Investment highlights
Covering October Rice Field for the first time (09676), the company's target price is HK$31.00, corresponding to 54 times P/E in 24 years. The company is strategically positioned as “good rice in Northeast China”. Based on high-quality products, it relies on leading brands and efficient channels to guarantee profit margins to feed back to the upstream and accelerate the branding of basic ingredients. We are optimistic about the company's broad development prospects in the trillion-yuan kitchen staple food market. The reasons are as follows:
In the trillion-yuan kitchen staple food market, there is plenty of room for improvement in pre-packaging rates and concentration.
1) Scale: According to Frost & Sullivan, China's kitchen staple food/rice market reached 1.9 trillion yuan/7234 billion yuan respectively in '22. Increased demand for high-quality prepackaged products drives structural upgrades. The 2018-22 bulk/prepackaged rice and multigrain market CAGR was 0.3%/8.5%, respectively. In 2022, the share of domestic prepackaged rice grains was 19.4%, and there is still a lot of room for improvement compared to the level of 52.9%/41.8% in Japan/South Korea; 2) Pattern: In '22, the CR5 of prepackaged rice grains in China was only 8.9%, compared to the 60%/21%/15% concentration of edible oil/flour/condiments, there is still plenty of room for improvement.
Based on high-quality products, supported by leading brands, efficient channels, and excellent teams. 1) High-quality products: strategically lay out the five core grain-producing regions, lock in high-quality raw materials, and rely on a strong supply chain to ensure product quality; 2) Leading brands: strategically positioned “good rice in Northeast China”, placed at the top of the rice category pyramid, successfully established the three major brand matrices of “firewood garden” positioned at the middle and high-end, “October rice field” positioned in the mass market, and “Fuxiangren” with value for money. Continue to consolidate brand value through omni-channel marketing; 3) Efficient channels: Online channels maintain a leading edge and grow faster than the market, while successfully developing KA, offline channels such as distribution, etc., to establish nationalization Sales network; 4) Excellent team: The team has been deeply involved in the kitchen staple food field for 20 years, and has a forward-looking layout of emerging channels in line with channel changes.
Category expansion, deep channel cultivation, and supply chain integration drive future growth. 1) Expanding categories: The company strategically and rapidly explores new high-potential and high-margin categories such as grains, beans, and dried goods, and further enriches the differentiated brand matrix to support profitability; 2) Expanding channels: the company continues to strengthen offline channels such as modern supermarkets and direct sales customers to achieve deeper channel network roots and wider coverage; 3) Consolidate the supply chain: The company expects the design capacity to reach 1.95 million tons in '26, 1.7 times that of '22. At the same time, the company continues to implement supply chain management capabilities through digitalization, warehousing and logistics expansion, etc.
What is our biggest difference from the market? We believe that the market underestimated the company's ability to expand offline channels with the brand potential saved online, and the company's ability to replicate the successful experience of individual rice products to develop new categories.
Potential catalysts: category development and new product development have exceeded expectations, and the speed of offline channel layout has exceeded expectations.
Profit forecasting and valuation
We expect the company's EPS for 23-24 to be 0.38 yuan and 0.52 yuan, respectively, and CAGR of 23% (adjusted net profit). For the first time, coverage gave a rating of outperforming the industry. The current stock price corresponds to 44 times P/E in '24, giving a target price of HK$31, corresponding to 54 times P/E in '24, and there is room for 22% growth.
risks
Food safety and quality control, channel maintenance and expansion, and price fluctuations due to weather and policy changes.