Key points of investment:
In July 2023, the Zhongshan State-owned Assets Administration Commission became the actual controller again, and management changes were basically completed, ending a five-year period of turbulent operation. The company's new round of equity incentives targets positive, further boosting market confidence.
Focus on fresh soy sauce and continue to cater to new trends
The size of China's soy sauce market has increased steadily, from 29.994 billion yuan in 2011 to 65.857 billion yuan in 2022, with a CAGR of about 7.41%. Among the segments, high-fresh soy sauce is booming. The scale of the industry was close to 20 billion in 2023, and the CAGR reached 11% in 2018-2023, which is higher than the overall growth rate of the industry. Zhongju Hi-Tech pioneered the high-fresh soy sauce category and is expected to enjoy the dividends of category growth. In addition, the company is actively improving the zero-additive and salt-reduced product matrix to continue to cater to the health trend.
Management changes completed, market-based reforms implemented
After nearly five years of run-in and adjustments, the Zhongshan State Assets Administration Commission re-became the actual controller in July 2023. The core management has extensive experience in consumer goods operations, which is expected to empower the development of the main condiment business. At the same time, organizational and remuneration market-based reforms are underway, and the labor efficiency ratio is expected to enter an upward channel. With the implementation of equity incentives on March 30, 2024, the treatment of core executives is expected to be further improved, and a concerted effort will be made to sprint to the 10 billion target.
Accelerate national layout, and channel quality improvement can be expected
(1) Sales team capacity is expected to improve: the company has replaced the sales team, and team capacity has improved markedly; (2) market action is expected to resume standardization and strengthen sales; (3) Dealer capacity is expected to improve: the company's unit dealer revenue from 2019 to 2022 fell from 4.45 million yuan to 2.67 million yuan. Although the number of dealers increased to 2,084 in 2023, quality declined slightly. We believe that with market-based remuneration reforms and management support, the company is expected to recruit core dealers with a good customer base and strong management and control capabilities. The two factors of improving the number and quality of channels resonate, and the revenue elasticity brought about is worth looking forward to.
Cost reduction and efficiency are ongoing, and there is enough room for cost optimization
The company's gross margin has a lot of room for improvement compared to its peers. With the gradual implementation of the “Chubang Intelligent Manufacturing” reform and the advancement of automated production lines and supply chain optimization projects, labor, freight and manufacturing costs in the soy sauce business are expected to continue to be optimized. Cost reduction and efficiency measures continue to advance, which are expected to further free up profit margins.
Profit Forecasts, Valuations, and Ratings
We expect the company's 2024-2026 revenue to be $57.75/68.12/8.112 billion yuan, respectively, with year-on-year growth rates of 12.38%/17.94%/19.08%, net profit to mother of 7.70/10.10/1,214 billion yuan respectively, year-on-year growth rates of -54.60%/31.02%/20.25%, and EPS 0.98/1.29/1.55 yuan/share, respectively. Maintaining a “buy” rating in view of strong expectations for the company's reforms.
Risk warning: food safety risk, risk of channel expansion falling short of expectations, risk of rising raw material prices