CMSC released a research report reiterating a "Strongly Recommend" rating on YIHAI INTL (01579), citing accelerating performance, considerable dividends, and positive changes in its related-party business. The company's core appeal lies in earnings improvement and high dividend yield. Previously, continuous price reductions in its related-party business constrained performance and affected valuation; however, this headwind is now expected to ease. Meanwhile, third-party business is projected to sustain double-digit growth, driven by rapid expansion in overseas and B-end segments. The company initiated substantial dividend payouts starting in 2023, with the payout ratio anticipated to remain high going forward. CMSC's key views are as follows: The company's core appeal lies in earnings improvement and high dividend yield. Previously, continuous price reductions in its related-party business constrained performance and affected valuation; however, this headwind is now expected to ease. Meanwhile, third-party business is projected to sustain double-digit growth, driven by rapid expansion in overseas and B-end segments. The company initiated substantial dividend payouts starting in 2023, with the payout ratio anticipated to remain high going forward. The brokerage forecasts EPS of RMB 0.81 and RMB 0.88 for 2025 and 2026, respectively, implying a 2026 valuation of 15X. The dividend yield for both 2025 and 2026 is expected to exceed 6%. CMSC is optimistic that earnings revisions, fueled by a recovery in the catering sector and improvements in related-party business, will drive a re-rating of the company's valuation multiple. It sets a target valuation of 22X for 2026, corresponding to a target price of HKD 21.5, implying 44% upside, and maintains the "Strongly Recommend" rating. Performance is expected to accelerate in H2 2025, with an improvement in the gross margin-to-expense spread. Based on recent tracking, the brokerage notes that while the growth rate of YIHAI's third-party revenue in H2 2025 has slowed sequentially, the decline in related-party business has narrowed. Overall, H2 2025 revenue is projected to grow at a low-single-digit rate. On the profit side, the company increased ex-factory prices in H2 2025 while also boosting channel expense investments and subsidies to support distributors in driving sales. Consequently, both gross margin and expense ratios rose, but the net effect was an improvement in the gross margin-to-expense spread. Furthermore, the company's continued efforts to enhance supply chain efficiency in 2025 also positively contributed to the gross margin. Additionally, a one-time payment of historical advance dividend taxes in H2 2024 led to a tax rate of 35.2%, up 7.1 percentage points year-on-year; the H2 2025 tax rate is expected to normalize, potentially releasing approximately RMB 50 million in profit. Overall, the brokerage anticipates low-to-mid single-digit revenue growth for H2 2025, with profit growth potentially exceeding 20%. Third-party C-end business remains stable, while B-end and overseas markets show impressive growth. Within the third-party business: 1) C-end: The company is advancing its "two direct" channel reform, reducing distribution layers to reclaim channel profits. It has already completed the transition to direct management and distribution for some key account (KA) channels and plans to further increase this proportion in 2026. Collaborations with channels such as Hema, Dingdong Maicai, and Pang Donglai are progressing smoothly, while cooperation with Sam's Club is actively being pursued. 2) Overseas: The overseas business is primarily focused on Southeast Asia, where production and distribution networks are relatively well-established, with simultaneous expansion into South America, Africa, and the Middle East. Overall overseas revenue achieved rapid growth in 2025. The company employs a dual-brand strategy, utilizing both the Haidilao brand and its own brand "Magic cook," currently targeting mainly the C-end. 3) B-end: B-end revenue is forecast to double in 2025, primarily driven by large B-end clients, relying on deepened cooperation with core customers like Xibei and Micun, and expanding from basic seasonings to higher-margin complex sauces. A dedicated small B-end team was established in 2025, acquiring over a thousand clients in H1 2025, mainly supplying standardized products while focusing on optimizing product taste compatibility for different small B-end formats. In terms of profitability, the net profit margins for small and large B-end segments are currently similar; however, the small B-end segment's net margin could potentially exceed that of the large B-end segment if it achieves direct connections and reduces distributor layers. The company plans to increase the proportion of small B-end business to optimize the overall profitability structure of the B-end segment. The return of Haidilao's founder is expected to bring improvements to the related-party business. The return of Zhang Yong, founder of Haidilao, has boosted employee morale and internal management at Haidilao. Furthermore, he has emphasized a more proactive "Pomegranate Plan" to create incremental growth. The condiments for its incubated brands are primarily supplied by YIHAI, suggesting that YIHAI's related-party business is well-positioned to benefit from the growth of these new brands. Additionally, Haidilao is implementing stricter quality management. As a related-party supplier, YIHAI is expected to provide higher-quality products and play a more significant role within the supply system, creating a win-win situation with Haidilao. The brokerage believes that, alongside a gradual recovery in overall catering demand and improved operational expectations for Haidilao itself, both the gross margin and supply volume of YIHAI's related-party business are poised to increase. Risk warnings include a slower-than-expected demand recovery, significant cost increases, loss of major customers, and slower-than-expected expansion in overseas markets and new channels.
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