China Puti Transforming into an Oolong tea producer

Transcription

1 Huafeng Group 364.HK China Puti Transforming into an Oolong tea producer Rating Current price Not Rated HK$0.25 Completed the acquisition of China Natural Tea in July 2013 Huafeng Group completed the acquisition of China Natural Tea with a total consideration of HK$2,487mn on 22 July China Natural Tea is an Oolong tea ( 烏龍茶 ) producer with tea plantation bases, production facilities, self-owned brand and sales network in the PRC. China Natural Tea is expected to become the major profit generator of the Group going forward. Based in Anxi County, a well-known Oolong tea plantation district China Natural Tea operates 38,800 mu of tea plantation bases in Anxi County of Fujian Province. Anxi County is well-known for its Oolong tea products, and was awarded The Home of Chinese Oolong Tea (a well-known tea) by Ministry of Agriculture. We visited China Natural Tea s plantation bases recently, and see countless pieces of tea farms along our route, demonstrating Anxi s position as a famous tea plantation district. China Natural Tea s plantation base manager stated that the weather so far this year is favorable for Oolong tea plants, and hence expect a better harvest for 2013 in comparison to Outsource most production process to tea farmers, >75% of sales was generated from selling raw teas The company engaged >1,000 tea-farmer households to cultivate most of its tea farms. The tea farmers are responsible for cultivating tea plants, harvesting tea leaves and processing tea leaves to become raw teas ( 毛茶 ). China Natural Tea then sold the raw teas to wholesalers as well as customers at the local tea fairs, which accounted for 75-78% of total sales during Offer branded Tie Guan Yin products through retail store, engaging Mr. Jet Li as brand spokesperson In addition to selling raw teas, China Natural Tea select a portion of its Tie Guan Yin ( 鐵觀音 ) raw teas to further process into refined teas ( 精製茶 ). The refined tea products is offered under its self-owned brand Ping Shan Famous Tea ( 坪山名茶 ) through its POS network, which comprised of 27 self-operated retail outlets and 119 third party retail outlets as of end Management targets to have 400 POS before the end of During our visit, we noted that Mr. Jet Li ( 李連杰 ), the famous Chinese martial artist, is acting as the spokesperson of Ping Shan Famous Tea. Tea industry should remain strong, seeking for expansion opportunities Management shared that they are optimistic toward the tea industry in PRC. Sales value of Oolong raw teas recorded 25.7% CAGR during , and is expected to achieve 17.7% CAGR during E, according to Euromonitor. To capture the opportunity of PRC tea market, management expressed that they are seeking for opportunities to acquire plantation bases as well as retail tea stores. Company Visit 3 October 2013 Cinda International Research (852) Trading data 52-Week Range (HK$) 0.176/ Mth Avg Daily Vol (m) 7.2 No of Shares (m) 11,532 Market Cap (HK$m) 2,883 Major Shareholders (%) Mr. Cai Zhenrong (58.5%) Auditors PKF Result Due FY13: Mar Company description Huafeng Group completed the acquisition of China Natural Tea on 22 July China Natural Tea is an Oolong tea ( 烏龍茶 ) producer with tea plantation bases, production facilities, self-owned brand and sales network in the PRC. Prior to the acquisition, Huafeng was principally engaged in the provision of fabrics processing services, manufacture and sale of fabrics, yarns and blankets. China Natural Tea is expected to become the major profit generator of the Group going forward. Price chart Page 1 of 6

2 Completed the acquisition of China Natural Tea in July 2013 Huafeng Group completed the acquisition of the entire issued share capital of China Natural Tea Holdings Company Limited with a total consideration of HK$2,487mn on 22 July China Natural Tea is an Oolong tea ( 烏龍茶 ) producer with tea plantation bases, production facilities, self-owned brand and sales network in the PRC. Prior to the acquisition, Huafeng was principally engaged in the provision of fabrics processing services, manufacture and sale of fabrics, yarns and blankets. China Natural Tea is expected to become the major profit generator of the Group going forward, hence Huafeng Group has proposed to change the name of the Company to Ping Shan Tea Group Limited in Aug Exhibit 1: Historical P&L of Huafeng Group (before M&A) Year to Sep (HKD mn) FY10A FY11A FY12A Revenue COGS (591) (616) (478) Gross profit SG&A (93) (89) (76) Impairment loss on PPE 0 0 (114) Fair value change on investment properties Loss on disposal of investment properties 0 0 (48) Other income / (expenses) (2) (1) 3 Operating profit / (loss) (175) Finance costs (13) (18) (11) Loss on modifications of convertible bonds 0 0 (2) Loss on disposal of subsidiaries 0 (140) (2) Profit / (loss) before tax 76 (134) (191) Income tax expense (7) (5) (0) Net income / (loss) 68 (138) (191) Exhibit 2: Historical P&L of China Natural Tea Year to Dec (RMB mn) FY10A FY11A FY12A Revenue COGS (152) (188) (201) Gross profit SG&A (27) (47) (33) Changes in fair value of biological assets Other income / (expenses) (1) (0) 5 Operating profit / (loss) Finance costs (0) (1) (1) Profit / (loss) before tax Income tax expense (5) (10) (7) Net income / (loss) Page 2 of 6

