Morningstar | Haitian’s 1Q 2019 Profit Slightly Beat; Shares Remain Overvalued to Our CNY 56 FVE. See Updated Analyst Note from 26 Apr 2019
Wide-moat Foshan Haitian Flavouring and Food reported strong first-quarter results that were slightly ahead of our forecasts, with revenue up 17% and net profit up 22.8% year on year. The upbeat net profit growth was driven by a lower-than-expected selling expense/sales ratio, leading a 1.3-percentage-point improvement in net profit margin. We maintain our fair value estimate at CNY 56 per share. For the long term, we expect Haitian’s strong competitive advantages will continue to strengthen its leadership in the condiment industry. That said, we think the shares are overvalued at current levels, trading in 1-star territory.Revenue increased 17% year on year in the first quarter, slightly higher than our forecast. This promising growth stemmed from the stronger-than-expected oyster sauce segment. Oyster sauce revenue grew 24.6% from the year-ago quarter, higher than our 20% forecast, while soy sauce and dipping sauce sales were up 14.7% and 6% year on year, respectively, both in line with our estimates. Given that the company didn’t raise selling prices, the growth came from sales volume and mix. We think the sales growth for oyster and soy sauce segments will remain strong in 2019, driven by deeper sales channel penetration.
Gross margin in the first quarter dropped 93 basis points from last year to 45.8%, because of stronger growth of the lower-margin oyster sauce business and higher depreciation expenses for the technological transformation, while the prices of raw materials and packaging materials stabilized. The selling expense ratio was 12%, down 1.15 percentage points year on year, which was a surprise, mainly due to lower marketing and advertising costs in the first quarter. The administrative expense ratio also went down 20 basis points to 3.5%. However, we think the low operating expense ratio will not be sustainable during the coming quarters and expect the company to increase the expenses for distribution network expansion and new product launches.
Foshan Haitian Flavouring and Food Company Ltd. is a China-based company, principally engaged in the manufacture and distribution of seasonings. The Company's products portfolio consists of soybean sauces, general sauces, oyster sauces, chicken essence seasonings, vinegar and others, with soybean sauces, general sauces and oyster sauces as its main products. Its general sauces are applied in barbecue sauces, hot pot sauces and others. Its oyster sauces are applied in cooking, salad dressings and others. The Company conducts its businesses mainly within domestic markets.
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