Great China Consumer：FY16/1HFY17 results review/preview what to focus on?

Deutsche Bank Markets Research Asia China Consumer Industry Great China Consumer Date 28 February 2017 Results FY16/1HFY17 results review/preview - what to focus on? Top picks: Buy Wuliangye, Mengniu, Yue Yuen, and Sa Sa ________________________________________________________________________________________________________________ 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. Anne Ling Research Analyst (+852 ) 2203 6177 anne.ling@db.com Charlie Chen Research Analyst (+852 ) 2203 6178 charlie.chen@db.com Mark Yuan Research Analyst (+852 ) 2203 6181 mark.yuan@db.com John Chou Research Analyst (+852 ) 2203 6196 john.chou@db.com Top picks Wuliangye Yibin (000858.SZ),CNY39.39 Buy China Mengniu Dairy (2319.HK),HKD15.44 Buy Yue Yuen (0551.HK),HKD27.85 Buy SA SA International (0178.HK),HKD3.20 Buy Source: Deutsche Bank Companies Featured Wuliangye Yibin (000858.SZ),CNY39.39 Buy 2015A 2016E 2017E P/E(x) 15.5 20.7 18.2 EV/EBITDA(x) 8.6 12.5 10.3 Price/book(x) 2.4 3.1 2.9 China Mengniu Dairy (2319.HK),HKD15.44 Buy 2015A 2016E 2017E P/E (x) 22.6 17.6 18.3 EV/EBITDA (x) 13.3 12.5 10.0 Price/book (x) 1.8 2.5 2.2 Yue Yuen (0551.HK),HKD27.85 Buy 2015A 2016E 2017E P/E (x) 14.5 12.0 11.0 EV/EBITDA (x) 7.2 6.6 6.0 Price/book (x) 1.2 1.3 1.2 SA SA International (0178.HK),HKD3.20 Buy 2016A 2017E 2018E P/E (x) 23.2 25.6 17.7 EV/EBITDA (x) 13.0 15.7 11.4 Price/book (x) 4.2 7.0 6.3 Source: Deutsche Bank Last year, we talked about potential corporate actions such as TVB, Intime, Hengdeli and Lifestyle. We believe managements' tone will be slightly better for 2017, given a better 4Q16/2H16 in general. However, as political uncertainties remain, globally, the 2017 budget will remain cautious. Any surprise on sales (SSS or sales volume) will help operating leverage. We remain less defensive but still selective. Anta, Sun Art, Yum China, Esprit results and other retailers – key takeaways A common message from NWDS, Parkson and Anta was that sssg recovered in China in 4Q16/2H16 vs. 9M16/1H16. This might be due to a low base or the gold price rise (in the case of department stores), but Nielsen’s consumer confidence trend made us more confident of a higher sustainable recovery. In 4Q16, the index reached its highest level since 4Q14, driven by better employment expectations. VAT reform benefits were seen in YUM China in 2H16. Listed companies (like Sun Art, NWDS, Esprit) are also efficient in cost saving. While most items like rental as % of sales were contained, the staff cost ratio is still rising, but more slowly. We upgraded Esprit from Sell to Hold. Staples – Baijiu was strong in 2016 while dairy companies are cleaning up Staples are yet to announce 2016 results but several have announced profit alerts. Some Chinese baijiu companies already have announced preliminary results which are broadly in line or slightly below expectations, but as Chinese New Year sales numbers are likely to beat expectations, the market seems to have looked forward and focused on new guidance for 2017, which may have upside to investors’ original expectations. Profit alerts on dairy (CMD and Mengniu) and food brands (China Food) are mainly on one-offs and house cleaning, in our view. Thus, we maintain Buys for these three companies. What should investors focus on during results announcements? Key comments to look for: 1) will higher CPI help SSS in 2017? We believe food retailers and restaurants will benefit; 2) which sub-segment will be able to pass on cost rises (PET, raw milk, copper, steel)? We believe dairy and white goods will be fine, but not F&B (like instant noodles); 3) what are international brands and manufacturers’ views on border-adjusted tax and its implications? Top picks: Buy Wuliangye, Mengniu, Gree, Yue Yuen, and Sa Sa We like Wuliangye as it is a valuation recovery laggard in the super-premium baijiu sector, with strong fundamental improvement to support double-digit earnings growth. In tandem with a rise in raw milk prices, Mengniu should benefit from measures implemented by its new management team, leading to margin expansion and sales growth. We like Yue Yuen on its stronger-than-expected profitability recovery at the ODM business as well as extra orders from Adidas. Among HK retailers and international companies, we like Sa Sa on its recovery trend and more meaningful