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Industrial Securities Co., Ltd. Summary

Core Content

Industrial Securities Co., Ltd. provides a comprehensive overview of the Chinese stock market and company performance. The report includes market indices, sector performance, daily headlines, company news, and detailed analysis of Guangdong Wen's Foodstuffs Group Co., Ltd., focusing on its financial health, business strategies, and investment potential.

Market Indices Overview

• SSE Composite: Closed at 3173.15, up 0.03% for the day, down 2.25% for the week.
• SZSE Component: Closed at 10314.35, down 0.43% for the day, 1.95% for the week.
• CSI 300: Closed at 3466.79, up 0.15% for the day.
• ChiNext Index: Closed at 1839.01, down 0.62% for the day, 2.57% for the week.
• Aggregate Market Volume: CNY464.91 billion, a 17.7% decrease from the previous session.
• Market Sentiment: Mixed, with more losers than winners (1654:1168).

Sector Review

Winners

• Financial Sector: Strong performance with notable gains:
  • China Merchants Bank Co. (600036): +2.23%
  • China Life Insurance Co. (601628): +1.34%
  • Haitong Securities Co. (600837): +1.94%
• Coal Miners: Rallying against the overall market trend:
  • China Shenhua Energy Co. (601088): +0.95%
  • Yanzhou Coal Mining Co. (600188): +2.45%

Losers

• Food and Beverage: Significant declines due to profit-taking:
  • Kweichow Moutai Co. (600519): -3.56%
  • Jiangsu Yanghe Brewery Joint-Stock Co. (002304): -1.71%
• Concept Stocks: Weakness in the "Guangdong-Hong Kong-Macao Bay Area" and "Xiong'an New District" sectors:
  • Shenzhen Yan Tian Port Holdings Co. (000088): -8.16%
  • China Fortune Land Development Co. (600340): -5.80%

Daily Headlines

• Regulatory Measures: Chinese regulators are considering easing outbound capital controls by returning cross-border payment authority to commercial banks.
• U.S. Steel Corp: Plans to investigate Chinese manufacturers for alleged price-fixing.
• Shadow Banking: Additional regulations are expected, with potential market impacts.
• U.S.-North Korea Tensions: Trump expresses confidence in Xi Jinping’s efforts to ease tensions.
• Illegal Futures Trading: Shanghai securities regulator targets illegal trading outside approved exchanges.
• Wen's Foodstuffs: Focuses on turning H7N9 crisis into opportunity by expanding into retail markets.
• China Mobile: Profit rose due to increased 4G subscribers.
• Microvast Power System: Raised $400 million for production expansion.
• Yidao says Le Holdings: To support resolution of capital issues.

Latest Company News

• Bank of Nanjing (601009): FY net profit of CNY8.26 billion.
• Do-Fluoride Chem (002407): 1Q net profit of CNY69.1 million.
• Huayi Brothers (300027): 1Q loss of CNY68.4 million.
• Jiangsu Hengrui Medicine (600276): 1Q net profit of CNY811.8 million, up from CNY684.3 million year ago.
• Leshi (300104): FY loss of CNY337.5 million after audit.
• Merchants Shekou (001979): 1Q net income of CNY2.12 billion.
• Minsheng Bank (601988): Offers solutions for sub-branch cases; fake WMP case not related to bills.
• Originwater (300070): Says it is not a target of government suits.
• Shandong Tyan Home (600807): Plans to purchase gold assets in Australia for CNY1.83 billion.
• Shanghai Mechanical (600835): 1Q net profit of CNY239 million, up from CNY219 million year ago.

Investment Recommendations

New Consumption Trend: Looking for Chinese-version Loreal

• Loreal Strategy: Started with hair dye, focused on R&D, and expanded through M&A even during financial turmoil.
• Domestic Cosmetics Opportunity: China's cosmetics market is the second largest globally, with a CAGR of 9.1% and domestic market share at 50%.
• Brand Strategy: Proposed "brand tree" strategy integrating core products, company brands, and new product brands.
• Recommended Stocks:
  • Shanghai Jahwa United (600315): Forecast EPS of CNY0.57 (2017), CNY0.72 (2018), and CNY0.83 (2019). Implied P/E ratios: 51.1x (2017), 40.5x (2018), and 35.1x (2019). Reiterate BUY.
  • Lafang China (603630): Only domestic hair care brand on Top 5 List. Forecast EPS of CNY0.91 (2017), CNY1.05 (2018), and CNY1.19 (2019). Implied P/E ratios: 47x (2017), 40.8x (2018), and 36x (2019).
  • Maogpm (pre-IPO): Advised to take closer look.
  • Qingdao Kingking Applied Chemistry (002094.SZ): Entered cosmetics industry via distributor acquisitions.

