CHINA PET FOODS(002891)IN-DEPTH TRACKING REPORT：FROM 1 TO N A CLEARER GROWTH PATH FOR DOMESTIC BUSINESS

China Pet Foods has an in-depth presence in the domestic market. With the continuous boom of China’s pet industry, the Company’s growth path becomes clearer, making it possible for the Company to grow into the industry leader in the future. Benefiting from the RMB depreciation, the profitability of the Company's overseas business is likely to gradually recover. At the same time, with the release of new production capacity and the continuous growth of the dry food business, the gross profit margin (GPM) of the Company's domestic business will gradually improve, driving the improvement of profitability for the domestic business. We raise our 2022E/23E/24E EPS estimates to Rmb0.62/0.88/ 1.18 (from Rmb0.56/0.85/ 1.12). We reiterate the target price of Rmb30 and maintain the "BUY" rating.
China Pet Foods: A growing pet food leader.
China Pet Foods has an in-depth presence in the industry for over 20 years. In recent years, it has focused on the domestic market and strived to build its own brands. Up to now, the Company has a number of independent brands such as "Wanpy" and "Zeal". With the gradual expansion of the Company's sales scale, brand influence has also gradually emerged. In 2021, its domestic operating revenue achieved Rmb690mn, with a CAGR of 46% in the past five years.
Pet food: The market continues to grow with divergence of domestic brands.
In 2021, the scale of pet food end market in China stood at about Rmb48.19bn (+12.9% YoY), of which the scale of cat food was about Rmb26.29bn (+22% YoY), while that of dog food was about Rmb21.81bn (+4% YoY). Based on the US and Japan markets, the domestic pet industry is likely to usher in a new round of “baby boom” in the post-pandemic era, driving the uptrend of the industry prosperity. At present, domestic brands as a whole have occupied about 70%-80% of the market shares, and the competition among domestic brands will become increasingly fierce in the future. We believe that industry leaders with outstanding products, stable supply chain, comprehensive channel presence, and efficient marketing investment are likely to continue to enhance their cutting edge and widen the gaps between them and the competitors. We also believe that the domestic brands will become increasingly divergent.
Domestic business: From 1 to N, the growth path becomes clearer.
The domestic market is the Company's strategic focus and core point. We believe that after years of accumulation, it has established leading advantages in many aspects including brands, channels, R&D and supply chains, and the long-term growth path has become clearer. 1) Wanpy: The brand strategy focuses on the food market. From 2019 to 2021, the CAGR of dry food was 121%. As new factories are gradually put into use, revenue from this brand is likely to sustain high growth. 2) Zeal: From the hot-selling single product to the expansion of the product matrix, the new wet food products are outstanding and likely to continue to ramp up in the future. 3) The investment map based on long-term development strategy has taken shape.
Overseas business: The leading treat exporter, with earnings gains from the RMB devaluation.
In 2021, the Company’s revenue from export business achieved Rmb2.1bn, ranking top in the industry. With the advantages of large scale and consistent product quality, the Company's share of domestic pet food exports has been steadily increasing, with a market share of 20%. In addition to domestic factories, the Company has built production capacity in North America, New Zealand, and Cambodia and on top of that, continues to improve its supply capacity. With the marginal improvement of the exchange rate, the profitability of the Company's overseas business is likely to gradually recover in 2Q22, and we expect increment of Rmb20mn-30mn in its earnings.
Potential risks
Exchange rate fluctuations; intensified competition in the domestic market; new product promotion not up to expectations; raw material price fluctuations.
Investment recommendation
Benefiting from the RMB depreciation, the profitability of the Company's overseas business is likely to gradually recover. At the same time, with the release of new production capacity and the continuous growth of the dry food business, the GPM of the Company's domestic business will gradually improve, propping up the profits of its domestic business. We raise our 2022E/23E/24E EPS estimates to Rmb0.62/0.88/1.18 (from Rmb0.56/0.85/ 1.12). Its revenue from domestic business continues to grow at a high speed with robust growth potential despite the temporary loss. Based on the historical valuation median of overseas comparable companies, 4.5x for Blue Buffalo (BUFF.O) and 10.5x for Freshpet (FRPT.O), and under the SOTP framework, we assign 5x 2022E PS to the Company to derive a target market cap of Rmb4.5bn for its domestic business. The Company as a leading exporter of pet food products has a leading market share. Based on the valuation of 29x for Petpal (300673.SZ) and 22x for Yiyi Hygiene (001206.SZ) (2022E Wind consensus estimates), we assign 24x 20224E PE to its overseas business and arrive at a target market cap of Rmb4.3bn for the segment. We maintain our target market cap of Rmb8.8bn and target price of Rmb30 for the Company and reiterate the "BUY" rating.
【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。

   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。