Haitian: Initiating With CNY 51 Fair Value, Competitive Advantage Conducive to Portfolio Transition

We initiate Foshan Haitian Flavouring 603288 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.

We note Haitian’s key competitive advantage derives from the economies of scale that it could achieve with its extensive distribution network. While the company’s gross margin was broadly consistent with that of its domestic and international peers, the low operating expenses ratio, enabled by its massive scale, drove higher margin levels versus peers. We recognize the company faced challenges from lower-priced alternatives as well as compound condiments in the catering channel. But we believe the company’s expertise in the condiment industry, as well as its scalable distribution network, would enable a transition in its product portfolio. The company’s well-known brand remains a key asset for its channel partners to replenish new offerings. In our view, short-term headwinds in the economy could drive catering customers, especially mom-and-pop outlets, to shift away from Haitian’s products to cheaper nonbranded offerings. But we view normalization in consumer confidence could help Haitian gain back share.