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This article is written based on public information and is only for information exchange purposes. It does not constitute any investment advice

Since February 2021, the A-share food and beverage sector has retreated by more than 52% overall, and the decline has even exceeded the big bear market in 2015 and 2018. Among them, 3 companies fell by more than 80%, 13 fell by more than 70%, and 39 fell by more than 50%.

In a market full of mud and sand,Dongpeng Beverage(SH:605499) rose 265% against the trend, becoming the only leader in the top ten food and beverage market capitalization to record positive returns. Looking at valuation, Dongpeng's latest PE is over 42 times, the highest among the top 50 in the sector.

Source: Wind

What do you think of Dongpeng Beverage?

01

Fundamentals OK

In such a weak market, Dongpeng Beverage was able to go against the trend and was given a higher valuation level. It was obviously because its own alpha performance was good, which offset the downward pressure brought by the market's β.

According to the latest performance forecast, in the first half of 2024, Dongpeng Beverage's revenue will be 7.86 billion yuan to 8.08 billion yuan, a year-on-year increase of 44% to 48%. Net profit attributable to the parent company will be 490 million yuan to 620 million yuan, a year-on-year increase of 44.4% to 56%.

This continues the high growth trend of performance in the past few years, and the overall growth rate has accelerated. From 2020 to 2023, the compound annual growth rates of revenue and net profit attributable to the parent company will be 27.9% and 37.5% respectively. It should be noted that in the past few years of the epidemic, the performance growth of many consumer leaders has encountered obvious bottlenecks, such as Fuling Zhacai, Juewei Foods, and Haitian Flavor Industry.

(Source: Wind)

Let's look at profitability. The latest sales gross profit margin is 42.77%, which is slightly lower than in previous years, but remains in a high range. The main reason is that the increase in raw material prices in the past few years and the launch of new products during this period have lowered the overall performance. However, Dongpeng has also ensured a high profit level through cost optimization. For example, the 250ML small gold bottle is packaged in PET instead of Red Bull's three-piece iron can, and the packaging cost of the former is 60 cents lower than the latter.

The latest net profit margin is 19%, which has continued to rise for many years and hit a record high. It can be seen that the company's three expenses are well controlled. Among them, the decline in sales expense rate is particularly obvious, from 31.9% in 2018 to 17.1% in the first quarter of this year. On the one hand, Dongpeng's sales scale has increased significantly, which has lowered the sales expense rate. On the other hand, Dongpeng's special drink brand has been recognized by consumers, and the growth of marketing and promotion expenses has slowed down significantly.

In the balance sheet, Dongpeng Beverage's latest contract liabilities are 2.688 billion yuan, up 59% year-on-year, setting a new record again. It can be seen that Dongpeng Special Drink's terminal products are selling well and distributors are relatively active in paying.

In terms of return on equity (ROE), the figures for 2017-2023 were 43.3%, 22%, 43%, 45.8%, 36.5%, 31.7% and 35.8% respectively. The decline in 2021 was mainly due to the sharp increase in net assets caused by the listing financing that year, which led to a decline in ROE. Overall, in terms of absolute value, ROE performed well and was at the forefront of the food and beverage track.

To summarize, Dongpeng Beverage's good performance and continued improvement in profitability are the core driving forces for the company's stock price to move beyond the independent industry.

02

The mystery of the counterattack

The rapid growth of Dongpeng Beverage is naturally inseparable from the market dividends of the functional beverage segment.

The scale of China's soft drink market is about 600 billion, but it has maintained a slow growth for many years. In terms of specific segments, packaged water accounts for 37.6%, followed by ready-to-drink tea, carbonated drinks, fruit juice drinks, functional drinks, and ready-to-drink coffee, which are 19.6%, 15.3%, 14.3%, 7.8%, and 2% respectively.

Although functional drinks do not account for a particularly high proportion of the entire soft drink market, their growth rate is quite fast. From 2019 to 2023, the industry scale will grow at a compound annual growth rate of 10%, far exceeding the average performance of the soft drink industry.

