CICC released a research report maintaining its earnings forecasts for CHINA FOODS (00506) for FY25/26. The company is currently trading at 11x/10x FY25/26 P/E ratios. Considering upward market valuations, the target price has been raised 40% to HK$4.9, corresponding to 14x/12x FY25/26 P/E ratios and 20% upside potential. The outperform rating is maintained.
CICC's key points are as follows:
**1H25 Revenue in Line with Expectations**
The company announced 1H25 results: revenue reached RMB 12.278 billion, up 8.3% year-on-year; net profit attributable to shareholders reached RMB 578 million, up 2.2% year-on-year. Revenue was in line with expectations, while profit was slightly below expectations, mainly due to higher-than-expected marketing investments.
**1H25 Soft Drinks & Energy Drinks Continued Strong Performance, Packaged Water Achieved Recovery Growth**
1H25 company revenue increased 8.3% year-on-year, driven by both volume and price growth, with sales volume up 5.5% year-on-year and ASP benefiting from product price increases. By category: 1) Soft drinks: 1H25 revenue increased 9.4% year-on-year to RMB 9.38 billion, contributing to major revenue growth, with sugar-free carbonated products achieving double-digit revenue growth; 2) Fruit juices: 1H25 revenue increased 0.8% year-on-year to RMB 1.67 billion, mainly benefiting from the relaunch of Qoo contributing incremental volume; 3) Packaged water: 1H25 revenue increased 8.2% year-on-year, mainly due to packaged water business contraction in the same period last year, with Ice Dew driving recovery growth in the water business in the first half of this year.
Additionally, coffee and other beverages maintained strong growth momentum, with 1H25 revenue increasing 13.8% year-on-year to RMB 640 million, including energy drinks up 36% year-on-year, with core brand Monster showing impressive growth.
**1H25 Gross Margin Significantly Improved Due to Price Increases, Sales Expense Ratio Rose Due to Increased Market Investment**
1H25 company gross margin increased 3.5ppt year-on-year to 38.1%, mainly due to gradual release of product price increase benefits. 1H25 sales expense ratio increased 3.8ppt year-on-year to 26.3%, mainly due to the company's increased investment in coolers and expansion of sales point resources, increasing investment to promote business expansion. 1H25 management expense ratio decreased 0.2ppt year-on-year to 1.7%, remaining basically stable. Gross margin improvement was offset by rising sales expense ratio, with 1H25 company net margin decreasing 0.3ppt year-on-year to 4.7%.
**Second Half to Continue High Investment for Growth, Future Plans for Strategic Layout in Food New Segments**
The company previously focused on optimizing resource allocation efficiency with controlled expenses. Currently, the company believes efficiency improvement has been largely completed, and the second half will continue market investment intensity to promote business expansion. The company's vending machines, VIP membership programs and other channels have broken through the single beverage business scope, attempting to expand food distribution business, with 1H25 vending machine non-beverage business volume approaching RMB 200 million.
In the long term, while consolidating advantages in core categories such as carbonated drinks and fruit juices, the company plans to strategically enter the nutritional health food segment, promoting strategic synergy between beverages and food to achieve operational efficiency optimization. The company stated that as the most suitable entity within COFCO Group to undertake food business, relevant planning is actively progressing, with specific measures expected to be implemented next year.
**Risk Warning:** Rising raw material prices, intensified competition, weak demand.