term view of China s beer market. Valuation. Our 12-month target price of HK$17.7 (up from HK$15.0) is based on 23X 2009E P/E, benchmarking its historical average premium of 108% and 12X P/E for MSCI China, the GS Global ECS Research team s target for Our 12-month target price of Rmb19.0 for Tsingtao (A) is based on 28X 2009E P/E, which represents a 9 premium to 14.7X for CSI 300 (the GS Global ECS Research team s target for 2009), compared with a 10 historical average premium. Beer companies are trading at a P/E premium to other F&B names, which in our view is supported by their stronger operating cash flow, while their valuation is not at a premium in the matrix of EV/EBITDA. We upgrade Tsingtao H- share to Buy and add it to our regional Conviction Buy List. We maintain our Neutral rating on Tsingtao A-share. Gao Hua Securities Investment Research 13

15 Key risks. Key risks to our target price and investment view include worse-than-expected competition or weaker-than-expected demand growth in the beer market. Exhibit 25: Tsingtao Brewery (H): Valuation premium 50X Tsingtao H share P/E prem/(disc) % to MSCI CN P/E (RHS) Tsingtao H share 12m fwd P/E (LHS) 25 45X 40X 20 35X 30X 15 25X 20X 10 15X Tsingtao H share avg premium % to MSCI CN= 108% 10X 5 5X 0X Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Source: Factset, Datastream, Gao Hua Securities Research. Milk: Demand recovery on track, better product mix; upgrade Mengniu to Buy and Yili to Neutral China s dairy market was hit hard in September 2008 with the onset of the melamine contamination scandal. The top-three participants were hurt the most as some of their milk samples were found to be tainted. According to management at each company, their dairy sales declined by as much as 9 right after the scandal. From October 2008, demand for dairy products has continued to rise on the back of stricter quality control measures implemented by both the dairy companies and the government. According to management at each company, December sales have rebound to about 7 of what they were prior to the scandal with high-end products generally recovering faster, as consumers are more willing to pay a premium for high-quality products given previous health and safety concerns. Although the main participants Mengniu and Yili are likely to have lost some market share, as a result of the scandal, in our view, we still feel that both companies will maintain their leading and competitive positions within China s dairy market. Upgrade Mengniu to Buy from Neutral. Mengniu preannounced unaudited FY2008 earnings at a loss of Rmb900mn, implying a loss of Rmb1.6bn since the scandal broke, most of which stemmed primarily from product recalls and returns. Gao Hua Securities Investment Research 14

16 According to company management, January 2009 sales have returned to about 8 of pre-scandal levels, which is slightly above our expectation of 7. We expect the company s sales to return to pre-scandal levels by around mid-2009 with full-year 2009E revenue similar to that of Moreover, premium products such as Milk Deluxe have recovered 9, according the company. The price of raw milk in China softened slightly in 4Q2008. Although the cost of raw milk is likely to increase in future because of the emphasis on quality, we do not expect the average cost of raw milk to increase in 2009, owing to a decline in demand. As a consequence, we expect Mengniu s gross margin to be 22% in 2009E, close to that which was achieved in 2007 (22.5%). However, we expect 2009 operating margin to be below that of 2007, as more effort will be required on the part of Mengniu to rebuild its brand image and reputation with the company having to book Rmb200+mn option expenses in 2009 (Rmb35mn in 2007). We estimate that Mengniu s net profit will total Rmb807mn for 2009E. As consumers rebuild their confidence in milk products, we feel that is also the time to revisit dairy stocks once again. We upgrade Mengniu to Buy from Neutral and we believe a recovery in sales, better product mix, and increasing visibility on 2009 earnings, will help to repair investor confidence and drive a re-rating on the stock. Valuation. Our 12-month target price of HK$11.7 (up from HK$8.3) is based on 20X 2009E P/E, implying 67% premium to 12X P/E for MSCI China, the GS Global ECS Research team s target for 2009, compared with its historical average of 75%. Key risks. Key risks to our target price and investment view include slower-than-expected sales recovery and an unexpected increase in raw milk costs. Exhibit 26: Raw milk prices (Rmb/kg) Raw milk price (Ministry of Agriculture) Source: Ministry of Agriculture, Dairy Association of China. Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Raw milk price (DAC) Nov-08 Gao Hua Securities Investment Research 15

