[20081114]CITICS*SECTOR RESEARCH*CITICS-Monthly Tracker for the Food & Be

Dear all,
Attached please find the November monthly tracker for the food & beverage sector entitled" Growth Rate in 3Q Slows Slightly; Watch Leading Companies" by Bo Guanhui, Xu Biao.
 
Investment Highlights
        Slight slow down in growth in 3Q; food safety issues and gloomy future batters the share prices of leading enterprises. In 3Q, the revenue of leading enterprises grew by 15.6%, and we saw a drop of 8% in growth rate QoQ and a drop of 15% YoY. Operating profits were up 23.4% and net profits were 33%. Each enterprise had its own reason for the decline in growth but weaker demand was a common cause. Over the last two months, the stock price of leading enterprises fell more than the Shanghai Composite Index.
        Growth of the liquor industry fell as expected. There is no question that the demand for liquor is weakening due to economic downswing. Enterprises with high brand loyalty, good management and operating measures are key choices.
        The growth in wine and beer industries was lower than expected. For the beer sector, the growth over the next year will come from the balance between lower costs and intensified competition. Consumers' confidence was hit hard due to the Sanlu milk powder scandal. In September, the production of liquid milk fell by 18%. It needs some time for customers to resume confidence before the industry has steady development. Pork prices witness a decline with improved profitability of meat products and the investment opportunities arrive in the meat sector.
        Potential risks: The slow down in the growth of income makes products unaffordable for consumers, and the high valuation level might be an obstacle to the rebound of the whole sector.
        Leading competitors remaining best choices of the sector. Leading players in the food and beverage industries with high quality and adequate cash flow provide us with high safety margin. We believe that leading enterprises will regain their defensive value in this weak market after the complete adjustment of share price. Therefore, we reiterate the investment rating of "Outperform" for the food and beverage sectors with Kweichow Moutai, Luzhou Lao Jiao, Yantai Changyu Pioneer Wine A and Henan Shuanghui Investment & Development as our key recommendations considering the growth of profit and cash flow conditions.
 
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