Story: Hsu Fu Chi (HFC) is a manufacturer and distributor of
confectionery products – namely, candies, cake and cookies and
sachima (a traditional Chinese puff pastry).
Point: The Group is a leading player in China’s candy
industry; according to Euromonitor, it has a sugar confectionery
market share of about 4.1% in 2005. It also manages its own
network of 68 sales offices with over 5,000 sales personnel
throughout China. HFC has over 400 products, which are mainly
marketed under its well-known Hsu Fu Chi (“徐福记”) brand.
Relevance: We project a bottom-line growth of about 15% -
16% for FY08F and FY09F, driven by growing consumer
affluence in China, underpinned by its sales/distribution network
and capacity expansion. We initiate coverage on the counter
with a BUY call and target price set at S$1.41, based on 18x
FY08/09F blended earnings.
The Business
Confectionery business. HFC manufactures and distributes candies, cake
& cookies and sachima (a traditional Chinese sweet puff pastry cake).
Over 400 of its products are marketed under its own brands, namely
Hsu Fu Chi. As of May 2007, we understand that it has a strong sales
network of 68 offices across China, with total sales staff of over 5,000.
Management plans to widen this network to more than 75 offices by
FY08.
Projected growth of 15% in the next two years. Based on our forecast,
we project bottom-line growth for the Group to be about 15% over the
next two years, thanks to its capacity increase and improved utilisation
of the Group’s production facilities. The higher growth projected in
FY07F is largely due to a higher utilisation of its newly added
production capacity and a longer peak season arising from a later
Chinese New Year in 2007 (18 February).
A leader amongst many players. The confectionery industry is
fragmented with low entry barriers. According to Euromonitor, HFC has
a market share of about 4.1% in the sugar confectionery market. HFC’s
key competitive advantage is its sales and distribution network and its
brand name, which is synonymous with Chinese New Year candies.
The Stock
BUY, target price at S$1.41. Based on our valuation, our target price for
this counter is S$1.41, pegged to 18x FY08/09F blended earnings, which
is in line with average Singapore-listed peers’ PE. Our DCF estimates
(WACC 8.8%, terminal growth of 2%) show a valuation of S$1.39,
equating to a PE of 17.2x on FY09F. Given its long history, established
brand as well as strong sales and distribution network, we recommend
BUY.
Risk – sales hinges on Chinese New Year. About two-thirds of annual
sales are from 2Q and 3Q, which is the Chinese New Year season. Any
hiccups during this key season could thwart the Group’s full-year
performance. Other risks include rising cost of raw materials and
competition arising from low entry barriers.
SWOT Analysis
Strengths Weakness
• Centralised control of its extensive sales and
distribution network by Sales Headquarters.
• Experienced management and sales team with
extensive industry experience.
• Strong relationships with customers within the
modern sales channel.
• Strong and popular brand, “Hsu Fu Chi”, built over the
past decade and continual investment in the brand to
retain brand loyalty and increase geographical
coverage.
• Accredited production capabilities with modern
equipment allowing for shorter production
development cycles and lower production costs.
• Wide range of quality confectionery products in varied
packaging forms to suit consumers’ diverse taste and
preference
• Nature of business has high seasonality pattern and sales
are highly concentrated during December to Chinese New
Year period.
• The Group is currently fully reliant on its Dongguan plant.
Even by 2Q08 with the Sichuan plant completed, 95% of
the Group’s capacity will still be situated in Dongguan.
• Sales headquarters solely controls the extensive sales
network from Dongguan. Any adverse impact, such as
retention of key personnel, will affect the workings of the
sales network, in turn, negatively impacting the business.
• The Group’s business is highly dependent on its product
listings and availability in retail stores. Cost of listing and
discount may increase in the future, thereby increasing the
Group’s cost of doing business.
Opportunities Threats
• Low per capita consumption in China compared to
other developed countries and global average.
• Growing affluence of consumers in China.
• Huge geographical expansion still available.
• Larger potential cost savings and higher control of
quality of raw materials and packaging materials
through building production and processing facilities
for such products.
• Modern sales channels playing an increasingly
important role in the retail market. As such channels
expand their geographical reach within the country, it
presents opportunities for the Group to ride on this
trend and expand their retail distribution points.
Opportunities Threats
• Low per capita consumption in China compared to
other developed countries and global average.
• Growing affluence of consumers in China.
• Huge geographical expansion still available.
• Larger potential cost savings and higher control of
quality of raw materials and packaging materials
through building production and processing facilities
for such products.
• Modern sales channels playing an increasingly
important role in the retail market. As such channels
expand their geographical reach within the country, it
presents opportunities for the Group to ride on this
trend and expand their retail distribution points.
Company Background
• Corporate history. In 1992, the executive Chairman, Hsu Chen founded Dongguan Hsu Fu Chi, the first
company in the group with his brothers Hsu Hang (Chief Operating Officer), Hsu Keng (Chief Technology
Officer) and Hsu Pu. Today, it has grown to become a leading candy and confectionery brand in China with
annual revenues of over RMB2bn.
• Hsu Fu Chi owns, manufactures and markets a diverse range of confectionery and bakery products
sold mainly in China. With over 400 products, the Group categorises them into: candy products, cake &
cookie products, and sachima products. Presently, all of the products are produced at its production facility
in Dongguan, Guangzhou Province in China. According to Euromonitor, the Group was ranked first (in
2005) with about 4.1% market share of the Chinese sugar confectionary market.
• Growth in three different phases. The company’s history dates back to 1992, when its Executive
Chairman, Hsu Chen first founded Dongguan Hsu Fu Chi. In the initial phase of entering the China market,
Hsu Fu Chi developed its business by marketing its products via third-party distributors, ensuring good
standard in product quality as well as building its own sales and distribution network to better control
product sales, marketing and pricing. About 95% of the Group’s revenue is from sales of the Group’s
products in China.
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