Investment Summary

- The company will continue to implement expansion plan in traditional and catering channels. Diversified sales channels are beneficial to the sustainable development of the Group.

- The cooking wine products are naturally brewed instead of chemically produced, in line with China's consumption upgrade and improvement of health and food safety awareness.

- The company has appointed celebrity Nicholas Tse as its brand ambassador. The company became the sponsor of the third season of his cooking show “Chef Nic”, broadcasted since September 2016. Moreover, the company's products have been recommended by the well-known gourmet Chua Lam.

- Inheritance and innovation are very important to the company. The company will make quality distinction (good product quality), visual distinction (use calligraphers` handwritten names on the outer packing) and price distinction (high-end products) possible.

- The company completed subscription of new shares at HK$6 with a premium of 27.66% and the new shares account for 10.37% of the total issued share capital.

Company Business

Honworld Group is a leading manufacturer of condiment products in China and has a history of over 160 years. The products include cooking wine, soy sauce, vinegar and other products. In 2016, the key product, cooking wine, continued to be the major source of revenue, representing 74.7% of the total revenue. Honworld is the largest cooking wine player in China.

The production plants are located in Huzhou, Zhejiang. The production facilities are shown in the following pictures.

The following picture shows the product series of the company.

Sales Channel Shifting

The company is facing a transition period. The company will continue to implement expansion plan in traditional and catering channels. Diversified sales channels are beneficial to the sustainable development of the Group.

95% of the revenue was contributed by supermarket channel business in 2015. In 2016 supermarket channel business accounted for about 69% of total revenue and traditional channel business accounted for about 31%. In November 2016 the company set up a catering channel sales team.

Moreover, the company is extending distribution network from mature 1st & 2nd tier cities to 3rd and 4th tier cities and further increasing market share.

Naturally Brewed Condiment Products

The cooking wine products are naturally brewed instead of chemically produced, in line with China's consumption upgrade and improvement of health and food safety awareness. As for soy sauce, most of the products are traditionally sun-dried and hand-made.

Brand Cultivation and Marketing

Brand cultivation includes advertisement investment, web marketing, online sales and so on. The company will use web marketing and reduce the proportion of TV advertising in the future.

The company has appointed celebrity Nicholas Tse as its brand ambassador. The company became the sponsor of the third season of his cooking show “Chef Nic”, broadcasted since September 2016. This show had top TV and internet viewership ratings in previous seasons. The company also sponsored “Delicious Band of Brothers”, a popular food show. Moreover, the company's products have been recommended by the well-known gourmet Chua Lam.

Cooking Wine Industry Has Growth Potential

The alcohol and the amino acids inside the cooking wine help dissolve odors in meat- and seafood-based dishes and the amino acids also add richer flavors to cuisines. Cooking wine is more specialized compared with yellow wine.

In many places people didn`t have the habit of using cooking wine. However, as the living standards improve and the differences between the North and South/East and West of China are getting smaller, food culture gradually tends to be similar.

Product Quality is Very Important

The company focuses on product quality and brand promotion. Web marketing, traditional channel promotion and word of mouth marketing can enhance the customer understanding. The quality of the products is different from small businesses.

The company's "Tai Soy Sauce" has been recommended by Chua Lam many times. It's brewed using ancient brewing technology and the brewing process is very complex with limited production capacity and delicious taste. The retail price in JD.COM is RMB288.

Inheritance and innovation are very important to the company. The company will make quality distinction (good product quality), visual distinction (use calligraphers` handwritten names on the outer packing) and price distinction (high-end products) possible.

Premium Subscription

On 23 June 2016, the company announced that the subscription of 60,000,000 new shares at HK$6 was completed and the subscriber was Natural Seasoning International. The total funds raised from the subscription are approximately HK$360,000,000. The subscription price of HK$6 per share represents a premium of approximately 27.66% to the closing price of HK$4.70 per share on 1 June 2016, being the date of the subscription agreement. The controlling shareholder of the subscriber is Lunar Capital and the new shares account for 10.37% of the total issued share capital.

Valuation

Buy Rating is given with TP of HK$5.00. We expect net profit growth of 9.9%/16.7% in FY2017/FY2018, driven by 12.0%/10.0% revenue growth. Our TP of HK$5.00 represents 11.3/9.7x FY2017E/FY2018E P/E. (Closing price as at 10 May 2017)

Risk

The substitutability of cooking wine and fierce competition in the industry;

Higher-than-expectation marketing costs;

The production costs get higher.

Financials

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