17 Exhibit 27: Mengniu Dairy: Valuation premium 50X Mengniu's P/E prem % to MSCI P/E (RHS) Mengniu's 12m fwd P/E (LHS) 25 45X 20 40X 35X 15 30X 25X Mengniu's avg premium= 75% 10 20X 5 15X 10X Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Source: Factset, Datastream, Gao Hua Securities Research. Upgrade Yili to Neutral. Yili only reported a loss of Rmb226mn in 3Q2008. We expect a loss of Rmb1.1bn based on our estimates for 4Q 2008E due largely to product returns. Yili booked robust sales growth in 3Q2008 (+41% yoy) driven by an intense advertising campaign and promotional activities during the Olympics. Unfortunately for the company the melamine scandal has reversed the positive sales trend. Similarly, like Mengniu, Yili has also seen its sales revenue recover from its trough. However, we believe it will take longer for Yili to see a full recovery at its baby milk powder operations, as parents are generally more sensitive to quality issues when it affects their children. We expect Yili to make a profit of Rmb343mn in 2009E. We upgrade Yili to Neutral from Sell. Since we added it to our Sell list on September 22, 2008, the stock has declined 17%, vs. a drop of 5% for the index, reflecting weak sentiment in the company following the milk scandal. Over the past 12 months, the stock has fallen 61%, vs. a decline of 57% for the index (see performance data in Exhibit 43). Valuation. Our 12-month target price of Rmb9.0 (up from Rmb5.7) is based on 21X 2009E P/E, benchmarking its historical average premium to the CSI 300 Index and 14.7X P/E for the CSI 300, the GS Global ECS Research team s target for Key risks. Key risks to our target price and investment view include slower-than-expected sales recovery and an unexpected increase in raw milk costs. Gao Hua Securities Investment Research 16

18 Exhibit 28: Yili Industrial: Valuation premium 50X Yili's P/E prem % to CSI300 P/E (RHS) Yili's 12m fwd P/E (LHS) X 20 30X 15 20X Yili's avg premium= 43% X 0X -5 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Source: Factset, Datastream, Gao Hua Securities Research. Spirits and wines: More exposed to macro weakness; stay positive over the long term We believe premium spirits and wines are likely to be more exposed to the current economic slowdown, as consumption of these products is more closely associated with business-related activities. A weak economy is likely to result in fewer business meals or alternatively people will trade down to less expensive products, as cost cutting becomes common practice. We hear from distributors that they have noticed a slowdown in the sale of premium spirits and wines starting from September We have also observed some correction in the retail price of such products, which have over the past few years, traditionally trended upwards. Changes in the price trend and uncertainty over demand outlook are likely to lead to lower inventory levels by distributors and, as a consequence, have a negative effect on the short term demand/supply situation, in our view. Over the long term, we remain positive on the leading participants of premium spirits and wines given their high profitability, pricing power, and growth potential, as consumption upgrade continues. Kweichow Moutai: Better positioned in the spirits market; stay positive Kweichow s products used to be in short supply; however, we believe the recent weakness in demand has reduced the gap between supply and demand. That said, even with a reduction in the retail price (from Rmb700+/bottle to Rmb600+/bottle), the distributors/retailers still enjoy a good profit given that the ex-factory price is about Gao Hua Securities Investment Research 17

19 Rmb439/bottle. We believe Kweichow is better positioned than other spirit manufacturers, who are now facing increased pressure with shrinking distribution margins. We expect Kweichow to maintain its current ex-factory price in 2009, i.e. suspend the annual practice of a price increase. We remain positive on Kweichow over the long term, as it is the only pure premium exposure in China s consumer staples market. Valuation. We maintain our 12-month target price of Rmb121, based on 21.8X 2009E P/E, implying 48% premium to the GS Global ECS Research team s target of 14.7X P/E for the CSI 300 in The stock is now trading at 18.6X 2009E P/E, which is attractive, in our view, for a premium consumer exposure with high margins and returns. We maintain our Buy rating on the stock. Key risk. The key risk to our target price and investment view includes weaker-thanexpected demand for premium spirits. Exhibit 29: Kweichow Moutai: Valuation premium 60X Moutai's P/E prem % to CSI300 P/E (RHS) Moutai's 12m fwd P/E (LHS) X 11 40X 9 Moutai's avg premium= 45% 7 30X X 1 10X X -5 May-03 Aug-03 Nov-03 Feb-04 May-04 Aug-04 Nov-04 Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Source: Factset, Datastream, Gao Hua Securities Research Changyu Wine: Attractive risk reward from B-share High-end wine products are also facing weaker demand in the current macro downturn, in our view, but to a lesser extent than premium spirits due to their lower unit price. Changyu has been successful in upgrading its product mix over the past five years, while management started to place more focus on mid-to-low-end products (less impacted by a slowdown in the economy) recently partly in reaction to changes in market demand. We believe the company s flexible management style with help it overcome the current downturn. We estimate the company will achieve 21% earnings growth in 2009E, down from 35% in Changyu B-shares still provide an attractive risk reward, in our view, at 13X 2009E P/E with downside protected by a 7% dividend yield. We maintain our Buy rating on Changyu (B) and our Neutral rating on Changyu (A). Gao Hua Securities Investment Research 18

