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China Huiyuan Juice Group Limited (1886.HK) Product differentiation to drive sales volume growth-Buy

Thursday, April 17, 2008

5552

China Huiyuan Juice Group Limited(1886)

Recommendation on 17 April 2008
Recommendation	Buy
Price on Recommendation Date	$5.460
Target Price	$8.340

Weekly Special - 1836 Stella International

Summary

Production Differentiation to drive sales volume growth- a new Kiwi juice drink product (奇异王果V-plus) launched in last December with a full marketing campaign in order to drive juice drink sales volume growth.

Expanding production capacity- nine new plants has been built in order to capture more raw materials, get closer to consumers, and lower the transportation costs.

Foreign competitor entering the juice market- Coca Cola is planning to launch pure juice products in the near future.

Increase on raw material price- Huiyuan would suffer from the increase in raw material price as the management is not likely to increase selling price in this year.

Valuation- Our DCF-based target price is HK$8.34 Buy.

Product Differentiation to drive sales volume growth

The competition in juice drink market is very strong. The sales value of the company dropped 0.4% to 6.0%, ranking no.4 in the market. Management addressed the juice drink share slippage. Therefore, a new Kiwi juice drink product (奇异王果V-plus) launched in last December with a full marketing campaign in order to drive juice drink sales volume growth.I take it positively for Huiyuan to have addressed the issue with a flavour diversification in order to differentiate itself from its competitors juice drink products.

I believe that the production differentiation will not only help to support sales volume increase for Huiyuans juice drinks, it will also likely raise the average selling price for the juice drink category. It is because the new Kiwi product will likely carry a higher selling price in comparison to the companys existing juice drink products. The average profit margin for juice drinks should also be improved.

Beside the favor differentiation, management decided to expand its product lines to produce smaller size of packages; company previously produces mainly family size package. I take it positively for Huiyuan to drive sales volume growth by diversification of packaging formats.

Expanding production capacity

The Group has built nine new plants in order to capture more raw materials, get closer to consumers, and lower the transportation costs. Previously, the Group has a large gap between southern and northern china. Now, the gap is filled and the transportation costs will be lower. And the key to succeed in juice industry is the supply and quality of fruit. The new plants would help to capture more good quality raw material for the group s sustainable development. And we can see the management carrying high expectation of sales volume growth as the company has built nines new plants (previously only has 13 plants) and accumulated raw material.

Risk Factor

Foreign competitor entering the juice market

Coca Cola is planning to launch pure juice products in the near future. However, we are not worried about it taking pure juice market share away from Huiyuan as Coca Cola will likely be also focusing on citrus flavours. Flavour diversification would help Huiyuan to sustain its market share on 100%juice market.

Increase in raw material price

Raw materials and consumables, principally imported juice concentrates and PET packaging material, account for increase in cost of goods sold. I expect Huiyuan would suffer from the increase in raw material price as the management is not likely to increase selling price in this year.

Valuation

Our DCF-based target price is HK$8.34 with assumption of 2% terminal growth rate and 13.15%WACC is also assumed. At our DCF-based target price, which suggests a potential 52.75% upside, Huiyuan would trade at a 2008E P/E of 49.1x, 2009E P/E of 37.9x and 2010E P/E of29.7x.

Financial statement and Ratios

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