Investment Summary

The Result Remains High While the Growth Rate Slows Down in H2

In 2018, JonjeE Hi-Tech recorded a revenue of RMB4,166 million, up by 15.4% yoy; a net profit attribute to shareholders of listed companies of RMB607 million, up by 34%, which was sharply slowed down compared with 61% in the H1 of last year. The shipment was decreased due to the relatively high base in the third quarter of last year and the typhoon in the third quarter of this year, which resulted in the flat net profit in the third quarter. The annual EPS was RMB0.76, and the result was slightly (5.6%) worse than our expectation. The weighted return on equity was 18.07%, up by 2.86 ppts yoy. The dividend per share was RMB0.23, with a dividend payout rate 30%.

Condiment Business Grows Steadily and Oyster Sauce and Cooking Wine Business Make highlight Achievements

The result of the Company's condiment sector maintained a steady growth, the annual revenue of Meiweixian was RMB3.85 billion, up by 10% yoy. Among the different product lines, the performance of two main categories of soy sauce and chicken powder grew steadily; among the small category of products, the sales of cooking oil grew rapidly, the oyster sauce and cooking wine business made achievements. The revenue of soy sauce increased by 8% to RMB2.59 billion, its sales volume increased 7.8%, and its unit price increased slightly. The revenue of chicken powder reached RMB440 million, up by 7.24% yoy, the sales volume increased by 7.27% yoy, and its unit price remained basically the same. The revenue of cooking oil increased by 16% to RMB320 million, the sales volume increased by 23% annually, and its unit price decreased. The revenue of oyster sauce increased sharply by 42% to RMB140 million, the sales volume increased by 39%, and its unit price increased slightly. The revenue of cooking wine and its sales volume increased sharply by 69% and 75% to RMB58 million and 9,986 tons, respectively.

During the period, the sales of the Company's commercial housing increased by RMB74 million, leading to an increase of 1.5 times to the revenue of real estate and service industries to RMB126 million, which also increased its performance.

Expense Rate and Cost Rate Increase and Decrease and the Whole Situation Remains Unchanged

In 2018, the Company's gross margin dropped slightly by 0.16 ppts to 39.1%, mainly due to the rapid growth of products with low gross margin such as oyster sauce, cooking oil, cooking wine and the increase of raw material prices. Due to the small scale, the gross margin of oyster sauce, sauce, vinegar and cooking wine was only half of that of Haitian Food. With the continuously production of new capacity in Yangxi Base, and the gradually emerged scale effect, the overall gross margin of condiment business will be expected to increase in the future.

The sales expense rate dropped by 1.46 ppts, mainly due to the slowdown in the growth of freight and business expenses and the reduction in advertising costs. The administration expense rate was basically flat, and the financial expense rate decreased by 0.37 ppts, mainly because the Company repaid part of some bank loans and the loan interest expenditure decreased accordingly. The Company restrained the impact caused by cost increasing to some extent by controlling cost and improving production efficiency.

Steady Progress Has Been Made in the Construction of Channels and National Layout Has Taken Shape

During the period, the Company continued to vigorously expand its sales channels, 18 blank prefecture-level cities and 178 distributors (90 in the H1 and 88 in the H2) were newly added. The total number of distributors reached 864, the development rate of prefecture-level cities was 77%, and the preliminary layout of export channels was completed. From the perspective of regional market development, in 2018, the revenue of condiments in the east, south, Midwest and north regions increased by 10%, 8%,12% and 18%, respectively. The growth of revenue in the Midwest and north regions was relatively high, and the growth of gross margin was steady, conforming the Company's regional development strategy of “steadily developing the southeast, focusing on the development of the north and the middle, accelerating the development of the southwest, and gradually promoting the development of the Northwest”. It is expected that the Company will have about 1,000 distributors by the end of 2019, and the distributors will preliminarily be distributed in all prefecture-level cities.

Investment Thesis

According to the annual report, 90,000 square meters of commercial housing in the real estate business of the Company will be sold in 2019, the inventory reached 23,000 square meters, and it's expected that the performance will be continuously increased. At present, the Company is striving to stand out from the second echelon of the industry and move closer to the first echelon, striving to record a sales revenue of more than RMB10 billion by 2023.We believe that China's condiment industry is entering a new stage featuring steady growth, restructuring, large-scale and high-quality. The Company's brand advantages are strong. Coupled with the expansion of capacity scale and pipeline and capital support, the Company will continue to be beneficial from consumption upgrading in the future.

We expected diluted EPS of the Company to RMB 0.93 and 1.14 of 2019/2020. And we accordingly gave the target price to 37.3, respectively 40/33x P/E for 2019/2020. "Cautiously Accumulate" rating maintained. (Closing price as at 16 April 2019)

Risk

Price war among peers

Raw material price increase

New business risk

Financials

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