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  • Stock has returned 27 per cent from its lowest point this year in August and analysts see a 24 per cent upside from here over the next 12 months
  • Company hosted analyst visits from UBS Asset Management, Pinpoint Asset Management, Fidelity and 24 other investors recently

Zhang Shidong

22 November 2021

What’s going on at Chongqing Fuling Zhacai Group? The maker of traditional pickled vegetables, typically served during breakfast, appears to be on the radar of curious stock analysts and money managers.

The company, located 1,670km west of Shanghai, has logged 27 visits from foreign institutional investors for research over the past two weeks, including UBS Asset Management, Pinpoint Asset Management and Fidelity International.

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That is the most recorded by any of the 2,500-odd firms listed in Shenzhen, according to the Securities Times based on stock exchange data. Vaccine maker Chongqing Zhifei Biological Products and machinery supplier Dongguan Yiheda Automation attracted 24 and 17 visits respectively.

The stock has returned 27 per cent to 32.29 yuan from its lowest level this year on August 31, outpacing the 2.5 per cent gain in the exchange’s Composite Index. Its decision to raise prices for the first time in three years amid a cost squeeze may be one reason for the bullish market consensus.

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“Fuling Zhacai has pretty strong pricing power, given its solid position within its industry and the lead over rivals in market share,” said Fu Rong, an analyst at Guosheng Securities, who has a buy recommendation on the stock. “That will fortify its earnings next year.”

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Overseas investors bought 2.68 million of its shares in the third quarter through the Stock Connect trading link with Hong Kong, according to stock exchange data, boosting their combined stake to 4.3 per cent.

Inflation has surfaced across many global economies, and there are signs that it could linger in the coming months, according to the Los Angeles-based Capital Group, which manages more than US$2 trillion of assets. Pricing power, always a positive for companies that can sustain it, may be a crucial competitive advantage in the year ahead, it said in a report, without referring to any specific country.

Those analyst visits to Fuling Zhacai have coincided with decisions by many manufacturers to raise prices to offset surging raw material costs at factory gates, despite facing a sharp slowdown in economic growth. On-the-ground checks could yield the next winners for global funds as Covid-19 vaccine makers, green-energy stocks and other cyclical bets become expensive.

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Pickled vegetables, or zhacai in Chinese, are mainly made of mustard or cabbage leaves and can also be used as condiments in cold dishes and soups. Zhacai constitutes almost 90 per cent of Fuling Zhacai’s revenue, while kimchi, dried turnips and others make up the balance.

The company increased the prices of its products by 3 to 19 per cent from November 12, according to a statement. Rivals like Foshan Haitian Flavoring also raised prices of its condiments by as much as 7 per cent last month, propelling a surge in its shares.

That could ease the pressure on margins for Fuling Zhacai. The price of cabbage, which accounts for 40 per cent of its raw material costs, has risen by 60 per cent this year as poor weather impacted supply from farms, according to Guosheng Securities.

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While the price increase will not reverse the fall in net income this year, the brokerage expects it to jump by 37 per cent in 2022.

Its shares will probably rise to 39.98 yuan in the next 12 months, implying a 24 per cent upside, according to consensus forecasts by analysts tracked by Bloomberg. The most bullish of them, Wang Yongfeng at GF Securities, has a 43.60 yuan price target. There are 21 buy and 1 hold recommendations, with no sell rating on the stock.

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“The price hikes will help alleviate manufacturers’ cost pressure and boost dealers’ profits,” analysts led by Chen Yantong and Ye Qianyu at Everbright Securities wrote in a report last week. “With the improvement in demand, sentiment on the sector will continue to get better.”