---
title: "Has Haitian Flavoring, with a Market Cap of 270 Billion Yuan, Reached Its Peak?"
description: "Haitian Flavoring (603288.SH) has seen its market value surge over six-fold since listing, but its growth is under pressure. Despite strong cash flow, current liabilities have risen sharply, inventory has surged, and prepayments have slowed, raising concerns about whether its high valuation is justified."
author: "袁兴"
publisher: "New Distribution"
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published: "2019-07-17"
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# Has Haitian Flavoring, with a Market Cap of 270 Billion Yuan, Reached Its Peak?

> Haitian Flavoring (603288.SH) has seen its market value surge over six-fold since listing, but its growth is under pressure. Despite strong cash flow, current liabilities have risen sharply, inventory has surged, and prepayments have slowed, raising concerns about whether its high valuation is justified.

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"Where there are people, there must be Haitian" is the development goal proposed by Haitian Flavoring (603288.SH). 2018 marked the final year of Haitian's "Second Five-Year Plan," and the company successfully achieved its ambitious goal of "building a new Haitian in five years, doubling operating revenue." Since its listing, the stock price has soared, and the market value has increased more than six-fold. Clearly, the capital market is very optimistic about Haitian Flavoring.
Behind Haitian's high valuation, foreign capital and Hong Kong Stock Connect funds have played a significant role. In recent years, foreign investors have placed particular emphasis on "super brand" stocks in China's consumer sector, such as Haitian Flavoring, Kweichow Moutai, and Gree Electric, which are well-known and influential. These stocks cover leading companies in various segments of daily necessities. Wind data shows that QFII holdings are mainly concentrated in large consumer industries such as food and beverage, home appliances, and pharmaceuticals and biology, with the largest market value share in food and beverage, close to 18%. Consumer super brands like Haitian Flavoring are undoubtedly favored by institutions.
However, with such high market value growth, we cannot help but ask: **Can Haitian's growth really support a market cap of 270 billion yuan?** Reviewing Haitian's annual reports since its listing, we find that the pressure on Haitian's growth is not a recent development.
**Sufficient cash flow, but current liabilities have surged**
Some investors once joked, "Haitian Flavoring is so poor that it only has money left." Although it's a joke, it reflects its ample cash flow. In the 2018 annual report, Haitian's net operating cash flow was 6 billion yuan, a year-on-year increase of 27%. However, behind its ample cash flow, current liabilities have been quietly rising.
In 2018, Haitian's current liabilities increased by 36% year-on-year, faster than the growth of operating revenue and advance receipts. Among them, other payables increased by as much as 70% year-on-year. The situation was similar in 2017, with current liabilities increasing by 33% year-on-year and other payables rising by 40%.
In contrast, in 2015 and 2016, the growth of current liabilities was not significant, with other payables increasing by only 10% and 0.4%, respectively. So why did other payables suddenly surge starting in 2017?
It is worth noting that in the breakdown of other payables in 2018, freight costs increased by as much as 245%. However, Haitian's shipment volume did not increase as significantly. In previous years, freight costs had been declining since 2016. So why did freight costs suddenly surge in 2018 and not match the increase in sales volume? Haitian did not disclose the reason in the notes to the financial statements. If this 180 million yuan in freight costs is inflated, could Haitian be using fictitious intercompany transactions to create off-balance-sheet fund circulation to adjust profits?
In addition, Haitian's promotional expenses have been soaring since 2017. In 2017, promotional expenses rose from 28 million yuan the previous year to 120 million yuan. In 2018, they continued to rise to 270 million yuan.
Besides promotional expenses, advertising expenses also increased from over 40 million yuan in 2017 to over 200 million yuan. In 2018, advertising expenses continued to surge to 360 million yuan. The growth rates of promotional and advertising expenses were both higher than the growth rate of operating revenue.
We cannot prove whether these suddenly increased promotional expenses are all real. Even if they are, it shows that Haitian is making great efforts to promote its products. However, behind Haitian's increased promotional efforts, it seems to highlight that its performance growth is facing bottlenecks.
**Inventory surges, prepayment growth slows**
In recent years, Haitian's inventory has been on an upward trend, with signs of acceleration despite modest increases. Among them, the growth of finished goods is much higher than the overall inventory growth. In 2017 and 2018, finished goods increased by 58% and 37% year-on-year, respectively.
A breakdown of inventory details reveals that Haitian's soy sauce inventory increased by 55% year-on-year in both 2018 and 2017. The company attributed the significant increase in product inventory to stocking up for the Spring Festival sales season. However, in 2016 and 2015, soy sauce inventory decreased year-on-year. Wasn't it also the Spring Festival sales season then? Why didn't they stock up?
