Company Reports

Wide-moat Foshan Haitian reported 2023 and first-quarter 2024 results, with both revenue and net income below our estimates for 2023. However, we think the first quarter was off to a good start, with both sales and earnings exceeding our projections. We leave our net income projections largely unchanged for 2024-28 and retain our fair value estimate at CNY 47 per share, which implies 42 times 2024 price/earnings, 31 times EV/EBITDA, and 1.4% dividend yield. Haitian’s share prices appeared to have stabilized over the past few quarters, as investors likely see the company bottoming out from the product and channel transition process. We think first-quarter results were constructive signs for its sales recovery, and we continue to see shares as undervalued.

Foshan Haitian strives to command competitive advantage in the condiment industry in China through scale, with large sales volume and high velocity creating stickiness among distributor partners and driving down operating costs. The company’s operating expenses ratio is among the lowest versus peers, resulting in mid-20% net margin levels. Through years of channel endeavors, the company has set up the most extensive distribution network in the industry. With its focus on the mass market segment, it has established a leadership position across the catering and retail channels in the key condiment category, soy sauce, which contributes more than half of its revenue. Competitive product pricing, enabled by cost advantage, is also key for its major customers, catering outlets. We see this as a virtuous cycle that allows Haitian to maintain its leading position in the industry and generate excess return consistently. Between 2010 and 2020, Haitian’s revenue and net income have grown at CAGRs of 15% and 26%, respectively.

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.

Foshan Haitian strives to command competitive advantage in the condiment industry in China through scale, with large sales volume and high velocity creating stickiness among distributor partners and driving down operating costs. The company’s operating expenses ratio is among the lowest versus peers, resulting in mid-20% net margin levels. Through years of channel endeavors, the company has set up the most extensive distribution network in the industry. With its focus on the mass market segment, it has established a leadership position across the catering and retail channels in the key condiment category, soy sauce, which contributes more than half of its revenue. Competitive product pricing, enabled by cost advantage, is also key for its major customers, catering outlets. We see this as a virtuous cycle that allows Haitian to maintain its leading position in the industry and generate excess return consistently. Between 2010 and 2020, Haitian’s revenue and net income have grown at CAGRs of 15% and 26%, respectively.

Wide-moat Foshan Haitian continues to navigate its strategy of widening its distribution channel and diversifying its product range to meet changing customer trends. This transition is weighing on Haitian’s performance more than we anticipated, with third-quarter revenue and profit slightly below our estimates. We keep our revenue projection for 2023 but lower our net income forecast to CNY 5.78 billion, from CNY 6.17 billion, to account for operating deleverage. Fourth-quarter margins should remain suppressed as the company continues to push through inventory adjustments and product transition. We expect revenue growth to rebound in 2024 as Haitian cycles a low base and inventory returns to a healthy level.

Foshan Haitian strives to command competitive advantage in the condiment industry in China through scale, with large sales volume and high velocity creating stickiness among distributor partners and driving down operating costs. The company’s operating expenses ratio is among the lowest versus peers, resulting in mid-20% net margin levels. Through years of channel endeavors, the company has set up the most extensive distribution network in the industry. With its focus on the mass market segment, it has established a leadership position across the catering and retail channels in the key condiment category, soy sauce, which contributes more than half of its revenue. Competitive product pricing, enabled by cost advantage, is also key for its major customers, catering outlets. We see this as a virtuous cycle that allows Haitian to maintain its leading position in the industry and generate excess return consistently. Between 2010 and 2020, Haitian’s revenue and net income have grown at CAGRs of 15% and 26%, respectively.

Wide-moat Haitian Flavouring and Food Company's second-quarter 2023 results disappointed, amid a bumpy transition in products and selling channels. Haitian's traditional condiment sales saw headwinds from diverse catering channel demand. We lower 2023 forecasts, as the company appears to require a longer period to turn around its sales. But we remain constructive on Haitian's long-term capability to remain as the market leader in the condiment industry. From our recent discussion with management, the company appears committed to diversifying its offerings and catering for the shift in demand from traditional to compound condiments. We keep our fair value estimate at CNY 51.00 per share, but we think investors may stay sidelined by the suppressed earnings outlook this year.

Foshan Haitian strives to command competitive advantage in the condiment industry in China through scale, with large sales volume and high velocity creating stickiness among distributor partners and driving down operating costs. The company’s operating expenses ratio is among the lowest versus peers, resulting in mid-20% net margin levels. Through years of channel endeavors, the company has set up the most extensive distribution network in the industry. With its focus on the mass market segment, it has established a leadership position across the catering and retail channels in the key condiment category, soy sauce, which contributes more than half of its revenue. Competitive product pricing, enabled by cost advantage, is also key for its major customers, catering outlets. We see this as a virtuous cycle that allows Haitian to maintain its leading position in the industry and generate excess return consistently. Between 2010 and 2020, Haitian’s revenue and net income have grown at CAGRs of 15% and 26%, respectively.

We initiate Foshan Haitian Flavouring with a wide moat rating and a fair value estimate of CNY 51. Our fair value implies 35 times 2023 P/E and 25 times EV/EBITDA. The earnings multiple is below the three-year average of 56 times to reflect a slowing growth outlook. We note the challenges that Haitian has faced in the catering channel in recent quarters, which has aroused investors’ concern as to the firm's future growth prospects. In our view, this has caused a significant correction in its share price since early 2022. However, we think the company’s competitive advantage lies in its scale and extensive distribution network. We believe its sales growth could rebound as consumer sentiment improves and Haitian’s sufficient financial resources could allow the company to transition its products to better meet market demand. The stock is trading moderately below our fair value estimate and we think the market has underappreciated Haitian’s long-term competitiveness.

