Q3 revenue resumed growth, but profit was still weak.
   
Q1-Q316 revenue rose a slight 2.1% to Rmb3.76bn and net profit attributable to theparent fell 6.6% to Rmb820m, missing market expectations. Q3 revenue was up17.5% but net profit was down 5.2%, with net margin down 3ppt YoY. We believe ahigher selling expense ratio and the consolidation of Marques del Atrio dragged downthe overall margin.
   
Profit margin likely to be under further pressure.
   
Excluding the consolidation of Marques del Atrio, we estimate Q3 organic revenuegrew c10% YoY while gross margin remained largely flat, due to: 1) higher expenses.
   
We estimate Q3 organic selling expenses rose c20% YoY with the selling expense ratioup c4ppt YoY; and 2) a low revenue comparison base in Q315. Organic revenue fell asharp c20% in Q216. This quarterly fluctuation could be attributable to the time ofdelivery. Amid tougher competition from overseas brands, we believe the company hadto continue its brand and channel investments to drive fast revenue growth, whichcould further weigh on its profit margin.
   
Execution to be the key.
   
As we stressed in our 17 June 2016 note UBS Evidence Lab reveals a strong brand butexecution risk could cap near-term growth”, we are positive on the wine industrygrowth potential. The company could benefit from the industry growth and integrationdue to its brand and channel advantages. However, it could face execution risks whenit shifts to a more diversified product mix model from one driven by high-gross-marginproducts. Whether it can defend against competition from imported wine with mid- tolow-end products and overseas acquisitions will largely depend on its execution inproduct expansion and brand and channel investments.
   
Valuation: Maintain Neutral rating, price target of Rmb40.09.
   
Our price target of Rmb40.09 is DCF-based (WACC 7.0%). We maintain our Neutralrating.