The situation for seasoning paste is similar to soy sauce. Notably, oyster sauce inventory has seen explosive growth since 2016 (109%), continuing to rise in 2017 and 2018. The company also cited Spring Festival stocking as the reason. It is puzzling why the company would stock up specifically for oyster sauce in 2016 but not for soy sauce, which accounts for a larger share of operating revenue.
Haitian's oyster sauce products have grown rapidly in recent years, with a market share of 47%. **Could the increase in oyster sauce inventory be due to sluggish sales as it becomes increasingly difficult to expand the market after reaching a high market share?** By extension, Haitian's soy sauce and seasoning paste may also be experiencing sluggish sales.
Because Haitian adopts a **cash-before-delivery** sales model, the amount of advance receipts can, to some extent, reflect Haitian's sales volume in a future period. From 2016 to 2018, the growth rate of Haitian's advance receipts declined from 62% to 21%. Combined with inventory data, if the surge in ending inventory is due to Spring Festival stocking, advance receipts should not have declined significantly. Now, with a clear slowdown in advance receipts, investors cannot help but wonder whether Haitian's soy sauce is still selling as well as before.
**Terminal consumption peaks: How long can Haitian's distributors hold on?**
According to the National Bureau of Statistics, China's soy sauce production experienced rapid growth from 2004 to 2015, but total production began to decline after 2015. In 2018, China's total soy sauce production was 5.76 million tons.
With the popularization of healthy eating concepts, a decline in per capita soy sauce consumption is a natural process. Japan's per capita soy sauce consumption peaked at 12 liters per person and then fell to the current 8 liters per person. In 2017, China's per capita soy sauce consumption was 7.2 liters per person, not far from Japan's. Therefore, **the room for growth in total soy sauce volume is limited.**
So, if the soy sauce industry's production peaked in 2015, where does Haitian's rapid performance growth in recent years come from? To answer this, we first need to understand Haitian's business model.
Haitian uses a **distributor model** to sell its products. Moreover, due to Haitian's position in the industry, distributors typically order with advance payments. Haitian then produces based on distributor orders plus a small amount of inventory. In other words, Haitian's operating revenue actually comes from distributors. And because Haitian uses a "**buyout**" sales model, there is no sales return. Due to Haitian's strong position over distributors, even if there is pressure on terminal sales, Haitian can ensure short-term performance by pushing inventory onto distributors.
According to Haitian's prospectus, in 2014, Haitian had about 2,100 first-tier distributors. By the end of 2018, the number of first-tier distributors had increased to over 4,800, a growth of 129% in five years. In contrast, Haitian's operating revenue over the same five years only grew by 73%. It can be seen that Haitian's performance growth in recent years has mainly relied on expanding the number of distributors. The average revenue per distributor has actually declined.
Furthermore, the ratio of advance receipts to operating revenue has been rising in recent years, from 10% in 2015 to 19% in 2018. Normally, if distributors maintain a certain level of channel inventory, this ratio should not fluctuate significantly. However, the continuously rising ratio of advance receipts to some extent reflects the fact that Haitian is indeed pushing inventory onto distributors.
Some distributors have already complained that they have become Haitian's porters, working hard but not making money. One distributor said: "Haitian's current growth is a bit like pulling up seedlings to help them grow. Although there are countless distributors under it, I understand that many experienced large distributors are unwilling to sell Haitian anymore because, with raw material prices rising so severely, Haitian's gross margin has not fallen but risen, leaving only a few percent profit for distributors."
Behind Haitian's push to distributors is the pressure of its performance growth. Distributors should be the manufacturer's right-hand man. In the short term, squeezing distributors can boost company performance. However, in the long run, if Haitian **does not consolidate its channels, it will be very dangerous.**
**Pressure on the catering channel**
Currently, the catering channel accounts for the largest share of condiment consumption, at 45%. Due to high consumption and loyalty, the catering channel is also the most core channel for condiment consumption. According to GF Securities analysis, 60% of Haitian's revenue comes from the catering channel. Its main products are mid-to-low-end Caogu Dark Soy Sauce and Jinbiao Light Soy Sauce.
Zhu Danpeng, a researcher at the China Food Industry Research Institute, analyzed: "**Haitian's rapid development has benefited from the rapid growth of the catering industry in the past two years. Currently, Haitian's main large single products have reached the ceiling, and it is difficult to achieve greater breakthroughs.** "
Wind data shows that since 2013, the growth rate of catering industry revenue has declined significantly. In 2017, the growth rate was only 3.6%. At the same time, the number of catering legal entities has shown negative growth, indicating a decrease in the number of restaurants. The downturn in the catering industry has cast a shadow over the further expansion of Haitian's soy sauce sales.
