Incident: The official websites of the Shanghai Stock Exchange and Shenzhen Stock Exchange announced that due to the implementation of component stock adjustments in the Hang Seng Composite Large-Cap Index, Mid-Cap Index, and Small-Cap Index, Weilong Delicious will be removed from the Hong Kong Stock Exchange's securities list with effect from March 4.
Liquidity is the core reason for the transfer out of Hong Kong Stock Connect. According to the “Hang Seng Index Calculation General Rules”, constituent stocks are required to meet the turnover rate test. A monthly turnover rate of 0.05% or more satisfies the monthly turnover test. The turnover rate = the median daily trading volume during the calendar month/number of shares issued after the circulation adjustment at the end of the month. We believe that Weilong's low turnover rate since its listing was the reason for the removal of Hang Seng Index constituent stocks. The company's low liquidity mainly includes two reasons: ① the proportion of shares sold publicly at the time of listing was low; ② major shareholders are optimistic about the company's development prospects and have not decreased their holdings. We believe that the company's valuation is currently at the bottom. As the investment value is gradually recognized by the market and liquidity gradually recovers, it is expected to return to Hong Kong Stock Connect.
Snack foods are popular during the New Year holidays, and the company's revenue is expected to maintain a relatively rapid growth rate. Snack foods continued to be popular during the Spring Festival. First, demand for gifts led to an increase in demand for snack gift boxes, and second, family and friend gatherings increased demand for snacks. Weilong launched three New Year gift boxes at this year's New Year's Festival, including the Dragon Gift Series, Lucky Gift Box Series, and Dragon Gift Box to meet the gift needs of young groups and expand the consumption scene. It is expected to achieve rapid growth during the New Year Festival.
The product matrix continues to expand, and there is plenty of potential for growth. The company currently has two major products, spicy bars and konjac soup. It launched Little Witch Konjac Vegetarian Belly in October '23, and added a sesame sauce fondue flavor on March 1, '24.
Spicy Crispy Hot Chips were launched in January '24, and lime-flavored products were added in March. Compared to traditional seasoned noodle products, crispy and spicy, it is expected to enter the puffed food market. It is highly differentiated. Currently, there are few competitors in the market. The company's product matrix continues to be rich. With the influence of spicy leading brands and a huge terminal sales network, it can achieve rapid delivery, and there is plenty of potential for growth.
Investment advice: We expect the company's 2023-2025 revenue to be 48.42/55.97/6449 billion yuan, respectively, up 4.52%/15.60%/15.22% year-on-year, and the company is expected to achieve net profit of 9.57/11.30/ 1,332 billion yuan in 2023-2025, up 532.77%/18.06%/17.89%, respectively, corresponding to 23-25 PE of 11.8/10.0/8.5X, respectively, giving it a “recommended” rating.
Risk warning: New product performance falls short of expectations; channel expansion falls short of expectations; risk of rising raw material prices, etc.