Foshan Haitian Flavouring & Food (603288.SH) is a cash cow and golden stock in Flavouring & Food Industry, just like Kweichow Moutai (600519.SH) in Liquor.
Haitian is the largest condiment producer in China, with revenue mainly consist of three parts, soy source, oyster source, and table source contributed 60%, 17%, and 13% respectively.
We initiated Haitian on 2019 April 1st, with px CNY87. And our key investment thesis is:
Mkt underestimates the company's unique competitive advantage in a huge and growing market
Mkt underestimates its outstanding profitability
The condiments sector is the best in class sector under the consumer industry, first, condiments belong to the non-cyclical industry, the sector still grows moderate, with an estimated 12% CAGR over 2017-2020, will reach to 420bn yuan in 2020.
Second, the company's long-term ASP hike capacity only next to the liquor industry, can reach 3.5% per year.
Third, the market concentration still very low, where the top five players only accounts for 21% market share.
Haitian is the leader in the condiments industry, especially in the soy sauce market, which represents 60% of the total condiment market share. Haitian has 17% and 50% in soy sauce and oyster sauce mkt respective.
Haitian's main driver and competitive advantage is the production capacity, in 2018, Haitian’s production reached to 2.7mil ton, and 98% of production has sold out. Haitian has achieved a nearly 100% production-sold out ratio in many years, which means the larger production, the larger the sales revenue. The revenue is directly linked with its production in this industry. Haitian production is far larger than the sum of the rest top-five player in the market. The second player Jonjee (600872) only got 550 Kiloton production in 2018, and I expect continuous industry consolidation.
The biggest single driver is the price per ton, if the price per ton increase 1% yoy, the implied share price will increase by 6% according to our model.
Haitian also got the geographic advantage as producing seasoned condiments requires perfect weather conditions with ample sunlight exposure. Guangdong province, which sits in special latitude, can provide such condition and effectively limits competition from the rest of China.
Haitian has a high gross margin, around 50% in most fiscal years, and also high net margin, around 25%, compared with peers 9-20%, and I estimated the company's net margin will keep growth above 20% CAGR in the next five years.
ROE of the company has keep above 33% in the last several years and reached a new high at 34% in 2018, and with the production improves, I estimated the ROE will reach 42% in 2023, reflecting the company’s superior operating margin.
In addition, Haitian’s legacy of management buyout has incubated a strong culture of equity ownership among management/board, a group of 58 individuals owns 85% of Haitian. I think all of these will warrant its long term profitability.
Our DCF valuation based on May 10 price tgt to the year end of 2019 is CNY110, with 20% upside, we derived 7.45% wacc for Haitian, and assuming 3.3% risk-free rate, 6% risk premium, with terminal growth rate 2.5%. This implies a 39x PE and 36x EV/EBITDA in 2020, higher than the global peers and local peers.
For catalysts, we estimated there are 1. potential product category expansion and M&A as Haitian has acquired a vinegar company in 2017 and the company has more ambition in product expansion as the condiment industry has a very low concentration.
2. Potential ASP hikes, our model test if the soy sauce price per ton increase 2.5%, the implied share price will soar to CNY138
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