Veyron is the largest organic wine company in China, with the largest organic vineyard in the world, focusing on the production and sales of traditional and organic wines (accounting for more than 90%). The company focuses on the East China market through the systematic "distribution + direct sales" channel system, and has good product recognition and brand influence in the wine market. In the past three years, the company's gross profit margin has remained above 55%, which is at the normal level of the industry; the net profit margin has stabilized at about 5%, which is significantly lower than that of Changyu, the leader, by 17 percentage points. In 2015, the company's performance began to stabilize and rebound, with revenue of 737 million yuan, an increase of 3.34% over the same period last year, and net profit of 42 million yuan, an increase of 18.47% over the same period last year. The decline in the rate of financial expenses prompted profit growth faster than income growth.

The wine industry is still in the growth stage, with mass consumption and imported wine market as the main focus. The base of domestic wine consumption is low, and it has the attribute of the healthiest wine. We believe that the industry can maintain a growth rate of about 10% in the next 3-5 years, and there is still room for about 2 times growth in the long run. The decline of domestic wine production narrowed in 2015, the industry picked up in the first 10 months, and full-year revenue and profits are expected to achieve double-digit growth. The import volume of Q1 wine in 2016 increased by 32.9% compared with the same period last year, continuing the high growth momentum, the market share increased to 33%, and the proportion of imported wine for the whole year is expected to further increase. From the perspective of consumer prices, wines below 100 yuan have become mainstream consumer products, and the profit margins of imported wine channels have been significantly improved. From the development of the international market, wine is more suitable for public consumption, we think that low alcohol content and low-end products will be the main battlefield of the industry in the future.

The company's organic wine products are positioned differently, which is expected to drive a continuous increase in revenue. Benefiting from the upgrading dividend of consumption, organic wine has gradually become a new trend in the development of the industry. In 2009, the company began to launch organic wine, and the proportion of sales has steadily increased to 38.58% in the past three years, making it one of the company's core product lines. Compared with traditional wines, organic wines are growing steadily and their share is expected to continue to increase in the future. The company's product structure is diversified, the price belt covers high, middle and low grade, and accurately locates multi-level consumer groups. The company has outstanding R & D technology and excellent innovation ability, and launched a new product of grape liquor "Weilong Legend" in 2014. In terms of channel system, the company gives priority to dealer channels, supplemented by merchant super direct sales, forming a "distribution + direct sales" model, and the proportion of distribution income has been gradually increasing in the past 3 years. The company is deeply focused on the eastern China market, accounting for 73% of revenue in 2015, and the advantageous areas during the industry adjustment period are growing against the trend. We believe that the company has a significant advantage in product differentiation, and the revenue scale is expected to continue to increase under the strengthening of the marketing system in the future.

Raise and invest to expand the production of organic wine, strengthen the marketing system and improve the brand strength. The company will issue 50.2 million shares this time, with a net fund of 515 million yuan expected to be used for organic wine cultivation and production projects, marketing network construction projects and bank loan repayment projects. We believe that this fundraising project of the company:

(1) greatly increase the production capacity of middle and high-end organic wines, and the company's profit end is expected to continue to increase in the future; (2) with the increase of marketing investment, the channel advantage will be strengthened, and the revenue end is expected to continue to grow.

We estimate that from 2016 to 2018, Weilong shares will achieve operating income of 7.77,8.37 and 919 million yuan, an increase of 20.03%, 19.54% and 18.12% over the same period last year. The net profit attributed to the parent company is 0.50,0.60 and 71 million yuan, up 20.03%, 19.54% and 18.12% over the same period last year. Assuming that this issue does not include the transfer of old shares and 50.2 million new shares, the EPS for 2016-2018 is 0.25,0.30,0.35 yuan respectively. With reference to the average valuation of the industry, the growth brought about by the enhancement of capital strength and capacity expansion after listing, the reasonable relative valuation is 25-30X2016PE, with a target price of 6.25-7.50 yuan.

Risk tips: the construction of the company's fund-raising projects is not as expected, food safety problems, and intensified competition in the wine market.