Maintaining the “Collection” rating, the new target price is HK$9.00. We have slightly lowered Master Kong's (“Company”) sales revenue forecast for 2023-2025 to RMB83.31 billion (-1.5%)/RMB87.478 billion (-2.2%)/RMB91,599 billion (-2.8%), respectively. Accordingly, we revised our 2023-2025 earnings per share forecast to RMB 0.612 (-1.6%)/RMB 0.681 (-6.0%)/RMB 0.709 (-10.9%), respectively. Since the beginning of the year, Master Kong's stock price has declined by 24.9%, reflecting less-than-expected sales revenue for the second half of 2023 and the market's generally conservative investment sentiment in the Chinese consumer sector. We reaffirm that the company is a defensive target, with stable growth prospects and attractive current dividend returns. Our price target is based on the predicted price-earnings ratio of 12.0 times 2024 (previously 17 times), corresponding to a 26% upside.
Despite Master Kong further consolidating its market share in a competitive environment, investors are still concerned about its slowing sales revenue growth since the second half of 2023. According to our estimates, Master Kong's drinks/instant noodles business revenue should increase by 2.5%/6.4% year-on-year in the second half of 2023. Due to shrinking market segment capacity and weak overall consumption growth, we expect the growth rate of high-priced bag noodles to continue to decline in 2024-2025. Meanwhile, due to poor demand from domestic industrial plants and site workers, sales of drum noodles are also under pressure. However, we believe the company has the ability to continue to increase its market share by increasing investment in product innovation and marketing promotion activities. As far as the beverage business is concerned, we saw a slight month-on-month improvement in the fourth quarter of 2023. Juices and packaged water are expected to regain solid growth momentum. The former is due to the growing consumption stickiness of the healthist consumer group (especially in drinking scenarios such as at home and restaurants), while the latter is benefiting significantly from a rebound in the outdoor activity scene.
A solid gross sales gap can leave some room for Master Kong to increase sales and distribution investment. Average unit sales prices are generally stable — the positive effects of price increases have been offset by an increase in the share of sales of cost-effective, high-volume products. The cost of raw materials such as palm oil and PET resin chips has declined marginally, and we expect the company's comprehensive gross margin for 2024-2025 to be 30.5%. We maintain our 2024-2025 sales expense ratio, capital expenditure, and annual dividend payout ratio forecasts of 21.3%, RMB 3-3.3 billion per year, and 100%, respectively, reflecting the company's long-term strategic strength and business resilience.
Catalysts: 1) marginal easing of inflationary cost pressure; 2) investors' approval of high dividend strategies is increasing, and the company's shares are expected to be overallocated; and 3) the company's price increases for some beverage SKUs have been implemented.
Risk factors: 1) demand recovery fell short of expectations; 2) food safety issues; 3) increased market competition; and 4) price fluctuations of raw materials and packaging materials exceeded expectations.