生物舒適性：國(guó)內(nèi)銷售快速增長(zhǎng)的順風(fēng)追蹤

1、By: Andy Li (S1700519070001), Yihui Sha (S1700519100001)Equity Research ReportFood ProductsFebruary 2020 HYPERLINK / China Pet Food IndustryInitiate coverage: Creature comforts track the tailwinds from rapid growth in domestic salesChinas largest pet food companies generate most of their revenue in

2、the USThe key to success is to grow domestic sales as pet ownership becomes increasingly popular in ChinaInitiate coverage on two industry leaders PEIDI (Buy) and China Pet Foods (Buy) the only listed A-share companies in the sectorDisclosures & Disclaimer: This report must be read with the disclosu

3、res and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it.Why read this report?An opportunity to get to know a small but fast-growing sector in ChinaWe explain how the key to success is to diversify away from exports to expanding domestic salesWe

4、initiate coverage on the only two listed A-share companies in the sector PEIDI (Buy) and China Pet Foods (Buy)The days when a pampered pedigree dog was a rare sight in Chinas large cities are long gone; dogs as our best friends are here to stay. Likewise, fluffy cats are stretched out on many more m

5、illions of sofas than they were 10 years ago. Its clear that, while having a pet is increasingly affordable and fashionable, especially among young professionals, the overall level of ownership is still low. This is good news for Chinas pet food producers. We estimate Chinas pet food market will gro

6、w 40% y-o-y, 33.5% y-o-y and 30.7% y-o-y in 2019-21e, respectively.Chinas largest pet food producers already have strong, fast-growing businesses, but most of their sales come from developed markets, particularly the US. As original equipment manufacturers (OEMs), they supply the leading internation

7、al companies that make the worlds popular brands of dog and cat food, and pet snacks. This market is large but steady and slow-growing. We believe the more exciting opportunities are to be found in Chinas fast-growing domestic pet food market.This report initiates coverage on two small but fast-grow

8、ing companies, which are the only two A- share listed pet food producers in China. We see this as an opportunity to invest early in what we believe is going to become a much larger sector in the next few years.We initiate coverage on Petpal Pet Nutrition Technology (PEIDI) with a Buy rating and on C

9、hina Pet Foods with a Buy rating. In 2018, PEIDI generated 84% of its revenue in the US by supplying major customers, such as Walmart, Spectrum Brands, Petmatrix (acquired by Spectrum Brands) and PetSmart. In the same year, China Pet Foods generated 82% of its revenue overseas, with 30% from the US.

10、 Customers include Spectrum in the US, Armitages in the UK, Germanys Fressnapf, and Japans Ohyama and Unicharm. Since 2018, the company has been developing its domestic e-commerce channels through S, Alibaba and JD.com. Both companies are starting the process of moving away from the OEM model by dev

11、eloping their own branded pet food in China.Contents HYPERLINK l _TOC_250008 Why read this report? 1 HYPERLINK l _TOC_250007 Investment summary 3 HYPERLINK l _TOC_250006 The global pet food market 10 HYPERLINK l _TOC_250005 Chinas pet food market 20 HYPERLINK l _TOC_250004 Company section 33 HYPERLI

12、NK l _TOC_250003 PEIDI (300673 CH) 34 HYPERLINK l _TOC_250002 China Pet Foods (002891 CH) 47 HYPERLINK l _TOC_250001 Disclosure appendix 57 HYPERLINK l _TOC_250000 Disclaimer 60Investment summaryPampered dogs and fluffy cats are an increasingly common sight in Chinas large citiesThe growing populari

13、ty of owning a pet is set to drive the rapid growth in the countrys relatively underdeveloped pet food marketWe initiate coverage on PEIDI (Buy) and China Pet Foods (Buy)Creature comforts: follow the tailwind of domestic salesOwning a pet is increasingly affordable and fashionableBoth companies are

14、developing their own branded pet food in ChinaThe days when a pampered pedigree dog was a rare sight in Chinas large cities are long gone; dogs as our best friends are here to stay. Likewise, fluffy cats are stretched out on many more millions of sofas than they were 10 years ago. Its clear that, wh

15、ile having a pet is increasingly affordable and fashionable, especially among young professionals, the overall level of ownership is still low. This is good news for Chinas pet food producers. We estimate Chinas pet food market will grow 40% y-o-y, 33.5% y-o-y and 30.7% y-o-y in 2019-21e, respective

