Collaboration with Yum drives profitability; dough fritters starting to dominate The company began to collaborate with KFC in 2002, setting a precedent for traditional Chinese foods to enter the global Western-style catering sales network. It became one of Yum’s tier-one suppliers in 2016 and was the only company in China to be listed in the best suppliers of rice and noodle category. Over 2017-20, Qianweiyangchu’s revenue grew from RMB593m to RMB944m at a CAGR of 16.74%. With scale expansion, net profit increased from RMB47m to RMB77m at a CAGR of 18.26%. Its main products include fried, baked and steamed dishes, and four other categories. Fried food is its core product with a more than 50% revenue share, while dough sticks account for about 60% of fried food revenue. We expect penetration of industry-scale fried dough sticks to widen to more than 30% annually to become a key profit growth driver for the company. Customized production model: ‘chef’s choice’ services within mass catering In providing customized services, the company does not supply its house brands directly to catering customers, but rather, it customizes product solutions to meet their particular needs. The customization process starts with R&D and production for B2B customers, and goes on to sales and other business activities. With an increase in young people dining out and a rising trend in chain restaurants, we expect the scale of the B2B supply chain to grow as the downstream catering market expands. At the same time, the emergence of large catering chains brings high-quality suppliers to the industry forefront. Top suppliers would benefit from the potential ripple effects of large B2B customers’ growth. Mature large B2B customers add profit stability and raise competitive barriers Endogenous growth such as storefront expansion for large B2B customers add stability to the company's growth. At the same time, mature large B catering chains have a strict supplier review and management systems to ensure supply chain food safety and stability. Qianweiyangchu’s self-assessment and hiring of third-party evaluators jointly ensure its supplier qualifications, providing a high intangible short-term barrier that is difficult for competitors to break through. More importantly, its deep ties with large B2B and leading restaurant chains boosts its product R&D advantages and operational management system. This set-up not only boosts horizontal category expansion and vertical market compatibility, but also helps to sustain its long-term growth. Growth segments: industry-scale fried dough sticks and ready-to-eat baked food We see growth headroom in the fried dough sticks market. As industry-scale fried dough sticks penetration rises, we expect the company's small size and strong competitiveness advantage to aid development in this category. At the same time, we expect baked food product differentiation in the blue-ocean catering market to drive its second growth driver. Valuation and risks We expect revenue of RMB1.22bn/1.57bn/2.03bn in 2021/22/23E, implying increases of 29/29/29% yoy, and net profit of RMB97m/128m/168m, increasing 26.93%/31.17%/ 31.67% yoy, with EPS at RMB1.14/1.50/1.97. Relative to peers Anjoy Foods and Ligao Foods’ average 2021E PE of 66x, we assign to Qianweiyangchu a 65x PE in 2021E. We initiate coverage with a BUY rating and target price of RMB74.10. Risks include: food safety and quality risks; operational risks caused by the Covid-19 impact; rising prices of raw materials; excessive reliance on large customers; rising competition; and short-term share price fluctuations. | 