20 Valuation. Our 12-month target price of HK$33.4 (up from HK$31) on Changyu B-shares is based on 15X 2009E P/E, implying a 25% premium to 12X for the MSCI China (the GS Global ECS Research team s target for 2009), compared with a 49% average premium historically. Our 12-month target price of Rmb47.3 for Changyu (A) is based on 23X 2009E P/E, which represents a 56% premium to 14.7X for CSI 300 (the GS Global ECS Research team s target for 2009), compared with a 78% historical average premium. Key risks. Key risks to our target price and investment view include worse-than-expected slowdown in demand and a deterioration in the competition environment. Exhibit 30: Changyu (B): Valuation premium 35X Changyu B P/E prem % to MSCI P/E (RHS) Changyu B 12m fwd P/E (LHS) 12 30X X 6 20X Changyu B avg premium 49% 4 15X 2 10X -2 5X -4 0X -6 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Source: Factset, Datastream, Gao Hua Securities Research. Gao Hua Securities Investment Research 19

21 Exhibit 31: Want Want China Holdings: Summary financials Profit model ($ mn) 12/07 12/08E 12/09E 12/10E Balance sheet ($ mn) 12/07 12/08E 12/09E 12/10E Total revenue 1, , , ,269.2 Cash & equivalents Cost of goods sold (658.1) (925.2) (1,141.4) (1,378.7) Accounts receivable SG&A (238.4) (302.0) (376.1) (450.4) Inventory R&D Other current assets Other operating profit/(expense) Total current assets EBITDA Net PP&E Depreciation & amortization (50.1) (62.4) (79.6) (97.3) Net intangibles EBIT Total investments Interest income Other long-term assets Interest expense (4.6) (3.3) (1.6) (1.2) Total assets 1, , , ,884.9 Income/(loss) from uncons. subs. (0.3) Others Accounts payable Pretax profits Short-term debt Income tax (23.8) (40.8) (63.3) (88.4) Other current liabilities Minorities (0.7) (0.9) (1.2) (1.5) Total current liabilities Long-term debt Net income pre-preferred dividends Other long-term liabilities Preferred dividends Total long-term liabilities Net income (pre-exceptionals) Total liabilities Post-tax exceptionals Net income Preference Shares Total common equity , , ,485.8 EPS (basic, pre-exceptionals) ($) Minority interest EPS (basic, post-exceptionals) ($) EPS (diluted, post-exceptionals) ($) Total liabilities & equity 1, , , ,884.9 DPS ($) Dividend payout ratio (%) BVPS ($) Free cash flow yield (%) Growth & margins (%) 12/07 12/08E 12/09E 12/10E Ratios 12/07 12/08E 12/09E 12/10E Sales growth EBITDA growth ROE (%) EBIT growth ROA (%) Net income growth ROACE (%) EPS growth Inventory days (103.8) (95.9) (99.7) (98.9) Gross margin Receivables days EBITDA margin Payable days (47.5) (35.0) (32.7) (29.4) EBIT margin Net debt/equity (%) (12.5) (20.6) (15.1) (14.8) Interest cover - EBIT (X) NM NM NM Cash flow statement ($ mn) 12/07 12/08E 12/09E 12/10E Valuation 12/07 12/08E 12/09E 12/10E Net income pre-preferred dividends D&A add-back P/E (analyst) (X) Minorities interests add-back P/B (X) Net inc/(dec) working capital (60.2) (45.0) (64.7) (53.5) EV/EBITDA (X) NM Other operating cash flow 74.3 (21.1) (26.1) (16.1) Dividend yield (%) Cash flow from operations Capital expenditures (87.9) (213.5) (230.8) (243.6) Aquisitions Divestitures Others (254.4) Cash flow from investments (335.3) (210.5) (227.8) (240.6) Additional Metrics 12/07 12/08E 12/09E 12/10E Dividends paid (common & pref) (27.4) (120.7) (130.4) (171.8) Inc/(dec) in debt (15.4) (110.0) (30.0) 0.0 Common stock issuance (repurchase) (2.4) Other financing cash flows Cash flow from financing (32.7) (160.4) (171.8) Total cash flow (54.4) 32.0 Source: Company data, Goldman Sachs Research estimates. Gao Hua Securities Investment Research 20

