Main points of investment:
Competition in food ingredients has intensified, putting pressure on the company's gross margin. Since the second half of 2016, Fonterra has built its own warehouses in China, the threshold for dealers has been greatly reduced, a large number of small dealers have poured in, and competition in the industry has intensified. The company has a certain loss of small customers, large customers based on the quality, after-sales service requirements, high stickiness. In this regard, the company takes the initiative to reduce prices to maintain market share. In addition, the company is actively engaged in business development, on the one hand, actively open up third-and fourth-tier cities, central and western markets, on the other hand, actively look for alternative products in Europe and the United States, to reduce the impact of Fonterra model transformation on the company. Throughout the year, the company's prices are down, sales are still up, and revenue is expected to be the same as last year. In the long run, Fonterra channel liberalization still has an impact on the company, gross profit margin is expected to continue to be under pressure.
The industrial chocolate business is expected to expand in 2019. In August 2016, the company entered the field of industrial chocolate manufacturing through the acquisition of Hangzhou Tianshun, a large-scale domestic skillful manufacturer. The company currently has a production capacity of 10,000 tons in Hangzhou and 5000 tons in Indonesia, and plans to continue to expand production capacity in Shanghai in the future, which is expected to be completed and put into production in 2019. Industrial chocolate business and the company's original business to form a certain coordination, make full use of the company's high-quality customer resources, give full play to the advantage of scale, is the company's extension to the ingredient manufacturing end.
The growth rate of the domestic flavor and fragrance industry has slowed down, and the company's business is relatively stable. The domestic development of the flavor and fragrance business is stable, and the annual growth rate is expected to be maintained at about 5% in the future. The company's flavors and fragrances are mainly food flavors and fragrances, with stable customer viscosity and stable business growth.
Earnings forecast and investment rating: downgraded to neutral rating. We predict that the annual EPS in 2017-18-19 is 0.500.52, respectively, and the annual PE in 2017-18-19 is twice as much as that in 24-23-21.
The company provides customers with "food flavor + food ingredients" one-stop service, business cooperation with users with high stickiness; Fonterra channel liberalization still has a medium-and long-term impact on the company, gross profit margin is expected to continue to be under pressure, downgrading the company to "neutral" rating.
Risk tips: food safety issues; fierce competition in the industry; craftsmanship business development is not as expected
