Flavoring Leaders Seek Growth Amid Slowing Demand

After experiencing the negative growth due to channel adjustments, Haidilao's channel inventory has gradually been digested, achieving better-than-expected performance growth when downstream growth slowed down.

Under the new situation, various condiment companies have accelerated the process of channel development, continuously advancing in the layout of online and food industry channels.

On the first trading day after the release of the semi-annual report, Haidilao's stock price opened high and went higher throughout the day, with the company's stock price soaring by 8.86%, and the market value increased by nearly 17 billion yuan in one day, with the total market value returning to over 20 billion yuan.

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Obviously, Haidilao's semi-annual report has exceeded market expectations.

In the face of the company's net profit declining year after year and the slowdown in the growth rate of condiment companies, Haidilao has been able to grow against the trend, and the effects of channel reform are gradually becoming apparent.

At the same time as releasing the semi-annual report, Haidilao also released its employee stock ownership plan.

The performance requirement is that the net profit attributable to the parent company after deducting incentives and capital operations and other expenses in 2024 will increase by no less than 10.8% year-on-year, which can be understood as a requirement for the growth of net profit after deducting non-recurring gains and losses.

Channels are the accelerator of industry differentiation.

The rapid expansion in the early stage and the repeated disturbances of the epidemic have challenged Haidilao's growth.

During the epidemic, the company began to adjust its channels.

After the epidemic ended, the catering industry recovered rapidly in 2023, but Haidilao's growth has not yet started, indicating that the adjustment has not yet ended; now the channels are back to growth, and the revenue has exceeded expectations.

For other condiment companies, they are also seeking growth against the trend.

The growth exceeded expectations in the first half of 2024, Haidilao achieved a revenue of 14.156 billion yuan, a year-on-year increase of 9.18%; the net profit attributable to the shareholders of the listed company was 3.453 billion yuan, a year-on-year increase of 11.52%.

On the first trading day after the release of the semi-annual report, Haidilao's stock price rose sharply, and the final closing price was 37 yuan/share, with a single-day increase of 8.86%, and the company's market value once again stood above the 20 billion yuan mark.

Correspondingly, since the end of May, Haidilao's market value has basically been hovering below 20 billion yuan.

At the first quarter report, Haidilao had already shown a double-digit growth trend.

In the first quarter of 2024, Haidilao achieved a revenue of 7.694 billion yuan, a year-on-year increase of 10.21%; the net profit attributable to the shareholders of the listed company was 1.919 billion yuan, a year-on-year increase of 11.85%.

After the release of the first quarter report, Haidilao's stock price once rose by nearly 4 percentage points.

After two consecutive quarters of performance exceeding market expectations, institutions directly concluded that Haidilao's turning point has arrived.

Haidilao also announced its employee stock ownership plan.

The total number of participants in the 2024 employee stock ownership plan does not exceed 800 people, and the source of funds is the company's allocated special incentive fund for the stock ownership plan of 184 million yuan.

The source of stocks is the company's repurchase of shares, with a grant price of 36.87 yuan/share, and the proportion of shares held by directors and supervisors does not exceed 15%.

Haidilao's employee stock ownership plan is implemented in five phases, and the basic survival period of the 2024 plan is 24 months.

The performance requirement for the assessment is that the net profit attributable to the parent company in 2024 will increase by no less than 10.8% compared to 2023 after deducting incentive expenses and mergers and acquisitions and capital operations.

In the first half of 2024, Haidilao's net profit after deducting non-recurring gains and losses attributable to the parent company was 3.325 billion yuan, an increase of 11.95%.

The employee stock ownership plan can be simply understood as the net profit after deducting non-recurring gains and losses.

In the second half of 2024, Haidilao also needs to maintain a basically equivalent growth to meet the performance requirements and unlock the "golden handcuffs".

The data from the Bureau of Statistics shows that in 2023, the total retail sales of consumer goods in society was 47.1495 trillion yuan, an increase of 7.2% over the previous year.

Among them, catering income was 5.289 trillion yuan, an increase of 20.4%.

Among them: the catering income of units above the designated size was 1.3356 trillion yuan, an increase of 20.9%.

However, the growth rate in the first half of this year has slowed down to 7.9%.

In 2023, the recovery of the downstream catering industry was positive, and the performance of the upstream condiment industry should also be good.

In 2023, the revenue growth of Qianhe Wei Ye exceeded 30%.

However, several condiment companies, including Haidilao, did not grow with it.

In 2023, Haidilao's revenue decreased by 4.1% to 24.559 billion yuan; the net profit attributable to the parent company was 5.627 billion yuan, a year-on-year decrease of 9.21%.

This is the first time in nearly 10 years since its listing that Haidilao has seen a negative growth in both revenue and net profit.

The decline in sales performance is closely related to Haidilao's channel adjustment.

Haidilao began to continuously disclose the company's dealer situation from 2019.

It was also from this year that the number of the company's dealers increased rapidly.

In 2019 and 2020, Haidilao's dealers increased by 999 and 1245 respectively, and the number of dealers at the end of the period was 5806 and 7051 respectively.

In 2021, Haidilao's dealer team continued to expand.

In this year, the company's dealers increased by 379, and the number of dealers reached a new high of 7430.

