20 November 2018 China EQUITIES MacVisit: Qianhe Condiment and Food 603027 CH Not rated High-end condiment player in Southwest Stock price as of 16/11/2018 RMB 16.93 GICS sector Consumer staples Key points Market cap RMBm 5,523 Qianhe has turned its focus to higher-margin segments and products. Avg Value Traded (3m) RMBm 82 12m high/low RMB 27.49/14.97 The company is expanding to the restaurant channel. PER FY19 x 25.4 Its 2017-20 management incentive plan is underway. P/BV FY 19 x 3.8 Historical financials Event YE Dec (US$m) 2015A 2016A 2017A We recently visited Qianhe Condiment and Food headquarters in Sichuan Revenue 624 771 948 Meishan and organised an investor meeting with management. The company % growth -4.2 23.6 23.0 develops, produces and sells soy sauce, vinegar and caramel color, with EBITDA 110 140 217 57.5% sales coming from Southwest in FY17. During the meeting, investors % growth 18.3 27.2 54.8 EPS 55.44 66.70 45.00 focused on its product mix upgrade trend and expansion to the markets across % growth 25.6 50.4 43.9 the country. They were also interested in the management incentive plan. EBIT Margin 13.7 14.1 18.0 Source: Company data, FactSet,November 2018 Key findings Focus on higher-margin segments and products. Qianhe used to provide Share price performance vs. CSI 300 caramel colour for Haitian until 2015 and Lee Kum Kee until this year, which Rmb contributed 38% sales in FY15. The company now focuses more on high- 50 6,000 margin condiment segments, with soy sauce, caramel colour and Vinegar 40 5,000 4,000 accounting for 53%, 23% and 16% of FY17 sales. As a result, gross margin 30 3,000 improved by 6.2ppt to 43.3% from 2015 to 2017. Meanwhile, according to 20 2,000 mgmt., ~60% of its sales come from high-end products, such as additive-free 10 1,000 soy sauce, with retail price above Rmb10/bottle, and the rest 40% from mid-to- 0 0 low end products with all sales coming from the Southwest. Moreover, the Jul-17 Jul-18 Jul-16 company holds a positive view on the cooking wine segment and does not rule Oct-16 Oct-17 Oct-18 Apr-16 Apr-17 Apr-18 Jan-17 Jan-18 603027 CH Equity CSI 300 out the possibility of acquiring a brand with good distribution channels. *Relative to the market. Expanding to the restaurant channel. In FY17, 95% sales of Qianhe came Source: FactSet, November 2018 from the retail channel and 5% from business partners with focus on high-end restaurants. Since July 2018, the company has built a salesforce of 100 to Share Price Driver penetrate mass restaurants by offering products under a new brand, Thematic Dongpohong (东坡红). Although the gross margin in the restaurants channel is Growth lower than that of the retail channel, the expansion should help digest 100k Value tons soy sauce capacity that will come on stream in October 2019, per mgmt. Event 2017-20 management incentive plan. The company launched the Source: Macquarie Research, November 2018 management incentive plan to offer 106 employees 604.5mn shares at Rmb9.31/sh. Based on top/bottom lines in 2016, growth rate targets are 20%/50% in 2017, 40%/80% in 2018, 70%/150% in 2019 and 100%/220% in 2020. Two restrictions should be unlocked: 1) either company’s sales or net profit targets mentioned above are met; and, 2) personal KPI is qualified. Financials Qianhe Condiment and Food reported 9M18 revenue of Rmb746.1m, up 8% YoY, with net profit up 66% YoY to Rmb174.0m due to a Rmb69m one-off gain Analysts from land asset disposal. 3Q18 revenue increased 28% to Rmb267.2m, with Macquarie Capital Limited net profit increasing 32% to Rmb38.2m. Linda Huang, CFA +852 3922 4068 [email protected] The stock is trading at 25x FY19E PER, compared with the average 27x Cici Yu +86 21 2412 9078 FY19E PER of domestic peers, all based on Bloomberg consensus. [email protected] Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. Macquarie Research MacVisit: Qianhe Condiment and Food Ownership (As of 3Q18) History and corporate governance Wu Chaoqun, 43.53% 1996, the company started with production and distribution of caramel colour. Wu Jianyong, 12.80% 2001, it expanded to the downstream industry, the production Beijing Kuanjiebohua Investment Center, 4.32% and sales of soy sauce and vinegar. Wu Xueming, 1.56% 2010, it acquired Liuzhou/Weifang/Shijiazhuang Hengtai. Pan Xuejun,0.98% 2012, it acquired Sichuan Hengji China Merchant Bank Xingquan Investment Fund, 0.86% 2016, listed in the Shenzhen Stock Exchange. National Social Security Fund 404 portfolio, 0.61% Balance sheet data and refinancing (As of 3Q18) Management and Directors background Cash and bank balance of Rmb715.5m Mr. Wu Chaoqun, aged 49, Chairman, founded Qianhe with Wu Xueming in 1996. He previously served as deputy general