Platform specialization, combining state-owned enterprise resources with international advanced experience. As a subsidiary of COFCO Group, the company's business has gradually been streamlined since 2007. After 2017, it became a specialized soft drink business operation platform, focusing on Coca Cola's bottling, distribution and distribution business in China. On the one hand, the company relies on COFCO Group's many years of operating experience and business network in the food and beverage field. At the same time, it also cooperates deeply with Coca Cola, an international soft drink leader, to absorb advanced management and marketing experience, and continue to improve profitability and management efficiency.
Industry transformation provides new growth points, and the company's price increases reshape the value chain. The market size of China's soft drink industry reached 637.2 billion in 2023, with sales volume of 93.79 billion litres. The industry is highly mature and has entered a stage of moderate growth. It is expected to grow by low single digits in the industry in the next three years. Transformation and upgrading and structural change have become the new main themes in the development of the industry. In the segment, carbonated beverages are driving new growth due to the sugar-free trend; the juice category has been damaged in the past seven years, and it is expected that there will be a structural shift to high-end high-concentration juice drinks in the future; the water category benefits from increased household user penetration rates to drive sales growth. Combining industry transformation trends, the company accelerated the pace of price increases. By continuously launching high-priced new products and reshaping the product value chain by increasing prices for classic products, etc., the company balanced consumer demand while guaranteeing dealer profits, and the price increase market acceptance was good.
Profits are growing steadily, and performance is highly deterministic. The company's 2018-2022 revenue CAGR was 7.6%, and net profit CAGR to mother was 19.8%. The company's revenue for the first half of 2023 was $12.46 billion, up 4.7% year on year; net profit to mother was $60 billion, up 24.7% year on year. Gross margin declined significantly in 2021 due to a large increase in raw material costs, and the price of the main raw materials for the company's products has gradually declined from a high level. It is expected that the pressure on the company's cost side will ease this year, and gross margin is expected to increase slightly.
Dividend rates are attractive, and undervaluations provide layout opportunities. The company's indicators such as OPM and ROE are compared horizontally in Coca Cola's global bottler system. None of them are impressive, and there is still room for growth in the future. However, in response to this, the company's valuation level is low, and there are still layout opportunities. In the current macro environment, we believe that the company's dividend rate of 4.5% (TTM) is more attractive, Coca Cola products are highly mature, the company's profits are steady, and profit distribution is more certain.
Investment advice and profit forecasting. We expect the company's revenue for 2023-2025 to be 216.9/225.3/23.22 billion yuan, up 3.4%/3.9%/3.0% year on year, and net profit to mother will be 7.7/83/9.3 billion yuan respectively, corresponding to 2023-2025 EPS of 0.27/0.30/0.33 yuan per share, respectively, up 16.2%/8.0%/12.5% year on year. Referring to a comparable company valuation of 14.4x in 2024, the company was given 11x PE in 2024, corresponding to the target price of HK$3.54 (1HKD=0.9195 CNY). There is 20% room for an upward trend, and for the first time coverage was given a “superior to the market” rating.
Risk warning: Liquidity issues, increased industry competition, fluctuating raw material prices, food safety risks.