Wen's Foodstuffs (300498.SZ)

• Strong Buy (Maintained): The company is turning H7N9 crisis into opportunity by expanding into retail markets.
• Key Financials:
  • 2017E Net Profit: CNY8.32 billion
  • 2018E Net Profit: CNY9.23 billion
  • 2019E Net Profit: CNY10.61 billion
  • Implied P/E Ratios: 16.6x (2017), 15.0x (2018), 13.0x (2019)
• Strategic Focus: Expanding offline fresh-meat supply stores, shortening the price conduction cycle, and maintaining competitive advantages in the swine raising industry.
• Market Position: Strong in the swine sector, which provides a buffer against chicken business fluctuations.
• Potential Risks: Price fluctuations in chicken, swine, and commodities; epidemic outbreaks.

Company Profile

• Guangdong Wen's Foodstuffs Group Co., Ltd. operates as a livestock and poultry farming company, offering fresh meat, processed meat, raw milk, finished milk, biopharmaceutical products, and animal husbandry equipment.
• Founded in 1983, based in Yunfu, China.
• Diversified Business: Includes deep-sea fish breeding, swine raising, and other breeding activities.
• Export Activities: Biopharmaceutical products exported to Egypt, Indonesia, Vietnam, and other Middle East and Southeast Asian countries.

Key Financial Indicators

• Revenue (2017E): CNY59,704 million
• Net Profit (2017E): CNY8,318 million
• Gross Margin (2017E): 21.4%
• Net Profit Margin (2017E): 13.9%
• ROE (2017E): 21.0%
• EPS (2017E): CNY1.59

Financial Forecast

• 2017E:
  • Revenue: CNY59,704 million
  • Net Profit: CNY8,318 million
• 2018E:
  • Revenue: CNY67,485 million
  • Net Profit: CNY9,226 million
• 2019E:
  • Revenue: CNY77,165 million
  • Net Profit: CNY10,613 million

Key Data

• Closing Price: CNY31.73
• Total Shares (Mn): 4350.30
• Shares Outstanding (Mn): 2980.88
• Market Cap (CNY/Mn): 138,034.92
• Market Float (CNY/Mn): 94,583.47
• Net Assets (CNY/Mn): 32,024.19
• Total Assets (CNY/Mn): 43,055.45
• BVPS: CNY7.36

Revenue Breakdown

• Livestock Breeding: 96.97% of total revenue in 2016
• Meat Product Processing: 1.32%
• Animal Drug: 0.81%
• Milk: 0.66%
• Equipment: 0.05%
• Other Primary Businesses: 0.19%

Cost Breakdown

• Fodder Material: Highest cost component, 70.30% in 2014
• Employee Salary: 5.30% in 2014
• Depreciation and Amortization: 2.20% in 2014
• Others: 4.50% in 2014

Earnings Estimation

• 2015:
  • Revenue: CNY48,240 million
  • Gross Profit: CNY9,440 million
  • Net Profit: CNY16,380 million
• 2016E:
  • Revenue: CNY59,360 million
  • Gross Profit: CNY16,750 million
  • Net Profit: CNY17,170 million
• 2017E:
  • Revenue: CNY59,704 million
  • Gross Profit: CNY127,800 million
  • Net Profit: CNY177,800 million
• 2018E:
  • Revenue: CNY67,485 million
  • Gross Profit: CNY139,000 million
  • Net Profit: CNY196,500 million
• 2019E:
  • Revenue: CNY77,165 million
  • Gross Profit: CNY158,400 million
  • Net Profit: CNY200,000 million

Investment Budget for Fresh Meat Store

• Franchise Fee: CNY10,000 (one-time)
• Security Margin: CNY30,000 (returned upon contract expiration)
• Equipment Access Fee: CNY30,000 (subject to situation)
• Loan Deposit: CNY20,000 (subject to situation)
• Store Decoration: CNY100,000 (approx)
• Cost of Required Equipment: CNY130,000 (approx)
• Total Investment Budget: CNY320,000

Balance Sheet Highlights

• Total Assets (2017E): CNY58,570 million
• Total Liabilities (2017E): CNY10,056 million
• Total Shareholders’ Equity (2017E): CNY48,515 million
• Share Capital: CNY5,220 million
• Capital Reserve: CNY5,714 million
• Undistributed Profit (2017E): CNY33,187 million

Income Statement Highlights

• Operating Income (2017E): CNY59,704 million
• Operating Expense (2017E): CNY46,921 million
• Total Profit (2017E): CNY9,041 million
• Net Profit (2017E): CNY8,950 million
• Net Profit Attributable to Parent Company (2017E): CNY8,318 million
• EPS (2017E): CNY1.59

Cash Flow Statement Highlights

• Net Profit (2017E): CNY8,318 million
• Depreciation and Amortization (2017E): CNY3,698 million
• Cash Flows from Operating Activities (2017E): CNY12,441 million

Conclusion

Wen's Foodstuffs is strategically positioning itself to overcome the H7N9 crisis by expanding into retail markets and leveraging its cost advantages in the swine sector. The company is expected to maintain a strong market position with steady growth in net profit and earnings per share. Industrial Securities recommends a "Strong Buy" for the company, citing its improved financial status and alignment with industry trends.