SOE reform plan approved by CSRC Wuliangye announced on 15 May that the company has received the approvalnotice from CSRC regarding its private placement (SOE reform) plan. Permission is granted to Wuliangye that the company may issue no more than85.67 million shares at CNY21.64 per share to five investors, including threestrategic investors, one investment fund for company employees and oneinvestment fund for Wuliangye’s distributors. Small dilution but big incentive to management The proposed private placement will dilute current shareholders by 2.3%. ButWuliangye’s management will hold 0.6% of the total company through a fund,which largely aligned management and shareholders’ interests. . A long awaited approval: overhang removed This private placement was originally proposed in August 2015 and Chineseregulator had not given any indication of the outcome until December 2016,when Wuliangye announced they have received verbal confirmation ofapproval. However, some investors are still concerned if there is any delay orunexpected changes which may take a toll on Wuliangye’s financialperformance this year due to distraction of management’s focus. This officialfinal approval, in our opinion, removes the overhang and the management isnow fully motivated to deliver good results.. Other information of the placement Among this 2.3% new share placement, management investment fund isallocated 0.6%, distributor investment fund is allocated 0.5%, remaining goesto Taikang Fund (0.6%), Huaan Fund (0.2%) and Kailian Fund (0.2%). Thisplacement is expected to be completed within 6 months. . Maintain Buy with target price CNY55.00 We believe this is an expected positive news to the company and our forecastshave priced in the positive impact of this event. We maintain our Buy ratingand DCF-based target price of CNY55.00 unchanged. Downside risks includingconsumption tax increase and adverse policies regarding baijiu industry fromthe government..

To bid Stonyfield for USD850m Yili announced that it plans to bid for 100% equity in Stonyfield for USD850m from Danone Group. Stonyfield is an organic yogurt maker based in New Hampshire, USA. The company has brands including YoBaby, YoToddler, YoKids and Oikos. According to New York Post, the company generated USD370m sales and USD50m EBITDA in 2016. The selling of Stongyfield is part of an agreement reached by Danone with the US Department of Justice for winning approval to buy soy-milk-maker WhiteWave for USD10bn, which was completed in April 2017. Dean Foods is also in the auction to buy Stonyfield, according to New York Post. Acquisition scenario: 5% incremental EBITDA in 2017; but good potential synergies in the long-term We expect Yili to use its internal capital to finance the acquisition (It has Rmb14bn in 2016 and has Rmb8-9bn operating cash flow per year in 2017-19). Based on Stonyfield’s 2016 financials (i.e. assuming the company generates the same 2016 revenue and EBITDA of USD370m and USD50m, respectively, in 2017), and assuming full year consolidation, we expect 3.9%/ 4.6% of incremental sales/EBITDA contribution for Yili in 2017E from the acquisition, if realized. While the earnings contribution appears to be limited in near term, we expect more upside potential for the long-term. With Yili’s wide distribution network in China and good track record in brand building, we think Yili should be able to drive sales in China for Stonyfield, and therefore provide potential for upside to the earnings contribution in the long term.

Q1results: high growth despite a high base; Buy Solid volume performance amid price hikeWuliangye reported a very strong set of results for 1Q17, recording 15% gross revenue growth and 24% net profit growth and beating investors expectations. As 1Q16was the strongest quarter last year with 30% yoy net profit growth, we believe this strong start sends a strong signal to the market that Wuliangye's management interests are now aligned with shareholders’ after the verbal approval of the company's SOE reform proposal in December 2016. Solid volume performance amid price hikesWuliangye’s 15% revenue growth in 1Q has dispelled investors’ previous concern over sizeable volume decline amid aggressive price increases in 2016. As the baijiu market continuous to recover and demand for super-premium baijiu climbs, Wuliangye has been able to keep volume flat with an effective c.15% yoy ASP hike in 1Q. With no further price hike this year, we see 10-15% a reasonable range for Wuliangye’s full-year 2017revenue growth.Operating leverage starts to show its powerWith the successful re-pricing of the flagship product and cuts in distributor subsidies, Wuliangye’s GP margin improved 80bps to 68.1% and EBIT margin expanded 3.8ppt in 1Q (both yoy), which drove net profit up 24%. We believe this trend will continue throughout 2017. Advance payment from distributors of RMB6.2bn was marginally lower than the RMB6.3bn on 31Dec. 2016, as 2Q is typically a light season, and there were some increases in account receivables mostly related to sales of non-alcoholic products. Such minor negatives did not change the nature of the strong 1Q result.Lift price target to RMB55.00on 13.4x FY18E EV/EBITDAWe revise upwards FY17E and FY18E EPS by 1% and 5% respectively, and roll over our valuation base to FY18, using the same target valuation of 13.4x EV/EBITDA. For details, please refer to page 5. We maintain our Buy rating with a revised target price of RMB55.

