Recovery trend expected to continue in 2H22F
- Haitian achieved a strong recovery in sales growth of 22% yoy to Rmb6.3bn in 2Q22 after flattish yoy growth in 1Q22, above our expectation.
- Its net profit rose by 12% yoy to Rmb1.6bn in 2Q22, due mainly to raw material price pressure, which affected its gross margin.
- With some raw material prices exhibiting a declining trend since July, we expect the company’s GPM to improve hoh.
- Given the high base effect of 16% yoy sales growth in 2H21 and the current Covid-19 volatility, we expect sales to grow by 10.1% and 9.9% yoy in 2H22F and FY22F.
- Reiterate Add with a higher DCF-based TP of Rmb113.
Accelerating sales recovery trend in 2Q22
The company’s sales grew by 22% yoy to Rmb6.3bn in 2Q22. All three core condiments – soy sauce, oyster sauce and table sauce – achieved positive yoy sales growth of 17%, 12% and 4% in 2Q22, accounting for 81% of total sales. Other non-core condiments achieved sales of Rmb796m in 2Q22, up by 582% yoy, mainly because 1) the company increased its marketing investment in new products, such as vinegar and cooking wine, to help large distributors expand their sales scale; and 2) the company spent Rmb440m to acquire 67% equity interest in a new business, Zhejiang Jiucheng, on 1 Apr 2022. Zhejiang
Jiucheng specializes in producing tea oil products, which are a kind of cooking oil. This acquisition supplements Haitian’s product categories, in our view. The company consolidated Zhejiang Jiucheng’s revenue in 2Q22.
Distributor confidence improving
The company’s sales in the eastern, southern, central, northern and western China markets also achieved recovery growth by 6%, 27%, 21%, 28% and 20% yoy in 2Q22. Owing to the Omicron impact in 2Q22, sales growth in the eastern China market lagged behind that of other markets. At the end of June, the company had 7,147 distributors, and the average revenue per distributor rose by 14% yoy in 1H22. The company’s online sales grew by 113% yoy, driven by group purchase channel expansion, whose sales contribution improved by 2% pts to 4% in 1H22. As at the end of Jun, the company’s advances from distributors grew by 22% yoy and 8% qoq to Rmb2.8bn, indicating that distributor confidence is recovering.
Cost pressure likely to fall hoh
The company’s GPM declined by 2.7% pts to 36.6% in 1H22, mainly due to increasing raw material prices and logistics costs. With tighter control of expenses, the company’s distribution expenses ratio declined by 0.4% pt to 5.1% in 1H22 and its G&A expenses ratio remained flattish yoy. Its net profit margin declined by 2.1% pts to 25.1% in 1H22, and net profit rose by 1% to Rmb3.4bn. Although soybean prices remain high, the prices of other raw materials, such as sugar, wheat and glass bottles, started to fall in July. We expect the company’s cost pressure to fall hoh, and expect its GPM to improve to 37.2% in 2H22F, from 35.8% in 1H22 (37.4% for FY22F).
Reiterate Add with a higher DCF-based TP of Rmb113
We raised our EPS forecasts for FY22F–24F by 0.7–1.4% to reflect the company’s better sales recovery. We reiterate our Add rating for Haitian, as it has consistently strengthened its distribution network by attracting more large distributors with stronger market influence, and Haitian is providing more market support to help these large distributors gain market share. The company has also improved its product diversification through organic product development and external acquisitions. A risk is higher-than-expected raw material prices, which might squeeze its GPM. Our TP is derived from the DCF valuation method with 8% WACC and a 3% terminal growth rate (details on P3).