Feihe is the No.1 IMF market player in China with 18% market share in Sep 2020. We think its effective marketing strategies, flattened and in-depth distribution system and product freshness are key reasons for it to keep gaining market share. We believe Feihe will diversity its product offerings and introduce more super-premium products to capture the premiumization trend. We forecast Feihe to post 32% adj. EPS CAGR from FY19 to FY22E led by 38% CAGR of high-end IMF sales, higher than peers’ average of 15%. We initiate coverage of Feihe with Buy rating and TP of HK$24.00 based on 23.7x FY21E P/E.
- Effective marketing initiatives. The Company perceives itself as the pioneer in IMF market to position its brand as “Most suitable for Chinese Babies”. It has a nationwide sales team of >2,000 ppl organizing and participating in online and offline seminars to educate consumers on Feihe products. Through training program, conversion rate of seminars reaches 20-30%. Such high conversion rate justifies further spending on more events. According to the Company, the second player only organized around 50,000 seminars in 2019, just one-tenth of the Company’s.
- Flattened and in-depth distribution system. Feihe operates a single-layer distribution system which allows it to effectively monitor channel sales and inventory and react quicker than competitors adopting multi-layer system. Distributors’ profitability of single-layer system could be higher and better incentivized too. In addition, Feihe has an in-depth network of over 1,900 offline customers covering 119,000+ retail POS, which cannot be matched by many competitors.
- Target 30% market share in 2023. The Company expects to further gain market share from int’l brands in tier 1-2 cities and from small brands in lower-tier cities. It will extend its product offerings to fast-growing A2 milk and goat milk and introduce more super-premium products to capture the premiumization trend.
- Initiate at Buy. Our TP HK$24.00 is based on 23.7x FY21E P/E, at 40% premium on Chinese IMF peers’ average of 16.9x P/E in FY21E. We think such valuation is justified because (1) Feihe is the sector leader which is gaining market share; (2) its 32% adj. EPS CAGR from FY19 to FY22E is the highest among peers. Key risks: (1) weaker-than-expected sales; (2) slump of China’s new borns; (3) keen competition and (4) food safety issues.
