Tontine Wines Group Ltd. (389 HK): Emerging star from Changbai Mountain - BUY (Int. Coverage)

Investment summary

• Favourable long term secular growth in China’s wine market – As the world’s fifth largest wine consuming country, China still has a very low per capita consumption of wine products at 0.53L/year (worldwide average 3.5L/year).  Long term secular growth is driven by rising income and emerging wine consumption culture.
• Tontine is Tonghua’s largest wine producer – Tontine is Tonghua’s largest native wine producer by revenue (FY12/08A: RMB486.7m).  It accounted for around 31.7% market share in terms of production capacity amongst the sizeable producers in the region.
• Clear positioning with differentiated products – Focus on sweet wines and ice wines gives differentiated positioning. We are positive on this strategy as it avoids direct competition with Dynasty (828 HK), Changyu (000869 CH) and Great Wall (under China Foods (506 HK)), which are more notable for their dry wine products.
• Stable and sustainable supply of quality grapes – Company has 20 year exclusive long term supply agreements with local farmers, giving them access to around 40% of total grape growing areas in Tonghua. 
• Potential to become top equity wine brand – China’s sweet wine market is still emerging.  Leveraging its: 1) famous origins; 2) Tonghua region brand association; 3) its quality products and 4) increased A&P spending, Tontine has the potential to emerge from other tier-two producers to become a top equity brand in Chinese sweet wines.

BUY call with target price HK$2.23. We initiate coverage on Tontine with a BUY call with target price of HK$2.23, representing 21.5x FY12/09P/E and 18.1x FY12/10F P/E based on our estimate. We think the positive growth of the company would come from: 1) 105% increase in production capacity; 2) sales of more higher margin product; 3) continue improvement in brand image; 4) strengthening of product promotion and expansion of distribution network; 5) industry growth.

Tontine: Emerging star from Changbai Mountain