Investment highlights

For the first time, Tsubame House (01497) was given an outperforming industry rating. The target price was HK$12.00, based on the price-earnings ratio valuation method, corresponding to 20 times P/E in 24 years. The company is a bird's nest brand with a leading market share in the domestic market. It is deeply involved in the bird's nest industry chain and has leading performance in terms of sales scale, R&D capabilities and financial data. The reasons are as follows:

The evolution of categories in the bird's nest industry has broadened boundaries, and there is room for improvement in concentration. Bird's nest has become a high-end ingredient due to its characteristics such as precious ingredients and strong recognition. According to Frost & Sullivan data, the bird's nest market is about 40 billion yuan, with a CAGR of about 15% over the next 5 years. Among them, dried bird's nest and bowl swallow bind the social and health needs of high-end customers. Freshly stewed bird's nest and bird's nest+ products radiate public consumption. In 2022, the industry CR3 was 11%. Mainly due to the obvious price advantage of non-traceable bird's nest and the large number of small workshops, we believe there is a trend of increasing concentration in the industry.

Tsubameya is a stable and stable industry leader, and channels and supply chains are advantages. 1) Create a differentiated model for Wan Yan+ offline franchise stores. The company has mastered mainstream offline purchasing channels for bird's nest products, concentrating a high quality customer base with high consumption power and high stickiness; at the same time, it combines convenient and high-quality products with a professional high-end channel image to meet the gift needs of high-end people and has a differentiated competitive advantage; thanks to the continuous expansion of channels, the volume and price of Wanyan products has risen sharply in recent years. 2) High quality raw materials, our own supply chain provides the foundation for building a high-end brand. The company's raw material sources are highly reliable, and it is equipped with its own raw material processing base, and has a complete production capacity and quality control system. The supply of raw materials in Indonesia has increased in recent years, and the declining unit price of bird's nest imports hedged upward pressure on labor costs, and the company's gross margin increased from 42.7% in 2020 to 50.8% in 2022.

Looking ahead, the company is expected to continue its high growth through channels, products, and brands: 1) offline channel expansion: especially in high-tier cities, we expect the offline channel CAGR to be 18.2% in the next three years; 2) Product innovation: The company continues to innovate through existing product innovation, new product breakthroughs, and new category scenario development. Currently, it has a rich product matrix with potential single products such as room temperature freshly stewed bird's nest and bird's nest porridge.

3) Brand promotion: The company strengthened its brand promotion efforts during the pandemic to help buck the trend and boost channel confidence and consumer awareness. The sales expenses rate in 2022 was 29.1%, up 2.7/4.7ppt from 21/20. We believe that the company can rely on brand competition to obtain higher profitability and become a leading brand in the field of Chinese nourishment.

Profit forecasting and valuation

We expect the company's EPS to be 0.42 yuan, 0.55 yuan, and 0.66 yuan respectively in 2023-25, with a CAGR of 25.4%. With the expansion of channels and rich product lines, we expect the company's revenue to reach 19.7/22.7/2.63 billion yuan in 2023/24/25, an increase of 13.8%/15.2%/16.1% year-on-year. Considering the increase in the number of new products released and corresponding sales, we expect net profit deducted from non-return to mother for 2023/24/25 (mainly excluding listing expenses) to be RMB 223/25/257 million yuan, an increase of 16.3%/15.0%/19.7% over the previous year. We gave a target price of HK$12, corresponding to 20/16xP/E in 24/25. The current stock price corresponds to 16/13xPE in 24/25, with 21% upside compared to the target price, giving it a rating of outperforming the industry.

risks

Weak macro-consumption has put pressure on the industry's growth rate, the industry's competitive pattern has deteriorated, upstream raw material supply safety, downstream channel inventory backlog, new product performance falls short of expectations, bird's nest public opinion events, risk of dependency on a single product, and risks to the company's strategic sustainability after listing.