20230303-招银国际-洪九果品-06689.HK-Harvesting_the_low-hanging_fruits_34页_2mb

Summary of Hongjiu Fruits (6689 HK)

Core Content

Hongjiu Fruits (6689 HK) is a leading fruit distributor in China, with operations extending into Southeast Asia. The company is positioned as a fast-growing vanilla fruit wholesaler and is initiating a "Buy" recommendation based on its competitive advantages and growth potential.

Key Advantages

• Multi-brand Portfolio: Hongjiu has developed 18 brands covering 14 fruit categories, enabling brand equity creation and premium pricing.
• Direct Procurement: The company sources fruits directly from their regions of origin, ensuring premium quality, supply stability, and cost efficiency.
• Efficient Supply Chain: Hongjiu has streamlined its supply chain by reducing intermediaries, implementing advanced optical grading technology, and utilizing the HJ Star Bridge digital system for real-time tracking and integration.
• Nation-wide Distribution Network: With 19 sales branches and 60 sorting centers across China, the company ensures wide market coverage and efficient delivery to end consumers.

Market Leadership and Growth

• Hongjiu is a market leader in the distribution of durian, dragon fruit, mangosteen, and longan, which are experiencing rapid volume growth.
• The company's branded fruit sales mix is expected to rise from 75.9% in 2019 to 90.4% in 2024E, significantly boosting gross profit margins (GPM) from 17.5% in 2022E to 18.1% in 2024E.
• The company is projected to deliver a 40.0% 3-year revenue CAGR from 2021 to 2024E, outperforming the industry's 7.8% growth rate.

Financial Performance

• Revenue: Expected to grow from RMB 5,771 million in FY20A to RMB 28,150 million in FY24E.
• Net Income: Projected to increase from RMB 3 million in FY20A to RMB 2,894 million in FY24E.
• EPS: Expected to rise from RMB 0.0 in FY20A to RMB 6.4 in FY24E.
• P/E Ratio: Trading at 5.5x end-23E P/E, with a target price of HK$44.0 (based on 8.4x end-23E P/E), indicating potential for re-rating.
• OCF/FCF Turnaround: The company expects to achieve positive operating cash flow and free cash flow by end-23/24E, reflecting a shift from aggressive expansion to more sustainable margin and cash flow growth.

Investment Risks

• Branding challenges
• Extreme weather events
• Intense competition
• Supply stability concerns

Strategic Initiatives

• Branding Strategy: Hongjiu has launched multiple branded products, such as the "Taihaochi" series, which enjoys high consumer satisfaction and loyalty.
• Supply Chain Optimization: The company has reduced distribution layers and implemented a digitalized system to improve operational efficiency and transparency.
• Customer Segmentation: Hongjiu serves a diverse range of customers, including terminal wholesalers, emerging retailers, and direct-to-consumer channels.

Shareholding and Management

• Key Shareholders: Mr. Deng Hongjiu (20.66%), Alibaba (11.66%), China Agricultural (7.68%).
• Management Team: Composed of seasoned professionals with extensive experience in the fruit industry, ensuring strategic direction and operational effectiveness.

Conclusion

Hongjiu Fruits is well-positioned to capitalize on the growing demand for premium fresh fruits in China, supported by its direct sourcing model, strong branding, and efficient supply chain management. Despite its longer cash conversion cycle, the company has taken steps to improve OCF and FCF, and its valuation appears undervalued relative to its growth prospects and market leadership. The "Buy" recommendation is based on its potential for re-rating as market confidence is restored.