As a supplier of pet products covering the full spectrum of categories, Tianyuan Pet is well placed to ride on the development opportunities in the pet sector on the back of its full-range product offerings, premium customer base, and efficient supply chain management system. As the destocking cycle of overseas customers ends, the Company's pet product business is likely to regain growth by setting up local teams and expanding facilities overseas to strengthen the localization of products, designs and services. The Company’s pet food business may expand sales channels such as general trade on top of cross-border trade, while expanding its roster of imported brands to maintain relatively high growth.

Company overview: Full-range supplier of pet products.

With 20 years of dedication to the pet sector, Tianyuan Pet is principally engaged in the design, development, production and sales of pet products. In 1-3Q23, the Company generated Rmb1.53bn in total operating revenue, increasing by 1.3% YoY, and Rmb52.211mn in attributable net profit, down 45.0% YoY. In 1H23, the revenue from pet litter pads/cat climbing frames/pet toys/other pet supplies accounted for 11.3%/16.8%/12.8%/19.2% of the total operating revenue; notably, pet supplies and pet food contributed 60.1% and 39.2% of total revenue, respectively. Despite having the bulk of sales generated from exports, the Company is seeing growing contributions from domestic sales. In 1H23, the revenue from domestic/export sales reached Rmb480mn/520mn, accounting for 48.0%/51.9%, respectively.

Pet supplies: Leading edges in product, channel and supply chain. 1) Products: Tianyuan Pet offers a comprehensive range of pet product categories to meet the "one-stop" procurement needs of downstream customers. Relying on an experienced product team, the Company's product offerings are ahead of its peers in terms of function, theme and category innovation. Its basic product line-up covers more than 5,000 regular and best-selling stock keeping units (SKUs), and its new product catalogs are launched on a bi-annual basis, totaling more than 2,000 SKUs. 2) Channel: The Company has established stable partnerships with key accounts (KAs) through a rapid and diversified product development system, an efficient and reliable supply chain control system and a sound and mature customer service system, and enjoys clear first-mover advantage among small and medium-sized customers. 3) Supply chain: Tianyuan Pet adopts a hybrid flexible supply chain management approach of in-house production and outsourcing. In 1H22, the Company produced 69.0%/19.4% of cat climbing frames/pet litter pads, its core product categories, in house, while outsourcing other long-tail SKUs to other suppliers. Moving forward, by setting up local teams and expanding facilities overseas, the Company is set to strengthen the localization of products, designs and services, and hit the accelerator again with the end of overseas customers' destocking cycle.

Pet food: Distributor of imported brands with rapid growth.

The Company has introduced internationally recognized brands such as Orijen, ACANA and Solid Gold (positioned at the mid-/high-end market, mainly pet staple food). In 2019-9M23, the revenue from the Company's pet food business surged from 3.5% to 33.1% of total operating revenue. In 2H21, after switching to a new supplier of the Orijen and ACANA-brand pet food, the Company's procurement price has further come down. As the Company plans to expand into other sales channels such as general trade, while expanding the number of imported brands it distributes, we expect its pet food business to sustain strong growth.

Potential risks: Changes in market environment overseas; Exchange rate fluctuations; Intensified industry competition; Swings of raw material costs; Unpredictable new product development and rollouts; Production model overly reliant on outsourcing.

Investment recommendation: We estimate that the Company may register Rmb1.98bn/2.37bn/2.73bn in operating revenue over 2023-25, an increase of 5.1%/19.3%/15.6% YoY, and attributable net profit of Rmb80mn/100mn/120mn, changing by -41.5%/+33.6%/+16.8% YoY, corresponding to an EPS forecast of Rmb0.60/0.80/0.93, respectively. Combining both the DCF and PE valuation results, we assign a target market cap of Rmb3bn for 2024E (30x 2024E PE) to derive a target price of Rmb24, and initiate coverage with an “OVERWEIGHT" rating.