No pain, no gain; initiating coverage with a Hold rating

Deutsche Bank Markets Research Rating Hold Asia China Consumer Food & Beverage Company Uni-President China Date 19 October 2016 Initiation of Coverage No pain, no gain; initiating coverage with a Hold rating Reuters Bloomberg Exchange Ticker 0220.HK 220 HK HSI 0220 ADR Ticker ISIN UPCHY US90458K1034 Forecasts And Ratios Year End Dec 31 2014A 2015A2016E2017E2018ESales (CNYm) 22,487.7 22,101.920,824.922,604.424,025.9EBITDA (CNYm) 1,784.9 2,434.62,448.62,777.23,051.0Reported NPAT (CNYm) 285.5 834.5748.2884.01,038.9Reported EPS FD(CNY) 0.07 0.190.170.200.24DB EPS FD (CNY) 0.07 0.190.170.200.24OLD DB EPS FD (CNY) 0.03 0.190.220.26–% Change 144.0% 2.0%-22.9%-21.8%–DB EPS growth (%) -74.0 192.3-10.318.117.5PER (x) 82.1 28.327.923.620.1EV/EBITDA (x) 15.2 10.29.17.86.9DPS (net) (CNY) 0.01 0.040.030.060.07Yield (net) (%) 0.2 0.70.71.31.5Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close Facing a setback until 2Q17 ________________________________________________________________________________________________________________Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Price at 18 Oct 2016 (HKD) 5.56Price target - 12mth (HKD) 5.2852-week range (HKD) 7.52 - 4.99HANG SENG INDEX 23,038 Charlie Chen Research Analyst (+852 ) 2203 6178 charlie.chen@db.com Price/price relative 4.05.06.07.08.09.010/144/1510/154/16Uni-President ChinaHANG SENG INDEX (Rebased) Performance (%) 1m3m12mAbsolute -6.9-5.0-21.1HANG SENG INDEX -1.35.7-0.1Source: Deutsche Bank We expect UPC to go through a difficult period in 2H 16 and 1H 17, and to take a step back in order to solidify its market position for future growth. UPC is still conducting de-stocking activities, which could hurt its short-term revenue in the beverage business. The company is also running new product trials in selected markets, rather than pushing all new products to the channels at once. Given a deliberately controlled sales push, and potentially stronger competition from rivals, we expect UPC to experience a 10% revenue decline and a net loss in 2H 2016, followed by 8.5% revenue growth in 2017. Initiating with a Hold rating and an HK$5.28 DCF-based target price We like UPC’s long-term outlook, due to management’s superior capability in product innovation, which should help the company to maintain its competitive advantage in a slow-growing Chinese consumer market. However, without seeing meaningful positive catalysts until at least 2017, we initiate coverage on UPC with a Hold rating and a DCF-based target price of HK$5.28. Product innovation capability the main long-term driver The company has demonstrated strong capability in product R&D since 2014. Over the past three years, UPC has launched nearly 20 new products in both instant noodles and beverages, with some still at the trial stage in selected markets. More importantly, most of UPC’s new products are at the high end of the market, which fits in with the trend for consumer trade-up. We believe this is UPC’s core competitiveness, and we expect it to drive its long-term revival. Valuation and risks We use a DCF to derive our target price of HK$5.28. The main downside risks include raw material price increases, competition intensification, and an outbreak of food safety accidents. The key upside risks include a better-than-expected performance from successful new product launches. Distributed on: 19/10/2016 09:00:00 GMT 19 October 2016 Food & Beverage Uni-President China Page 2 Deutsche Bank AG/Hong Kong Model updated:18 October 2016 Running the numbers Asia China Food & Beverage Uni-President China Reuters: 0220.HK Bloomberg: 220 HK Hold Price (18 Oct 16) HKD 5.56Target Price HKD 5.2852 Week range HKD 4.99 - 7.52Market Cap (m) HKDm 24,015 USDm