Yindu Kitchen Equipment is a leading domestic commercial catering equipment manufacturer which primarily focuses on exports, with a strong emphasis on its proprietary brands. In 2022, 59% of its revenue came from the US market. Currently, the Company’s “intelligent fry robotic solution” is undergoing trials in North American fast-food restaurants. In the long run, with advancements in machine vision technology, the Company is poised to create a second growth curve of fast-food automation in the North American market. Its competitive edges in the new business stem from its well-established traditional channels in North America and cost advantages associated with manufacturing in China. We are optimistic about the Company’s earnings growth and put its 2023E/24E/25E attributable net profit (ANP) forecast at Rmb560mn/750mn/930mn. We assign 25x 2023E PE to derive a target price of Rmb34, corresponding to a target market cap of Rmb14bn and reiterate the “BUY” rating.

Company profile: A leading domestic manufacturer of commercial catering equipment with a primary focus on exports.

Yindu focuses on export-oriented business primarily. In 2022, its total operating revenue totaled Rmb2.63bn, with Rmb2.51bn coming from export sales, accounting for 95.4% of its core business revenue. The Company’s US subsidiary contributed Rmb1.57bn to the total revenue, representing approximately 59% of the overall revenue for the year. Yindu ranks first by operating revenue, with its core business segment commercial refrigerators / western kitchen equipment generating revenue of Rmb1.99bn/431mn, accounting for 75.4%/16.4% of total revenue, respectively, in 2022.

Meanwhile, the Company prides itself on its proprietary brands and enjoys a favorable profit margin, with sales gross profit margin (GPM) of 37.8% and net profit margin (NPM) of 16.9% in 2022. It recorded revenue of Rmb1,332mn in 1H23, down 7.0% YoY, and ANP of Rmb269m, down 3.2% YoY.

Industry analysis: Upward prosperity in North American market, machine vision empowerment, and vast automation replacement market. 1) The commercial catering equipment market in North America is valued at US$14.32bn, with a 4.8% CAGR from 2011 to 2021. The downstream demand market continues to exhibit consistent growth.

According to the data from Grand View Research and newsijie.com, the global commercial catering equipment market reached a size of US$90.86bn in 2021, with a likely CAGR of 6.7% from 2020 to 2027. As per data from North American Association of Food Equipment Manufacturers (NAFEM), the North American market size stood at US$14.32bn in 2021, with a CAGR of 4.8% from 2011 to 2021. Among all equipment categories in the downstream segment, commercial dining refrigeration equipment held the largest market share at 29%, with revenues of US$4.12bn in 2021. This segment demonstrated a remarkable revenue CAGR of 7.3% from 2011 to 2021, significantly outpacing the industry’s overall growth rate of 4.8%. The North American restaurant performance index (RPI) has consistently exceeded 100 since 1Q21, indicating an expanding downstream demand market. By 4Q22, it reached an inflection point in growth, entering an upswing phase, which suggests that the demand for commercial catering equipment will continue to grow steadily. 2) Advancements in machine vision technology enable automation across multiple dining processes. With the robust development of machine vision technology, the capability of machinery to recognize non-standard objects has improved significantly. Coupled with the decreasing costs of implementing machine vision at the application level, automation replacements in various dining processes, such as fry preparation, are gradually becoming visible. 3) The North American commercial catering equipment automation market is vast, with a potential space for labor replacement of US$44bn. Based on our calculations, the annual labor cost for fry preparation alone amounts to US$10.8bn in North America. The potential market space for labor replacement through the implementation of intelligent fry robotic solution is estimated at US$7bn, with the potential for a return on investment within one year for individual restaurants. Similarly, significant opportunities for automation replacements exist in other dining processes such as frying chicken, grilling meat patties and bacon, coffee and other beverage preparation, and burger making. Assuming an 80% penetration rate for automation replacement, we estimate annual labor cost savings of US$5.18bn, US$5.18bn, US$3.23bn, US$7.78bn, and US$5.18bn, respectively, totaling US$26.6bn per year.

Company analysis: Traditional core business is bouncing back, paving the way for the second growth curve of North American fast-food automation. 1) Traditional business recovery, with the potential for profit growth in the future. According to National Restaurant Association, core indices related to the North American commercial catering equipment market demand, such as RPI, have consistently remained above 100. The demand for traditional North American business is recovering and continues to expand, with RPI reaching a growth inflection point in 4Q22. The Company’s two main revenue streams, commercial dining refrigerators and western kitchen equipment, reached revenues of US$1.99bn and US$0.43bn in 2022, with GPM of 37.9% and 39.1%, respectively. As the newly established production capacity comes online and North American market demand increases, there is potential for revenue and profit growth in the future. 2) Ice-making machine entering a high-growth phase with significant increases in the North American market. Yindu’s ice-making machine products have entered a high-growth phase since 2Q22, achieving sales of approximately Rmb43mn in 1H23, representing a YoY growth of approximately 60%, with a GPM of around 40%.

These products are primarily targeted at the US market, offering a clear price advantage, and is likely to substantially increase in market share in the future. 3) The new product, intelligent fry robotic solution is currently undergoing testing in North America and is likely to ramp up next year.

In 2023, the Company introduced its new product, the "intelligent fry robotic solution", which offers an unmanned solution for fry preparation with functions like storage, distribution, and frying. It has already been delivered to North American customers for testing and will gradually be introduced to other markets. The product will likely enter mass production next year. 4) Yindu boasts both channel advantages and low-cost competitive advantages in the North American fast-food automation field. Compared to other domestic companies, the Company enjoys channel advantages with a nationwide sales and after-sale service network established in the US. In contrast to American companies, it stands out for its significant cost advantages. The establishment of a production base in Thailand aims to mitigate the impact of US tariffs on profitability.

Potential risks: Sharp increases in raw material costs such as stainless steel and foam materials resulting in a significant decline in GPM and affecting cash flow; international trade policies and currency fluctuations impacting GPM and NPM; Intensified market competition, inability of new products to meet market demands, gradually denting the Company's competitive edges; overseas market expansion falling short of expectations, affecting the Company’s growth rate; rising sea freight costs affecting export GPM levels; the expansion of new products such as universal steam ovens and smart fry robots falling short of expectations, adversely impacting the Company’s operations; lower-than-expected demand in the US market.

Investment strategy: Yindu is a leading domestic manufacturer of commercial catering equipment, primarily focused on exports, with a strong emphasis on its proprietary brands.

In 2022, over 90% of its total revenue came from overseas sales. Since 2023, the North American RPI has shown a sustained uptrend after reaching a growth inflection point, indicating continuous expansion in the downstream demand within the commercial dining industry. This suggests that the Company’s traditional business is poised to achieve growth in both revenue and profits. The North American market for commercial catering equipment automation is vast, and its new product, the “intelligent fry robotic solution” is likely to help the Company tap into the second growth curve of fast-food automation, offering promising growth prospects. We are optimistic about the Company’s earnings growth and estimate its 2023E/24E/25E ANP at Rmb560mn/750mn/930mn. Taking into consideration the valuation levels of comparable companies including Ninebot (689009.SH), Roborock (688169.SH) and Ecovacs (603486.SH) on 41x/24x/18x 2023E PE based on Wind consensus estimates, and considering that the Company is in a similar growth stage as the comps, we assign 25x 2023E PE to derive a target price of Rmb34, corresponding to a target market cap of Rmb14bn and reiterate the "BUY" rating.