The country’s choice; initiating with Buy We believe high-end baijiu is the most defensive sub-sector within Chinaconsumer staples in a downcycle. Unlike many other sectors that are facingdownside pressure on pricing and volume, due to overcapacity and slowconsumer demand growth, the high-end baijiu sector is benefiting fromstrengthening demand, driven by continuous personal income growth andChinese consumers’ trend of trading up. We view Moutai as the best play inthe high-end baijiu sector and initiate coverage on the stock with a Buy rating. Carefully managed distribution gives the company a good grasp on its future In our view, Moutai has the best visibility among all the baijiu companies todeliver a 16.5% EPS CAGR over 2016-18E. Moutai’s management has kept exfactoryprices unchanged since 2012, despite strong demand recovery. Itsproducts are undersupplied and the factory has been running at almost fullcapacity since early 2016. We believe Moutai now has the flexibility to adjustits product mix, volume output or pricing to achieve its revenue target of 4% in2016. We see very little downside to our earnings forecasts for Moutai in thenext 12 months. Growth of sub-brands could be a positive surprise We think potential upside could come from Moutai’s sub-brands, whichaccounted for 3.4% of Moutai’s total revenue in 2015. With more flexibility toexpand capacity for sub-brands and management’s shifting focus to build awider product portfolio, we estimate that Moutai’s sub-brands will outpace thegrowth of core brands and contribute 8% of total revenue in 2018. Valuation: 15.6x FY17E EV/EBITDA, target price CNY385; risks We use a developed market peer average trading multiple of 15.6x FY17EEV/EBITDA to derive our target price of CNY385. We choose an EV/EBITDAvaluation over a PE valuation because of Moutai’s large net cash position vs. its global peers. China’s consumption tax reform might pose some short-termrisk to Moutai’s earnings, but would provide a better entry point.