Investment highlights

For the first time, Wanchen Group (300972) was given an outperforming industry rating. The target price was 27.20 yuan. Based on the segmented valuation method, it corresponds to the projected price-earnings ratio of 12.9 times in 2025. The reasons are as follows:

The mass-selling snack industry is on the rise. The industry still has room to double in 3-5 years, and there are still great prospects for future development.

The current number of stores in the mass retail snack industry is about 0.03 million. Using three methods, we estimate that the industry has about 0.06-0.08 million stores, and there is still room to double. The industry's “two super” competition pattern has been formed. Currently, it is still in the horse racing field stage. The two leading factions only account for about 9-10% of the stores in the fiercely competitive region. It is not as intense as imagined, and the empty market is still large. We believe that the mass snack industry can last forever in the future, and differentiation and specialization are the development trends.

The company is in the leading camp, leading in comprehensive strength, and the strong are strong under the effect of scale. The company has five major advantages: 1) team advantages: integrating regional brands through the establishment of joint ventures and binding core management through equity incentives; 2) regional first-mover advantage: the company already has a first-mover advantage in parts of East China, North China and central China, and has strong store expansion capabilities; 3) Supply chain advantages: the purchasing side of the company has bargaining power, and the scale effect on the warehousing and logistics side is gradually reflected; 4) Operation management advantages: the professional 600-person operation team empowers the store with digital intelligence; 5) Brand advantage: create super brand symbols and theme songs to enhance brand awareness.

Store expansion is accelerating, individual stores are still climbing, and profitability continues to improve due to scale effects. The number of the company's stores is expanding rapidly, and there is a marked acceleration in 2024. We expect to exceed 0.015 million in the medium to long term. Single store revenue is still climbing, and franchisees are willing to open stores. Due to the scale effect, the company's gross profit margin and cost efficiency ratio increased, and profitability continued to improve.

What is our biggest difference from the market? The market believes that the mass snack industry has limited space to open stores, fierce competition, and pressure on the company's profitability and cash flow. We believe that the mass snack industry is booming and is still in the horse-racing stage. The competition between the two leading factions is not as intense as imagined, and the prospects for future development are broad.

Potential catalyst: The company's mass snack business will accelerate the expansion of stores across the country in 2024; the profitability of the company's mass snack business will improve quarterly due to scale effects.

Profit forecasting and valuation

We expect the company's EPS to be 0.72 yuan and 2.12 yuan respectively in 2024-25, and the CAGR will be 89.4% in 2022/25. The current stock price corresponds to 2024/25 28.1x/9.6x P/E. The first coverage gave an outperforming industry rating. Based on the segmented valuation method, the target price was RMB 27.2, corresponding to 37.6x/12.9x P/E in 2024/25, respectively, with an upward margin of 33.9%.

risks

Changes in demand in the mass snack market; new business development and integration risks; increased industry competition; risk of seasonal fluctuations in edible fungus sales prices; food safety issues; risk of equity pledges by major shareholders.