honworld group (2226hk) china puti fast growing by naturally...

of 17

10 February 2014

Kenneth Li

[email protected]

(852) 2235 7619

Trading data

52-Week Range (HK$)

3 Mth Avg Daily Vol (m)

No of Shares (m)

Market Cap (HK$m)

Major Shareholders (%)

Auditors

Result Due

8.24/10.64

-

519

5,320

Mr. Chen(55.6%)

E&Y

FY13: March Company description

Honworld is the largest manufacturer of cooking

wine in China under the brand Lao Heng He (老恒和). The Lao Heng He brand has rich history in

brewing and sales of condiment products in China

dated back to the Qing dynasty. Honworld was

the first manufacturer to introduce

naturally-brewed cooking wine to the Chinese

market in December 2011, and the products

received overwhelming response from

consumers.

Price chart

0.00 0.00 0.00 0.00 3.00 3.00 3.00 3.00 6.00 6.00 6.00 6.00 9.00 9.00 9.00 9.00 12.00 12.00 12.00 12.00 Jan-14

HK$

Fast growing by naturally brewing Rating Buy New initiation

Target price HKD 14.00

Current price HKD 10.64 Upside +32%

Largest naturally-brewed cooking wine producer in China Honworld is the largest manufacturer of cooking wine in China under the brand Lao Heng He (老恒和). The Lao Heng He brand has rich history in brewing and sales of condiment products in China dated back to the Qing dynasty. Honworld was the first manufacturer to introduce naturally-brewed cooking wine to the Chinese market in December 2011, and the products received overwhelming response from consumers. As such, Honworld’s turnover is forecast to grow by CAGR 38% during FY12-FY14.

Naturally-brewed base wine inventory offers unique advantages Honworld targets to more than double its base wine inventory to 1.69m liters by FY14, base wine inventory forms a natural entry barrier to natural-brewed cooking wine industry as it takes atleast 2-3 years produce vintage base wine. Naturally-brewed cooking wine offers much better tasting and is healthier compared to chemically-brewed cooking wine. Demand for Honworld’s natural condiment products with healthy and natural concepts and nutritional value is expected to benefit from rising health consciousness and food safety awareness in China.

Expanding distribution network from regional to national Honworld’s sales have been geographically concentrated in Zhejiang, Shanghai, Guangdong, Liaoning, Shandong and Beijing, which contributed 88% of total revenue in 2013 1-8M respectively. Honworld is still in the stage of expanding its nationwide distribution networks and streamlining distributor structure to deepen its market penetration in other regions and have more promotion with distributors to promote the concept and advantages of naturally- brewed cooking wine products compared to chemically-produced.

China condiment market offers growth and recession-proof During 2012-2017, the Chinese cooking wine market is forecast to grow by CAGR 20.3% during 2012-2017 while the overall Chinese condiment market is forecast to grow by CAGR 12.4% driven by rising purchasing power, rising demand for products with health and wellness attributes. Besides growth, China’s condiment market also offers recession-proof ability as both Chinese and US condiment markets recorded growth during the great financial crisis in 2008/09.

Initiate at BUY with target price HK$14.00 We initiate Honworld with BUY and target price of HK$14.00 based on 25x FY14 PE, based on the average FY14 PE of listed China consumer staple companies. Although Honworld has short listing history, we believe it deserves scarcity premium as it is the only condiment stock listed in Hong Kong market.

Rmb m (Dec-end) FY10A FY11A FY12A FY13E FY14E

Revenue 36 109 337 522 643

Operating profit 12 39 151 214 283

Net Profit 6 20 98 156 233

EPS (Rmb) - - - 0.30 0.45

P/E (x) - - - 28.3 19.0

Div yield (%) - - - 0.9 1.4

Sources: Company, CIRL estimates

Honworld Group (2226HK)

China Puti

of 17

Largest naturally-brewed cooking wine producer in China

Honworld is the largest manufacturer of cooking wine in China under the brand Lao

Heng He (老恒和). The Lao Heng He brand has rich history in brewing and sales of

condiment products in China, which can be dated back to the Qing dynasty’s Xianfeng

period from 1851 to 1861. The largest shareholder of Honworld, Mr. Chen whose

ancestors were the original founders of Lao Heng He, was officially the first

manufacturer to introduce naturally-brewed cooking wine using naturally-brewed yellow

rice wine as base without adding any alcohol to the Chinese market in December 2011,

and received overwhelming response from consumers.