Earnings growth tracks ahead of our full year forecastYili reported 3% sales growth to Rmb15.8bn and 12% net profit growth toRmb1.7bn in 1Q17. The sales growth tracks behind our full year forecast at 7%in 2017, but the earnings growth is better than our 2017 forecast at 9%. Grossmargin declined 4.3ppts yoy to 37.2%, which likely due to rising milk powdercost. SG&A/sales declined significantly by 5.0ppts to 25%. What’s behind our expectation: strong control in selling expense…The earnings growth is mainly contributed by significant savings in sellingexpense, which declined 3.8ppts yoy to 25.0% in 1Q17. The selling expenseratio is at the lowest level since 3Q15, likely helped by savings in A&Pspending. As a result of rising industrial milk powder price from 2H16, thecompany likely further controlled A&P expense to maintain profitability. …yet market share remained resilientYili’s room temperature products, chilled products and Infant formula marketshare increased slightly from 32.4%, 15.6% and 5.6% in 4Q16 to 33.6%, 16.2%and 5.8% in 1Q17, respectively. Yili could continue to gain market share evenwhile controlling A&P expense, likely helped by an easing of marketcompetition and more efficient expenses. Infant formula sector likely resumes growthYili didn’t report segment sales in 1Q17, but we estimate its IMF segment salesmight recover to positive growth (vs 15% decline in 2016), given its marketshare increase 40bps yoy in 1Q17. This is likely helped by healthier channelstocking and less pressure from market competition. Maintaining BuyWe expect a similar trend for full year as 1Q17. The headwinds in gross marginwill likely increase due to rising raw material cost, yet this could be offset byeasing market competition and savings in A&P cost. Potential acquisitionswould be the main positive catalyst for the company. We maintain Buy on Yili.

To terminate share placement and acquisition of China Shengmu. Yili announced on 27 April 2017 that it will terminate the share placement of 587mn shares at Rmb15.33/share, as a result of cancelling the acquisition of 37% interest in China Shengmu. Accordingly, the general offers triggered by the transaction based on HK listing rules also lapsed. Yili indicated that the acquisition cancellation was mainly due to the failure to fulfill all the conditions precedent in the framework contract with Shengmu until 21 April 2017 (“Long Stop Date”), and in particular, it have NOT received the approval from Anti-Monopoly Bureau of MOFCOM. Both Yili and Shengmu agreed on 25 April not to extend Long Stop Date, and therefore the Sale and Purchase Agreement automatically terminated on 21 April 2017. To recap, Yili announced that it plans to finance Rmb9bn through issuing 587mn shares to five investors at Rmb15.33/share in October 2016. The proceeds will be used for the acquisition of 37% interest in China Shengmu (1432.HK, NR) at HK$2.25/share and Capex for high-end products' production. Positive on terminating placement; maintaining Buy. We think termination of placement should remove overhangs for EPS dilution. It has a strong cash balance of Rmb14bn in 2016 and has Rmb8-9bn operating cash flow per year, indicating there is not much necessity for equity financings. While Yili terminates the acquisition of Shengmu, we expect the management should continue to seek growth through M&A, likely for high ROE companies and oversea brands. We maintain Buy.

