As a full-category pet product provider, the company has a complete range of products, high-quality customer resources, and an efficient supply chain management system, and will enjoy the dividends of the pet industry. In the future, the company's pet products business is expected to return to growth by setting up a local overseas team and arranging overseas factories to strengthen the localization of products, design and services. It is expected that the pet food business will expand sales channels such as general trade on the basis of cross-border trade, while increasing the number of imported brands and maintaining high growth.
Company Overview: Provider of a full range of pet products. The company has been deeply involved in the pet industry for 20 years, mainly engaged in the design, development, production and sales of pet products. 2023Q1-3, the company's total operating income was 1.53 billion yuan, +1.3% year-on-year, attributable net profit of 52,211 million yuan, -45.0% year-on-year. 2023H1, the total revenue of the company's pet litter, cat crawler, pet toys, and other supplies accounted for 11.3%/16.8%/12.8%/19.2% of total revenue, pet products accounted for 60.1% of total revenue, and pet food accounted for 39.2%. The company's business is mainly exports, and the share of domestic sales is gradually increasing. 2023H1 domestic/export revenue is 480 million million/52 million yuan respectively, accounting for 48.0%/51.9% of revenue.
Industry analysis: rapid growth, broad space. According to Euromonitor, the retail scale of the global pet products market (excluding services) in 2022 was 171.1 billion US dollars. The penetration rate of pet breeding in developed countries is high and has entered a mature stage. China is still in a period of rapid development where penetration rates are increasing. According to JD's “China Pet Industry Trend Insights White Paper”, the penetration rate of pets in US/Japan/Europe/China is 70%/57%/46%/18% in 2021. 1) Pet food: According to Euromonitor, the global pet food market in 2022 was 123.5 billion US dollars, of which China is about 48.7 billion yuan, with an estimated CAGR of 10% over the next 5 years. High-frequency pet food needs to be repurchased, and the leading brand effect is remarkable. Through independent cultivation/mergers and acquisitions, Mars/Nestle Purina's share of the global pet food market reached 21.5%/20.1% in 2022. The domestic pet food market is scattered, with CR 1029.8% in 2022. Imported brands in the staple food sector (especially high-end) still have significant advantages, and local brands have a higher market share in the snack sector with their advantages in raw materials and labor costs. 2) Pet products: As pet owners pay more attention to pet emotions, etc., the pet products industry is expected to continue to grow. According to Euromonitor, the retail scale of the global pet products market in 2022 is 47.7 billion US dollars, and the CAGR is expected to be 6% in the next 5 years; the retail scale of pet products in China will reach 36 billion yuan, and the CAGR is expected to be 12% in the next 5 years. Pet products cover a wide range of categories, are quickly updated and iterated, and the industry is scattered. Overseas pet products are mostly channel brands, and Chinese companies are mostly OEM for overseas channel vendors.
Company analysis: steady development of supplies and rapid growth of food. 1) Pet products: leading products, channels and supply chains. Product: Full coverage of pet product categories to meet the “one-stop” procurement needs of downstream customers. Relying on an experienced product team, the company's product features, themes, and category innovation lead the industry. The company's basic product catalog covers more than 5,000 regular models and best-selling products, and launches a new product catalog twice a year, totaling more than 2,000 models. Channels: With a rapid and rich product development system, an efficient and reliable supply chain management system, and a good and mature customer service system, the company has established a stable cooperative relationship with major customers, and has a first-mover advantage among small and medium-sized customers. Supply chain: Self-production+outsourcing, flexible supply chain organization. Independent production of the 2022H1 core category cat crawler/nest pad accounts for 69.0%/19.4%. Other long-tail products mainly rely on external production.
In the future, through the establishment of overseas local teams and the layout of overseas factories, the company will strengthen the localization of products, designs, and services. Growth is expected to return as overseas customers end their warehouses. 2) Pet food: The company has introduced internationally renowned brands such as Desire, Kenna, and Souli (positioned as high-end, mainly pet staple food), 2019-2023Q1-3, and the company's pet food revenue as a share of total revenue increased from 3.5% to 33.1%.
After 2021H2, the company's purchase price declined further after replacing suppliers of pet food under the Yikena and Ekana brand. In the future, the company plans to expand other sales channels such as general trade and increase the number of cooperative imported brands. We expect its pet food business to maintain high growth.
Risk factors: risk of changes in overseas market conditions; risk of exchange rate fluctuations; risk of increased industry competition; risk of fluctuations in material costs and prices; risk of new product development and promotion; risk of production models relying on outsourcing.
Profit forecast and valuation: We forecast that the company's revenue from 2023 to 2025 will be 1.98 billion /2.37 billion /2.73 billion yuan, +5.1%/+19.3%/+15.6% year over year; net profit will be 0.8 billion/100 million/120 million yuan, -41.5%/+33.6%/+16.8% year-on-year, and the corresponding EPS forecast is 0.60/0.80/0.93 yuan, respectively. Combining the DCF valuation and PE relative valuation method, we gave the company a target market value of 3 billion yuan in 2024 (corresponding to 30 times PE in 2024), a target price of 24 yuan, coverage for the first time, and a “increase in holdings” rating.