However, with the continuous increase in the number of dealers, Haidilao's growth is becoming more and more weak, and the marginal effect of channel growth is gradually disappearing.

In 2019 and 2020, the two years when the number of dealers increased the fastest, Haidilao's revenue increased by 16.22% and 15.13% respectively.

In 2021, the company's revenue increased by 9.71%, and the revenue fell into single-digit growth for the first time.

Starting from 2022, Haidilao began to adjust the channels.

In this year, the company's dealer number decreased by 258, and the remaining dealers at the end of the period were 7172.

Although there was a decrease, it was still at a high level.

In 2023, Haidilao's dealers continued to decrease by 581, and after two consecutive years of reduction, the company's remaining dealers were 6674.

This is the first time since 2020 that Haidilao's dealers have been below 7000.

Looking at the decline, the southern, central, and western regions are the main areas.

Compared with the peak in 2021, the number of dealers in these three regional markets in 2023 decreased by 14.71%, 12.31%, and 12.66% respectively.

The decline in the eastern and northern regions is within one tenth.

Even after entering 2024, this trend has not stopped.

At the end of the first quarter of 2024, Haidilao's dealers dropped to 6506, a decrease of 168 from the end of 2023.

2023 was a year for Haidilao to destock.

After the company's annual report was released, many institutions pointed out that the company's performance pressure is directly related to channel adjustment and de-stocking.

In the context of the prolonged recovery cycle of demand, Haidilao actively adjusted the dealer network.

With the deepening of channel reform and the continuous advancement of de-stocking, after adjusting for several quarters, coupled with a low base and cost dividends, Haidilao finally regained growth.

Cost dividends are also an important factor that cannot be ignored.

Haidilao's annual report shows that agricultural products such as soybeans and white sugar are the main raw materials of the company, accounting for more than 50% of the cost.

Taking direct raw materials as an example, in the futures market, the non-genetically modified soybean one main continuous index has been rising since the end of 2019, from around 3400 points to over 6500 points in November 2021, an increase of more than 90%.

After hovering at a high level for a period of time, it began to fall, and the index has now fallen to 4322 points.

The white sugar futures index has also fallen to the low level of the second half of 2020, with a drop of about 20% compared to the high level in 2023.

The positive impact of cost reduction can be seen from the gross profit margin.

In the first half of 2024, Haidilao's gross profit margin was 36.86%, an increase of nearly one percentage point year-on-year, and an increase of more than two percentage points compared to the whole year of 2023.

The company's gross profit margin has reached the best level in the past two years.

Channel adjustment is in line with the trend.

After a continuous reduction, in the first half of 2024, Haidilao's dealer number reached 6674, an increase of 83 from the beginning of the year.

Compared with the end of the first quarter of 2024, the number of dealers increased by 168.

The return of dealers to growth means that after the release of the dividends from channel reform, the confidence of dealers has been restored.

China Merchants Securities also said that after two years of de-stocking and optimizing dealers, the enthusiasm of Haidilao's sales team and the willingness of dealers have improved significantly, and the number of dealers has also resumed growth.

Considering the lower base in the second half of the year, it is expected to continue to maintain steady growth.

Channels are the accelerator of industry differentiation.

Another condiment leader, Zhongju High-tech, is also focusing on this.

As Zhongju High-tech said in its semi-annual report, after experiencing the development stage of land grabbing, the condiment industry is gradually entering the era of stock competition, the compound growth rate of the industry has begun to slow down, and the channels of the condiment industry are also evolving towards diversification and refinement, and market competition is becoming more and more fierce.

After experiencing changes in management, the management of Zhongju High-tech has become stable.

At present, the company is transforming its channels, "transforming the delicious fresh channel and increasing the intensity of cost input".

After the transition period of the transformation, the company is expected to gradually realize the dividends of reform in aspects such as channels, products, and cost management.

Dongwu Securities pointed out that in order to maintain the benign development of channels, Zhongju High-tech took the initiative to de-stock in the second quarter of 2024.

It is expected that the channel inventory in April and May 2024 will be 1.5-2 months, and although there will be pressure at the end of June, the overall inventory is healthy.

In June 2024, the company held the 2024 dealer meeting.

With the implementation of policies, the dividends of the company's channel reform are expected to be gradually released.

The main demand of the condiment industry is one is ToB catering, and the other is ToC mass market.

The catering channel has a large sales volume and is easy to defend and difficult to attack.

It is the core channel of condiment companies, but the current catering channel is under pressure and suppresses the amount of condiments used.

The trend of declining passenger flow in retail channels such as supermarkets is not stopping, and online sales are becoming more and more important.State-owned Investment Securities stated that, regionally, apart from Haidilao Flavor Industry having essentially achieved a nationwide layout, other companies have seen a rapid increase in the number of dealers outside their provinces or main sales areas.

Online presence and industrial layout are expected to become new growth drivers for the condiment industry.

In terms of specific measures, Haidilao Flavor Industry is exploring incremental opportunities in the catering sector and focusing on customization; Zhongju High-tech, under the leadership of its new management, is strengthening its catering layout and continuously advancing its nationwide presence; Qianhe Flavor Industry is concentrating on developing incremental opportunities in distribution, with its online advantage continuing; and Tianwei Food is focusing on customized services to address personalized needs.