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Morningstar | We Expect Haitian to Finish Strong in 2018; Raising FVE to CNY 49.50, but Shares Remain Overvalued

Despite China’s catering sales growth decelerated to 9.5% in 2018 from 10.7% in 2017, we expect wide-moat Foshan Haitian Flavouring and Food to finish strong in 2018, with revenue and net profit up 16% and 19% year on year, respectively. Management expects its revenue and profit growth will retain at mid-teens rate for 2019, driven by strong performance from the soy sauce and oyster sauce segments, as well as some contributions from new product offerings, such as vinegar, hot-pot sauce, and Chinese pickles. It projects the sales from soy sauce and oyster sauce will increase at double digits rates, while dipping sauce revenue will grow at single digit rate.

Although the company’s guidance was slightly higher than our expectation, we do not intend to alter our forecasts at the moment. We believe Haitian will continue to grow ahead of the market and gain market share with its strong intangible brand equity and entrenched distribution network amid the ongoing premiumization trend. We anticipate the company’s revenue and operating profit to grow at compound annual growth rates of 11.5% and 12.7% through 2022. We also expect the company’s profitability will further improve through better product mix, as higher-end product growing faster than lower-end products. High-end product sales mix is expected to increase to 40%-50% from 35% currently.

We increase our fair value estimate for Haitian to CNY 49.50 per share from CNY 48, owing to the time value of money. That said, we still think the shares are overvalued at current levels, trading at a 50% premium to our fair value estimate.