16、ly.Chinas largest pet food producers already have strong, fast-growing businesses, but most of their sales come from developed markets, particularly the US. As original equipment manufacturers (OEMs), they supply the leading international companies that make the worlds popular brands of dog and cat

17、food, and pet snacks. This market is large but steady and slow-growing. We believe the more exciting opportunities are to be found in Chinas fast-growing domestic pet food market.This report initiates coverage on two small but fast-growing companies, which are the only two A- share listed pet food p

18、roducers in China. We see this as an opportunity to invest early in what we believe is going to become a much larger sector in the next few years.We initiate coverage on Petpal Pet Nutrition Technology (PEIDI) with a Buy rating and on China Pet Foods with a Buy rating. In 2018, PEIDI generated 84% o

19、f its revenue in the US by supplying major customers, such as Walmart, Spectrum Brands, Petmatrix (acquired by Spectrum Brands) and PetSmart. In the same year, China Pet Foods generated 82% of its revenue overseas, with 30% from the US. Customers include Spectrum in the US, Armitages in the UK, Germ

20、anys Fressnapf, and Japans Ohyama and Unicharm. Since 2018, the company has been developing its domestic e-commerce channels through S, Alibaba and JD.com. Both companies are starting the process of moving away from the OEM model by developing their own branded pet food in China.Despite short-term i

21、ssues, such as the US-China trade tensions and the African swine fever, which has pushed up the price of chicken, a key ingredient, we believe the outlook for Chinas pet food companies, particularly those that can expand domestic sales, is bright indeed.Global pet food market to experience stable gr

22、owthSales in the global pet food market totalled USD91.1bn in 2018, with a CAGR of c5.5% in 2010-We estimate the global pet food market will expand steadily at a CAGR of 7% in 2019-21e.The market is highly concentrated, with the top five companies having a combined market share of more than 50%.Curr

23、ently, the global pet food market is highly concentrated. The market share of the top five companies Mars, Nestl, Colgate (Hills), JM Smucker and General Mills (Blue Buffalo) is more than 50%. Given their advantages in terms of brand and capital, we believe they will achieve above-industry average g

24、rowth. The US is the worlds largest pet food market valued at more than USD30bn in 2018 in terms of sales, of which snacks represented 22%. We estimate it will grow at a CAGR of c5% in 2019-23e, led by pet snacks (7-10%).Chinas underdeveloped market has potentialWe estimate the total sales value of

25、Chinas overall pet market was RMB101.6bn in 2018, with a CAGR of 37.4% in 2004-18; pet food accounted for RMB59bn. We believe there is room for substantial growth. In 2017, there were 59.12m pet-owning households in China, about 17% of the total population, well below the figures for the US (68%) an

26、d Japan (38%). We estimate the pet food market will grow 40% y-o-y, 33.5% y-o-y and 30.7% y-o-y in 2019-21e to RMB82.7bn, RMB110.4bn and RMB144.3bn, respectively.Exhibit 1. The rate of pet ownership is still low in China (2017)Exhibit 2. We expect the pet food market to grow rapidly80%70%60%50%40%30

27、%20%10%0%ChinaJapanAustraliaUSA15068%17%38%57%1005002004 2006 2008 2010 2012 2014 2016 2018 2020e70%60%50%40%30%20%10%0%Pet food market size(right axis,RMBbn)y-o-y(right axis,%)Source: Wind, HSBC Qianhai SecuritiesSource: Wind, HSBC Qianhai Securities estimatesThree growth factorsYoung consumers: As

28、 people get wealthier, they tend to spend more on creature comforts like their pets. Chinas pet market is still underdeveloped compared to countries like the US, Japan and Europe, so we see significant room for growth, particularly among younger consumers. According to the “2017 China Pet Sector Whi

29、te Paper”, pet ownership is concentrated among the post-1980s (41%) and post-1990s (32%) generations. As younger people are the main driver of consumption in China and are likely to be more open to owning a pet, we think they will drive the market.Diversified demand: Pet products are similar to many

30、 other parts of Chinas consumer market people like new ideas and concepts. This means the market will likely broaden. For example, high-income groups attach greater importance to fancier types of specialised pet food, while low- income and young consumers are more sensitive to price.Online channels:

