It is a leader in the instant noodle and soft drink industry, and the channel power ranks first in the industry. After 30 years of development, Master Kong is currently a leader in the instant noodle and soft drink industry in China. The company's equity structure is centralized and stable, and the management team is experienced, and equity incentives have been carried out for many years, deeply binding the company's core team. The company has extensive channel coverage and strong control, and has both depth and breadth. It has already sunk to cover small cities and township markets. It has high sales rates, single points of sale and high sales speed. It is a typical example of FMCG channel construction in China.
Demand for beverages continues to be good, and the company's product matrix is in line with consumer trends. According to Haitong International Demand Monthly Report, benefiting from good performance in travel and travel scenarios, sales in the beverage industry have continued to grow since this year; at the same time, the growth of the beverage industry has always been largely undependent on price increases, and has been less affected in the context of poor CPI. We expect the cumulative revenue of the industry to achieve year-on-year growth in the number of medium to high units from the beginning of the year, and the growth rate of Master Kong's beverage business is also in sync with the industry market. In the company's beverage business, sugary ready-to-drink tea and sugary carbonated drinks are traditional strengths, and the products are cheap and have excellent cost performance, benefiting from the macro-consumption trend of pursuing cost performance since this year. Although the rise of sugar-free products in recent years has changed the market pattern, the company promptly launched sugar-free products such as “The Successor of Tea”, which is expected to enjoy the industry dividends of high growth in the segmented circuit.
Profitability increased steadily in 2024, and price increases had a positive impact. At the same time, raw material costs and cost investment were manageable. According to channel research, since November 2023, Master Kong has successively achieved a double-digit increase in the retail price of 1L tea/juice on various terminals, and the factory price rose in April this year. The price increase category is expected to account for about 20% of the beverage business, which is conducive to boosting the gross margin of the beverage sector. At the same time, the Group's overall costs will remain manageable in 2024, mainly sugar and PET prices will be manageable, and the gross margin of the beverage business will be boosted. However, this year's instant noodle business is expected to see a decline in gross margin compared to last year, mainly due to last year's high base, and palm oil prices may rise somewhat. The company has increased its investment in advertising and other expenses this year, and the sales expenses rate may rise. Based on price increases and raw material trends, we expect the company's gross margin to rise by 0.6 pct this year, with a slight increase in net interest rate.
If the dividend target is high, the dividend guarantee is strong. The company has maintained a percentage dividend for many years. The annual cash dividend ratio for 2020-2023 was 100%/166%/198%/100%, respectively. Based on the company's 100% dividend in 2023, the company's latest annual dividend rate is 6.2%. Consumer stocks are in the first tier in the Hong Kong stock market. Master Kong still has the potential to maintain a high dividend rate in the future. We expect the company's net profit for 24 years to be 3.34 billion yuan (up 7.0% year on year). Assuming that the company continues to maintain a historical dividend rate of more than 100%, the corresponding dividend rate will reach 6.6% based on current market value, and its dividend value is very impressive.
Investment advice and profit forecasting. We expect the company's 2024-2026 revenue to be 842.7/880.6/91.80 billion yuan, up 4.8%/4.5%/4.2% year on year; net profit to mother for 2024-2026 is expected to be 33.4/35.5/3.74 billion yuan, corresponding EPS 0.59/0.63/0.66, respectively, up 7.0%/6.5%/5.2% year on year. Referring to comparable company valuations, we also think that a company's dividend rate of 5% or more is highly attractive. Therefore, we gave the company 19xPE in 2024, with a corresponding target price of HK$12.1, with 27% upside. For the first time, coverage gave it a “superior to the market” rating.
Risk warning: Increased industry competition, fluctuating raw material prices, food safety risks.