Haitian Earnings: Growth Stays Suppressed Amid Product and Channel Transition

Wide-moat Haitian Flavouring and Food Company’s 603288 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.

Sales fell 4.2% year on year in first-half 2023, with notably weak soy sauce demand. The company continued to reduce channel inventory during the second quarter as demand from catering channels remained soft. More intense competition in the retail channel also put pricing pressure on the broad soy sauce market. While soybean prices have declined, the company sees elevated costs in other raw material inputs, such as sugar. A lower mix of soy sauce and operating deleverage dragged down gross margin. Haitian also increased investments in sales and marketing post-COVID-19, which further drove net margin down versus last year. As such, second-quarter net income fell 11.7% year on year.

We reduce full-year revenue and gross profit estimates, but Haitian should cycle a lower base in the second half. We do expect sales and marketing expenses ratio to increase as the company pushes through its new compound condiment offerings and develop new customers in catering channels. But we think 2023 should continue to be a period of transition, with muted growth in earnings.