【行业研究报告】洪九果品-Harvesting the low-hanging fruits

PLEASEREADTHEANALYSTCERTIFICATIONANDIMPORTANTDISCLOSURESONLASTPAGEPLEASEREADTHEANALYSTCERTIFICATIONANDIMPORTANTDISCLOSURESONLASTPAGEMOREREPORTSFROMBLOOMBERG:RESPCMBRORhttp://www.cmbi.com.hkChinaConsumer–FoodandBeveragesJosephWong(852)39000838josephwong@cmbi.com.hkStockDataMktCap(HK$mn)40,381Avg3mthst/o(HK$mn)20.6752wHigh/Low(HK$)41.8/10.0TotalIssuedShares(mn)932Source:BBGShareholdingStructureMr.DengHongjiu20.66%Alibaba11.66%ChinaAgricultural7.68%Source:BBGSharePerformanceAbsoluteRelative1-mth6.6%14.1%3-mth33.8%21.6%6-mthn.an.aSource:BBG12-mthPricePerformanceSource:BBGRelatedReports1.MengniuDairy(2319HK)–Alaggardplaytothisearly-stagedconsumption-ledrecovery–21Feb20232.YiliInd(600887CH)–Sharescouldrallyinreliefonbackofaninline4Q22–21Feb20233.KweichowMoutai(600519CH)–ProxyofChina’sconsumption-ledrecovery–06Feb20234.ChinaConsumer–Sector’sbull-runcouldtakeabreatherfromhere-31Jan2023271217222732374247Sep-22Dec-22Mar-236689HKHSI(rebased)(HK$)BUY(Initiation)TargetPriceHK$44.0Up/Downside52.8%CurrentPriceHK$28.813Mar2023Afast-growingvanillafruitwholesaler;initiateatBuyHongjiuisChina’slargestfruitdistributorwithoperationsextendingintoSoutheastAsia.Leveragingitscross-regionbusinessmodel,Hongjiuhassuccessfullymorphedintoaconsolidatorwithindustry-beatinggrowththatstemsfromitscompetitiveadvantages,including1)amulti-brandportfoliothatenablesthecreationofbrandequityandhencebrandpremiumthatsustainspricemark-ups,2)directprocurementfromplaceoforiginthatensuressupplystabilityandbest-of-breedquality.Onthebackend,theseinitiativesarebackbonedbyacostefficientend-to-endsupplychainandanation-widedistributionnetworkthatfacilitatesdatacirculationandvaluemonetization.RelativetoPagoda,Hongjiuisavanillafreshfruitdistributorandyetwithamuchlongercashconversioncycle.Whilethislookstohaveraisedthemarket’seyebrow,inourview,managementhastakenappropriatestepstocontaintheimpacttoshareprice.Webelieve,inadditiontoearningsdelivery,therestorationofmarketconfidenceshouldrepresentyetanotherreratingcatalysttoHongjiugoingforward.Hongjiuisbothgrowth-generativeandmargins-enhanciveWeprojectHongjiutodelivera40.0%3-yearrevenueCAGR,outgrowing7.8%oftheindustry,perCIC.Inourview,anacceleratingbrandedfruitssalesmix,from75.9%in2019to90.4%in2024E,drivestheoutperformance.Alternatively,weenvisagethegrowthwillbeunderpinnedbyfastergrowthindurian,longan,andmangosteenetc,inwhichHongjiuisunchallengedlyleading.BothshouldaidGPMtoexpandfrom17.5%in2022Eto18.1%in2024E.OCFturnaroundisaroundthecornerunderarenewedbusinessfocusHongjiuhasoncecommittedtotrade-offapositiveOCFforafast-growingbusinessthatmanifestedintomarketleadershipandpricingpower.Enteringintoanewphaseofthebusinesscycle,wethinkHongjiuwillfine-tuneitsexpansionpace(fromprevious100%-ishto40%-ish)inbalanceformorefruitfulmarginsandhealthiercashflow.Forinstance,thecompanywillshortenitsprepaymenttermwithitssuppliersandtightenthelimitofthecredittermwithitsdownstreamcustomersinordertorevampitsOCF/FCFtopositivebyend-23/24E,inourview.Valuation–thestockistradingat5.5xend-23EP/EOurTPisbasedon8.4xend-23EP/Ethatrepresents+1sdaboveitsvaluationaveragesinceIPO.Inourview,themethodologyreflects1)afastertoplinegrowththanitslocal/globalpeers,2)arelativelyhighersensitivitytoChina’sre-openinggivenarapidlyrecoveringon-tradeconsumption.