Honworld offers different price range naturally-brewed cooking wine to cater for different

consumer markets, based on the weighted average wine years of the vintage base wine

used. Its premium cooking wine products are sold with ASP range from Rmb20-Rmb38,

high end range from Rmb16-Rmb20, medium range from Rmb8-16 and mass market

products range from Rmb2.5-Rmb6. The company also offers soy sauce and vinegar

products with ASP range from Rmb4 to Rmb38.

Exhibit 1:Turnover of Honworld Exhibit 2: Composition of Honworld turnover for FY13

0

100

200

300

400

500

600

700

FY10 FY11 FY12 FY13E FY14E

Cooking wine Soy sauce products Vinegar products Others

CAGR 38%

33

109

337

522

643

RMB m

Cooking wine,

67%

Soy sauce

products, 27%

Vinegar

products, 1%Others, 4%

Source: Company, CIRL estimates Source: Company, CIRL estimates

Exhibit 3: Cooking wine breakdown by product category for FY13 Exhibit 4: Cost of sales for Honworld (2013 1-8M)

Premium, 26%

High-end, 30%

Medium-range,

39%

Mass-market,

5%

Rice, 51%

Packaging

materials, 24%

Soy beans, 13%

Wheat, 3%

Others, 9%

Source: Company, CIRL estimates Source: Company, CIRL

of 17

Exhibit 5: Premium cooking wines Exhibit 6: High-end cooking wines

Source: Company, CIRL Source: Company, CIRL

Exhibit 7: Mid-end cooking wines Exhibit 8: Mass market cooking wines


Exhibit 9: Soy source products Exhibit 10: Vinegar products


of 17

Naturally-brewed base wine inventory offers unique advantages

Naturally brewed cooking wine has stronger natural flavour

In Chinese cuisine, the four key attributes of good cuisine are colour, flavor, taste and

appearance (色，香，味，美). The main competitive advantage of Honworld’s cooking

wine over its competitors is that all its cooking wine products are naturally brewed which

enhance all four attributes.

We have tried to cook food using Honworld’s cooking wine products with those of its key

competitors, all with similar price range. We found Honworld’s key advantage over its

key competitors such as Wang Zhi He, Lao Cai Chen and Hengshun, is that Honworld’s

naturally-brewed cooking wine has much stronger wine flavor and food cooked using it

has more natural coloring as shown in Exhibit 12. We found those chemically-produced

cooking wines have strong alcoholic flavor and once the cooking wine reached high

temperature, the alcohol which was added in cooking wine evaporated and food was left

with little flavor and tastes. In addition, couple with the Chen family’s secret recipe of

cooking wine dated back to the Qing Dynasty which comprised of a mix of over 40

varieties of traditional Chinese herbs, Honworld’s cooking wine offers much better tastes

than its other key competitors.

Exhibit 11: Market share in the cooking wine industry in China

Rank Company name Market share in

value 2012 (%)

Market share in

volume 2012 (%)

Primary production method

1 Lao Heng He

(老恒和)

13.8 5.8 Naturally-brewed

2 Wang Zhi He

(王致和)

6.4 3.6 Chemically-produced

3 Lao Cai Chen

(老才臣)


4 Hengshun

(恒顺)


5 Julong

(巨龙)

1.3 0.8 Naturally-brewed

Source: Euromonitor, Company, CIRL

Exhibit 12: Cooked meat – 3rd

and 4th

piece used Honworld Exhibit 13: Cooking wines by different brands

Source: CIRL Source: CIRL

of 17

Exhibit 14: Honworld mid-end cooking wine Exhibit 15: Brand B cooking wine


Exhibit 16: Brand C cooking wine Exhibit 17: Brand D cooking wine


Naturally-brewed cooking wine is healthier

According to the applicable industrial standards in China, there are 3 methods to

produce cooking wine. 1) Honworld’s method using naturally-brewed rice wine as base

wine, 2) using alcohol as base wine and 3) using a mixture of alcohol and

naturally-brewed rice wine as base wine.

