China Foods Limited (中国食品)(HKEX: 0506) is a subsidiary of COFCO Corporation (中粮集团), a Chinese state-owned investment holding company comprising of 15 publicly listed entities that together make up the country's largest agriculture and food corporation. China Foods' main business is the manufacturing, distribution, marketing and sales of Coca-Cola products in 19 out of China's 34 province-level administrative regions, covering 81% of the land area and 51% of the population in mainland China. China Foods is COFCO's only beverage-focused entity.
Key Characteristics
Mature company with a track record of generally increasing revenue and profit and relatively stable profit margins
Consistent dividend payout ratio over the past four years
Exposure to the risk of shifting consumer preferences, especially the recent shift towards healthier beverage products
May be suitable for investors seeking a moderate level of dividend income from a relatively stable business that operates in a less volatile sector
Disclaimer: the information presented in this series does not constitute investment advice and is provided for informational purposes only
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Corporate History
The predecessor of what is now COFCO Corporation was originally founded as a company to conduct foreign trade in 1949, the same year as the founding of the People's Republic of China. Over the subsequent decades, COFCO went through a series of structural reforms and expansions, all the while focusing on growing its core business of agricultural trade.
In 1993, COFCO acquired a shell company on the Hong Kong Stock Exchange and renamed the entity COFCO International Limited (中粮国际)(HKEX: 0506).
In 2000, COFCO entered into an agreement with The Coca-Cola Company and established COFCO Coca-Cola (中粮可口可乐), a joint venture which provides bottling services for Coca-Cola brand beverages in various parts of China.
In 2007, COFCO International Limited spun off its oil seeds, rice, wheat, and brewing materials businesses into a separate entity called China Agri-Industries Holdings (中国粮油)(HKEX: 0606) which went public on the Hong Kong Stock Exchange the same year, while COFCO International Limited itself was renamed China Foods Limited (中国食品). China Foods focused on the production and distribution of cooking oil, seasoning sauces, confectionery, wine, and non-alcoholic beverages (including Coca-Cola products).
During 2016 to 2017, China Foods transferred all of its businesses except for the non-alcoholic beverages business to other COFCO-affiliated entities. The remaining non-alcoholic beverages business primarily comprised of Coca-Cola products.
In 2021, China Foods launched a supplementary "smart retail" business with the setting up of 20,000 beverage vending machines across China. As of June 2024, China Foods' smart retail network covers 280 cities in 31 out of China's 34 province-level administrative regions.
Business Overview
As of the end of 2023, China Foods offered 24 different Coca-Cola products across ten different beverage categories, including water, sparking drinks (e.g. soda products), juices, energy drinks, tea, coffee, sports drinks, and plant-based protein drinks.
Product series include the classic Coca-Cola, Sprite, Fanta, Schweppes, Minute Maid, Qoo (a fruit juice series targeting children in mainland China) and Costa.
China Foods only has one operating segment and all of the company's revenue are generated in mainland China.
Financial Highlights
In this section, we present selected financial highlights summarising China Foods' performance from 2018 to 2023. We choose 2018 as the starting year to allow for a year-on-year comparison without any changes in business model.
Revenue and Profitability Metrics
Total Revenue And Profit Increased Steadily During 2018-2023, But Declined In 1H2024
China Foods' total revenue grew at a compound annual growth rate (CAGR) of 6.5% from RMB15.6 billion in 2018 to RMB21.4 billion in 2023, while the company's gross profit grew at a nearly identical CAGR of 6.4% from RMB5.5 billion to RMB7.5 billion over the same time period. China Foods' operating income grew at a CAGR of 19.2% from RMB769 million in 2018 to RMB1.85 billion in 2023, while the company's net income also grew at a CAGR of 19.2% from RMB576 million to RMB1.4 billion during this period.
While the sale of Coca-Cola products seems to be a relatively stable business, China Foods had a surprising decline in performance during the first half of 2024 (1H2024). During this period, the company's total revenue decreased 9% compared with the first half of 2023 (1H2023), while gross profit decreased 11.3%, operating profit dropped 4.5%, and net profit dropped 5.1% year-on-year. The decline in revenue is attributable to a 7.8% decrease in revenue from sparkling drinks (which comprised 75.7% of 1H2024 revenue), a 14% decrease in revenue from juices (which comprised 14.7% of 1H2024 revenue), and a 32.3% decrease in revenue from water products (which comprised 4.7% of 1H2024 revenue), offset by a 30.5% increase in other products (which comprised 4.9% of 1H2024 revenue). In terms of sales volume, management states that the total sales volume across all product categories declined 15.7% year-on-year, and they attribute the decline in revenue due to this overall decrease in consumer demand.
Operating profit and net profit declined less than gross profit in percentage terms due to lower distribution and selling expenses as a percentage of total revenue in 1H2024 compared with in 1H2023.
Note: we don't display 1H2024 data in this article because the interim data is misleading when compared with annual figures. Specifically, doubling China Foods' 1H2024 data to approximate fiscal 2024 data results in estimates that are higher than fiscal 2023 results, seemingly indicating that the company did well in 1H2024. However, a comparison with 1H2023 shows that revenue and profit actually declined year-on-year in 1H2024.