**Limited room for industry concentration improvement**
Due to differences in eating habits and taste preferences, China's food consumption has formed a pattern of "sweet in the south, salty in the north, sour in the east, and spicy in the west." **The condiment industry is clearly regionally divided, showing a trend of regional concentration.** In addition, due to China's vast territory, it is difficult for manufacturers to penetrate the national market, so improving industry concentration is inherently difficult.
In Japan, the top three soy sauce companies have a concentration of 48%. Japan's soy sauce industry is more mature than China's, and its leading company, Kikkoman, faces the global market. Even in such a mature market, the CR3 concentration has not exceeded half, and the market shares of companies ranked 4-10 are not high. It can be seen that **the differentiated demand for condiments has, to some extent, inhibited excessive brand concentration.**
Based on sales revenue, the concentration of China's soy sauce industry's top three has reached 56%, exceeding Japan's. Haitian's sales share is 36%. Based on production volume, the concentration of China's soy sauce industry has also exceeded 40%, with Haitian accounting for 33%. It is clear that it will become increasingly difficult for Haitian to increase its market share in the future.
**Executives reduce holdings by over 100 million yuan**
A review of Haitian's executive reduction data shows that from August 22, 2018, to mid-June 2019, Haitian's directors, supervisors, and senior managers reduced their holdings of the company's shares 35 times, cashing out over 100 million yuan in total. In 2019 alone, they cashed out 81.358 million yuan.
It is worth noting that after Haitian's stock price broke through 100 yuan on May 30, four members of the company's directors, supervisors, and senior managers—Zhang Xin, Wu Zhenxing, Chen Junyang, and Ye Yanqiao—sold 210,000 shares at the 100-yuan price, cashing out a total of 22.613 million yuan. The reason given was personal capital needs. In addition, in 2018, four of the top ten shareholders reduced their holdings of Haitian by a total of 15.89 million shares.
Zhu Danpeng, an analyst at the China Food Industry Research Institute, commented: "**Haitian's current stock price is at its peak. Executives reducing their holdings at this time may be due to concerns about the company's development; otherwise, they would not sell stocks at this stage.** "
Unlike brokers who are keen to recommend Haitian, buy-side institutions seem to hold a more cautious view. Looking at institutional holdings, at the end of 2018, 379 institutions held Haitian, but by the first quarter of 2019, only 81 remained. During this period, Haitian's stock price rose over 30%. It can be seen that institutions were selling all the way up, and chips gradually shifted to retail investors.
**When will the institutional herding end?**
From 2015 to the present, the shareholding ratio of Haitian's top ten shareholders has increased from 78% to 83%. This period also coincides with the continuous increase in foreign capital's holdings of A-share "white horse stocks." Although the concentration of holdings in the condiment industry has increased in recent years, Haitian's concentration is the highest. For example, Zhongju Hi-Tech (600872.SH) has a concentration of only 47%, Qianhe Flavoring is 65%, and Hengshun Vinegar is 54%. Kweichow Moutai's top ten shareholders' concentration is only 77%.
From the perspective of Haitian's holding concentration, the phenomenon of institutional herding is particularly evident. Many investors believe that Haitian's current high valuation is due to institutional herding. So, will the institutional herding phenomenon end?
Analysts at China Merchants Securities believe: "**The current phenomenon of institutions herding into consumer stocks is mainly because the consumer sector has faster earnings growth than other sectors. If the earnings gap between the consumer sector and other sectors reverses, institutions will also adjust their expected returns on consumer stocks.** " In addition, based on past experience, when fund investors "herd" into "consumer-type" products and fund managers, it may also be the time when the excess returns of consumer stocks end.
**Conclusion**
Although Haitian's performance has achieved growth, compared with its valuation, the growth rate is relatively low. Currently, Haitian's development goal for 2019 is to increase operating revenue by 16% and profit by 20%. Based on the forecast earnings per share for 2019, the dynamic price-to-earnings ratio is 53 times, which is much higher than the net profit growth rate, indicating that the company's valuation is relatively high.
2017 seems to be a turning point. Through analysis, it can be seen that various phenomena after 2017 indicate that Haitian has shown signs of slowing growth. To cope with the lack of growth, Haitian has used its strong industry position to transfer pressure to distributors. But how long can this approach last? Now, Haitian's performance growth rate is like a Damocles sword hanging overhead. Once it fails to meet investors' minimum expectations, Haitian's valuation may undergo significant adjustments.
Source: Interface News (ID: wowjiemian)


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