Haitong International has maintained its "Outperform" rating for U-PRESID CHINA (00220). The company's operations showed sequential improvement in January-February, which is expected to continue steadily. The firm forecasts revenues of 33.4/35.1/36.5 billion yuan for 2026-2027 (previously 35.0/36.3/NA billion yuan), representing year-on-year growth of 5.4%/4.9%/4.2%. Net profit attributable to shareholders is projected at 2.26/2.42/2.61 billion yuan (previously 2.40/2.62/NA billion yuan), with year-on-year increases of 10.0%/7.2%/7.8% (previously 10.3%/9.4%/NA). A target price of HK$11.35 (previously HK$12.1) is set based on a 2026 P/E ratio of 20x (previously 2025 P/E of 22x). Key points from Haitong International are as follows:

Operational improvements and one-time impairment affected profits. In 2025, the company reported revenue of 31.7 billion yuan, up 4.6% year-on-year. Food, beverage, and other business revenues increased by 4.6%, 1.2%, and 60.1% respectively, with beverage performance in the second half impacted by food delivery price wars and market competition. Gross margin rose 0.7 percentage points to 33.2%, driven by lower raw material costs and higher capacity utilization. The sales expense ratio remained flat at 22.2%, while the management expense ratio dropped 0.1 percentage points to 3.6%. Operating profit grew 14.3% to 2.56 billion yuan, with the operating profit margin up 0.7 percentage points to 8.1%. Net profit attributable to shareholders increased 10.9% to 2.05 billion yuan, and the net profit margin rose 0.4 percentage points to 6.5%, partly offset by a one-time impairment of approximately 50 million yuan related to underperforming catering investments. Excluding this impairment, net profit would have grown 17.6% year-on-year.

Beverage segment slowed in the second half due to industry competition. Beverage revenue reached 19.471 billion yuan in 2025, with growth slowing significantly in the second half (H1/H2: +7.6%/-5.8%) due to food delivery platform price wars and intensified competition. Inventory reduction and freshness management in Q4 led to a quarterly revenue decline. Tea beverages, juice, milk tea, and other beverage revenues changed by +2.6%, -7.4%, +1.2%, and +29.3% year-on-year, respectively, with juice declining notably due to competitor price cuts, discount store private labels, and timing of the Lunar New Year holiday.

Food business gross margin hit a five-year high, with product mix optimization. Full-year food revenue was 10.494 billion yuan, the second-highest since 2022. Gross margin improved 0.6 percentage points to 27.1%, a five-year peak. Products such as Soup Master, Tomato Emperor, and Man Han Feast achieved double-digit growth, and products priced above 5 yuan accounted for 45.2% of revenue, up 2 percentage points, indicating ongoing product mix enhancement. Snack distribution revenue doubled to 2 billion yuan in 2025, accounting for 6% of total revenue, covering both owned brands and OEM operations.

Strong cash flow and attractive dividend yield. Cash and equivalents stood at 11.46 billion yuan at the end of 2025, with operating cash inflow of approximately 3.28 billion yuan. Capital expenditure was 1.09 billion yuan, with two-thirds allocated to refrigeration and one-third to production line upgrades. A final dividend of 47.47 cents per share is proposed, maintaining a 100% payout ratio. Assuming continued full payout, the dividend yield for 2026 is projected to reach 7.1%, underscoring significant value for shareholders.

Risks include heightened industry competition, raw material price volatility, food safety issues, and slower-than-expected consumption recovery.