As the functional beverage market grows, the internal market structure has undergone tremendous changes. According to Euromonitor, Red Bull's market share will be 53% in 2023, a sharp drop of 27% from 2014. Dongpeng Beverage ranks second with a market share of 17%, a significant increase of 12% from 2014. The market share of other brands, including Lehu, Zhongwo, and Zhanma, has increased slightly.

Changes in the functional beverage market, Source: Huatai Securities

According to the Nielsen IQ report, Dongpeng's sales volume accounted for 43% in 2023, up from 36.7% at the end of 2022, 12.2% higher than Red Bull. From this perspective, Dongpeng Beverage has achieved a reversal against Red Bull after several years of rapid growth.

Dongpeng’s ability to take over a lot of Red Bull’s market share is due to both internal and external factors.

External factors: Thai Tianshi and Huabin Group had a trademark dispute over the distribution of interests, and went to court, and the lawsuit continued. During this period, Thai Tianshi cooperated with other domestic brands to launch Red Bull products with similar packaging. This continued to have a negative impact on the Red Bull brand and channel expansion, and also gave domestic brands such as Dongpeng Special Drink room to turn things around.

Of course, the most important factor that enabled Dongpeng to break through is its continued efforts in products, channels, brands, etc.

In terms of products, the ingredients are basically the same as Red Bull, with the core ingredients being 50g taurine, 20g caffeine and 20g creatine. In 2009, Dongpeng began to differentiate its packaging and launched PET bottled beverages with dustproof caps. This actually hits the pain point of consumers, making it easy to carry and store, and also increases product recognition.

In fact, an important turning point in Dongpeng's development was the launch of the 500ML gold bottle at the end of 2017. The price is positioned at the mid-to-low end, with 500ML priced at only 5 yuan, far lower than the 6 yuan 250ML Red Bull. With such a high cost-effectiveness, the product was a great success once it was launched.

From 2018 to 2021, the sales revenue of 500ML gold bottle soared from 800 million yuan to 5 billion yuan, with a compound annual growth rate of 85% (not disclosed separately in 2022-2023). In 2023, the product has entered the top three of Nielsen's national beverage product rankings.

The low-price strategy is an important weapon to achieve such results. This also coincides with the macro-consumption downgrade trend and has reaped some dividends. You know, after the epidemic, the growth rate of social retail consumption has slowed down, and the phenomenon of consumption downgrade has become more prominent. The main consumer groups of energy drinks are more sensitive to commodity prices and are more pursuing high-quality and low-priced commodities.

In terms of channels, Dongpeng Beverage started in Guangdong and gradually penetrated the national market. Red Bull's advantages in outlets are in traditional channels such as large supermarkets and convenience stores, as well as special channels such as high-end restaurants, gyms, and nightclubs, targeting white-collar workers and students. Dongpeng's focus is different, targeting grocery stores, small shops, factories, Internet cafes and other channels in second- and third-tier cities. The consumer group is mainly blue-collar workers, including drivers, takeaway boys, and couriers.

Red Bull adopts a large channel model, setting up distributors at the city level, and developing second- and third-tier distributors to gradually sink into county and township markets. Dongpeng has two distribution strategies. In core markets (Guangdong, Guangxi, East China, and Central China), it implements a intensive cultivation model, setting up distributors and postmen on first-tier distributors, and ultimately connecting terminals and consumers. In potential markets such as Southwest and North China, it adopts a large circulation model, jointly developing the market with first-tier distributors, directly connecting terminals, and the management difficulty is relatively low.

Of course, the most important thing for channel push is that the channel profit is rich. For example, for a 5-yuan Dajin bottle, Dongpeng gives distributors and terminals a profit of 2.05 yuan, and the gross profit level is over 40%. In addition, the manufacturer also provides an additional subsidy of 0.4 yuan to the channel and 0.15 yuan to the terminal. The overall channel profit is better than that of its peers, driving the terminal sales to improve.