For the sake of comparison, Swire Pacific (太古)(HKEX: 0087), a Hong Kong-based multinational conglomerate which manufactures, markets, and distributes Coca-Cola products in 12 province-level administrative regions primarily in the southern half of mainland China, Hong Kong Special Administrative Region, Taiwan, and certain Southeast Asian countries, recorded a 4% year-on-year decrease in revenue and 11.9% decrease in attributable profit from Coca-Cola-related sales in mainland China during 1H2024. PepsiCo (NASDAQ: PEP), which manufactures and sells PepsiCo products directly in China, mentions a low-single-digit year-on-year decline in beverage unit volume sales in China during 1H2024.
Gross Profit Margin Is Stable, While Operating And Net Profit Margins Grew Slightly
China Foods' gross profit margin has been relatively stable from 2018 to 2023, with a slight increase in 2020 due to lower procurement costs of major raw materials during the year. In contrast, the company's operating profit margin increased slightly over the past six years from 4.9% in 2018 to 8.6% in 2023, while net profit margin increased from 3.7% in 2018 to 6.5% in 2023.
In 1H2024, China Foods' recorded a gross profit margin of 34.6%, representing a year-on-year decrease of 0.9 percentage points (pp), an operating profit margin of 11.2%, representing a year-on-year increase of 0.5pp, and a net profit margin of 8.5%, representing a year-on-year increase of 0.3pp.
Sparkling Drinks Account For Approximately 3/4 Of Total Revenue, While Juices Are The Second Largest Revenue Driver
In percentage terms, each product segment's contribution to total revenue did not change significantly over the past six years. Sparkling Drinks contributed between 73% to 77.2% of total revenue from 2018 to 2023, while Juices accounted for 12% to 15.8% of total revenue, Water generated 5.8% to 8.8% of total revenue, and Others contributed 3.3% to 4.5% of total revenue.
In raw monetary terms, revenue from Sparkling Drinks increased year-on-year from 2018 to 2023, while revenue from Juices fluctuated during 2018 to 2021 before increasing in 2022 and 2023. Revenue generated by Water and Others did not exhibit a clear trend over the past six years.
Note: percentages may not exactly sum to 100% due to rounding
Additional Metrics
EPS Grew Steadily During 2018-2023, With A Slight Decline In 1H2024
China Foods' earnings per share (EPS) increased steadily year-on-year from RMB0.1147 per share in 2018 to RMB0.2976 in 2023. In 1H2024 (not shown below), China Foods recorded an EPS of RMB0.2021, compared with RMB0.2147 in 1H2023.
ROE Increased Steadily From 2018 To 2023, With A Slight Decline In 1H2024
China Foods' return on equity (ROE) grew steadily year-on-year over the past six years from 8.6% in 2018 to 14.3% in 2023. However, during 1H2024, the company's ROE dropped one percentage point from 10.5% in 1H2023 to a level of 9.5%.
Dividend Distributions Grew Year-On-Year, With A 50% Payout Ratio Over The Past Four Years
China Foods has been paying an increasing amount of dividend each year. In terms of dividend payout ratio, the company has been paying out approximately half of its earnings in the form of dividends each year since 2020, although there is no official fixed dividend policy.
Management's Future Strategies For China Foods
We provide a brief summary of management's key strategies for China Foods going forward.
Optimising Product Mix And Promoting High Profit Margin Products
Management plans to continue optimising the company's product mix, particularly by promoting more expensive products with higher gross profit margins, in order to boost China Foods' profitability going forward.
Enhancing Operating Efficiency
Management also aims to improve supply chain efficiency to bolster the company's performance.
Growing The Smart Retail Vending Machine Business
Management plans to tap into the smart retail vending machine business as a future growth point for China Foods.
Investor Summary
Key characteristics of the company include:
Mature company with generally increasing revenue and profit
Operates in a relatively less volatile business environment
Relatively stable profit margins
Key characteristics of the stock include:
Moderage return on equity
Moderate dividend yield*
Relatively consistent ~50% dividend payout ratio over the past four years
*compared with other stocks listed on the Hong Kong Stock Exchange
Future opportunities include:
Coca-Cola generally benefits from pricing power and can increase prices in line with future inflation
Coca-Cola is generally viewed to benefit from a wide economic moat
China Foods is trying to expand its product offerings by selling a broader variety of products (such as different teas and juices) to target a wider range of consumers
Key risk factors include:
Changing consumer preferences, such as the recent shift from soda (which are viewed as unhealthy) towards healthier beverages (e.g. unsweetened teas and juices). Although China Foods does offer tea and juice products, these beverages only contribute to a relatively minor percentage of total revenue
China's urbanisation rate is reaching its ceiling, so it would be difficult for China Foods to acquire new customers
China Foods may be suitable for investors who are seeking:
Moderate dividend yield*
Exposure to a relatively stable business that operates in a less volatile sector
*we reiterate again that management has not committed to a specific dividend policy going forward
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