Earnings largely in line with our expectation

Q1-Q316 net profit attributable to the parent increased 10.1% YoY to Rmb128m,largely in line with our expectation. Q1-Q316 revenue rose 5.1% YoY and operatingprofit was up 1.8% YoY. Net margin expanded mainly due to a lower effective tax rateYoY.

Q3 revenue up slightly, expense ratio higher

Q316 revenue rose 2.8% YoY, slower than Haitian’s and Jonjee’s double-digit growth,which we attribute mainly to weak sales of the company’s mid-/high-end soy sauceproducts. Affected by higher depreciation due to new capacity launches since H215,Q1-Q316 gross margin shrank 1.1ppt YoY. Despite low selling expenses in H116, theselling expense ratio started to rebound in Q316, bringing the operating profit down12.5% YoY for the quarter.

Much investment still needed for brand upgrading and regional expansion

While we expect the company’s gross margin to rise on product mix upgrades, its netmargin could still face significant pressure in the coming years, as the lower expenseratio seen in Q1-Q316 cannot be sustained because much investment is still needed forpromotion of mid-/high-end products and expansion into tier-1/2 cities.

Valuation: Maintain Sell rating, price target of Rmb5.96

Our price target is DCF-based (WACC 7.1%).