3Q18 revenue fell short of market expectations Changyu A announced results from 1 to 3Q18, with revenue of 3.861 billion yuan, an increase of 1.65%, and net profit of 770 million yuan, a decrease of 5.69%, corresponding to an EPS of 1.12 yuan. Revenue for the third quarter fell short of market expectations, mainly because the overall consumption of popular alcohol was weak in the third quarter, while the company continued to eliminate low-grade products. The gross profit margin for the first three quarters was 64.53%, down 2.42ppt from the same period, mainly due to the merger of overseas wineries with low gross margins. The development trend is steady revenue growth, and structural improvements are a highlight. The company's strategy of focusing on the middle and high-end and large single products is firm. Low-end red wine and low-end brandy declined in the first three quarters, while Jiebaina and high-end dry red continued their good growth momentum. Judging from the volume of imported alcohol, the cumulative year-on-year decline in the previous September was 2%, and the impact on domestic alcohol continued to weaken marginally. At the same time, the company is also continuously strengthening brand building to enhance grade and value. Gross margin continued to be under pressure during the year, and we expect it to ease somewhat in '19. The year-on-year decline in gross margin in the first three quarters showed an expanding trend, mainly due to overseas business with low consolidated gross margin. Since there was still a year-on-year basis effect in the fourth quarter, gross margin is expected to continue to decline. With the complete merger of overseas business throughout '18 and the adjustment of our own product structure, we expect the company's gross margin to basically stabilize in '19. Profit forecast Due to lower revenue and gross margin, we lowered our EPS forecast for 18/19 by 3.3%/5.0% from $1.48/1.53 to $1.43/1.46. The valuation and recommendation is that Changyu A's current stock price corresponds to 20.7/20.4x P/E in 18/19, maintaining a neutral rating, but due to lower profit forecasts, the target price was lowered 9% from 38.3 yuan to 35.0 yuan, corresponding to 24.4/24.0 yuan in 18/19, and there is 18% room for the target price. Changyu B's current stock price corresponds to 10.4/10.2x P/E in 18/19, maintaining the recommended evaluation. Due to lower profit forecasts and valuations, the target price was lowered 17% from HK$30 to HK$25, corresponding to 15.4/15.1x P/E in 18/19, and there is 48% room for the target price. The impact of risk product restructuring has exceeded the original forecast, and revenue will be under great pressure.