1H22 earnings expected to rise 10% YoY, beating market expectations
We expect China Foods’ revenue to grow 6% YoY in 1H22 thanks to strong performance of its juices and coffee businesses. We estimate the firm’s 1H22 net profit will rise 10% YoY mainly due to effective control over costs and expenses.
　　Trends to watch
　　Revenue from sparkling drinks rose steadily; juices and coffee maintained rapid growth. In 1H22, we estimate the firm’s revenue grew steadily at 6% YoY despite COVID-19 resurgence. Specifically, we believe sparkling drinks recorded mid-single-digit growth bolstered by new product launches in 1H22. Juices, coffee, and tea beverages reported strong performance. In 1H22, we estimate juices and coffee both booked double-digit YoY growth in revenue, and tea beverages may see its revenue double on a low base. However, we believe revenue from packaged water products (mostly small-packaged water products) may suffer a double-digit decline due to COVID-19 resurgence in 1H22. Looking ahead into 2H22, we expect the firm to perform better thanks to rising sales boosted by easing COVID-19 conditions and hot weather. We estimate the firm’s revenue will maintain mid-single-digit YoY growth in 2022.
　　Profitability beats on effective cost and expense control. In 1H22, prices of polyethylene terephthalate (PET) grew more than 25%, putting the whole industry under considerable cost pressure. However, the firm was less affected thanks to its effective procurement strategy (purchasing PET in early-2022 for use throughout the year). Overall, we estimate the firm’s net profit grew 10% YoY in 1H22, outperforming the industry. We also expect the firm to maintain the strong growth momentum into 2H22 considering that the company had largely locked in a lower PET price in early-2022 for use throughout the year.
　　Acquires non-carbonated drink factories to further improve operational efficiency. The firm and Swire Pacific recently acquired five non-carbonated drink factories from Coca-Cola Bottlers Manufacturing Holdings at a consideration of around Rmb540mn. Through the acquisition, the firm plans to incorporate non-carbonated beverage manufacturing (e.g., functional water, juices, tea, dairy beverages, and coffee) into its existing system. We expect the acquisition to contribute slightly to the firm’s profit, considering its current production system yielded relatively low earnings. We also believe the transaction will essentially help improve the flexibility in the firm’s manufacturing of non-carbonated drinks, and enable the firm to be more responsive to customer needs, further enhancing its operational capabilities.
　　Financials and valuation
　　The stock is trading at 9.9x 2022e and 8.9x 2023e P/E. We raise our 2022 earnings forecast 5.6% to Rmb620mn, and maintain our 2023 earnings forecast at Rmb690mn given the firm’s good cost control. Considering uncertainties due to COVID-19 resurgence in 2H22, we keep our TP unchanged at HK$3.8, implying 14.8x 2022e and 13.3x 2023e P/E with 49% upside. Maintain OUTPERFORM.
　　Risks
　　High raw material prices; fiercer competition.