Suspension of trading . Trading of Yili is suspended on today (24 April 2017), pending the release of an announcement on material information, according to the Shanghai Exchange news. Possibly due to circulation of Shengmu acquisition . To recap, on Oct 22, 2016, Yili announced that it plans to finance Rmb9bn through issuing 587mn shares to five investors at Rmb15.33/share. The proceeds will be used for the acquisition of 37% interest in China Shengmu (1432.HK) at HK$2.25/share and Capex for high-end products' production. Yili signed a framework contract with Shengmu on Oct 22, 2016. According to the contract, the acquisition is conditional on conditions of 1) approved by NDRC; 2) approved by MOFCOM; 3) approved by anti-monopoly Bureau of MOFCOM; 4) approved by SAFE and 5) Deposit of Sale shares into a share escrow account. If the conditions set out above are not satisfied or waived before the Long Stop Date (April 21, 2017), the Sale and Purchase Agreements will automatically terminate. Given the Long Stop Date was last Friday, we think Yili is possibly suspended for further circulation of acquisition of interest in China Shengmu (1432.HK), which is also under trade suspension today..

2016 recurring profit in lineYili reported 2016 results with revenue of Rmb60,609m and earnings ofRmb5,662m, representing 0.4%/22.2% yoy growth. Excluding the nonrecurringprofit influence of Rmb1,135m (mainly including government subsidyof Rmb1,058m and most received in 4Q16), recurring profit was Rmb4,527m,largely in line with our forecast at Rmb4,623m. By segment, liquid milk/icecream increased 5%/2.4% yoy, while milk powder declined 15.4% yoy. Grossprofit increased 4.7% yoy with GPM expanded 1.5ppt to 37.6% in 2016, partlyoffset by 3.9% increase in SG&A expenses, leading to 0.6ppt improvement onEBIT margin. In 4Q16, sales declined 0.3% yoy to Rmb14,438m. Gross profit decreased12.1% yoy with GPM squeezed 4.6ppt to 34.5%. Thanks to 17.5% decrease inSG&A expenses, EBIT increased 19.3% yoy with EBIT margin of 6.9%. Sales growth driven by high-end productsRetail sales market share of Yili’s dairy was 20% in 2016, up 1.1ppts yoy, withroom temperature liquid milk, low temperature liquid milk and infant formulaexpanded 1.8ppts, 0.6ppts and 0.2ppts to 31.6%, 16.2% and 5% respectively. In 2016, sales of new products and key products accounted for 22.7% and49% of total sales, 7ppts and 3.2ppts higher than 2015, showing continuedimprovement of product mix and strong contribution from new products. 2017 outlook – target 7.2% sales growthManagement guided total revenue of Rmb65bn for 2017, representing yoysales growth of 7.2%. It also targets to reach pre-tax profit of Rmb6.2bn in2017, representing 11% yoy growth if excluding government subsidy from2016 results. The company expects to achieve the targets through newproduct growth, international business expansion, branding enhancement andchannel penetration improvement.

2017 Q1 preliminary results announced Kweichow Moutai announced preliminary results of Q1 2017. The company estimates revenue to grow 25.4% to RMB12.8b and net profit to increase 15.9% to RMB5.7b. The slower growth rate of net profit is probably due to continued adjustment of the consumption tax rate. Moutai also reported last year’s base liquor production which hit a historical high of c.a. 60,000 tons, including 39,000 tons of Moutai brand base liquor and 21,000 tons of sub-brands base liquor. Only one quarter but broadly in line with our full year forecasts Moutai’s estimated 1Q performance is stronger than our full year revenue forecast of 23% but weaker than our net profit growth forecast of 24%. We are not overly concerned about Moutai’s full year net profit growth as 2H 2016 was a low base after consumption tax adjustment, thus Moutai’s 2H 2017 earnings growth may accelerate. Maintain Buy rating and price target of CNY410.00 Moutai’s strong Q1 preliminary results announcement is consistent with our observations from a recent market visit, which showed strong end demand and high velocity on the distributor level. Moutai’s first tier distributors’ selling price after Chinese New Year has stabilized at around RMB1,150 per bottle which is in line with our expectations. We remain positive on Moutai, maintain Buy rating and price target of CNY410.00.