31、 The younger generations preference for online shopping will likely be another driver in China, where e-commerce has become an increasingly powerful force in the retail market.Export tariffsPEIDI: Export tariffs on PEIDIs products increased by 25% because of the US-China trade tensions. The company

32、does not disclose how much of the additional tariff it pays or how much it passes on to customers. We try to quantify the impact on profits based on the companys 1H19 results:1H19 revenue from the US was RMB308.8m, with 59.46% coming from its Chinese factoriesProducts from its Chinese factories: 25%

33、 in additional export tariffs, and we quantify the impact by assuming the company paid different levels of tariffs 25%, 20%, 15%, 10% and 5%The corporate tax rate was 25%Based on our assumptions about the additional tariffs levels, we estimate PEIDI paid between RMB34.43m (25%), RMB27.54m (20%), RMB

34、20.66m (15%), RMB13.77m (10%) and RMB6.89m(5%) in 1H19. Without the additional export tariffs, 1H19 results would have improved by 112.6%, 90.1%, 67.6%, 45% and 22.5%.We estimate the additional export tariffs paid by PEIDI to be 15-20%, which means 1H19 net profit would have been about RMB40m withou

35、t the additional export tariffs.Exhibit 3. PEIDI Impact of extra export tariffs on 1H19 results Export tariffs paid by PEIDI RMBm1H1925%20%15%10%5%Sales exported to the US from its Chinese factories183.6134.4327.5420.6613.776.89 Adjusted net profit without extra export tariffs Net profit22.9348.7543

36、.5938.4233.2628.09Changes (%)112.6%90.1%67.6%45.0%22.5%Source: Wind, HSBC Qianhai Securities estimatesChina Pet Foods: A 25% in additional export tariffs is to be paid because of the US-China trade tension.We estimate that a third of the companys revenue came from the US market in 1H19The American s

37、ubsidiary, American Jerky Company LLC, contributed RMB113.69m (43.3% of sales to the US)Products from its Chinese factories had 25% in additional export tariffs, and we quantify the impact by assuming the company paid 25%, 20%, 15%, 10% and 5%The corporate tax rate was 25%We estimate China Pet Foods

38、 paid about 10% in additional export tariffs, which means 1H19 net profit would be about RMB30m without the additional export tariffs.Exhibit 4. China Pet Foods Impact of extra export tariffs on 1H19 results Export tariffs paid by company RMBm1H1925%20%15%10%5%Sales to the US262.39Sales exported to

39、the US from its China factories148.737.1829.7422.3114.877.44 Adjusted net profit without additional tariffsNet profit16.1143.9938.4232.8427.2621.69Changes (%)173.1%138.5%103.8%69.2%34.6%Source: Wind, HSBC Qianhai Securities estimatesCompetitionIn 2017, the top five pet food companies in China had a

40、combined market share of c30% and the top 20 had less than 50% of the market. According to TianYanC, there are 3,000companies engaged in pet food production and processing, suggesting that Chinas pet food industry is highly fragmented. The main companies in Chinas pet food market are international b

41、rands, such as Royal Canin, which have high brand recognition and established sales channels. Leading domestic brands include Bridge Petcare.Initiate coveragePEIDI generates most of its revenue by supplying large US retail operationsChina Pet Foods: 82% of its revenue comes from pet snack exportsPEI

42、DI (300673 CH, Buy, TP RMB32.20)Petpal Pet Nutrition Technology (PEIDI) generates most of its revenue by supplying large US retail operations like Walmart, Spectrum Brands and PetSmart. Founded in 2002, the company develops, manufactures and distributes a wide range of pet food, including animal ski

43、n chews, plant chews, and meat snacks.In 2017, PEIDI became the first pet food maker to list on the A-share market. In 2018, the company established a subsidiary, Petpal Pet Nutrition NZ Limited, in New Zealand, and acquired BOP Industries Limited (BOP), a pet food company in New Zealand. The strate

44、gy is to make its own-branded pet staple food there and sell the products in China, where it is developing its domestic sales channels. The company also has production capacity in Vietnam and Cambodia.The business has expanded rapidly in recent years but has hit two speed bumps in the last 18 months

45、. The first was export tariffs related to the US-China trade tensions. The second, ongoing one, is African swine fever, which has pushed up the price of chicken, a key raw material in pet food, as consumers seek alternatives to pork. This will likely hit 2019e earnings and profits, but we think rapi

