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Morningstar | Haitian’s 3Q Results Largely in Line; FVE Remains at CNY 48, but Shares Look Overvalued. See Updated Analyst Note from 30 Oct 2018

Wide-moat Foshan Haitian Flavouring and Food, or Haitian, posted a solid third-quarter result largely in line with our expectation, with revenue and net profit increasing 17% and 23% year on year, respectively, driven by strong sales volume for soy sauce and oyster sauce, as well as improving profitability. Although the market seems to be concerned that demand will be curbed as the Chinese economy weakens, we think the condiment industry will be less impacted and expect the company is on track to achieve its 2018 full-year sales and profit targets.

Our wide moat and stable trend ratings for Haitian remain unchanged and our CNY 48 fair value estimate is intact, as our long-term view remains positive. We believe the company will further benefit from the ongoing premiumization trend, as consumers are willing to spend more on high-end food products, and gain market share with its strong brand power and extensive distribution network. We forecast the company’s revenue and net profit to grow at a compound annual growth rate of 11.5% and 12.8%, respectively, through 2022. However, we think the current share price remains unattractive, as it is a 22% premium to our fair value estimate.

Third-quarter revenue was up 17% year on year to CNY 3.99 billion, thanks to management’s effective distribution network expansion plan online and offline. By product segment, soy sauce and oyster sauce sales grew 15% and 20%, respectively, while the dipping sauce sales increased at a single-digit rate.

Gross margin declined 1.37 percentage points year on year to 45.1%, due to higher packaging and raw materials costs. Meanwhile, we expect the recent increase of soybean costs will likely have more impact in 2019 as Haitian secures its procurement on a long-term basis. That said, we believe the gross margin will gradually improve via product upgrades and production efficiency improvement. Due to lower operating expense ratio, operating profit and net profit rose 24% and 23%, respectively, to CNY 1.07 billion and CNY 883 million, with operating margin and net margin improving 1.5 and 1.1 percentage points, respectively, to 24.1% and 23.4%.