Incidents:
Haitian Flavors released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 24.559 billion yuan, -4.1% year on year; net profit to mother of 5.627 billion yuan, -9.21% year on year; net profit after deducting non-return to mother of 5.395 billion yuan, -9.57% year on year. Looking at a single quarter, 2023Q4 and 2024Q1 achieved operating income of 5.909/7.694 billion yuan, -9.3%/+10.21%; net profit to mother of 12.98/1.919 billion yuan, -15.2%/+11.85% YoY; net profit without return to mother of 12.43/1.86 billion yuan, -15.39%/+13.34% YoY.
Investment highlights:
Channel inventory returned to a healthy state, and Q1 got off to a good start. In 2023, the company focused on optimizing channel inventory levels and speeding up terminal sales. There was still a slight decline in annual revenue, but 2023Q4 channel inventory has returned to a healthy level. We believe that the decline in 2023Q4 revenue was mainly due to the Spring Festival mistake. 2024Q1 achieved rapid revenue growth under the influence of reasonable channel inventory, high enthusiasm of dealers to prepare goods at the beginning of the year, and a good start in Chinese New Year restaurants.
(1) On the product side, soy sauce/sauce/oyster sauce/other products achieved revenue of 126/24/43/35 billion yuan in 2023, respectively, -8.8%/-6.1%/-3.7%/+19.35%, respectively. We believe that sales of soy sauce/sauce/oyster sauce decreased by 8.2%/0.4%/1.9%, respectively. We believe that the main channel is inventory removal, while C-side consumption is weak, B-side retouching and pre-prepared dishes have been diverted. In terms of price, the weak recovery in consumption and increased demand for food and beverage cost reduction also reduced the tonnage price of soy sauce/condiment/oyster sauce by -0.7%/-1.9% to 5499/8559/4937 yuan, respectively. 2024Q1 soy sauce/seasoning sauce/oyster sauce/other products achieved revenue of 41/8/13/1.1 billion yuan respectively, up 10.1%/6.4%/9.6%/22.1% year-on-year respectively. Soy sauce and oyster sauce achieved good growth due to the high popularity of food during the Spring Festival. Since 2023, the “other” category has maintained a high growth rate driven by cooking wine and vinegar.
(2) On the channel side, in 2023, the company continued to promote dynamic optimization of the distribution network and strengthen multi-scenario and multi-channel development. The number of dealers decreased by 581 compared to 2022, and 2024Q1 continued to decrease by 85 to 6506. Benefiting from healthy channel inventories and deepening channel reforms, all regions of the country achieved growth in 2024Q1. The East/South/Central/North/West segments increased 10.3%/21.8%/10.2%/6.5%/10.1% year-on-year.
Gross margin fluctuated with the product structure, and profitability initially improved. In 2023, the company's gross margin was -0.95pct year-on-year to 34.74%. We think it was mainly due to the high gross margin soy sauce sales share and the decline in tonnage prices of major categories. On the cost side, the sales/management/ R&D expense ratios were 5.32%/2.14%/2.91% respectively. The overall sales and R&D expenses rate was stable, and the management expense ratio was +0.42pct year-on-year, mainly due to an increase in management labor and information technology expenses. The final net interest rate to mother recorded 22.91%, -1.29pct year on year. 2024Q1 benefited from the recovery in sales of soy sauce and oyster sauce, gross margin of +0.38pct to 37.31% year over year. The overall cost ratio was stable, and the net profit margin to mother rose to 24.94% +0.37pct year over year.
Product+channel improvements go hand in hand, and we look forward to the results of subsequent reforms. The company set a revenue target of 27.51 billion yuan for 2024, an increase of 12.01% over the previous year; net profit to mother was 6.23 billion yuan, an increase of 10.72% over the previous year. The company has long been leading the industry in terms of C-side market coverage and B-side customer stickiness. Currently, on the one hand, it is increasing offline network density, strengthening the decline of terminals, and promoting the transformation of dealer terminals; on the other hand, it is speeding up the development of new channels such as online business and community business, and continuously strengthening channel barriers. At the same time, we use technical advantages to promote healthy products such as zero additives and organic products to enhance market competitiveness. Product+channel improvements go hand in hand, and I am optimistic that the company will gradually return to healthy development.
Profit forecasting and valuation: As a leader in the condiment industry, the company has strong brand power. At the same time, it has formed certain barriers in both B-side and C-side channels. Currently, operations are gradually improving as channel changes advance. We expect the company to achieve operating income of 269/292/31.1 billion yuan in 2024-2026, up 9%/9%/6% year on year; net profit to mother of 61/66/ 7.4 billion yuan, up 8%/9%/11% year on year, corresponding EPS of 1.09/1.20/1.32 yuan, respectively, and corresponding PE of 36X/33X/30X respectively, with initial coverage and a “gain” rating.
Risk warning: 1) Prices of raw materials have risen sharply; 2) Sales have fallen short of expectations due to increased competition; 3) Food safety incidents; 4) Consumer demand recovery has fallen short of expectations; 5) Channel reform has fallen short of expectations.