Investment Summary

Yihai is a leading and fast-growing compound condiment manufacturer in PRC. The company achieved high growth since 2013, given revenue/net profit recorded FY13-16 CAGR of 51%/104% respectively. We believe that the company will benefit from the trend of consumption upgrade and increasing resident consumption demand. We also highlight that the company enjoys significant brand advantage and has strong channel advantage with a national wide distribution network. We use DCF model to get stock price and review it with relative valuation, which shows our target price located in a rational range. We give ‘Accumulate’ recommendation with target price of HKD9.1 implying 11.8% upside, and suggest buying during price dips.

Business Overview

Company Background. The company started from producing hot pot flavoring for Haidilao restaurants and was listed on HK exchange in 2016. Haidilao (HDL) was established in 1994 and now has become a national hot pot chain with 192 restaurants in China as up to 17H1. According to Frost & Sullivan, HDL is the largest Chinese hot pot restaurant chain and the No.1 Chinese cuisine restaurant company in China, as measured by 2015 sales. The listed company is the sole supplier of hot pot soup flavoring products to HDL. The company hss the exclusive right to use the Haidilao brand to sell condimentproducts on a royalty-free basis for a perpetual term commencing from 2007.

Product Portfolio. The company manufactures mid- to high-end compound condiment products, including hot pot soup flavoring products, hot pot dipping sauce products and Chinese-style compound condiment products. The main product is hot pot soup flavoring making up 85% in 17H1 revenue with gross profit margin around 33%. According to Frost & Sullivan, the company is the largest mid- to high-end hot pot soup flavoring condiment manufacturer as measured by 2015 sales, which accounts for over 30% market share.