22 Exhibit 32: Tsingtao Brewery (H): Summary financials Profit model (Rmb mn) 12/07 12/08E 12/09E 12/10E Balance sheet (Rmb mn) 12/07 12/08E 12/09E 12/10E Total revenue 13, , , ,426.5 Cash & equivalents 1, , , ,642.5 Cost of goods sold (9,216.0) (10,766.6) (11,232.2) (12,345.8) Accounts receivable SG&A (3,341.0) (3,906.3) (4,159.6) (4,471.4) Inventory 2, , , ,828.6 R&D Other current assets 1, , , Other operating profit/(expense) (1.3) Total current assets 4, , , ,628.5 EBITDA 1, , , ,331.8 Net PP&E 5, , , ,695.9 Depreciation & amortization (528.2) (588.1) (633.6) (684.0) Net intangibles EBIT , , ,647.7 Total investments Interest income Other long-term assets Interest expense (15.0) (32.3) (38.0) (38.4) Total assets 11, , , ,616.7 Income/(loss) from uncons. subs Others Accounts payable 1, , , ,217.7 Pretax profits , , ,627.1 Short-term debt 1, Income tax (413.8) (329.1) (404.3) (455.6) Other current liabilities 3, , , ,094.5 Minorities (39.9) (37.2) (53.9) (65.1) Total current liabilities 5, , , ,470.5 Long-term debt , , ,540.9 Net income pre-preferred dividends ,106.4 Other long-term liabilities Preferred dividends Total long-term liabilities , , ,691.0 Net income (pre-exceptionals) ,106.4 Total liabilities 5, , , ,161.5 Post-tax exceptionals Net income ,106.4 Preference Shares Total common equity 5, , , ,820.0 EPS (basic, pre-exceptionals) (Rmb) Minority interest EPS (basic, post-exceptionals) (Rmb) EPS (diluted, post-exceptionals) (Rmb) Total liabilities & equity 11, , , ,616.7 DPS (Rmb) Dividend payout ratio (%) BVPS (Rmb) Free cash flow yield (%) Growth & margins (%) 12/07 12/08E 12/09E 12/10E Ratios 12/07 12/08E 12/09E 12/10E Sales growth EBITDA growth ROE (%) EBIT growth ROA (%) Net income growth ROACE (%) EPS growth Inventory days (75.8) (79.9) (83.4) (80.3) Gross margin Receivables days EBITDA margin Payable days (37.1) (38.7) (38.6) (35.3) EBIT margin Net debt/equity (%) (0.6) Interest cover - EBIT (X) NM Cash flow statement (Rmb mn) 12/07 12/08E 12/09E 12/10E Valuation 12/07 12/08E 12/09E 12/10E Net income pre-preferred dividends ,106.4 D&A add-back P/E (analyst) (X) Minorities interests add-back P/B (X) Net inc/(dec) working capital (162.2) (339.6) (113.2) (22.8) EV/EBITDA (X) Other operating cash flow Dividend yield (%) Cash flow from operations 1, , , ,862.7 Capital expenditures (1,054.1) (966.0) (1,065.0) (1,150.3) Aquisitions Divestitures Others (63.7) Cash flow from investments (1,113.9) (966.0) (1,065.0) (1,150.3) Additional Metrics 12/07 12/08E 12/09E 12/10E Dividends paid (common & pref) (287.8) (350.3) (451.9) (578.2) Inc/(dec) in debt (130.0) 0.0 Common stock issuance (repurchase) Other financing cash flows (58.8) Cash flow from financing (581.9) (578.2) Total cash flow (152.2) Source: Company data, Goldman Sachs Research estimates. Gao Hua Securities Investment Research 21