3 Based in Anxi County, a well-known Oolong tea plantation district China Natural Tea operates 38,800 mu of tea plantation bases in Anxi County, Quanzhou City, Fujian Province ( 福建省泉州市安溪縣 ). With a favourable climate, soil and geographic conditions for Oolong tea plants, Anxi County is well-known for its Oolong tea products. Anxi Country was awarded The Home of Chinese Oolong Tea (a well-known tea) by Ministry of Agriculture of the PRC in 1995, and produced 65,000 tons of tea in We visited China Natural Tea s plantation bases in Anxi recently. We see countless pieces of tea farms along our route, demonstrating Anxi s position as a famous tea plantation district. During our visit, China Natural Tea s plantation base manager introduced the 4 types of oolong tea plants in the base, namely Tie Guan Yin ( 鐵觀音 ), Mao Xie ( 毛蟹 ), Huangjin Gui ( 黃金桂 ) and Ben Shan ( 本山 ). The manager stated that the weather so far this year is favorable for the growth of Oolong tea plants and hence expect a better harvest for 2013 in comparison to Aims to increase the proportion of organic plantation The plantation base manager also showed us their organic base. The company has granted the organic plantation certification for 500 mu tea farms (~1% of China Natural Tea s plantation area), and plans to expand the coverage of the organic base. It could potentially boost the ASP and profit margin of its tea products by increasing the proportion of organic production, according to the plantation base manager. Exhibit 3: China Natural Tea s plantation bases and organic tea farms in Anxi Source: CIRL Outsource most production process to tea farmers The company currently engaged >1,000 tea-farmer households to provide cultivation and production services on most of its tea farms. The tea farmers are responsible for cultivating tea plants, harvesting tea leaves and processing tea leaves to become raw teas ( 毛茶 ). China Natural Tea pays the tea farmers a service fee based on the quantity and quality of raw teas that the tea farmers return to the company. The total service fees for tea farmers accounted for 81.3 %, 81.4 % and 73.5 % of China Natural Tea s COGS during respectively. Page 3 of 6

4 >75% of China Natural Tea s sales was generated from selling raw teas During , 75-78% of China Natural Tea s revenue was generated from selling raw teas to wholesalers as well as customers at the local tea fairs. On the other hand, China Natural Tea select a portion of its Tie Guan Yin ( 鐵觀音 ) raw teas to further process into refined teas ( 精製茶 ) by removing visible impurities, fine powder and small broken tea leaves before being packaged. Exhibit 4: Historical revenue breakdown of China Natural Tea Year to Dec (RMB mn) FY10A FY11A FY12A Raw teas Wholesalers Tea fair customers Refined teas and other related products Self-operated retail outlets Third-party retail outlets Direct Sales Customers Offer branded Tie Guan Yin products through its 146 POS network China Natural Tea offers its refined tea products under its self-owned brand Ping Shan Famous Tea ( 坪山名茶 ) through its nationwide retail network. As of end 2012, China Natural Tea s retail network comprised of 27 self-operated retail outlets and 119 third party retail outlets. Management targets to have 400 POS before the end of Besides, a portion of the refined teas are sold to direct sales customers. Exhibit 5: Ping Shan Famous Tea ( 坪山名茶 ) products Engaging Mr. Jet Li as brand spokesperson We visited the POS of Ping Shan Famous Tea in Fujian. We noted that Mr. Jet Li ( 李連杰 ), the famous Chinese martial artist, is acting as the spokesperson of Ping Shan Famous Tea. Management stated that they have signed a 3 years contract with Mr. Jet Li in Dec 2010, and they are now discussing a new contract in order to continue the cooperation. China Natural Tea also offers other tea-related products such as tea utensils in the store to enhance customer experience. Page 4 of 6

5 Exhibit 6: Ping Shan Famous Tea POS in Fujian Source: CIRL Tea industry should remain strong, seeking for expansion opportunities Management shared that they are optimistic toward the tea industry of PRC due to the improving general living standard. Sales value of Oolong raw teas recorded 25.7% CAGR during , and is expected to achieve 17.7% CAGR during E, according to Euromonitor. To capture the opportunity of PRC tea market, management expressed that they are seeking for opportunities to acquire plantation bases as well as retail tea stores. Exhibit 7: Sales momentum of Oolong tea in PRC is expected to continue in the next few years Source: Euromonitor Page 5 of 6

6 Rating Policy Stock Rating Sector Rating Rating Definition Buy Outperform HSI by 15% Neutral Between -15% ~ 15% of the HSI Sell Underperform HSI by -15% Accumulate Outperform HSI by 10% Neutral Between -10% ~ 10% of the HSI Reduce Underperform HSI by -10% Analysts List Antony Cheng Research Director (852) antony.cheng@cinda.com.hk Hayman Chiu Senior Research Analyst (852) hayman.chiu@cinda.com.hk Kenneth Li Senior Research Analyst (852) kenneth.li@cinda.com.hk Lewis Pang Research Analyst (852) lewis.pang@cinda.com.hk Susanna Chui Research Analyst (852) susanna.chui@cinda.com.hk Shawn Yang Research Analyst (852) Xiaoxia.yang@cinda.com.hk Analyst Certification We hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was / were, is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note. Disclaimer This report has been prepared by the Cinda International Research Limited. Although the information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Any opinions expressed in this report are subject to change without notice. The report is published solely for information purposes, it does not constitute any advertisement and should not be construed as an offer to buy or sell securities. Cinda International will not accept any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. This document is for the use of intended recipients only, the whole or a part of this report should not be reproduced to others. Page 6 of 6