Chemically-produced cooking wine generally contains preservatives, plasticizer, glacial

acetic acid and other artificial flavorings, while naturally-brewed cooking wine products

are rich in vitamins, minerals, and a variety of amino acids, including eight essential

amino acids that cannot be synthesized by human body and must be obtained from

daily diet. Due to rising consumer sophistication, health consciousness and food safety

awareness in recent years, demand for cooking wine products with healthy and natural

concepts and nutritional value is also expected to increase. In particular, there has been

an increasing market demand for naturally-brewed cooking wine which is free of

blended alcohol, preservatives and artificial flavorings.

of 17

Naturally-brewed base wine forms a natural entry barriers and fuels future growth

Since its strategic transformation into a naturally-brewed cooking wine manufacturer in

December 2011, Honworld has been actively building up its base wine inventories, both

vintage base wine and mixer base wine. Base wine which has stored for 2 years or more

are regarded as vintage base wine, while base wine which store for less than 2 years

are regarded as mixer base wine. Honworld’s mixer base wine inventories has

increased 274% to 40.3m liters from FY11 to 2013-8M and its vintage base wine

inventories increased by 44% to 15.1m liters from FY11 to 2013-8M. We believe the

vintage wine base is Honworld’s key advantages over its competitors, as it forms a

natural industry entry barrier. This is because for new players to become a

naturally-brewed cooking wine producer, it takes atleast 2-3 years to produce vintage

base wine, and after that it takes more time to build the brand and distribution network.

As Honworld will use 50% of its IPO proceeds, approximately HK$445m to purchase

rice to produce base wine, we believe Honworld’s first mover advantage over its

competitors will be further enhanced. Honworld targets its total wine base to reach 169m

liters by the end of FY14.

Exhibit 18:Honworld’s vintage base wine inventory Exhibit 19: Honworld’s mixer base wine inventory

11.0 10.5 16.4

24.5

55.1

112.3

0

20

40

60

80

100

120

FY10 FY11 FY12 FY13E FY14E FY15E

m liters

0.8 10.8 13.0

60.2

117.5

140.1

0

20

40

60

80

100

120

140

160

FY10 FY11 FY12 FY13E FY14E FY15E

m liters

Source: Company, CIRL estimates Source: Company, CIRL estimates

Exhibit 20: Honworld’s inventory vs turnover Exhibit 21: Breakdown of inventory as at end of 2013-8M

36

109

337 323

522

643

21 64

115

253 238

381

0

100

200

300

400

500

600

700

FY10 FY11 FY12 2013 8M FY13E FY14E

Turnover Inventories

RMB m

Raw materials ,

8%

WIP, 90%

Finished goods,

1%

Source: Company, CIRL estimates Source: Company, CIRL

of 17

Honworld’s inventory level jumped 120% from FY12 to 2013-8M， we believe this is

normal as Honworld needs to build large vintage base wine and mixer base wine

inventories for future market expansion.

Distinctive ecological advantage by locating in Huzhou

Honworld has four production facilities located in Huzhou Zhejiang. Huzhou has

distinctive ecological advantages including the local water, air and accompanying

microbiological conditions, have provided a suitable environment for traditional brewing

methods over its main competitors such as Wang Zhi He and Lao Cai Chen which are

based in northern China. In addition, the main reasons of the Beijing based Lao Cai

Chen and Wang Zhi He used alcohol as base is that the weather in northern China is

not suitable to brew yellow wine.

