中国食品(00506) 　　In our view, the refranchising transaction is a milestone for the long-termgrowth of China Food. It will expand the company’s coverage region to 50% ofChina's population from 34% currently and increase beverage sales by 45%.Meanwhile, we expect strong sales growth of its energy drink (monsterbeverage) to continue in the near term. In addition, future disposal of underperforming assets should increase the company’s profitability. We reiterate Buy with target price of HK$4.3. 　　The refranchising plan: 45%/9% incremental impact on sales/net profit 　　Last Friday, China Foods announced it would acquire from Coca Cola/Swireand dispose to Swire certain bottling subsidiaries (“The refranchising”, Figure 1-3). The refranchising plan will expand its distribution regions from 15 to 19 provinces, and increase its population coverage from 34% to 50%. Based on the 2015 financials, the regional changes would increase its beverage sales and net profit by 45% and 9% in 2015 (Figure 4). The transaction is subject to regulatory approval. We expect the transaction to complete in 1H17. 　　We expect beverage margin to expand after integration 　　Though the profit impact from refranchising was lower than our previousexpectation at 21% (refer to our report “Regaining Growth” dated 12 Sep2016), due mainly to the lower ROE of the acquisition of subsidiaries (at 8% vs.China Foods’ 12.5% in 2015), we believe there is good potential for marginimprovement in 2017-18 post integration. During the company conf-call,management indicated it targets to improve the utilization rate and operationefficiency through streamlining the operation between different factories. 　　Maintaining Buy 　　Our previous earnings model factored in the impact of refranchising. We nowlower our net income forecast by 5-14% in 2017-18, mainly to factor in lowerthan- expected earnings impacts from the refranchising. We derive our newtarget price of HK$4.3 based on SOTP methods. We maintain Buy. Key risk:failure of refranchising; lower-than-expected growth in energy drinks.