Ex-factory price lifted by 8%. Wuliangye (WLY) lifted ex-factory price of its standard 52% Abv-“Wuliangye”from RMB609 to RMB659 (500ml/bottle), and the company’s Chairman,Zhongguo LIU, said in an interview with Securities Journal that WLY is strivingto complete channel destocking in the Mid-Autumn Festival-peak season. To recall, WLY lowered the ex-factory price from RMB729 to RMB609 in May2014. Currently, the retail price quoted by online yihaodian, jd and jiuxianstores is RMB609-659, and we believe distributors can only make money fromrebates. Prior to the price hike, WLY offered distributors to place additional50% order at RMB509 upon meeting sales targets, i.e. effective ex-factoryprice is RMB576. Now, distributors will get rebates periodically based on salesperformance. No change to achieved price forecast, but pricing discipline reaffirmed. As we have yet to see a reasonable retail margin, we don’t see the price hikeas a signal of completion of WLY destocking or a strong recovery of the baijiumarket, but WLY’s reaffirmed commitment to pricing discipline, which ispositive to the development of the entire supreme baijiu market. As to WLY,we have not changed our forecast, as we think the price hike should notchange the achieved price (net of rebate) until we see a reasonable retailmargin. We keep our Buy rating on WLY, as we are looking for a NPAT recovery andworking capital improvement in 2016, as well as SOE reform to help thecompany transforming into a brand portfolio manager, mainly by introducingstrategic partners and management incentive scheme. WLY has beensuspended since 29 July 2015, and we are not sure if it is related to progressof SOE reform. Our DCF-based target price (9.5% WACC and 0% TG) isRMB31/share, equivalent to 20.8x 2015E PE; ex-cash it would be 18.9x 2015EPE. Key downside risks include: prolonged destocking, slowing cashconversion.

TP adjusted to RMB275.4. Kweichow Moutai announced distribution of scrip (1 for 10) and cash(RMB4.37/share) dividend for 2014, and accordingly, we change our TP fromRMB303 to RMB275.4 to reflect the share capital adjustment. Our TP is derived from DCF, factoring in 9.5% WACC and 0% TG, in line withour assumptions for Chinese consumer stocks. It is equivalent to 21.1x 2015EPE and ex-cash 19.4x 2015E PE. We have a Buy rating on the stock. Key downside risks: non-core investments and non-supreme spirits expansioncould dilute return and incur unnecessary risk, slowing cash conversion.