Key points of investment
Investment logic in one sentence
Lotus Holdings is the first MSG stock in China. Short-term MSG production capacity release supports the growth of the main MSG business. Medium- to long-term overseas channels have accelerated penetration and substantial growth space and organizational structure changes have brought improvements in human efficiency, which is expected to drive performance beyond expectations.
Strong brand power+solid product power+diversified channel layout to build the company's core competitive advantage. We believe that the core competitiveness structure logic of Lotus Holdings is: under 40 years of brand power endorsement, the company has a first-mover advantage to launch high-margin home-packaged MSG products. At the same time, online channels accurately grasp the dividends, and the global layout continues to advance, which in turn drives the rapid release of large single products.
1) Brand strength: Through the 40-year cycle, brand value shines brightly. The company was founded in 1983. The brand has persisted through the major cycles of the monosodium glutamate industry, and has a deep historical accumulation.
2) Product strength: First-mover advantage to launch major home-packaged MSG products. The MSG industry is popular for high-margin, high-margin packaging products through industrial channels. The company has taken a different approach to focus on high-margin home packaging. With deep brand endorsement, and empowered by government policy support and strong R&D capabilities, it has successfully created Lotus MSG's largest single product.
3) Channel power: Online dividends are accurately controlled, and the global layout continues to advance. Under the guidance of the “521” product strategy, the company re-organized the channel structure, accurately controlled the traffic dividend of the online channel (online channel revenue CAGR was 202.0% in 2019-2023), the offline channel dealer network covered nationwide, and the overseas expansion process continued to advance (the number of the company's overseas distributors increased net by 30 to 219 in 2023), which in turn drove the rapid release of large MSG products with 40 years of brand accumulation to achieve the revival of domestic brands.
Logic that exceeds expectations
Exceeding expectations 1: The organizational structure reduces costs and increases efficiency, and is expected to drive performance to exceed expectations.
Market concerns: The company has experienced many controlling shareholder and executive adjustments, past performance has fluctuated greatly, and the market is worried about the sustainability of the company's future development.
We believe that the background of the new management is mostly national wealth, freed from problems left over from past company history. The board of directors has a large degree of decentralization. The management enhances administrative efficiency through refining the organizational structure, introduces equity incentives, and gradually optimizes the management expense ratio. The 23-year management fee rate was reduced by 7.7 pcts to 3.6% compared to 19; at the same time, the management sorted out the sales side personnel structure to optimize the remuneration and incentive system, improve the efficiency of terminal sales personnel, and achieve continuous improvement in sales expense rates. The company's sales expenses rate decreased by 5.1 pcts to 5.0% compared to 2019; the company achieved cost reduction and efficiency through organizational structure changes, providing strong support for subsequent product-side changes and ensuring the sustainability of development.
Exceeding expectations 2: Short-term MSG production capacity release supports the growth of the main MSG business, and medium- to long-term overseas channels accelerate the penetration of solid growth space.
Market concerns: MSG is a mature industry, and the medium- to long-term ceiling is obvious. The company's MSG business accounted for 77.3% in '23, and the market is worried that the company's main MSG business has limited room for growth.
We believe: orderly expansion of short-term production capacity+medium- to long-term overseas channels are expected to accelerate penetration, and the main MSG industry still has room for development. Specifically: 1) The online channels of long-established domestic brands will usher in a new growth point. The company will expand production capacity in an orderly manner, and the implementation of the second phase of the industrial park project is expected to support the continuous growth of the main MSG industry in 23; 2) The company will launch the Malaysian MSG brand “Weizhipower” acquisition plan. The future will be accompanied by successful brand acquisitions. The company is expected to rely on local brand channel advantages and customer stickiness, and overseas expectations will be driven by the strong two-wheel drive of the main brand brand Accelerate penetration and further support The main MSG business has grown over the medium to long term.
Profit Forecast and Valuation:
We expect the company's revenue for 2024-2026 to be 2.582/3.147/3.77 billion yuan, respectively, with a year-on-year change of +22.9%/+19.8%; net profit to mother of 0.187/0.253/0.351 billion yuan, respectively, up 43.7%/35.6%/38.8% year-on-year, and PE 32/23/17 times, giving the first coverage a “gain” rating.
Catalysts:
The main business grew more than expected; raw material costs declined.
Risk warning:
Raw material price fluctuation risk; main business growth falling short of expectations; food safety risk.