Buy before another likely rally, TP raised to RMB410 We raise our target price for Moutai to RMB410 (from RMB385) and reaffirm our Buy rating. Based on our recent market visits and the company's latest guidance, 2017 is likely to be a very strong year for Moutai. We forecast Moutai's revenue and net profit growth to accelerate around 20% each, offering strong support to the share price. In the near term, we believe high-end baijiu (including Moutai) will maintain good momentum after Chinese New Year (CNY) and potential strong first quarter result is the next catalyst. Management’s updated guidance for 2017 growth is over 20% Moutai Group conducted its 2017 business planning meeting in late December 2016. According to Moutai’s social media platform, Moutai Group (Moutai listco’s parent company) has set ambitious targets for 2017 ? group revenue to increase 20% and net profit to increase 23%. As Moutai listco contributes around 80% of group revenue and 70% of group net profit, we believe Moutai listco’s net profit growth will likely exceed 20% in 2017. Recent market visits suggest a very strong start Moutai plans to sell 26k tons of Feitian in 2017 (vs. 23k in 2016) and has allocated 6k tons for January due to the strong CNY sales season. Our market visits suggest Moutai is likely running at a full capacity and has distributor inventory as low as 3-4 days. Considering that Moutai management has been consistent in giving conservative targets, we expect the first month of sales to exceed 6k tons and full-year sales to again beat management’s guidance. Valuation and risk We raise FY17-18 earnings forecasts by 2.7%-5.1% to reflect our changed revenue forecasts. We raise TP to RMB410 from RMB385, which is 15.6x FY17E EV/EBITDA. Our EV/EBITDA-based TP implies 24.7x FY17E PE, still within the reasonable trading range of Moutai’s peers in developed markets. We believe Moutai’s distributor price can stay above RMB1,100/bottle after CNY. Risk: The baijiu market cools down faster than expected after CNY.

Sales growth to improve in 2017 Yili attended DB Access China conference this week. Investors’ interest mainlyfocused on its promotion/marketing plan in 2017, impact of raw material costincrease, and new products in next few years. Management expects salesgrowth in 2017 to be better than 2016, helped by improving industryenvironment, high-end product growth, and lower base after splitting upYouran Dairy farm in 2016. It targets a double digit for high-end UHT “Satine”and 20-30% yoy growth for UHT yoghurt “Ambosial”. Liquid milk: expecting less price discount Management believes industry competition could ease down in 2017, as rawmilk cost is bottoming up and small industry players should reduce pricediscount. Meanwhile, higher consolidation level after recent industry’s M&A(i.e. Shengmu and China Modern Dairy) will help to reduce price competition.The management expects to allocate more budget on advertisement forbranding, while reduce low efficient price promotion. Infant formula (“IMF”): intensive competition likely continues in near-term Management expects intensive industry competition to continue in the IMFsector, as it think the benefit of higher consolidation is unlikely to emergebefore Jan 1, 2018 when the new regulation takes effect. Yet the company stillexpects some recovery for its IMF sales, helped by its increasing penetration inbaby stores channel and e-commerce channel, and a cleaner channel stockingcurrently compared to 2016. 4Q16: sales growth to be similar as 9M16 The management expects its sales growth in 4Q16 to be similar as 9M16, i.eflattish or slightly growth. By category, retail sales of “Satine” grew by 10%and “Ambosia” grew by 100% according to AC Nilesen, but this is partly offsetby a sales decline in kids’ milk and milk beverage. Yili’s market share in roomtemperature products, low-temp, and IMF all increased slightly to 33%, 16%and 6.0% in 4Q16 from 31.8%, 15.6%, and 5.7% in 3Q16.