Expanding distribution network from regional to national

Honworld’s sales have been geographically concentrated in a few key regional markets,

namely Zhejiang Province, Shanghai, Guangdong Province, Liaoning Province,

Shandong Province and Beijing, contributing an aggregate of 85% and 88% of total

revenue in FY12 and 2013-8M respectively. Honworld has over 200 distributors

throughout China covering 30 provinces, municipalities and autonomous regions.

However, Honworld is still in the stage of expanding its nationwide distribution networks

and streamlining distributor structure to deepen its market penetration in other regions.

At the end of 2013, Honworld added two distributors in Chongqing and Harbin to deepen

its market penetration.

Exhibit 22: Sales by geographical location (2013-8M) Exhibit 23: Sales by distributor category (2013-8M)

Zhejiang

province, 25%

Shanghai, 17%

Guangdong

province, 15%

Liaoning

province, 12%

Shandong

province, 11%

Beijing, 9%

Rest of China,

12%

Category A,

83.3%

Category B, 7.8%

Category C, 2.3%Category D, 3.5% Others, 3.1%


Honworld has implemented a multi-category distributor system to manage distribution of

products since 2011. Distributors are classified into Categories A, B, C and D, with

Category A distributors employing extensive distribution networks and sales channels

covering one or more provinces, while Categories B, C and D distributors maintaining

more limited distribution capacities and geographic reach. Honworld’s product

distribution is primarily handled through Category A distributors and supplemented by

Categories B, C and D distributors to ensure comprehensive market coverage.

of 17

The aggregate sales attributable to Category A distributors constituted 83.3% of

revenue in 2013-8M. Honworld has six Category A distributors and plans to expand

Category A distributors by engaging additional seasoned condiment distributors as well

as provide additional support to eligible Category B or C distributors.

Honworld plans to further strengthen sales and marketing efforts through enhanced

advertising and promotional activities with Category A distributor. In addition, Honworld

will promote the concept and advantages of naturally-brewed cooking wine products

compared to those that are chemically-produced.

Exhibit 24: Honworld’s cooking wine in supermarkets in China Exhibit 25: Number of distributors by categories

6 519

184

0

20

40

60

80

100

120

140

160

180

200

Category A Category B Category C Category D


Exhibit 26: Honworld’s current distribution network

Source: CCID, CIRL

of 17

China condiment market offers both growth and recession-proof

According to Euromonitor, the condiment market in China grew by CAGR 14.4% during

2008-2012 and it is forecasted to grow by CAGR 12.4% during 2012-2017. The key

condiment products include cooking wine, soy sauce, vinegar and MSG. The PRC

condiment industry is primarily driven by the size and growth of the PRC population as

well as rising purchasing power, rising demand for products with health and wellness

attributes and increasing popularity of regional cuisines outside of their originated

regions.

We believe China’s condiment market is a good place to invest in given it offers both

sales growth and recession-proof. The Chinese condiment market still recorded growth

of 7% in 2009 amid global financial crisis. On the other hand, the US condiment market

recorded growth of 4.2% and 5.9% respectively during 2008-2009 amid global finance

crisis.

Exhibit 27: China condiment market Exhibit 28: US condiment market growth rate during GFC

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F

Rmb m

CAGR 14.4%

CAGR 12.4%

0.6%

1.2%

4.2%

5.9%

2.8%

0%

1%

2%

3%

4%

5%

6%

7%

2006 2007 2008 2009 2010

Source: Euromonitor, CIRL Source: Euromonitor, CIRL

Exhibit 29: McCormick turnover amid GFC Exhibit 30: Cooking wine sales volume breakdown by channels

2,716 2,916

3,176 3,192 3,336 3,697

4,014 4,123

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

US$ m

Retail sales ,

50.50%

catering services,

41.50%

Others, 8%


of 17

The PRC cooking wine market grew by CAGR of 23.4% during 2008-2012 according to

Euromonitor. As one of the fastest growing segment in the PRC condiment market, it is

forecasted to grow by CAGR of 20.3% during 2012-2017 due to rising purchase power

more consumer use cooking wine instead of yellow wine or white wine for cooking..