Fixed asset and construction in process of Rmb639.7m manager, and general manager at the company. Short-term and long-term debt: Rmb100m Mr. Wu Xueming, aged 65, Board Director, founded Qianhe Net cash/equity ratio at 48.3% with Wu Chaoqun. He was appointed as Vice Chairman of China Condiment Association’s 4th and 5th council in 2008 and 2013, respectively. Mr. Wu Jianyong, aged 32, serves as General Manager of the condiment sales department. Latest results highlights (3Q18) Latest results highlights (FY17) Revenue grew by 28% to Rmb267.2m in 3Q18. Revenue grew by 23% to Rmb948.2m in FY17. Gross margin expanded by 4.9ppt to 46.5% in 3Q18. Gross margin expanded by 2.3ppt to 43.3% in FY17. EBIT margin increased by 1.4ppt to 17.4%. EBIT margin was up by 3.9ppt to 18.0% in FY17. Net profit increased by 32% to Rmb38.5m. Net profit increased by 44 % to Rmb144.1m. Fig 1 Revenue breakdown by product (Rmb m) Fig 2 Gross margin by product GPM% 100% 60.0% 80% 50.0% 60% 40.0% 40% 30.0% 20% 20.0% 0% Soy sauce Caramel color Vinegar Soy sauce Caramel color Vinegar Other business Other business Total Source: Company data, November 2018 Source: Company data, November 2018 20 November 2018 2 Macquarie Research MacVisit: Qianhe Condiment and Food Fig 3 Revenue breakdown by region (Rmb m) Fig 4 Gross margin by region (%) GPM% 100% 60.0% 80% 50.0% 60% 40.0% 40% 30.0% 20% 20.0% 0% East South Central North East South Central North Northwest Southwest Northeast Other regions Northwest Southwest Northeast Total Source: Company data, November 2018 Source: Company data, November 2018 Fig 5 Sales volume ('000 tons) Fig 6 Average selling price (Rmb/t) '000 tons RMB/ton 6,000 100 5,000 80 4,000 60 3,000 2,000 40 1,000 20 - FY2015 FY2016 FY2017 Soy sauce Caramel color Vinegar Soy sauce Caramel color Vinegar Source: Company data, November 2018 Source: Company data, November 2018 Fig 7 Gross margin trend (%) Fig 8 Operating margin trend (%) GP margin % OP margin % 80.0% 45.0% 70.0% 40.0% 60.0% 35.0% 30.0% 50.0% 43.3% 41.0% 37.2% 25.0% 40.0% 32.5% 20.0% 18.0% 30.0% 13.7% 14.1% 15.0% 10.9% 20.0% 10.0% 10.0% 5.0% 0.0% 0.0% FY2014 FY2015 FY2016 FY2017 FY2014 FY2015 FY2016 FY2017 Source: Company data, November 2018 Source: Company data, November 2018 20 November 2018 3 Macquarie Research MacVisit: Qianhe Condiment and Food Fig 9 Net profit margin trend (%) Fig 10 Net debt to equity ratio (%) NP margin % 30.0% 40.0% 35.0% 20.0% 30.0% 10.0% 25.0% 20.0% 0.0% 15.2% 15.0% 13.0% 10.7% -10.0% 10.0% 8.1% 5.0% -20.0% 0.0% FY2014 FY2015 FY2016 FY2017 -30.0% FY2014 FY2015 FY2016 FY2017 Source: Company data, November 2018 Source: Company data, November 2018 Fig 11 Free cash flow (Rmb m) Rmb mn 200.0 150.0 100.0 50.0 - (50.0) (100.0) (150.0) (200.0) FY2014 FY2015 FY2016 FY2017 Operating cash flow Capex Free cash flow Source: Company data, November 2018 20 November 2018 4 Macquarie Research MacVisit: Qianhe Condiment and Food Qianhe Condiment and Food (603027 CH, not rated) Interim Results 2H16A 1H17A 2H17A 1H18A Annual Results 2014A 2015A 2016A 2017A Revenue m 415 480 468 479 Revenue m 651 624 771 948 Gross profit m 172 210 201 209 Gross profit m 212 232 316 411 Cost of goods sold m 243 271 267 270 Cost of goods sold m 439 392 455 537 EBITDA m 71 112 105 187 EBITDA m 93 110 140 217 Depreciation m 15 22 23 24 Depreciation m 21 24 30 45 Amortisation 1 1 1 1 Amortisation 1 1 2 2 EBIT m 56 89 81 162 EBIT m 71 86 109 170 Net interest income m 2 0 (1) (2) Net interest income m (7) (7) 1 (1) Forex gain/loss m 0 0 0 0 Forex gain/loss m 0 0 0 0 Other pre-tax profit m (17) 1 0 0 Other pre-tax profit m 0 2 12 2 Pre-Tax Profit m 63 90 80 161 Pre-Tax Profit m 64 81 122 171 Tax expenses m (11) (15) (12) (25) Tax expenses m (11) (14) (22) (27) Net profit m 52 75 69 135 Net profit m 53 67 100 144 Minority interest m 0 0 0 0 Minority interest m 0 0 0 0 Reported Earnings m 52 75 69 135 Reported Earnings m 53 67 100 144 Reported Earnings m 52 75 69 135 Reported Earnings m 53 67 100 144 EPS (rep) ₵ 29 24 21 42 EPS (rep) ₵ 44 55 67 45 EPS (adj) ₵ 29 24 21 42 EPS (adj) ₵ 44 55 67 45 EPS grow th yoy (adj) % 1 (38) (25) 76 EPS grow th yoy (adj) % (25) 26 50 44 PE (rep) x NA NA 67 40 PE (adj) x NA NA 67 40 EBITDA margin % 17.1 23.4 22.4 39.1 EBIT margin % 13.4 18.6 17.4 33.9 Total DPS ₵ NA NA 19.0 13.0 Revenue grow th % 28 35 13 (0) Payout ratio % NA NA 28.5 28.9 EBIT grow th % 29 67 46 82 Weighted average shares m 120 120 150 321 2014A 2015A 2016A 2017A Cash Flow Analysis 2014A 2015A 2016A 2017A Profit and Loss Ratios Revenue growth % 6.2 (4.2) 23.6 23.0 Net income m 53 67 100 144 EBITDA grow th % (9.5) 18.3 27.2 54.8 Depreciation & Amortisation m 22 25 31 47 EBIT Grow th % (14.5) 20.5 27.4 56.2 Other non-cash adjustments