Private placement approved by CSRC Wuliangye made an announcement overnight that according to theirknowledge, the company’s proposed private share placements to employees,distributors and strategic investors have been approved in a review meeting ofthe CSRC, although the official approval documents have not yet beenreceived. We believe this is significant positive news for Wuliangye as theoverhang on Wuliangye’s share price has been removed. Focus on better aligning interests of shareholders and employees According to Wuliangye’s last announcement on 3December, the companyplans to raise a total of RMB1.85bn with a placing price of RMB23.34pershare and placing 82.3m new shares (2.2% of total shares outstanding as ofend-2015). Within the 2.2% share dilution, 0.6% is reserved for a fund that isopen for employee subscription, 0.5% is for a fund to be subscribed byWuliangye’s distributors and the remaining 1.1% is to be subscribed by threestrategic investors (Taikang, Hua’an and Jiaxing Kailian). The proceeds will beused in IT infrastructure development, marketing and e-commerce projects. Reduction of placement size before approval On 3December, Wuliangye announced that the size of this private placementhad been reduced by 20% (from the original RMB2.33bn to RMB1.86bn).Comparing the plans before and after the revision, the planned shares to beissued to employee-owned funds and distributor-owned funds remainunchanged, and shares to be placed to three strategic investors have beenlowered from 62.1m shares to 40.8m shares. Positive impact: management is now fully motivated We believe this is a significant positive development for Wuliangye, asmanagement has been distracted by the uncertainty of regulators’ decisionsfor too long, and the last two quarters (2Q and 3Q) results have not been verynoteworthy. After the overhang is removed, we believe that management anddistributors will have full motivation to improve the company’s profitability,and the interests of shareholders and operators are much better aligned. Wekeep our Buy rating on Wuliangye with a target price of RMB46.30.

Yili held a conference call today after it announced to raise Rmb9bn from aprivate placement and its plan to acquire 37% interest in China Shengmu(1432.HK). Key takeaways from the call:1) Rationale for the acquisition: Yili expect the market to have increasingdemand on organic milk. Shengmu has 70% market share in organic milk,the acquisition will help Yili to become market leader in this category. Meanwhile, the acquisition will help Yili to have access to internationalcapital market through HK listing company platform. 2) Accounting treatment: If the interest in Shengmu increase to higher than50% after execution of general offer to remaining shareholders, the P&L ofShengmu will consolidated into Yili. If the interest is lower than 50% butYili has control in Shengmu’s Board of Directors, it can also consolidatethe P&L3) Sales and distribution plan for Shengmu: Yili will consolidate Shengmuinto its own operation platform, including 1) using Yili’s distributionnetwork to distribute Shengmu’s downstream products; 2) leveragingYili’s advertisement resources to enhance Shengmu’s branding; 3)improving Shengmu’s working capital though stronger AR management. The management are positive on Shengmu’s long-term growth4) Growth target for share options plan: Yili also announced to issue 60mnshares, including 45mn options and 15mn restricted shares tomanagement. The growth target for exercising option is 30% cumulatednet profit growth from 2015 to 2017, and 45% growth from 2015 to 2017,with an ROE of not lower than 12%. The growth target will include theimpact of Shengmu acquisitions. We expect the acquisition to enhance Yili long-term growth; maintaining Buy. While the share placement could dilute Yili’s EPS in near-term and reduce itsROE, we get more comfort from its planned usage of proceeds, as we believeit is investing in right categories and right products, which should enhance itslong-term growth. We maintain Buy on the stock. Downside risk: food safetyissues and channel stockings.

