According to a research report released by Haitong International, they have maintained the 'Outperform' rating on China Foods (00506) with a target price of HKD 3.54. Against the background of weak macro consumption and sluggish demand for carbonated products due to a high base, the company's sales volume has been affected and market share has declined, resulting in some pressure on revenue. In addition, according to the Haitong International Cost Weekly Report, the cost of raw materials (PET, sugar, etc.) in the soft drink sector is controllable, and it is expected that the company's gross margin will remain basically flat year-on-year in 2024.

Haitong International's main viewpoints are as follows:

The carbonated business is under pressure, and the company's revenue is expected to decline by a high unit digit in 24H1.

According to channel research, the retail price of 500ml PET bottles (which account for about 30% of carbonated drinks) of the company's products has increased from CNY 3 to CNY 3.5 (an increase of 17%), and the factory price has also increased by 5%. Other carbonated drinks have also raised prices, with a basic increase in factory prices of 1-2 percentage points. However, PepsiCo only followed suit in 24Q2, so against the backdrop of weak macro consumption and sluggish demand for carbonated products, the company's sales volume has been affected and market share has declined, resulting in some pressure on revenue. It is expected that the carbonated drinks sector (accounting for 70% +) of the company in 24H1 will experience a high single-digit decline, the juice sector (accounting for 15% +) will experience a slight decline, and the packaged water sector (accounting for 5% +) will experience a slight decline. However, it is expected that the company's revenue will improve on a month-on-month basis in 24H2. Based on the fact that both Coke and Pepsi have raised their prices, it is expected that the company's Coke products will benefit from the leading brand power, and the market share will recover on a month-on-month basis.

It is expected that the company's gross margin will remain basically stable in 2024, and the expense ratio can be controlled.

According to the Haitong International Cost Weekly Report, the cost of raw materials (PET, sugar, etc.) in the soft drink sector is controllable, and it is expected that the company's gross margin will remain basically flat year-on-year in 2024. At the same time, the company has implemented a multi-factory linkage production plan since last year, which has brought savings in storage, transportation, and production line start-up and shutdown costs. The expense ratio is expected to decrease significantly in 2023 and this measure will continue to benefit cost savings in 2024. However, due to the company's declining revenue, efforts to offset this improvement will ensure overall control of the expense ratio. Considering the impact of one-time projects such as government subsidies, overall profit for the company in 24H1 is expected to drop slightly by a single-digit percentage for the whole year.

The dividend yield is attractive, with low valuations providing opportunities for layout.

Based on the weak macro consumption environment, we recommend high dividend companies with certainty. The company has increased its dividend payout ratio since 2021, with a dividend payout ratio to shareholders of 43.5%/45.0%/40.5% for 2021-2023, and the company's dividend yield (TTM) is 5.68%. Although profitability is expected to be somewhat under pressure in 2024, the maturity of the Coca-Cola products means the company's future profitability remains stable, with a high level of certainty in the distribution of profits.

Risk reminder: liquidity issues, intensified industry competition, fluctuation of raw material prices, food safety risks.