46、d growth will resume in 2020-21e. We expect net profit to fall 55.8% y-o-y in 2019e and then rise 100% in 2020e and 37.4% in 2021e to RMB61.95m, RMB124m and RMB170m, respectively. Overall, we expect an earnings CAGR of 66% in 2019-21e, up from 32.1% in 2016-18.PEIDI has been trading at a historical

47、average forward PE of 32.7x since its listing. As there are only two listed pet food A-share companies, overseas peers tend to have much larger market caps. For peer comparison, we chose a fast-growing, small company, fresh pet food producer Freshpet (FRPT US, Not Rated), which has a PE of more than

48、 60 x for 2019-21.The strong earnings CAGR in 2019-21e is partly due to the low base in 2019e and a similar condition happened in 1H18, when the average PE was about 38x with a low base in 1H17 and a nearly 100% growth rate, so we think a 38x target PE is justified; its higher than the historical av

49、erage and lower than Freshpets average PE. Based on our 2020e EPS estimate, we derive a target price of RMB32.20, which implies 29.5% upside from the current share price. We initiate coverage with a Buy rating.Recently, the companys share price has been volatile because of the novel coronavirus pneu

50、monia (NCP).Potential share price catalysts: A marked improvement in earnings on a q-o-q basis, a stronger- than-expected easing of trade tension, and falling raw material prices.Key downside risks: An escalation of the US-China trade tension, a larger-than-expected rise in raw material prices, slow

51、er-than-expected domestic market expansion, and slowing downstream demand growth.China Pet Foods (002891 CH, Buy, TP RMB27.90)The company has two main product categories, pet snacks and pet food. Its revenue mainly comes from pet snack exports (82%) to more than 50 countries like Japan, the US, Cana

52、da and Germany. Its main customers include Spectrum in the US, Armitages in the UK, GermanysFressnapf, and Japans Ohyama and Unicharm. Some 30% of its revenue comes from the US, so it has less exposure to tariffs that PEIDI.In 2018, the company stepped up the building of its domestic sales channels

53、in China, partly developing e-commerce channels through S, Alibaba and JD.com. This proved to be expensive selling expenses rose 107% y-o-y to RMB140m, but domestic revenue rose from RMB150m in 2017 to RMB250m. Higher selling expenses not only boosted revenue up 39.1% y-o-y to RMB1.412bn but also le

54、d to net profit attributable to shareholders of the listco dropping 23.4% y-o-y to RMB56.44m in 2018.We estimate 2019-21e net profit to grow 4.7%, 74.1% and 52.9% y-o-y to RMB59.12m, RMB103m and RMB157m, respectively, at a CAGR of 41% during the period, higher than the CAGR of 0.5% in 2015-18.Since

55、its listing, the stock has been trading at a historical forward PE of 45x. Given the high valuation following its debut in 2018 and the fact it has grown its domestic sales faster than PEIDI, we think a 2020e forward PE of 45x, equal to the historical average, is justified. Our target price of RMB27

56、.90, based on our 2020e EPS estimate, implies upside of 23.7% from the current share price. We initiate coverage with a Buy rating.Recently, the companys share price has been volatile because of the novel coronavirus pneumonia (NCP).Potential share price catalysts: A marked improvement in earnings o

57、n a q-o-q basis, a stronger- than-expected easing of trade tension, and falling raw material prices.Key downside risks: A greater-than-expected increase in raw material prices, worse-than- expected business development in China, and demand slowdown of downstream customers.Where we are different from

58、 the marketPEIDI: Our 2019-21e revenue estimates are 10.3%, 8.2% and 6.1% below consensus, respectively, while our earnings estimates are 30.4%, 15% and 1.1% below consensus in 2019-21e. We believe 2019 consensus has not fully priced in the negative impact of the US-China trade frictions and the inc

59、reasing raw material cost (such as chicken) on revenue and earnings. In addition, the increase in marketing costs due to the development of Chinas market will likely affect profits in the short term, even though revenue should increase rapidly. We are positive on the long-term profit outlook and bel

60、ieve the company will become an important player in Chinas pet food industry.China Pet Foods: Our 2019-21e revenue estimates are 7.5%, 13.3% and 18.3% below consensus, respectively; our earnings estimates are 7.7% below in 2019e, 9.4% above in 2020e and 6.1% below in 2021e. We believe 2019 consensus