Foshan Haitian strives to command competitive advantage in the condiment industry in China through scale, with large sales volume and high velocity creating stickiness among distributor partners and driving down operating costs. The company’s operating expenses ratio is among the lowest versus peers, resulting in mid-20% net margin levels. Through years of channel endeavors, the company has set up the most extensive distribution network in the industry. With its focus on the mass market segment, it has established a leadership position across the catering and retail channels in the key condiment category, soy sauce, which contributes more than half of its revenue. Competitive product pricing, enabled by cost advantage, is also key for its major customers, catering outlets. We see this as a virtuous cycle that allows Haitian to maintain its leading position in the industry and generate excess return consistently. Between 2010 and 2020, Haitian’s revenue and net income have grown at CAGRs of 15% and 26%, respectively.

We are dropping coverage of Foshan Haitian Flavouring. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Wide-moat Foshan Haitian Flavouring and Food’s strong 19% year-on-year recurring profit growth in the third quarter was slightly higher than we expected. We expect Haitian to meet its 2020 full-year guidance with revenue and net profit growing 15% and 18% from 2019, respectively.

Foshan Haitian Flavouring and Food is a leading firm for both market share and profitability in China’s condiment and flavoring industry. It was established in 1955, but the Haday brand can be traced back over 300 years to the Qing Dynasty. Following a series of restructurings in 1994-2007, Haitian transformed from a state-owned to a privately owned company, and was listed in 2014. Haitian has been leading the condiment industry for almost 20 years. Its 17% market share in soy sauce is around 3 times that of its major rival Lee Kum Kee. The firm has a wide-ranging product portfolio covering all commonly used condiments for Chinese cuisine, such as soy sauce, oyster sauce, dipping sauce, and vinegar. Its business relies largely on catering and the food-processing industry, which accounts for 60%-70% of total sales. Bolstered by high product quality, successful operating and marketing strategies, and sound management execution, Haitian has delivered solid net profits at a 21% CAGR for the past five years, along with rapid growth in the catering industry.

Foshan Haitian Flavouring and Food is a leading firm for both market share and profitability in China’s condiment and flavoring industry. It was established in 1955, but the Haday brand can be traced back over 300 years to the Qing Dynasty. Following a series of restructurings in 1994-2007, Haitian transformed from a state-owned to a privately owned company, and was listed in 2014.

Wide-moat Foshan Haitian Flavouring and Food reported strong earnings growth in the second quarter that exceeded the market’s and our expectations. The impressive performance again evidenced that Haitian’s strong competitive advantages continued to support revenue growth and improve profitability amid the coronavirus pandemic. Although the operation was affected negatively in the first quarter, the demand for sauces and condiments remained stable as the pandemic came under control. Thanks to the company’s efforts in expanding distribution and channel restocking from the catering services, Haitian’s revenue and profit year-on-year growth reaccelerated to 22% and 29% in the second quarter, respectively, from 7% and 9% in the first quarter.

Affected by the coronavirus outbreak, wide-moat Foshan Haitian Flavouring and Food posted a weakened result in first-quarter 2020. Having said that, we think the revenue growth of 7.2% and net profit growth of 9.2% were quite decent during the crisis, as the company accelerated its sales channel developments (the number of dealers increased by 5% in the first quarter), particularly in the Central and West China regions. Management recently emphasized that the revenue and profit targets for this year remain intact (up 15% and 18%, respectively). It seems to be confident that its business will return to the targeted growth trajectory, as the epidemic has been under control.

Foshan Haitian Flavouring and Food is a leading firm for both market share and profitability in China’s condiment and flavoring industry. It was established in 1955, but the Haday brand can be traced back over 300 years to the Qing Dynasty. Following a series of restructurings in 1994-2007, Haitian transformed from a state-owned to a privately owned company, and was listed in 2014.

We’re raising our fair value estimate for wide-moat Foshan Haitian Flavouring and Food, or Haitian, to CNY 72 per share from CNY 61, as we increase our medium-term revenue growth and margins assumptions. The performance in the fourth quarter of 2019 remained as strong as the first three quarters, with revenue and net profit growing 15% and 23% year on year, respectively. 2019 full-year revenue and earnings were slightly above both the company’s guidance and our expectations. However, we view the shares as overvalued at current market levels, trading at around 50 times of 2020 earnings, which is higher than its historical average.

Foshan Haitian Flavouring and Food is a leading firm for both market share and profitability in China’s condiment and flavoring industry. It was established in 1955, but the Haday brand can be traced back over 300 years to the Qing Dynasty. Following a series of restructurings in 1994-2007, Haitian transformed from a state-owned to a privately owned company, and was listed in 2014.

Foshan Haitian Flavouring and Food is a leading firm for both market share and profitability in China’s condiment and flavoring industry. It was established in 1955, but the Haday brand can be traced back over 300 years to the Qing Dynasty. Following a series of restructurings in 1994-2007, Haitian transformed from a state-owned to a privately owned company, and was listed in 2014.