20170713-农银国际证券-A_leading_player_in_China_11页_1mb

Summary of Shuanghui Development (000895 CH)

Core Content

Shuanghui Development is a leading meat processor in China, with a strong focus on product quality and a diversified product portfolio that includes both packaged and fresh meat products. The company has a national business network covering 18 provinces and has been able to maintain a significant market share in the packaged meat segment, increasing from 37.4% in 2014 to 39.6% in 2016. It also has global sourcing capabilities through its parent company, WH Group, which helps in leveraging price differentials between domestic and international markets.

Main Points

• Market Leadership: Shuanghui is the largest meat processing company in China, with a strong presence in the national supermarket channel and a market share of 39.6% in 2016.
• Diversified Product Portfolio: The company offers both packaged meat products (low-temperature and high-temperature) and fresh meat products, with packaged meat contributing over 50% of sales and 70% of gross profit in recent years.
• Efficient Cost Management: Shuanghui improved its cost effectiveness in 2016 by reducing SG&A expenses-to-sales ratio and S&D expenses-to-sales ratio. This led to a slower decline in operating profit margin (OPM) compared to gross profit margin (GPM).
• Working Capital and Leverage: The company has a strong working capital management, with receivable turnover days below 1 day and inventory turnover days around 28 days. It maintains a low leverage level, with total debt-to-equity and debt-to-asset ratios at 7% and 5% respectively by the end of FY16.
• Growth and Profitability Outlook: The company is projected to grow revenue at a CAGR of 6.72% and net profit at a CAGR of 13.24% from 2016 to 2019. Gross profit margin (GPM) and net profit margin (NPM) are expected to improve from 18.14% and 8.50% in 2016 to 20.19% and 10.15% in 2019.
• Valuation: The target price (TP) is set at RMB 27.90, which corresponds to a P/E ratio of 18.97x/16.44x and a P/B ratio of 6.27x/6.04x for 2017 and 2018 estimates. The valuation is considered premium compared to the sector average, reflecting strong growth and profitability expectations.
• Investment Highlights: The company is positioned as a national industry leader with a comprehensive business network, global sourcing capabilities, and a commitment to product quality. It is also adjusting its product portfolio to meet evolving consumer preferences.

Key Financial Metrics (2015A–2019E)

Risk Factors

1. Macroeconomic Risk: A slowdown in China's economic growth could negatively impact demand for meat products.
2. Regulatory Risk: Tightening food regulations may increase compliance costs and potentially disrupt the industry.
3. Changing Consumer Tastes: The company needs to continuously adapt its product portfolio to meet evolving consumer preferences.
4. Inflation Risk: Rising production costs could compress margins if not offset by price increases.
5. Product Quality/Safety Risk: Any incidents of contamination or quality issues could harm the company's brand reputation.

Valuation Comparison

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

Growth Projections

• Revenue CAGR (2016–2019E): 6.72%
• Net Profit CAGR (2016–2019E): 13.24%
• Packaged Meat Segment: Expected to grow at 2.28% CAGR
• Fresh Meat Segment: Expected to grow at 9.33% CAGR

Investment Recommendation

• Rating: BUY
• Target Price (TP): RMB 27.90
• Estimated Share Price Return: 21.78%
• Estimated Dividend Yield: 5.78%
• Estimated Total Return: 27.56%

Conclusion

Shuanghui Development is well-positioned to maintain its leadership in the Chinese meat processing industry due to its efficient cost management, strong product quality standards, and diversified product offerings. With a focus on both packaged and fresh meat products, and a strategic adjustment to meet new consumer demands, the company is expected to deliver solid growth and improved profitability over the forecast period. Its current valuation, based on a premium P/E and P/B ratio, supports the BUY rating, although it is exposed to various risks including macroeconomic and regulatory changes.