Returning to a healthy growth trend
- Yanghe’s sales grew by 22% yoy to Rmb18.9bn, and net profit grew by 22% yoy to Rmb6.9bn in 2Q22, above our estimates, mainly due to better expenses control.
- With a high base of 28% yoy sales growth in 2H21 and strong advances from distributors, we now expect sales to grow by 9% yoy in 2H22F and 17% yoy in FY22F.
- Reiterate Add with a higher DCF-based TP of Rmb235
Expanding marketing activities to mitigate the Omicron impact
In 2Q22, in the company’s home market, Jiangsu province, some cities were temporarily affected by Omicron outbreak. When the pandemic situation was relaxed, the company officially launched a special marketing campaign, called “Summer storm – 70 days of hard work”, to utilize all its resources to support market-oriented development from 21 Apr. The company also increased its marketing investment in its premium product, Blue Dream, in both its home market, Jiangsu province, and outside markets. Sales in its home market maintained solid growth of 19% yoy in 1H22, despite the Omicron impact, accounting for 46% of total sales in 1H22. Sales in outside markets grew even faster, by 25% yoy in 1H22. The company’s total sales rose by 22% yoy in 1H22, driven mainly by 17% yoy volume growth. In 2Q22, sales grew by 17% yoy, but net profit rose by only 6% yoy, mainly due to a one-off financial asset revaluation loss. Excluding this impact, the company’s core earnings (Figure 1) rose by 29% yoy in 2Q22. Advances from distributors rose by 43% yoy to Rmb7.9bn as at the end of Jun, implying distributors’ strong confidence in the upcoming peak season sales in 3Q22F.
Newly upgraded product received good market feedback
In 2Q22, the company launched a new version of Blue Sea products, replacing the old version in all distribution channels. The new Blue Sea product is sold at a retail price of Rmb140 per bottle in 2Q22, 7% higher than the old one. Based on our estimates, Blue Sea accounts for 30%+ of total sales in FY21. This new product has received a good market response and achieved strong volume growth in 2Q22. So the company’s sales of products with an ex-factory price above Rmb100 per bottle grew by 29% yoy in 1H22, accounting for 86% of total sales. But its GPM declined by 0.5% pts to 73.9% in 1H22, due mainly to product structure changes, since the sales contribution of Blue Sea, which has a lower margin, increased. Sales of products with an ex-factory price below Rmb100 per bottle contracted by 11% yoy in 1H22.
We expect a stable margin in FY22F
In our view, the company has continued to implement distributor adjustments and devoted more resources to large distributors to build a good position in local markets. As at the end of Jun, the company had 7,769 distributors, for a net reduction of 373 ytd. Average revenue per distributor rose by 43% yoy to Rmb2.4m in 1H22. Despite being affected by the Covid19 situation, its distribution expenses ratio declined by 0.8% pt to 7.9% in 1H22. We expect the company to increase its marketing investment in 3Q22F to boost sales. We expect the net profit margin to remain stable at 29.8% in FY22F vs. 29.6% in FY21.
Reiterate Add with a higher DCF-based TP of Rmb235
We raised our EPS forecast for FY22F–24F by 2.0–3.1% to reflect margin improvement. We reiterate our Add rating, as the company completed the product upgrade for the entire Blue classic brand, which accounts for c.80% of total sales in FY21.When its share option plan is implemented in FY21-23F, we expect the company to strengthen its market position in Jiangsu province and accelerate its expansion in outside markets. A risk is intensifying market competition in Jiangsu province. Our TP is derived from the DCF valuation method with 11% WACC and a 3% terminal growth rate (details on P2).