Foshan Haitian Flavouring and Food:Initiate at BuyHigher Profitability Spices Up Appeal

Strong growth profile — We initiate Haitian at Buy, believing it is a high qualityand decent growth play in China’s new-normal consumption era. Our positive viewis premised on the company’s leading franchise in the growing condiment industry,superior profitability with a 30%+ ROE, strong FCF, good dividend, andmanagement quality. We expect mid-teens sales and earnings growth in 2016-18E.

    Condiments are the sweet spot in the consumer space — Thanks to resilientdemand, trade-up to healthier diet habits and mild competition, China’s condimentindustry has maintained above-F&B industry sales growth despite the past two years’economic slowdown. Consolidation in the condiment industry is also under way withconsumers shifting to famous brands for food quality and safety reasons, which ishelping leaders to gain share in a fragmented market.

    Haitian consolidating its leadership — Haitian is the largest player in its productlines (soy sauce, oyster sauce and seasoning sauce) and leads China’s overallcondiment market with a ~5% share. With 60% and 40% of sales from foodserviceand home-use markets, Haitian is well-positioned to enjoy a broader and morestable demand base than retail-focused players. It has stronger profitability thanksto its economies of scale and sophisticated production management. Outpacing theindustry in the past three years, management plans to further optimize its productmix, expand new markets and product lines, and enhance efficiency.

    Solid financials and relatively undemanding valuation — We expect revenueand EPS to grow at 14% and 16% CAGRs in 2015-18E, and forecast superior ROEof 30%+ on high profit margins and dividend payouts of 60%+ on strong free cashflow. The stock trades at 25x 2017E P/E, below A-share peers’ 34x and globalpeers’ 26x. Our target price of RMB37.70 is based on 30x 2017E P/E.