More resilient growth during macro slow down    Yanghe is the largest brand in premium liquor (Rmb300-600/bottle) in China. Near term, we expect its growth to be more resilient than other liquor brands, helped by its “value for money” nature, flat channels and rapid market response. Yanghe exhibited its resilience in the last downcycle in 2013-14. Long term, we expect it to consolidate the premium liquor sector through increased penetration and improved product mix. Risk/reward is attractive at 15x 2019E P/E with a 22% earnings CAGR over FY18-20E. Initiate Buy.    Premium liquor sector: fast-growing sales and improving consolidation    The premium segment accounted for 9% of liquor volume and 20% of liquor sales in 2017. Premium liquor has good branding and reasonable pricing catered to the social and business demand. With middle-class consumers trading up, the premium segment is expected to have the highest growth among all categories in Baijiu, and estimated to have a 16% sales CAGR in 2018-20 by Euromonitor. Meanwhile, in view of consumers’ increased brand awareness, we expect leading brands to gain market share in the segment.    Yanghe: well positioned to scale up in the premium sector    Yanghe takes a 30% market share by volume in the premium segment and we expect it to continue to consolidate the segment. Compared to other premium peers, Yanghe has a wider distribution channel, better brand awareness and more diversified products. Management also has high incentives with a significant interest in the company. We expect Yanghe to gain market share through increased penetration and improved product mix in the long term.    Initiating with Buy; Target price RMB150    Yanghe’s shares have fallen 30% (MSCI China staples index: -23%) since June due to weak market sentiment, but we believe the story of market share gains in the premium segment is intact. The stock trades at 15x 2019E P/E with a 22% earnings CAGR in 2018-20E. We initiate on Yanghe with a Buy rating. Our target price of RMB150 is based on DCF (9.5% WACC and 2% terminal growth). Downside risk: macro slowdown, channel destocking of Moutai and food safety. (See pages 17 & 18).

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