To issue new shares and acquire China Shengmu Yili announced that it plans to finance Rmb9bn through issuing 587mn sharesto five investors at Rmb15.33/share. The proceeds will be used for theacquisition of 37% interest in China Shengmu (1432.HK) at HK$2.25/share andcapex for high-end products' production. We expect the placement to dilute its2017-18 EPS by 3-4%, but the acquisition and investment in high-end productsshould accelerate its long-term sales growth. We maintain Buy. Near-term EPS will be diluted... The placement will expand Yili’s share outstanding by 9.68% and increase itsnet cash from an already-high level – Rmb10bn (as of 2016/6/30) to a higherlevel of Rmb19bn. If Shengmu’s financials are consolidated from 2017, theplacement will still dilute Yili’s EPS by 3-4% in 2017-18E. Meanwhile, weexpect the placement to enhance the stability of the management, given localgovernment (currently the largest shareholder)’s interest in Yili will increasefrom 8.79% before placement to 12.92% after placement. …but acquisition and investment should enhance its long-term growth We expect synergies from acquiring Shengmu, helped by Yili’s strongdistribution network and Shengmu’s niche product positioning. Yili will alsospend the proceeds on capacity expansion for high-end products, includingimported UHT, yoghurt, and plant-based milk, which are all core drivers in thedairy sector. We expect Yili’s sales growth to accelerate in the long term,making the transactions EPS incremental from a long-term view. Maintaining Buy We are concerned that the share placement could dilute Yili’s EPS in the nearterm and reduce its ROE, given Yili currently has enough owned cash foracquisition, even without a share placement. However, we get more comfortfrom its planned use of the proceeds, as we believe it is investing in the rightcategories and products, which should enhance its long-term growth. Wemaintain Buy. Downside risks: food safety issues and channel stocking.

To extend suspension by up to 20 days Yili held a board meeting today, and announced it will extend its tradingsuspension by 20 days at most. To recap, Yili has suspended trading since 19September owing to the potential share placement to Inner MongoliaCommunications Investment Co. LTD (“IMCI”), an SOE wholly owned by InnerMongolia Development and Reform Commission. How long could a Shanghai listed stock be suspended for share placement According to the guidance of the Shanghai Exchanges, the suspension shouldbe no longer than 10 days, but with granting periods:n Stage 1: incremental 5 days by the company’s application; Stage 2: incremental 20 days with approval of board meeting (Yili is now atthis stage); andn Stage 3: incremental 2 months with approval of shareholders’ generalmeetings The company should disclose its detailed placement plan during thesuspension period. If the company cannot not disclose a detailed plan, itshould terminate the process and should not initiate a similar plan for onemonth (stage 2) or two months (stage 3). Yili to inject Rmb6bn cash into Hong Kong subsidiary Yili also announced that it is to increase the registered capital of Hong KongJingang Trading Holding Limited (100% subsidiary) by Rmb6bn. The mainbusiness of the Hong Kong subsidiary is investment and trading, according tothe announcement. We think the cash injection could facilitate potential futureoverseas investment.

To issue new shares to SOE controlled by Inner Mongolia government Yili announced that it was planning to issues shares to Inner Mongolia Communications Investment Co. LTD (“IMCI”), an SOE wholly owned by Inner Mongolia Development and Reform Commission. Yili extended the shares suspension to 5 trading days after October 10th. The placement should strengthen stability of the board We expect the share placement, if completed, will strengthen the stability of the board. To recap, current largest shareholder Hohhot Investment (SOE controlled by local government) and four core managements have a total 16.75% equity interest in Yili, followed by the second largest shareholder Sunshine Insurance, who announced to increase its shares to 5% on Sep 18. A-share’s key regulation on share placement What’s the potential price for share placement? The issue price should NOT be lower than weighted average price in the 20 days before the valuation base day. Who could approve share placement? The share placement should be approved by 2/3 of shareholders on the shareholder’s general meetings. How long could a company suspend trading for private placement? 15 days + 3 months. Typically, the suspension should be no longer than 10 days, but with granting periods 1) incremental 5 days by the company’s application; 2) incremental 20 days with approval of board meeting; and 3) incremental 2 months with approval of shareholder’s general meetings. How to nominate a new board member in listed company? Shareholders who have over 3% of equity interest could submit a proposal during shareholder’s general meetings. The proposal of nominating a board member should be both approved by 50% of shareholders and 50% of small/medium size shareholders on the general meeting.