Expected difference 1 (industry level): The C-side still has strong upgrade potential. The company's C-side accounts for 70% +, and in the process of upgrading the industry to functionality, segmentation, and health, the average price has a lot of room for improvement. According to Euromonitor, the CAGR of retail sales in China's condiment industry in 19-22 was 6.3%, of which the volume/price difference was -1.0%/+7.3%. Despite B-side damage due to changes in the macroeconomic environment, condiments still have resilient growth. The sales driver is shifting to household consumption, and along with the upgrading of the C-side product structure, the price increase contributed even more significantly.
The concentration of leaders is expected to increase further. The company is in the leading position in the soy sauce industry. It is expected that its market share will continue to increase through the development of a blank market outside the province and the completion of the product matrix. According to data from the Condiment Association, the number of soy sauce production companies among the top 100 companies decreased from 35 to 31 in 20-22, and the share of the top 100 soy sauce production in the country increased from 51% in '17 to 76% in '21. In a context where industry demand and costs are under pressure from many parties, small enterprises are gradually clearing up, while leading players have adjusted their channel, product, and inventory strategies, and their market position is still stable.
Expected difference 2 (company level): Equity and personnel changes are implemented, and operating efficiency is expected to improve.
Since '22, Zhongshan Runtian has continued to passively reduce its holdings due to debt issues. At the beginning of '23, Torch Group introduced concerted actor Dinghui United to gradually increase its holdings in the secondary market and return to the position of majority shareholder. New management was appointed in October '23. Most of them have working backgrounds in China Resources and are experienced in brand operation, channel operation, and terminal management. Referring to recent China Resources management empowerment cases, the company is also expected to benefit from strategy execution, channel resources, and operational efficiency.
Expected difference 3 (investment level): There is plenty of room to explore profit margins, and the neutral assumption is bullish 25% +.
23Q1-Q3's net interest rate is 11.4pct/4.8pct lower than Haitian/Qianhe respectively. The difference is reflected in production, procurement, and personnel remuneration. After the new management took office, they actively promoted actions such as business process reengineering, supply chain optimization, and market-based performance reforms, and performance flexibility is expected to be unleashed. According to scenario analysis based on different revenue growth rates and profit margin assumptions, the average PE value of comparable companies in 25 years was about 23x, and the market capitalization space was bullish 28% to 45% under neutral conditions in '25.
Profit forecasts, valuations, and ratings
According to the company's recent disclosure of the “Notice on the Progress of Major Litigation”, as the lawsuit is completed and the withheld debt is recovered, the 23-year results will turn a loss into a profit. The company's net profit for 23-25 is estimated to be 1,684/768/981 million yuan respectively, turning the year-on-year loss into profit/ -54%/+28%.
The net profit of the company's main business (Delicious Fresh subsidiary) in 23-25 is estimated to be 5.3/7.4/960 million yuan, respectively, -3.2%/+40%/+30%, respectively, giving the industry average PE (28x in 24 years), and a valuation of about 5.6 billion yuan for 1,600 acres of land. The reasonable market value is 26.3 billion yuan, and the target price is 33.51 yuan/share, maintaining a “buy” rating.
Risk warning
Food safety risks, market reputation risks, channel expansion falling short of expectations, governance improvements falling short of expectations.