Key points of investment
Previously, we published the in-depth report “Aipu Shares: Fragrance Business Expected to Exceed Expectations, Food Ingredients Open Up Follow-up Space” by Aipu Co., Ltd. In this report, we hope to respond to the five major issues that the market is concerned about recently and make key recommendations!
Core logic: The company is a leading flavor and fragrance company. Through the expansion of food ingredient businesses such as industrial chocolate and fruit products, it has gradually transformed into a comprehensive supply chain capable of providing product solutions. We believe that 22Q2 is the low point in the company's fundamentals and performance. With the subsequent launch of the e-cigarette business and the commissioning of production capacity in the food ingredients business, the company will enter an upward trend channel, and performance is expected to improve rapidly.
22H1 Due to the high base of 21H1 superimposed by the epidemic, we expect the company's 22H1 business performance to decline, but we can see that the company: the demand for industrial chocolate in the food ingredient manufacturing business is rising rapidly, and the proportion of pure fat continues to rise, driving the increase in the profitability of the food ingredients business; demand in the flavor and fragrance business continues to grow steadily. In the context of price increases, the decline in raw material prices in the second half of the year is expected to release profit elasticity, and the launch of e-cigarette oil licenses is expected to bring new catalysts within the year. From this, we believe that 22Q2 is a low point in the company's performance and fundamentals. It will enter an upward channel in the second half of the year, and there is plenty of room for the future. The company's employee shareholding/equity incentive plan through repurchases shows confidence in subsequent development. From this, we make key recommendations and hope to answer the market's previous concerns.
Question 1: What is the impact of the pandemic on the company's performance?
We think the impact of the pandemic on the company has been better than market expectations. First, the company's Shanghai flavor and fragrance factory was in the process of relocating to Jiangxi one after another at the end of 21. As a result, the impact of the epidemic containment in Shanghai in the second quarter on the company's production was relatively limited; at the same time, industrial chocolate and fruit products factories produced normally and were not affected by the blockade; food ingredients trade is expected to weaken on the demand side due to the epidemic, which is expected to be greatly affected. As a result, we expect the company's 22H1 revenue decline to be in single digits; at the same time, considering the impact of the blockade and the higher freight costs, we expect a profit decline of around 25%.
Question 2: How do you view the subsequent growth of the company's industrial chocolate and fruit products?
1) Demand for the industrial chocolate business is strong, and the proportion of pure fat continues to increase, driving the increase in profitability. The company's chocolate business achieved revenue of 456 million yuan in 2021, with a production capacity of 38,000 tons. Due to rising demand for terminals and insufficient supply in the industry, demand for the company's industrial chocolate business is strong, and production is still full during the off-season. At the same time, along with the upgrading of terminal consumption and the fact that new products developed by the company collaboratively with major downstream customers use pure fat chocolate, it is expected that the share of pure fat chocolate will increase from 10% to 20%, thereby boosting the company's profitability.
From the perspective of production capacity, the company currently has a chocolate production capacity of 38,000 tons, and the production capacity of the new plant is expected to be released at the end of the year or the beginning of next year, which will lead to the release of 18,000 tons of design production capacity every year for the next three years. After the production capacity is released, it will become the largest chocolate factory in China; from the demand side, current orders are sufficient, and new customers are developing smoothly. According to the customers that have now become qualified brand suppliers, the demand for chocolate production capacity is 200,000 to 250,000 tons each year, and there is plenty of room on the demand side. From this, we believe that with the subsequent release of production capacity and the upgrading of the demand-side product structure, the company's industrial chocolate business has good growth potential.
2) The fruit products business is positioned at the high end, and the customer and product structure are continuously optimized and adjusted. The company's fruit products are high-end fruit jam products with high prices. It achieved revenue of 146 million yuan in 2021. The yield rate has increased to around 90%, with a production capacity of 12,000 tons. It is expected that 50,000 tons of design capacity will be added in the next three years. The company's major customer resource advantages guarantee a stable demand for jam. We believe that fruit products are currently in an adjustment period. Subsequent use of existing customer resources will be used to optimize and improve the customer structure to drive the continuous growth of the company's performance.
Question 3: How do you view the development of the company's e-cigarette smoke oil business?
I am optimistic that the implementation of the company's e-cigarette license is expected to bring about a new increase in performance. Following the introduction of e-cigarette related regulations, we believe it is beneficial to increase the concentration of the industry. At the same time, the amount of raw materials used in e-cigarette flavors is limited, and higher requirements are placed on the R & D capabilities of suppliers. Aipu Co., Ltd. has research and development capabilities at a high level of technology. The reserve of e-cigarette smoke oil products has been completed, and its original tobacco flavor customer resources can be used. If the subsequent company's e-cigarette license is implemented, we expect it to bring a new increase in the company's performance.
Question 4: What are the company's subsequent catalysts?
We believe that mainly the implementation of e-cigarette licenses, the quarterly improvement in performance, and the release and commissioning of production capacity in the food ingredients business will continue to bring new catalysts to the company.
Question 5: How do you view the company's subsequent performance and business quality? (Profit forecasting and valuation) We think the quality of the company's operations has improved. The company achieved revenue of 3.345 billion yuan in '21 and achieved net profit of 189 million yuan. Of these, Aice Holding (9.93% of the shares) held by the company is the largest ice cream factory in Indonesia, and Aice contributed about 42 million to benefit from changes in fair value in '21. We don't expect much change in the company's fair value changes in '22. Considering the impact of the epidemic in the first half of the year, we slightly lowered the company's profit forecast. We expect revenue to be 35.50/40.24/4,5597 billion yuan respectively in 2022-2024, 6.15%, 13.35%, and 14.24%, respectively; realized net profit to the mother was 1.50/192/249 million yuan (previous value was 209/254/308 million respectively), compared to -20.29%/27.43%/24.68%, respectively. The quality of operations improved. The company's EPS is expected to be 0.39/0.50/0.62 yuan respectively in 2022-2024, and the corresponding PE is 27.50/21.58/17.31 times, respectively.
Currently, our forecast for the company's subsequent performance does not take into account the contribution of e-cigarette smoke oil. Considering the high profitability of the e-cigarette smoke oil business, if it can contribute to the performance in 2023, it will help improve the company's overall profitability in the future. At the same time, we believe that 22Q2 is a low point in the company's performance and fundamentals. The fundamentals and performance in the second half of the year will enter an upward channel. There will be a lot of new business growth in '23, which is expected to achieve a double blow for Davis. Furthermore, the company's employee shareholding/equity incentive plan through repurchases shows confidence in subsequent development, giving the company 30 times PE in 23 years. Corresponding to the current situation, there is still room for 30%-40%, which is raised to the purchase rating.
Risk warning: The COVID-19 pandemic has repeatedly affected terminal demand, raw material costs continue to rise, etc.