Exhibit 31: Cooking wine retail sales value in China Exhibit 32: Cooking wine retail sales volume in China

1.8 2.2 2.7

3.4 4.2

5.2

6.4

7.6

9.0

10.6

0

2

4

6

8

10

12

2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Rmb b

CAGR 23.4%

CAGR 20.3%

462 536

621 717

824 943

1,071

1,208

1,352

1,500

0

200

400

600

800

1,000

1,200

1,400

1,600

2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

'000 tonnes

CAGR 15.6%

CAGR 12.7%


Fragmented cooking wine market offers opportunities for industry consolidation

There were over 1,000 cooking wine manufacturers in China in 2012, most of which are

small to medium-sized players who compete on a regional level. The PRC cooking wine

industry is led by a small number of major players, with the rest of the market highly

fragmented. In 2012, the top five manufacturers accounted for an aggregate of 28.1%

and 14.0% of the total cooking wine market share in terms of retail sales value and retail

sales volume. Honworld is the largest player in the cooking wine market with 14%

market share in terms of retail value in 2012 and 6% market share in retail volume in

2012. Leading players such as Honworld have been placing more emphasis on retail

sales as they enjoy higher brand awareness among households and offer higher value

cooking wine products. We believe the fragmented market offers Honworld plenty of

opportunities for industry consolidation.

Exhibit 33: China cooking wine market share by sales value 2012 Exhibit 34: China cooking wine market share by sales volume 2012

Honworld, 14%

Beijing Wang Zhi

He, 7%

Beijing Lao Cai

Chen, 4%

Hengshun, 2%

Chengdu Julong,

1%

Others, 72%

Honworld, 6% Beijing Wang Zhi

He, 4% Beijing Lao Cai

Chen, 2%

Hengshun, 1%

Chengdu Julong,

1%

Others, 86%


of 17

Difference between cooking wine and yellow wine

The main differences between cooking wine and yellow wine is that yellow wine is for

drinking and cooking wine is for cooking food. Cooking wine use yellow wine as base

wine and adds traditional medicine flavor so the food has better flavor and taste. During

the cooking wine production process, proportional amount of water is added to the

yellow wine base because yellow wine flavor is too strong for cooking. When yellow

wine is used to cooking meat, it will take away the true taste and flavor of the meat while

frying vegetable will cause bitterness.

As such, this partly explains why Honworld’s gross margin of 57% in FY12 is a lot higher

than Guyuelongshan (600059 CH) as the later is a pure yellow wine for drinking.

Another reason for the margin difference of the two companies is that Guyuelongshan

spends 50% of its COGS on packaging while packaging only accounted for 25% of

COGS for Honworld. The third reason is that Guyuelongshan is an SOE while Honworld

is a private company, Guyuelongshan has close to 3,000 employees while Honworld

only has 188 people, overall turnover per employee is Rmb0.54m for Guyuelongshan

while Honworld is Rmb1.79m per employee. In addition, there is Rmb240/t tax impose

on sales of yellow wine, we estimates the tax reduces 1.5ppt from gross margin of

Guyuelongshan.

In China, many family use yellow wine or white wine as cooking wine. We believe as

consumers pay more details to condiments used, more consumers will distinguish the

different usage and tastes of yellow wine, white wine and cooking wine. An example of

consumers paying more details to condiments use is that consumer used to have one

soy source (生抽) at home for all purpose. Now consumers realize the need of old soy

source (老抽) to marinate the meat to get more food coloring, as such there are different

soy sources at home for different usage.

The cooking wine market could be much bigger than Euromonitor’s estimates

Due to the fact that most Chinese consumers use yellow wine and white wine for

cooking instead of cooking wine, the actual cooking wine market is worth around

Rmb30b to Rmb35b according to China Yellow Wine Association, which is also agreed

by Honworld’s management. Euromonitor’s cooking wine estimate of Rmb4.2b in 2012

is based on their survey on the name “料酒” only. According to management, Honworld

targets to reach 10% market share in the actual cooking wine market in 5 years time.