For Dongpeng, the logic of nationalization has not yet been completed. In 2023, the revenue outside the province will account for 53.5%. Among them, East China, Central China, Guangxi, Southwest China, and North China are 13.5%, 12.4%, 8.7%, 10.4%, and 9.2% respectively. The provincial market still has certain growth potential, but the future engine is still the market outside the province.

In terms of brand building, it also adopted the strategy of following Red Bull at the beginning. Red Bull's slogan is "Drink Red Bull when you are thirsty, and drink Red Bull when you are tired and sleepy", while Dongpeng simply changed it to "Drink Dongpeng Special Drink when you are tired and sleepy", and its positioning was deeply rooted in people's hearts. Later, Dongpeng changed its slogan to "Young people should stay awake and work hard", emphasizing that the brand's target audience is young people, completing the transformation from functional promotion to shaping brand spirit.

In 2023, Dongpeng launched its national brand positioning, and put forward the slogan "Win glory for the country, Dongpeng energy" for the first time on CCTV. The general direction of building a national brand image is correct, because domestic products in all walks of life are becoming more and more popular among consumers.

With the combined efforts of both inside and outside, Dongpeng snatched the market from the jaws of Red Bull's near monopoly and achieved its rise.

03

Foreign investment increases vs management reductions

For a long time in the future, the growth engine of Dongpeng Beverage will still come from Dongpeng Special Drink, a major single product, and the driving force of growth comes from the continuous replacement of Red Bull's market share. Dongpeng also has a certain layout on the second growth curve.

In recent years, the company has launched hydrating electrolyte water, oolong Shangcha sugar-free tea, Da Ka coffee, VIVI cocktail, etc. Its strategy is similar to that of Nongfu Spring, casting a wide net and using existing channels to expand the market to see who can come out on top. Dongfang Yezi, a subsidiary of Nongfu Spring, is a dark horse, with revenue exceeding 10 billion in just a few years and moving towards the 20 billion target.

Dongpeng's electrolyte water, which was launched in April 2023, has become popular. Its annual sales revenue reached 400 million yuan, becoming the company's second largest single product. However, the electrolyte water market is relatively small, and it will be difficult to drive the rapid growth of the market in the future. If new single products emerge in the sub-segments such as 8 billion sugar-free tea, 5 billion ready-to-drink coffee, 4 billion coconut milk, and lemon tea, then Dongpeng's growth space will be opened.

But no matter what, from the current perspective, Dongpeng Beverage's growth potential is in the first tier in the entire food and beverage industry, which is also the core logic behind the capital market's willingness to give it an ultra-high valuation of 45 times.

As for Dongpeng, foreign investors have also seen it and continued to increase their holdings, expressing their attitude with real money. As of the latest, northbound funds hold 5.64% of Dongpeng Beverage (only 0.22% at the beginning of 2022), with a holding value of 5.26 billion yuan, ranking 7th in food and beverage, second only to Maowu Lufen, Yili and Haitian.

But in sharp contrast, major shareholders and management continued to reduce their holdings in Dongpeng Beverage.

From September 2022 to May this year, the second largest shareholder, Junzheng Investment, has cashed out more than 2.8 billion yuan in total. Last year, 13 shareholders and directors, supervisors and senior executives collectively reduced their holdings by 2% of the total share capital, cashing out 1.369 billion yuan. These negative factors at the capital level did not prevent Dongpeng from going against the trend, but we still need to pay attention to risks in this regard in the future, especially the movements of the actual controller Lin Muqin (50%).

In short, Dongpeng Beverage's growth potential is still worth looking forward to. It is unlikely that its valuation will continue to rise in the future. It will be good enough to get the money from performance growth. Especially in the weak food and beverage market, it is also necessary to guard against the risk of short-term and medium-term turbulence and pullback.

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