20180601-中国银河国际证券-达利食品-03799.HK-Soymilk_and_new_bakery_products_to_drive_growth_in_2018__appealing_valuation_6页_1005kb

Dali Foods Group Summary

Core Content

Dali Foods Group (3799.HK) is a Chinese snack food and beverage company that has shown potential for growth in 2018 despite concerns about slowing sales in some of its legacy product categories. The company's focus on new product launches and expansion into high-margin segments is expected to drive revenue and profitability improvements.

Main Points and Key Information

1. Share Price Performance and Valuation

• Since the release of FY17 results, Dali Foods' share price has dropped 19%, underperforming the broader market due to concerns over slowing growth in bread, biscuits, and herbal tea segments.
• The company is currently trading at a 17.4x 2018E PER, significantly lower than the 29.5x average of its peers.
• This valuation is considered undemanding given the company's expected low- to mid-teens net profit growth in 2018E.
• The dividend yield is also attractive, at 3.3% in 2017 and 4.0% in 2018E, offering support to the share price.

2. New Product Launches and Growth Drivers

• Doubendou, a soymilk brand, was launched in April 2017 and contributed RMB1bn in revenue for the period April–December 2017, achieving a profit breakeven in nine months.
• The plant-based and milk beverage segment grew by 33% in 2017 and is expected to continue with >30% sales growth in 2018E, driven by Doubendou and the "Quality Breakfast" series.
• The "Quality Breakfast" series was launched in June 2017 and achieved RMB300m in sales within the first six months. The company plans to expand the product line with shorter shelf life items (1–2 months and 1–2 weeks) in 2018, aiming for RMB1bn in sales for the year.
• The potato puffed food segment grew by 20% in 2017 and is expected to offset potential slowdowns in other segments.

3. Market Position and Competitive Edge

• Doubendou's healthy, additive-free nature gives it a competitive edge over peers.
• Dali Foods is well-positioned to benefit from the growing demand for healthy food in China.
• The company has a strong track record in new market exploration, as seen with the HiTiger (樂虎) brand, which ranked No. 3 in the energy drink market by 2014.
• The company aims to increase its distributor network to 8,000 in the long term, up from 5,178 at end-2017.

4. Financial and Operational Outlook

• The company expects 1H18 results to provide more insight into the progress of its new product initiatives.
• Gross margin is projected to mildly improve in 2018E due to the ramp-up of high-margin products like soymilk (estimated GPM: ~50%) and the "Quality Breakfast" series (~40%).
• Days receivable are expected to decline in 2018E as the company shifts soymilk sales from the modern channel (50% in 2017) to a lower proportion (30% in 2018E).
• CAPEX is expected to be RMB400m in 2018, mainly for new production plants, marketing, and facility maintenance. The company has a strong cash position of RMB8.3bn, which should support these investments.
• The company plans to maintain a payout ratio of ~70% in 2018, up from 66% in 2017.

5. Segment Performance (2017)

• Bread, cakes and pastries: Largest segment, contributing 31% of total revenue in 2017, but saw a -3.6% YoY growth.
• Potato puffed food: Grew by 20.1% YoY in 2017.
• Biscuits: Grew by 3.8% YoY.
• Energy drinks: Grew by 31.4% YoY.
• Plant-based and milk beverages: Grew by 32.9% YoY.
• Herbal tea: Declined by -7.0% YoY.
• Other beverages: Declined by -3.1% YoY.
• Other revenue: Increased by 184.5% YoY.

6. Cost and Profitability

• Raw material costs represented 53.8% of total cost of sales in 2017.
• PET price increased by 7% YTD 2018, but the company expects this to be manageable due to lower costs in other materials like sugar and palm oil.
• Gross margin slightly declined from 38.3% in 2016 to 37.7% in 2017, but is expected to improve in 2018E.
• Net profit grew by 9.5% YoY in 2017, reaching RMB3,434m.
• ROE was 24.8% in 2017 and is expected to increase to 27.0% in 2018E.

7. Peer Comparison

• Dali Foods has a lower PER than its peers, with an average of 29.5x for 2018E.
• Toly Bread (603866.CH), a major competitor in the bread segment, has a higher PER of 43.6x.
• Dali Foods' PBR is also lower than its peers, at 4.3x in 2018E.

Conclusion

Dali Foods Group is expected to benefit from its new product launches, particularly Doubendou and the "Quality Breakfast" series, which are driving revenue and margin growth. The company's valuation is attractive, and its dividend yield offers additional support. Despite challenges in legacy product growth, the expansion into high-margin segments and improvements in receivables management are key to sustaining performance. The company's financial health and strategic initiatives position it well for continued growth in 2018.