Investment advice
China's pet food industry is still in the early stages of rapid penetration. Emerging brands continue to emerge, and brand competition is still fierce. However, we found that although emerging brands are starting up fast, there is a certain ceiling on their scale. As a leading domestic product, Gaibao is growing better than the industry under a high base. How can we understand the strengthening of its brand competitive advantage? We believe that through strong product support, pan-entertainment marketing, and grasping online channels and direct sales dividends, the leading brand potential has been formed. Currently, it shows strong price increase ability, high repurchase rate, and strong channel control. It is highly scarce, and is expected to break out of internal volume and continue its excessive growth trend.
rationales
Strong brand strength is reflected: strong ability to raise prices, high repurchase rate, and strong channel control. 1) Strong ability to raise prices: The average sales price of the market has continued to decline over the past 23 years. The company's unit price has bucked the trend, and the promotion has declined significantly, breaking away from within the brand. The 1Q24 online unit price of McFudi/Frégart increased 68%/138% compared to 1Q17, and the 618 discount rate for staple foods/snacks fell from 38%/30% in '21 to 12% in '24. 2) High repurchase rate: The high repurchase rate reduces dependence on major promotions. The share of McFudi's online sales in October-November fell from 32% in '17 to 23% in '23. 3) Strong channel control: Leading brands bring their own traffic back to the channel, and the platform favors resources for the first place. McFuddy/Fregat has the leading share of low-rate potential talents, and Douyin's self-broadcast revenue share rose from 29%/33% in '21 to 67%/49% in '23.
Brand matrix sorting: Using McFudi as the foundation, we are deeply involved in the middle and high-end, using Frégart and Wang Zhenchuan as breakthroughs and precision to develop the high-end cat and dog racetrack, and jointly build the number one domestic pet product. In 2013, the independent brand McFudi was established. According to Euromonitor, the company's market share in the domestic pet food industry reached 5.5% in '23, and the overall brand, cat food, and dog food tracks all ranked first among domestic brands. In recent years, the company's brand matrix has been gradually improved. The main brand, McFudi, focuses on the middle and high-end main customer groups; Frégart and Wang Zhenchuan are each on the high-end cat food and dog food tracks; Waggin' Train positions itself as an American high-end dog snack brand, focusing on overseas.
How is strong brand power formed: strong product support, pan-entertainment marketing, and seizing online & direct sales dividends.
1) Strong product strength support: The three dimensions of production, R&D and product innovation create strong product strength, help brands differentiate and break the game, and are also the underlying support for continuous excessive growth; 2) Pan-entertainment marketing: pioneering pan-entertainment marketing, occupying the psychological share of young customers, and the brand search index continues to rise. The business promotion and sales service rate has been around 19% in the past 4 years, and the amount of expenses has widened the gap with revenue growth and competition; 3) Seize e-commerce dividends: McFudi opened stores on Tmall and JD in '13, and deployed Douyin in '21, ranked first and second in the Tmall/JD/ Douyin pet sales list in '24, leading the industry with an online market share of 6.6%; 4) Increase the share of direct sales: Direct sales accounted for 43%, gross profit margin 57% in '23, helped increase the share of high value-added direct sales, which helped increase the share of high-value-added direct sales Consumer preferences create a closed loop to enhance brand potential.
Profit forecasting and valuation
Keeping the profit forecast unchanged, the current stock price corresponds to 32/25 times P/E for 24/25. The outperforming industry rating and target price of 69 yuan remain unchanged, corresponding to 50/40 times P/E in 24/25, with 57% upward space.
risks
Increased competition in the domestic market; fluctuations in raw material prices and exchange rates; trade frictions and overseas business risks.