Gradual convergence of consumer tastes and demands

Due to the geographic divergence in consumer tastes, the PRC cooking wine market

used to be highly fragmented caused by the different regional products that suit the

respective regional demand. Driven by the robust population migration across China in

the past decades, there is a trend of product homogeneity in the cooking wine market in

China as differences in regional consumer preferences are greatly narrowed. Cooking

wine produced from yellow rice wine which used to be primarily consumed by

consumers in Yangtze River Delta region is now becoming more popular in other

regions including the inland areas. The trend of convergence of consumer tastes and

demands creates growth opportunities for cooking wine manufacturers, especially those

with extensive distribution network and established relationship with seasoned

distributors, to tap into the nationwide market.

of 17

Financials

We forecast revenue growth to be driven by cooking wine segment. We forecast

total revenue growth of 55% yoy in FY13 and 23% yoy in FY14. In particular, we

forecast cooking wine segment to enjoy fast growth of 20%/25% for FY13/FY14 mainly

due to rising in sales volume and expansion in distribution network. We forecast soy

sauce segment sales to grow by 1011%/23% in FY13/FY14 due to rise in sales volume,

ASP as well as expansion in new distribution network.

Gross margin to be stable at around 58% for FY13/FY14. We forecast overall gross

margin to reach 58.5% in FY13 from 57.2% in FY12 due to ASP hike as well as higher

sales of soy sauce. We forecast overall gross margin to decline slightly to 57.7% in

FY14 due to rise in raw material costs.

Tax rate. We expect Honworld will receive preferential tax rate of 15% starting from

FY14. As a result, we forecast net profit using 17% effective tax rate from FY14.

Surge in net profits. We expect net profit to reach HK$156m in FY13, representing

net profit growth of 59% yoy. We forecast net profit to grow by 49% yoy to HK$233m in

FY14.

We initiate Honworld with BUY at 25x FY14 PE, target price HK$14.00. We initiate

Honworld with BUY and target price of HK$14.00 based on 25x FY14 PE, based on the

average FY14 PE of listed China consumer staple companies. Although Honworld has

short listing history, we believe it deserves scarcity premium as it is the only condiment

stock listed in Hong Kong market.

of 17

Exhibit 35: Peers comparison

Source: Bloomberg, CIRL

Bloomberg Mkt Cap Price PER (x) P/B (x)

code (HKD mn) (HKD) FY12A FY13E FY14E FY12A FY13E FY14E

CHINA DISCRETIONARY COMPANIES

TINGYI HLDG CO 322 HK 110,921 19.82 31.4 33.0 26.3 6.8 5.7 5.1

WANT WANT CHINA 151 HK 134,612 10.18 31.3 26.4 22.6 13.0 10.8 9.0

CHINA RES ENTERP 291 HK 55,164 22.95 14.0 31.0 25.4 1.5 1.4 1.3

TSINGTAO BREW-H 168 HK 74,665 57.00 35.6 30.2 26.2 5.6 4.9 4.2

CHINA MENGNIU DA 2319 HK 67,538 36.80 42.1 33.2 25.1 4.6 4.1 3.7

UNI-PRESIDENT 220 HK 25,376 7.05 24.1 24.5 22.9 3.0 2.7 2.4

Average 78,045.9 25.6 29.8 29.7 24.7 5.8 4.9 4.3

HONWORLD GROUP 2226 HK 5,090 10.64 28.3 19.0 2.9 2.6

INTERNATIONAL CONDIMENT COMPANIES

MCCORMICK-N/V MKC US 64,590 21.4 20.1 19.1 5.2 4.9 4.7

AJINOMOTO CO INC 2802 JP 65,308 15.2 18.6 18.7 1.3 1.2 1.4

KIKKOMAN CORP 2801 JP 29,650 27.4 33.5 26.9 1.9 1.8 2.1

Average 53,183 21.3 24.1 21.5 2.8 2.7 2.7

of 17

Exhibit 36: Key assumptions

Source: Company, CIRL estimates

FY10 FY11 FY12 FY13E FY14E

Revenue

Cooking wine 15 60 292 352 439

Soy sauce products 10 21 13 142 175

Vinegar products 4 14 9 5 6

Others 4 15 23 23 23

Total 33 109 337 522 643

ASP (Rmb)

