Maintain BUY but adjust our TP to HK$ 108.52, based on 58x FY22E P/E (reduced from 63x FY21E P/E, to factor in a slower growth). We are still confident on Yihai’s ability to self-correct and ensure its execution capability as they expand to other product categories. We believe current valuation of 59x/ 46x FY21E/ 22E P/E and 2x PEG is not too demanding, vs HDL/ JMJ/ Haitian ’s 49x/ 39x/ 63x.
- FY20 net profit miss by 7%. Yihai’s net profit grew by 23% YoY, 7% below BBG/ CMBI est., mainly due to: 1) weaker-than-expected sales from related parties, e-commerce and convenient food products, 2) miss in GP margin and higher-than-expected opex (e.g. A&P and other opex).
- Multiple issues in 2H20 and the management is coping with it.
#1 Slowdown in growth after COVID-19. Demand for hot pot condiment (to third parties) and convenient food slowed down from 90%/ 96% YoY in 1H20 to 32%/ 33% YoY in 2H20. We attributed this to: 1) demand normalization, 2) intensified competition from traditional brands and 3) slow strategy adjustments. Management is fully aware and would: 1) introduce frequent reviews and more timely strategy adjustments, in order to achieve sales target, 2) increase product quality (e.g. healthier oil or fresher ingredients used for soup base) and 3) expand range of flavors, product categories and price point.
#2 Slow ramp up for new products. Many SKUs were introduced since the reform of product launches in FY18, but ramp up was slower than expected (e.g. brewed rice/ noodles), due to lack of advertising and supply chain constraint, therefore more investments will be made in FY21E on these areas. Also, success rate was not too satisfactory recently and Yihai had introduced the regional manager system in late 2020, which should help: 1) developing more regional products with national potential, 2) introducing better fliting and more careful evaluation before approving new products and 3) rationalizing marketing expenses in the region by linking it to regional manager’s KPIs.
- Related parties sales should rebound but with a lower ASP and margin. Due to the low base in 1H19, we are relatively optimistic for a rebound in related parties sales in FY20E. But we would not be surprised to see Yihai’s sales contribution to Haidilao to drop further in FY21 (vs ~85%/ 90%+ in FY20/19), as well as a drop in ASP and GP margins.
- Maintain BUY but lower our TP to HK$ 108.52. We maintain BUY but cut TP to HK$ 108.52, based on 58x FY22E P/E (from 63x). We cut FY21E/ 22E NP forecasts by 14%/ 16%, to factor in: 1) slower third parties and online sales, 2) lower GP margin and 3) higher A&P and opex. Current valuation is still attractive at 46x FY22E P/E, given a 29% NP CAGR in FY20-23E.
