20170713-农银国际证券-A_leading_player_in_China_12页_949kb

Shuanghui Development (000895 CH) Summary

Core Content

Shuanghui Development is a leading meat processing company in China, with a strong presence in both packaged and fresh meat products. The company operates across 18 provinces and has a comprehensive business network, including 30 processing facilities and full industry chain services. It has a significant market share in the packaged meat segment, reaching 39.6% in 2016, and continues to expand its product portfolio to meet evolving consumer preferences.

Main Points

1. Industry Leadership and Business Network

• Shuanghui is the largest meat processing company in China.
• It has a national business network covering 18 provinces and has global sourcing capabilities through its parent company WH Group.
• Its market share in the supermarket channel for packaged meat products increased from 37.4% in 2014 to 39.6% in 2016.

2. Commitment to Quality

• The Group's production, processing, and distribution facilities are certified under ISO9001, HACCP, and ISO14001.
• It has a dedicated logistics subsidiary established in 2003 with extensive capacity for transport and storage.

3. Product Portfolio

• The product range includes packaged meat products (low-temperature and high-temperature) and fresh meat.
• Packaged meat products have been a major contributor to sales and gross profit, accounting for over 50% of total sales volume and over 70% of gross profit in the past three years.
• The Group is adjusting its product mix to cater to the growing demand for low-temperature packaged meat and chilled/frozen fresh meat.

4. Cost Efficiency and Working Capital Management

• The Group improved its cost effectiveness in 2016 by reducing SG&A expenses/sales ratio.
• S&D expenses-to-sales ratio and admin-expenses-to-sales ratio declined from 5.14% and 3.21% in 2015 to 4.38% and 2.33% in 2016.
• Efficient working capital management is evident from its receivable turnover days (~1 day) and inventory turnover days (~28 days), leading to a cash conversion cycle below 10 days.

5. Financial Performance

• The Group's revenue is projected to grow at a CAGR of 6.72% from 2016 to 2019, while net profit is expected to grow at a CAGR of 13.24%.
• Gross profit margin (GPM) is expected to improve from 18.14% in 2016 to 20.19% in 2019, and net profit margin (NPM) is projected to rise from 8.50% to 10.15%.
• Its net profit (to owners of the Company) is expected to grow significantly, with a CAGR of 13.24% from 2016 to 2019.

Key Financial Metrics

Investment Highlights

• Initiation: BUY
• Target Price (TP): RMB 27.90
• Valuation Metrics: TP represents 18.97x/16.44x 17E/18E P/E, or 6.27x/6.04x 17E/18E P/B
• Projected Yield: 5.78%
• Projected Total Return: 27.56%

Risk Factors

1. Macroeconomic Risk: Slower economic growth could impact consumer demand for pork and related products.
2. Regulatory Risk: Tightening regulations on food products may increase compliance costs and lead to industry disruption.
3. Changing Consumer Tastes: Companies must adapt to evolving preferences to maintain growth and margins.
4. Inflation Risk: Rising CPI and PPI could increase production costs, affecting margins if prices are not adjusted accordingly.
5. Product Quality Risk: Any incidents of product contamination could harm brand image and sales.

Valuation Comparison

Shuanghui's valuation metrics are significantly higher than the sector average, indicating a premium valuation based on its strong financial performance and growth potential.

Conclusion

Shuanghui Development is a market leader in China with a strong focus on product quality, diversified product offerings, and efficient cost management. Its financial performance is projected to improve, with both revenue and net profit growing at substantial CAGRs. The company's ability to maintain low leverage and strong working capital efficiency further supports its investment appeal. Despite the risks, its strong fundamentals and strategic adjustments make it a compelling investment opportunity.