COOKING WINE

Premium 14.8 16.7 16.7 17.2

High-end 10.9 11.0 11.3

Medium-range 4.3 5.3 6.1 6.3 6.5

Mass-market 1.9 2.0 2.5 4.6 4.7

Sub total 2.4 4.0 5.4 8.6 8.8

Soy sauce products 3.3 3.5 4.3 11.0 11.3

Vinegar products 2.7 4.1 3.6 5.4 5.5

VOLUME (million litres)

COOKING WINE

Premium 0.4 4.9 5.5 6.4

High-end 2.3 9.5 11.8

Medium-range 1.5 7.4 19.0 21.8 26.4

Mass-market 4.7 7.4 28.1 4.1 5.0

Sub total 6.2 15.2 54.2 40.9 49.6

Soy sauce products 2.9 5.9 2.9 12.9 15.5

Vinegar products 1.4 3.4 2.6 0.9 1.1

GROSS MARGIN

COOKING WINE

Premium 84.6% 75.6% 73.0% 72.5%

High-end 68.9% 64.4% 63.5%

Medium-range 23.5% 39.3% 51.9% 43.2% 42.0%

Mass-market 54.0% 50.0% 55.5% 60.0% 49.0%

Sub total 41.2% 46.9% 60.8% 58.1% 56.6%

Soy sauce products 9.1% 32.3% 37.0% 69.0% 68.0%

Vinegar products 32.5% 37.8% 55.5% 57.5% 55.0%

Total 25.6% 36.6% 55.7% 58.5% 57.7%

of 17

Exhibit 37: Financial summary

Source: Bloomberg, CIRL etimates

Income statement Cash flow

Year to Dec (RMB mn) FY10A FY11A FY12A FY13E FY14E Year to Dec (RMB mn) FY10A FY11A FY12A FY13E FY14E

Revenue 36 109 337 522 643 Pre-tax profit 8 28 135 203 280

Gross profit (reported) 13 46 193 305 371 Taxes paid 0 1 1 (47) (48)

EBITDA 12 40 153 218 289 Depreciation 0 0 3 4 6

Depreciation (0) (0) (3) (4) (6) Associates 1 2 3 4 5

EBIT 12 39 151 214 283 CFO bef. WC change 12 40 153 218 289

Net interest income (exp.) 0 0 0 0 0 Change in working cap 10 (27) (89) (143) (153)

Associates 0 0 0 0 0 Cashflow from operation 22 12 64 74 136

Exceptionals/others 0 0 0 0 0 CAPEX (5) (28) (20) (60) (85)

Profit before tax 8 28 135 203 280 Free cash flow 17 (15) 44 14 51

Tax expenses (2) (7) (37) (47) (48) Dividends 0 0 0 (39) (58)

Minority interest 0 0 0 0 0 Balance sheet adj. 1 2 3 4 5

Adjusted net profit 6 20 98 156 233 Sharse issued 0 0 0 1,285 0

Dividends 0 0 0 39 58 Others 1 2 3 4 5

Net cash flow 0 24 (22) 1,203 (58)

Balance sheet Net cash (debt) start 1 1 25 2 1,205

Year to Dec (RMB mn) FY10A FY11A FY12A FY13E FY14E Net cash (debt) at year-end 1 25 2 1,205 1,147

Cash & equiv 12 52 2 1,205 1,147

Trade receivables 41 58 78 121 150 Ratios

Other receivables 33 57 128 128 128 Year to Dec (RMB mn) FY10A FY11A FY12A FY13E FY14E

Inventories 21 64 115 238 381 Growth rate (%)

Other current assets 2 15 0 0 0 Revenue 201.7 207.9 54.8 23.2

Fixed assets 5 32 131 188 267 EBITDA 228.7 287.1 41.8 32.8

Intangible assets 1 5 0 0 0 EBIT 228.1 282.8 41.7 32.6

Investment, associates etc 12 13 24 24 24 Adjusted net profit 221.8 387.0 58.6 49.1

