Investment Highlights

Located in Shouguang, Shandong Province and having been working in the industry for more than two decades, Shandong Luscious Pet Food Inc. (“Luscious”/ the company) specializes in the research, production and sales of pet foods. Its products mainly include jerky, cans, cookies and bones for cleaning teeth.

In 2021, the company achieved CNY 459 million in revenue, with three-year CAGR of 10.61%, and its net income attributable to shareholders, also known as net profit attributable to shareholders, stood at CNY 30 million.

As its overseas business in 2021 accounted for 83.43%, the stability of its overseas business plays a decisive role in the company’s performance.

1) Factors impacting the company’s revenue: ①the overseas pet industry was stable in growth and rigid in demand; ② the company owns high-quality clients and has built stable cooperation with them.

Clients in the downstream usually take longer time to fix their suppliers, once settled, they will not change easily; ③the overseas competition takes on a scattered and differentiated pattern. 2) Factors impacting the company’s profit rates: ① raw material: as the raw materials were dominated with bulk commodities and pet food companies own weaker bargaining capabilities, the prices of raw materials have a bigger say in the gross margin; ② exchange rate: if Chinese Renminbi appreciates, there will likely be losses on exchange rates; ③ product mix: as different products have different gross margin, the selling structure will pose impacts on the company’s profit margins; ④policies: Despite that the US increases tariffs on Chinese pet foods, the company will likely see marginal improvements.

As China’s pet food industry is on the rising trajectory, the company is raising funds to roll out business in main food and focuses on niche markets, which is expected to benefit from the industry and see performance growth.

The company’s IPO will be for the construction of its “annual output of 30,000-ton pet main food project”.

The company further beefs up efforts in functional pet foods including antiviral and immunizing foods and specializes in meat product processing techniques for main food with high-end fresh meat.

Earnings forecast and investment recommendation Due to multiple driving factors including rising feeding rates, changed pet-raising concepts and upgraded consumption in China, niche markets will see huge growth potentials, and the industry growth potentials and profitability are worth expecting.

Having been working in the industry for ages, Luscious has stabilized its overseas business, and its main food business in China is expected to see a rise in sales volume.

We estimated its net income attributable to shareholders at CNY 36 million, CNY 36 million, and CNY 38 million, its EPS at CNY 0.39, CNY 0.40, and CNY 0.42 for 2022, 2023, and 2024, implying a P/E ratio to 14.2x, 14.0x, and 13.3x, based on the closing price on June 23rd of 2022. We give it an “Outperform” rating with the first coverage.

Potential risks price

swings of raw materials; exchange rate fluctuations; magnified competition; overcapacity