Tianyun International (the “Company” or “Tianyun”) is a processed fruit products company from Shandong. It was the 7th largest canned fruit producer in China in 2014, with a market share of 3.2%. The company mainly sells processed fruit products packaged in metal cans, plastic cups, and glass bottles domestically and abroad using the original manufacturer's contract manufacturing method, but at the same time sells processed fruit products and engages in fresh fruit trading domestically under its own brands “Tiantong Dai” and “Guo Xiaolai”. Tianyun's revenue and net profit in 2014 were RMB 450 million and RMB 89 million respectively, while revenue and core net profit (excluding listing fees) for the first half of 2015 increased 25.4% and 36.5% year-on-year to RMB 250 million and RMB 51 million respectively. Benefiting from the increase in the number of dealers and the launch of more products for consumers to buy, the company's share of its own brand sales increased from 8.2% in 2012 to 19.6% in the first half of 2015. Tianyun was just listed in Hong Kong in July this year at a price of HK$1.28 per share, with a net capital raised of HK$280 million. The chairman and management of the company hold 55.7% of the shares, while independent third parties and pre-IPO investors together hold 19.3% of the shares.

The main business revenue of Chinese canned vegetable and fruit manufacturers reached RMB 75.4 billion in the first eight months of 2015, an increase of 3.1% over the previous year, while the total profit of the industry increased 19.2% year-on-year to RMB 3.35 billion during the period. The per capita consumption of canned fruit products in China in 2013 was only 0.7 kg, while the per capita consumption of canned fruit products in the US was 6.0 kg during the same period. As urbanization continues to advance, per capita disposable income increases, and consumer demand for healthy and nutritious food increases, the per capita consumption of processed fruit products in China still has plenty of room to rise. Frost & Sullivan expects China's canned fruit sales to reach RMB 14.62 billion in 2019, with a compound annual growth rate of 6.0% in 2014-2019. The growth rate of domestic sales in China is far faster than exports, which is expected to reach 8.9% during the period, and the share is also expected to rise to 65.8% from 57.3% in 2014.

Tianyun's capacity utilization in 2012-2014 was above 85%, so revenue growth was limited. The company currently has two workshops and six production lines. The design capacity of the production facility is about 64,000 tons per year. One production line with an annual production capacity of 11,000 tons was only put into operation in March 2015. The other two production lines with a production capacity of about 20,000 tons are expected to be put into operation in the first quarter of 2016, and the problem of tight production capacity will be alleviated one after another. Tianyun is one of the original contract manufacturing suppliers for the most famous brands in the global fruit processing industry. The increase in popularity and trustworthiness after listing has helped the company obtain more overseas orders. On the other hand, domestic demand for processed fruit products is increasing, and the company will increase its market share through the following strategies: 1) increase the distribution system for domestic sales of its own brands to obtain more information on terminal sales of its own brands and competitors' products; 2) provide more support to dealers and attract more dealers to join to promote sales of their own brands; 3) launch new products such as fruit cream and develop new products such as fruit puree; and 4) increase marketing and publicity.

Benefiting from increased production capacity and rapid development of its own branded product business, we expect Tianyun's revenue and net profit compound annual growth rates to reach 29.5% and 29.9% respectively in 2014-2017, while due to the dilution effect of new shares, the compound annual growth rate of net profit per share is 18.1%. We think Tianyun's valuation should be slightly higher than that of juice concentrate companies listed in Hong Kong, similar to canned fruit companies listed globally, but at a discount compared to large food and beverage companies in Hong Kong. The valuation derived from the discounted cash flow model is HK$2.25 per share. After a 20% discount is given, the target price is HK$1.80, which is equivalent to 10.3 times the 2015 core price-earnings ratio (excluding listing fees) and 9.2 times the 2016 price-earnings ratio, which is also consistent with our findings in the industry comparison. Therefore, we rated Tianyun's investment as a “buy.” The main risks include a sharp rise in fresh fruit prices, food safety incidents in the industry and companies, and improper dealer behavior.