Total assets 126 295 478 1,903 2,096 Fully diluted EPS 221.8 387.0 58.6 49.1

Margins (%)

Account payables 23 66 48 71 90 Gross margin (reported) 36.9 42.2 57.2 58.5 57.7

Other payables 3 32 34 34 34 EBITDA 33.2 36.2 45.5 41.7 45.0

Short-term debt 68 146 206 206 206 EBIT 33.1 36.0 44.8 41.0 44.1

Other current liabs 11 9 37 37 37 Net margin 17.3 18.5 29.2 29.9 36.2

Long-term debts 6 6 19 19 19 Other ratios

Deferred tax and others 0 0 4 4 4 ROE (%) 40.6 56.7 74.0 10.2 13.6

Other long-term liabs 0 (0) (4) (4) (4) ROA (%) 5.0 6.9 20.6 8.2 11.1

Total liabilities 111 259 345 368 387 Net gearing (%) 460.9 355.4 160.9 (64.4) (54.5)

Interest coverage (x) 3.3 3.4 9.8 19.4 94.5

Share capital 0 0 0 0 1,285 Receivables days 602.2 164.6 73.9 69.9 76.9

Reserves 15 36 133 250 425 Payables days 5304.2 255.4 144.2 100.8 108.1

Shareholders' equity 15 36 133 1,535 1,710 Inventory days 2496.3 246.3 226.0 297.3 415.2

Minorities 0 0 0 0 0 Effective tax rate (%) 25.4 27.0 27.3 23.0 17.0

Total equity 15 36 133 1,535 1,710

Net cash (debt) (71) (127) (214) 988 931

of 17

Risk factors

Strong competition in the PRC condiment market

China’s condiment market, including cooking wine market is highly competitively with

over 1,000 manufacturers and the market is highly fragmented. Pricing competition or

new product offering by competitors might affect sales

Risk of geographical concentration

Out of the 36 provinces in China, the top 5 provinces accounted for 80% of Honworld’s

total sales in 2013. As such, there is risk of geographical concentration.

Weather conditions and earthquake

Given brewing takes place in winter in Zhejiang, extreme weather conditions or

earthquakes will affect production of base wine which in return will affect the sales.

Earthquake could destroy the base wine inventory. However, the region never had

earthquake before.

Change in consumer preferences

Change in consumer preferences or tastes of cooking wine will affect the sales of

Honworld’s cooking wines.

of 17

Rating Policy

Rating Definition

Stock Rating Buy Outperform HSI by 15%

Neutral Between -15% ~ 15% of the HSI

Sell Underperform HSI by -15%

Sector Rating Accumulate Outperform HSI by 10%

Neutral Between -10% ~ 10% of the HSI

Reduce Underperform HSI by -10%

Analysts List

Antony Cheng Research Director (852) 2235 7127 [email protected]

Hayman Chiu Senior Research Analyst (852) 2235 7677 [email protected] Kenneth Li Senior Research Analyst (852) 2235 7619 [email protected]

Lewis Pang Research Analyst (852) 2235 7847 [email protected] Susanna Chui Research Analyst (852) 2235 7131 [email protected]

Analyst Certification

I, Kenneth Li hereby certify that all of the views expressed in this report accurately reflect my personal views about the

subject company or companies and its or their securities. I also certify that no part of my compensation was / were, is /

are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note.

Disclaimer

This report has been prepared by the Cinda International Research Limited. Although the information and opinions

contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International

cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not

be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and

comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers

prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from

the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so

uncertainty may contain. Any opinions expressed in this report are subject to change without notice. The report is

published solely for information purposes, it does not constitute any advertisement and should not be construed as an

offer to buy or sell securities. Cinda International will not accept any liability whatsoever for any direct or consequential

loss arising from any use of the materials contained in this report. This document is for the use of intended recipients

only, the whole or a part of this report should not be reproduced to others.

honworld group (2226hk) china puti fast growing by naturally...

Documents