Key points of investment:

Deeply cultivate the duck neck business and lay out a food ecosystem. Exquisite Foods is a leading enterprise in the casual halide products industry. Early on, it determined a franchise-centered development model. Over the years, it has formed a mature franchise system, leading the number of stores in the country, forming a scale effect advantage. Currently, Exquisite Foods continues to maintain the speed of store expansion, actively lay out a sinking market, and continue to gain strength on the channel side. At the same time, it has created a second growth point for the food ecosystem, and laid out table braised flavors to empower long-term development.

Performance is expected to be resilient, and stores will continue to expand. The company's revenue in 2023 was 7.261 billion yuan, up 9.64% year on year, and net profit to mother in 2023 was 0.344 billion yuan, up 46.63% year on year. Over the long term, the price of upstream raw materials has declined, and the company continues to expand its stores. At the same time, the company actively manages inventory and expenses, and net profit has a long-term positive trend. The total number of the company's stores in 2023 was 15,950 (excluding Hong Kong, Macao, Taiwan and overseas markets), with a net annual increase of 874. In 2023, the company's single-store revenue increased 1.22% year on year. While steadily expanding stores, the company actively guarantees the recovery of the same stores. At the same time, upstream duck seedlings are actively launched. Raw material prices are expected to remain low, and the company's performance is expected to improve steadily.

The scale of the halogen products industry continues to expand, the concentration of the industry is low, and the space for leading enterprises is large. The market size of the halogen products industry continues to expand. According to Ai Media Consulting, the market size of China's halogen products in 2018 was 233 billion yuan. The market size is expected to reach 405.1 billion yuan in 2023, and the growth rate will remain at 9%-15% from 2018 to 2023, maintaining steady growth. We believe that as residents' income levels rise and the trend of diversification of halogen products progresses, there is still room for further improvement in the market size. There are many enterprises in the halide products industry, but the number of leading enterprises that have achieved large-scale expansion is small, and the industry concentration is low. In 2020, the market share of the leading delicious food in the casual marinated food industry was 5.39%. Currently, leading companies are bucking the trend and expanding their stores, and leading companies are expected to further increase their market share.

The company has a rich product matrix to promote brand rejuvenation. The company is deeply involved in core products, launched various flavor products to meet the consumer needs of different consumer groups; launched various packaging products such as simple packaging, hardcover, and gifts. At the same time, regional specialty products are launched to meet the differentiated needs of consumers. The company clearly targets “Gen Z” as its main target customer, and actively creates products that meet the consumer needs of young consumers and the way young people spend. The company reached a strategic cooperation with Tencent, and Zweiwei Duck Neck was launched in collaboration with Yuanmeng Star, and it is still possible to interact with consumers in game content. The company continues to empower brand promotion through joint branding to attract more young consumers.

The sinking market has broad prospects, and the management system empowers franchisees. Currently, about 60% of the urban distribution of exquisite food stores are located in Tier 1 and 2 cities. The store density is relatively saturated. Tier 3 and 4 cities account relatively low, and there is plenty of room for improvement. The cost of joining the company is low, and the payback period is about 14 months. The company has formed an evaluation and professional guidance and training before opening a store, marketing support for new stores after opening, and a unified management system for stores, cultivating franchisees more suitable for the development of delicious food, and improving the success rate of franchisees in opening stores.

The company's production base covers the whole country and introduces digital management. Currently, the company has 22 production bases (including 3 under construction), each covering a radius of 300-500 kilometers. In the supply chain, Zhuwei Foods deployed an SAP-ERP information management system to help digital management under the 10,000 store model, and deployed and implemented various systems including procurement, order, warehousing, inspection and distribution, production, and logistics business systems using SAP as the core point on the supply chain side. The retail side covers CRM members, stores, terminal management systems, etc., to achieve standardized management of thousands of stores.

Investment advice: We consider that the company currently has a strong brand influence and high popularity. At the same time, the company has a comparative advantage in terms of number of stores and production capacity. We expect the 2024-2026 EPS of Zhouwei Foods to be 1.23 yuan, 1.42 yuan and 1.60 yuan respectively. Corresponding to the current stock price PE is 12X, 10X and 9X, respectively. The industry average 2024-2026 PE is 20X, 16X, and 14X, respectively. The first coverage gives a “buy” rating.

Risk warning: the risk of food safety, the risk of a single store's revenue growth falling short of expectations, the risk of a sharp rise in raw material prices, and the risk of store expansion falling short of expectations.