Haitian: Product Mix Shift to Drive Sales Growth, but Will Keep Margins Below Historical Levels

We tone down our 2024-27 margin assumptions for wide-moat Foshan Haitian Flavouring and Food to account for the product mix shift to newer condiment categories from traditional soy sauce. Revenue and net profit growth in 2023 should stay suppressed as the company works through clearing channel inventories, but this is conducive to rebounding top-line growth in 2024. New categories such as compound condiments, cooking wine, and vinegar could continue to fuel revenue growth in our view, but these products generate lower margins than mainstay soy sauce and oyster sauce. Consequently, we cut net income projections between 2024 and 2027 by 1%-6% and reduced our fair value estimate to CNY 47 per share, from CNY 50. Our fair value implies 42 times 2024 P/E and 29 times enterprise value/EBITDA. Haitian remains the category leader in the condiments sector, given its capability to leverage its distribution network and expand category coverage. Nonetheless, investors could be concerned about its near-term challenges grappling with industry competition. Our assumptions already bake in lower-than-historical margin levels over the next five years as fierce competition leads to a higher expense ratio and muted soy sauce growth. We think shares remain undervalued.