Weak third-party sales likely in 4Q23F
- We expect double-digit yoy growth for related-party sales (with Haidilao) in 2H23F, driven by a low base in FY22 and good recovery in Haidilao’s table turn-over rate.
- We also expect third-party sales to drop yoy in 2H23F due to late launch of new products and a relatively high base in 2H22.
- We expect related-party sales growth to remain solid and third-party sales growth to pick up in FY24F, driven by the B2B channel and lower tier market expansion.
- Reiterate Add with a lower DCF-based TP of HK$18.6, as we believe Yihai has ample room to expand its third-party sales channels and launch new products.
A double-digit yoy decline in third-party sales likely in 4Q23F
Management said, during our Consumption Corporate Day on 16 Jan 2024, that third-party sales were weak in 4Q23F and likely dipped by the double-digits yoy due to a high base in 4Q22, which partially offset the mid-single-digit yoy sales growth in 3Q23. Management saw a sales recovery in the condiment segment in 3Q23, driven by the relaunch of products (i.e. beef tallow). However, the weak macroeconomics and high base in 4Q23 dragged down overall third-party sales growth. The convenient food segment was the biggest drag for sales growth in 2H23F, due to a high base in 2H22. Management expects the convenient food segment sales to decline by double-digit yoy in FY23F. Overall, we estimate third-party sales to decline by 7% yoy in FY23F (1H23: -14.8% yoy; 2H23F: -1.9% yoy).
Related-party sales to Haidilao remained strong in 2H23F
Haidilao’s (6862 HK, Add, TP: HK$30, CP: HK$12.8) table turnover rate has continued to recover in 2H23F. We estimate Haidilao’s table turnover rate rose to 80% of 2019’s level in FY23F, i.e. 4.8x table turnover rate in FY19. We expect Yihai’s sales to Haidilao (at 34% of its sales in 1H23) to stay strong in 2H23F. Management said related-party sales rose in the double-digits yoy in 2H23F. We expect related-party sales growth to be robust at 21.4% yoy in 2H23F vs. 34.6% yoy in 1H23. Yihai reduced its selling prices to Haidilao by the single digits in Sep 23 due to lower raw material prices, which would lower Yihai’s relatedparty GPM. Management said in the meeting that the company aims to maintain a GPM of
15% with its related party, ie Haidilao, from FY23 onwards (from c.25% average in the past 5 years). We expect Yihai’s overall GPM to widen by 0.8% pt yoy to 31% in FY23F (1H23: 30.5%, 2H23F: 31.4%). We expect 2H23F to see hoh higher GPM, driven by: 1) lower raw material costs, and 2) better product mix, since 2H is the high season for hotpot.
Expanding into B2B distribution channel and online channel
Management said in the Consumption Corporate Day meeting that it plans to grow its B2B channel sales from c.Rmb100m in FY23F to Rmb200m-300m in FY24F, through cooperation with smaller catering brands and restaurant chain brands. The company used to pay less attention to its online channel, but management said that it would focus on managing the online channels from FY24F onwards. Since Yihai’s Thailand plant has started operating since Apr 2023, we believe that overseas expansion would be a revenue growth driver in the next 3-5 years, by: 1) providing more tailor-made products for local markets, 2) penetrating more local distribution channels, and 3) supplying more condiment products to Super Hi (9658 HK, Not Rated), as Super Hi’s restaurants expand overseas.
Reiterate Add, with a lower DCF-based TP of HK$18.6
We cut our FY23-25F EPS forecasts by 5.8-13.0%, reflecting lower-than-expected third party sales growth. Hence, we derive a lower DCF-based TP of HK$18.6 (WACC: 10.7%, terminal growth rate: 3%). We reiterate our Add rating as we believe that Yihai has potential to improve its margins, supported by third-party sales recovery and increasing in-house production ratio. Better revenue growth in 1H24F is a potential re-rating catalyst. Key downside risks are: 1) a slower recovery in third-party sales, 2) weaker sales to Haidilao, and 3) higher raw material prices.
