Haitian Earnings: Results Hit by Muted Demand, but Sales Growth to Accelerate in 2024

Wide-moat Foshan Haitian 603288 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.

We moderately reduce our fair value estimate to CNY 50 per share, from CNY 51 per share, which implies 36 times 2024 P/E and 26 times EV/EBITDA. Haitian is relatively undervalued at the current share price, but we may still see another quarter of tepid profitability.

Sales grew a mild 2.2% year on year, below our estimate of 4%. Positively, the decline in soy sauce sales moderated from the first-half pace. Higher sales of new products and compound condiments partially offset the decline in traditional sauce products. Persistent weakness in soy sauce, however, which commands higher margins than other categories, dragged gross margin below our estimates. Management said demand in catering channels recovered during the third quarter, but the company continued to navigate the fragmentation of its retail distribution channels. We think Haitian is still grappling with increased competition in the consumer condiment market, as consumers remain price-sensitive. We think Haitian can afford to be more aggressive in its product line and invest further in sales and marketing in order to defend its market share against emerging brands like Qianhe. We have baked in higher sales and marketing expenses to reflect this expectation.