We reaffirm our “buy” investment rating with a target price of HK$6.50. We expect the revenue of the unified enterprise China Holdings (“unified central control” or “company”) to reach RMB 29.535 billion/RMB 31,875 billion/33.999 billion in 2023-2025, an increase of 4.5%/7.9%/6.7% year on year. We expect net shareholder profit for 2023-2025 to be RMB 1,490/1,744 million/$2,025 million, which is equivalent to an average compound growth rate of 18.3% for 2022-2025. Due to the high base for the same period in the second half of 2022, many investors worry that the sales revenue of unified central control in 2023 will fall short of the previous guidelines for the year-on-year increase in the number of units. We believe that such negative views have basically been reflected in stock prices. Looking ahead, we expect unified central control in 2024 to achieve a higher sales growth rate. At the same time, the profit margin level of unified central control in 2023-2025 is expected to improve year by year, driven by factors such as the upgrading of the sales structure, the decline in raw material costs, and reasonable optimization of cost rates.
Our target price is HK$6.50, which is based on a 15.0 times forecast price-earnings ratio for 2024.
Continue to be optimistic about the beverage business sector. We expect unified centrally controlled beverage sales to record a year-on-year increase of nearly 11% in 2023. We expect ready-to-drink tea and juice to maintain solid growth momentum from the second half of 2023 to 2024. In addition to outdoor activities and an increase in passenger traffic, the development of the beverage business with unified central control will be mainly rooted in the following three strategic focuses. 1) Occupy consumers' minds for a long time with a clear brand image. The company actively promotes brand building, strives to establish interaction and connections between its brands and young people, and consolidates the nationwide sales volume of major products such as unified iced black tea and unified green tea. In response to “Words of the Sea,” the company uses mineral-containing sea salt raw materials from the Mediterranean as an entry point to highlight the functional position of hydrating and reducing electrolyte loss. The advertising slogan “Drink the Sea When You Sweat” is increasingly being accepted by the younger generation of Chinese consumers. 2) Channel penetration. For the distribution process, unified central control further expands sales terminals (POS), actively lays out drinking scenarios such as gifts, households, and restaurants, and boosts the base market. 3) Product innovation. The company continues to expand its product line to meet the higher demands of different consumers for a healthy lifestyle, such as the successful launch of sugar-free jasmine green tea in 2023 and further enrich its 100% fruit and vegetable juice product portfolio.
Consolidation of market share will continue to be the key goal of unifying the central control food business sector. We expect the year-on-year decline in food sales to narrow in the second half of 2023. The increase in passenger traffic has led to a significant recovery in outdoor ready-to-drink consumption scenarios (including transportation hubs, tourist attractions, etc.), but since the overall operating rate in mainland China is still low, consumer demand from factory workers is weak. Looking ahead, the instant noodle market (especially the high-end category) faces the double challenge of a marginal decline in demand and increased market competition. However, we have also seen that the unified central control “Jiahuang” series has performed well, and is expected to take over and grow into a new generation of super products; we expect the series to maintain a medium to high double-digit year-on-year growth rate from the second half of 2023 to 2024, which is expected to exceed expectations.
A relatively strong gross margin may leave some room for unified central control to expand distribution expenses. Thanks to the marginal decline in the prices of raw materials such as palm oil/PET resin, we expect the consolidated gross margin of unified central control to increase 1.1 percentage points year-on-year in 2023.
Risks: Raw material prices fluctuate beyond expectations; food safety issues.