20230303-招银国际-百果园集团-02411.HK-Sowing_the_franchiser_s_seed_36页

Shenzhen Pagoda (2411 HK) Equity Research Summary

Core Content

Shenzhen Pagoda is China's largest nationwide fruit retailer, with over 5,600 stores and a vertically integrated upstream supply chain and downstream franchise-based OMO (Online-Merge-Offline) distribution network. The company has over 20 years of industry experience and has continuously refined its business model by leveraging competitive advantages such as upstream integration, brand innovation, price segmentation, and proprietary IT solutions. The research initiates the stock at Buy with a Target Price of HK$7.9, implying a 29.5% upside from the Current Price of HK$6.1.

Main Points

Business Model and Competitive Advantages

• Franchise-based expansion: Pagoda's asset-light model enables rapid store growth without significant capital investment.
• OMO strategy: Combines offline retail with online platforms (WeChat APP, Ele.me, etc.) to serve local communities and enhance distribution efficiency.
• Proprietary IT solutions: Standardize operations and enable price segmentation based on fruit quality, improving margins and customer value.
• Agricultural technology: Empowers farmers with advanced cultivation, post-harvest, and cold chain logistics solutions, particularly for premium products like Red Ballerina strawberries.
• Brand portfolio: Has launched 31 self-owned product brands under Excellent and Grade A categories, and registered 211 trademarks, such as Daba for musang king durian and Panda.F for fresh groceries.

Financial Highlights

• Revenue growth: Projected to grow at a 3-year CAGR of 11.6% (outperforming the industry's 7.8%).
• Gross Margin (GPM): Expected to rise from 11.9% in 2022E to 12.9% in 2024E, driven by premium brand growth, quality differentiation, and online business break-even.
• Free Cash Flow (FCF): Forecasted to be RMB316mn/419mn/531mn for 2022-2024E, with a ~70% FCF conversion rate.
• Dividend policy: Anticipated 20% annual dividend payout due to strong cash flow and low capital expenditure.

Valuation

• Current P/E ratio: 18.0x (end-2023E), below the 23.0x used to calculate the Target Price.
• Price-to-book (P/B): 2.4x (end-2023E), showing a reasonable valuation.
• Dividend yield: Projected to increase from 0.9% in 2023E to 1.1% in 2024E, enhancing shareholder returns.

Growth Drivers

• Store expansion: Plans to add ~600 stores annually, with a focus on franchising.
• Excellent-grade sales mix: Expected to rise from 9.2% in 2019 to 19.6% in 2024E, driven by brand acceptance and demand for quality fruits.
• Online business: Transitioning from third-party platforms to self-operated channels, with a forecast to break even in 2023E.

Key Information

Company Overview

• Founded in 2001 by Mr. Yu Huiyong, with the first store opened in 2002 in Shenzhen.
• Recognized as a China Well-known Trademark in 2016, and awarded National Leading Company of Agricultural Industrialization in 2021.
• Achieved ISO22000:2018 certification in 2022, emphasizing food safety and quality.

Management Team

• Mr. Yu Huiyong (Chairman): 30 years of experience in the fresh food industry.
• Ms. Xu Yanlin (Executive Director): Previously a clerk and later promoted to general manager.
• Mr. Tian Xiqiu (Executive Director): Has experience in both internal and external operations.
• Mr. Jiao Yue (Executive Director): Oversees day-to-day operations and has a background in tech and management.
• Mr. Zhu Qidong (Executive Director): Manages procurement and has stakes in related agricultural companies.
• Independent Directors: Include experts in finance, education, and media, ensuring diverse strategic guidance.

Shareholding Structure

• As of June 2022, the major shareholders are:
  • Wang Yonghua: 14.93%
  • CICC: 13.26%
  • Hong Yuan Shang Go: 10.97%

Investment Risks

• Branding: Maintaining brand premium and market share.
• Extreme weather: Impacting supply chain and agricultural yields.
• Competition: From both domestic and international players.
• Supply stability: Ensuring consistent fruit supply and quality.

Conclusion

Shenzhen Pagoda is well-positioned to benefit from the growing demand for quality fruits in China, supported by its franchise model, OMO strategy, and agricultural technology. The company's efficiency-driven operations, strong cash flow generation, and dividend policy make it an attractive investment opportunity. With a Buy initiation and a Target Price of HK$7.9, the stock is expected to outperform its peers and deliver value to investors over the forecast period.