Key points of investment:

Leading exporter of pet leashes with a multi-category layout. The company was founded in 2004 and occupies a leading position in the export field of pet leashes. At the same time, pet snacks achieved rapid development. In 2021, the company's revenue was 1,069 million yuan, of which pet leashes/pet snacks/pet clothes/pet injection molded toys accounted for 57.3%/33.0%/5.8%/1.1% respectively. The company's revenue in 2021 was 1,069 million yuan, a year-on-year increase of 75.7%, and the 2018-2021 CAGR was 35.0%; net profit returned to the mother in 2021 was 137 million yuan, an increase of 64.5% over the previous year, and the 2018-2021 CAGR was 29.6%. The 202H1 company's revenue was 548 million yuan, an increase of 14.5% over the previous year, continuing the previous growth trend. The net profit returned to the mother was 102 million yuan, an increase of 79.6% over the previous year. The increase in profit was mainly due to fluctuations in the 2022 H1 RMB exchange rate, which contributed 16 million yuan in exchange income.

Europe and America are the main demand regions for pet consumption. The pet market in Europe and the US started early. Judging from the penetration rate, the domestic pet penetration rate in low-tier cities/high-tier cities in 2021 was 12.3%/39.1%, while the overall household pet penetration rate in Europe/US in 2021 was 46%/70%, respectively; in terms of annual consumption, the annual consumption of a single US cat/dog in 2020 was 6265/9528 yuan/dog, 2.45/3.21 times the domestic level. According to APPA and FEDIAF statistics, the US pet industry market size in 2021 was 123.6 billion US dollars, the 2015-2021 CAGR was 7.5%, the European pet industry market was 512 billion euros, and the 2018-2021 CAGR was 6.1%. Looking at the racetrack segment, Europe and the US are the main markets for pet dog bites and leashes, mainly due to the large number of pets, high product penetration rate, and high frequency of replacement/use.

European and American brands occupy leading positions in the global pet industry, with traditional channels and e-commerce channels going hand in hand. European and American brands are leaders in the global pet food and supplies industry. In 2021, the global pet food industry CR5 reached 52.4%. Among them, Mars and Nestle were 21.1% and 19.8% respectively, and the global pet products industry CR5 was 15.2% in 2021, with Central Garden and pet companies accounting for 3.7%. Pet food is more concentrated due to its stronger scale effect and continuous mergers and acquisitions integration of leading players. Currently, the sales channels for pet products are still dominated by supermarkets, department stores, and pet specialty channels. The experiential, service and social properties of traditional channels determine that they cannot be completely replaced, and the convenience, spatial extensibility, and high transparency of e-commerce channels also drive their rapid development. Judging from the layout of retailers such as Walmart, PetSmart, and Petco, it is also driven by traditional and e-commerce channels. In the future, e-commerce channels will be an effective complement to traditional channels.

The company lays the foundation for growth for high-quality manufacturing targets in the pet industry, multi-category layout, and domestic and foreign production capacity expansion. 1) Outstanding product strength, binding leading high-quality customers in the industry. The company mainly provides OEM services to well-known foreign companies, and ODM revenue accounted for 99.1% of its main business in 2021. The company set up cutting-edge research teams and design R&D centers in the US and Shanghai respectively to respond quickly to target customer needs. The average R&D cost rate in 2018-2021 was 3.0%, higher than the industry average of 1.5pct. With reliable product quality, excellent design capabilities, global production capacity layout, and multi-category supply capacity, the company reached close cooperation with customers such as PetSmart, Petco, Walmart, B&M, Pets at Home, Target, and America's Haoshi (China Pet Company). The top five customers dominated The operating ratio continued to be above 60%. In 2021, thanks to the continuous rise in production capacity of the Aitao plant in Cambodia, a joint venture between China Pet Co., Ltd., the US share of Good's main business increased by 6.5 pct to 19.3%, driving the share of the top five major customers to 74.3% in 2021. 2) The supply chain has significant advantages, and the profitability of the Cambodian base is outstanding. The domestic base is located in Shuitou Town, Pingyang, Wenzhou, the “capital of China”. It has the advantages of leather raw materials and pet industry clusters. In 2018, the company strategically laid out the Ryde and Aitao base in Cambodia and put into operation in 2020H2. It enjoyed no additional tariffs, income tax benefits, and low labor cost dividends. In 2021, Cambodia Ryder/Aitao's gross margin was higher than the domestic base's 3.8/0.4 pct, and the net interest rate was higher than the domestic base's 12.4/6.1pct. 3) IPO listing is expected to achieve rapid development with the help of the capital market. The capital raised in this IPO is mainly invested in products (R&D center construction), supply chain (new production capacity investment, production technology and intelligent warehousing projects), and channels (marketing operation center construction) to enhance the company's competitiveness in multiple dimensions. The company is expected to use the capital market to seize the dividend period of rapid development in the pet industry.

The blue ocean market in the pet industry is booming, and the company uses its first-mover advantage to bind high-quality customers in the industry. Overseas bases are put into operation to guarantee product supply while strengthening overall profitability. Fundraising projects enhance the company's competitiveness from multiple dimensions of products, supply chains and channels to help the company grow. Considering that production capacity of the company's Cambodian base continues to rise, product structure optimization, and the 2022-Q2 RMB depreciation contributed a lot of revenue, it is estimated that 2022-2024 will return to the mother's net profit of 2.18/243/293 million yuan, compared to +59.1%/+11.8%/+20.2%. The current stock price corresponding to 2022-2024 PE is 21X/19X/16X. Considering that the company currently mainly exports OEM business, the independent brand is still in its infancy. There is some uncertainty about development, and the first time it covers a “increase in holdings” rating.

Risk warning: risk of falling overseas demand; risk of exchange rate fluctuations.