2021 results in line with our expectations
　　China Foods announced 2021 results: Revenue grew 14.7% YoY to Rmb19.78bn and attributable net profit rose 14.8% YoY to Rmb572mn, in line with our expectations. 2H21 revenue grew 9.1% YoY, but attributable net profit fell 0.3% YoY.
　　Trends to watch
　　2H21 sales continued to grow steadily; raw material price pressure　emerging. The firm’s 2H21 sales continued to grow from a normalized base.
　　Sparkling drinks recorded solid growth of 8.5% thanks to consumers’ growing demand for sugar-free carbonated beverages. The firm enriched its product portfolio by launching new products such as AH! HA!, hoping to meet the challenge from emerging players such as Genki Forest. We think this strategy worked well, as sales of AH! HA! exceeded Rmb100mn in 2021. The firm’s market share in the carbonated beverage market stopped falling and stabilized in 2H21, and we expect it to increase in 2023.
　　Juices: The firm expanded the flavors and forms of its products (e.g. launch of peach-flavored juice, 100% juice, and fruit juice sparkling water) to improve product competitiveness. The firm has successfully taken share from Huiyuan, with 2H21 sales rising 13.1% YoY. For other categories, the firm launched fruit-flavored water and zero-vapor soda water under the Chun Yue brand, which boosted sales of mid- and high-end water products and improved the structure of packaged water products, with ASP rising 6.1ppt YoY. Revenue from ready-to-drink (RTD) coffee soared 229% YoY, and market share of some products ranked No.2 in the market. On the cost side, 2H21 raw material prices rose sharply, with those of PET and aluminum growing over 30%. As a result, 2H21 gross margin dropped 9.1ppt to 31.5% due to the rising cost and accounting standard changes (display and other expenses offsetting revenue, with a full-year impact of about 1.5ppt). Selling expense ratio fell 7.1ppt due to accounting standard changes and improving digital management. Overall, the attributable net profit margin dropped 0.2ppt to 2.0% in 2H21.
　　Steady launch of new products in 2022 to bolster solid growth; enacts price increases and structural improvement to cope with cost　pressure. The firm expects to maintain a mid-to-high single-digit growth in　2022, as: 1) its rapid launch of new products may bolster growth, thanks to growing demand for healthy and trendy products - e.g. we expect the new Coca-Cola product Starlight and the newly designed sugar-free Sprite to boost sales of the firm’s core sparkling drinks; and 2) the firm continues to promote digital management and expand service outlets to seek incremental growth (with over 2mn service outlets as of 2021, continuing to improve from 1.8mn in 1H21). The firm expects cost pressure to continue in 1H22, and plans to implement price increases starting from 4Q21. We expect the firm’s new product launches and improved management to offset part of the cost pressure regarding gross margin and expense control. We expect the firm’s profit margin to be manageable.
　　Financials and valuation
　　The stock is trading at 11.7x and 9.9x 2022e and 2023e P/E. Considering fluctuating raw material prices, we lower our 2022 earnings forecast 4.6% to Rmb587mn. We maintain our 2023 earnings forecast at Rmb691mn. We maintain a target price of HK$3.80, implying 14.7x and 13.2x 2022e and 2023e P/E with 33% upside, given the satisfying performance of new　products. We maintain an OUTPERFORM rating.
　　Risks
　　Sharper-than-expected rise in raw material prices; fiercer competition.