The Zhitong Finance App learned that Guolian Securities released a research report stating that due to rigid demand and while looking forward to a recovery in catering and consumption power to improve industry demand, the bank is optimistic about the prospects of the seasoned fermented products industry and gave it a “stronger than the market” rating. Among them, compound condiments benefit from an increase in the chain rate of catering, cost reduction and efficiency (excellent chefs are in short supply, high prices), and the continuous increase in demand for C-side convenience, and the industry is booming.

There is still room for improvement in concentration in the remodulation industry. The bank anticipates that future concentration increases mainly due to new product launches+intensive channel cultivation. It is optimistic about leaders with excellent management capabilities and a strong channel base. It recommends Tianwei Foods (603317.SH) with scarce targets and reasonable valuations, as well as Yihai International (01579), which has an outstanding valuation ratio and can be expected to have an inflection point in fundamentals.

The main views of Guolian Securities are as follows:

The growth rate of compound condiments is expected to continue to lead the condiment industry

With the increase in the restaurant chain rate and the increasing demand for cost reduction and efficiency in stores, changes in the family structure and the development of the “lazy economy”, the size of the compound condiment market, which has good convenience and rich flavors, has ushered in a continuous increase. The 2015-2019 industry CAGR was 12%; in 2019-2023, the industry CAGR remained around 11%, and the revenue of China's polymodulation industry reached 96.7 billion yuan in 2023. In 2023, the revenue from hot pot conditioning/Chinese polymodulation was 149.19/17.193 billion yuan respectively, corresponding to the 2019-2023 industry CAGR of 10.51%/12.12%, respectively. We expect the industry's compound growth rate to remain at double digits over the next 3 years.

Before 2020: rapid development, horse-racing field

The increase in the chain rate of catering was compounded by household restructuring, and the industry ushered in a period of rapid development. The industry CAGR for 2010-2015/2015-2019 was 16.17%/12.47%, respectively. Major companies are actively improving the product matrix. The number of dealers and unit revenue generation ushered in a double rise, and the sales expenses rate of leading companies remained stable. The industry's CR3 increased steadily from 6.7% in 2015 to 12.7% in 2019. Specifically, the share shares of Yihai International, Tianwei Foods, and Richen increased by 4.7/0.5/0.1 pct, respectively.

2020-2021: Oversupply, increased competition

The home scenario was strengthened, and the revenue side performance of 2020H1 mainly overcame expectations. Under the influence of optimism, the supply side of the industry expanded rapidly. In the early stages of this phase, major enterprises accelerated the expansion of dealers and increased sales expenses. However, there was insufficient sustainability on the demand side. Competition intensified in the later stages, and competition intensified due to the mismatch between supply and demand, and the industry pattern gradually deteriorated. The net interest rate of enterprises declined mainly in the latter stages. In 2021, the net interest rates of Tianwei Foods/Yihai International/Richen Shares/Baoli Foods/Anji Foods declined 6/4/7/2/4 pcts year-on-year, respectively.

End of 2021 to date: industry boom, stable competition

At the end of 2021, small brands began to be cleared, competition improved, and restructured companies to actively expand categories, sort out products on sale, and implement detailed channel management. Expenses were more accurate, sales expenses were optimized, and the overall industry developed in a healthy direction, and the share of leading companies increased steadily. (1) Hot pot base: In 2023, the market share of Yihai's third party and Tianwei was 15%/8% respectively (2) Chinese multiplication: in 2023, the third party market share of Tianwei/Yihai was 11%/3%, respectively. It is expected that the future increase in concentration in the remodulation industry will mainly depend on new product launch+intensive channel cultivation.

Investment advice: recommend Tianwei Food and Yihai International

Demand is rigid, and we also expect a recovery in catering and consumption power to improve industry demand. We are optimistic about the prospects of the seasoned and fermented products industry and give it a “stronger than the market” rating. Among them, compound condiments benefit from an increase in the chain rate of catering, cost reduction and efficiency (excellent chefs are in short supply, high prices), and the continuous increase in demand for C-side convenience, and the industry is booming. There is still room for improvement in concentration in the remodulation industry. We expect future increases in concentration mainly due to the launch of new products and intensive channel cultivation. We are optimistic about leaders with excellent management capabilities and a strong channel base. We recommend Tianwei Foods with scarce targets and reasonable valuations, as well as Yihai International, which has an outstanding valuation ratio and can be expected to have an inflection point in fundamentals.

Risk warning:

The risk of macroeconomic failure to meet expectations, the risk of increased industry competition, and the risk of food safety.