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The pet food industry is an intriguing economic segment that thrives under what is called the "big industry, small company" investment strategyThis strategy operates under the premise that within a large and potentially lucrative market, the individual companies may be relatively smaller in size and market share, thereby presenting growth opportunitiesThe critical factor driving success in this sector is the ability to build and develop proprietary brands in both domestic and international markets, which transforms the narrative from merely focusing on small players in a large market to showcasing brands that can truly stand on their own.
Pet food, as a niche market within a broader category, stands poised to deliver significant returns on investmentThis sector is not just ripe for growth but is characterized by its potential for companies to triple or even quintuple valuations in the near futureEmerging signs indicate that starting in the latter half of 2024, publicly listed companies such as "GuaiBao Pet" and "ZhongChong Co." have begun to see their stock prices rise, suggesting a robust future for the industry.
At this juncture, it is worthwhile to delve into the dynamics that shape the pet food industry and explore the performance of relevant listed companies, further illuminating the landscape of investment opportunities.
In the realm of "big industry, small company", opportunities aboundThe essence of this investment strategy signifies that a sector with a large scale and stable or rapid growth includes firms whose scale and market share are limitedThese smaller entities, by virtue of their underperformance relative to the overall market, are often viewed as candidates for substantial growth, making them prime choices for investment.
From a practical perspective, when we refer to a "big industry", we are pointing towards a category with a massive market size and a relatively fast or steady growth rate
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The overall scale of the industry sets the boundary for the potential revenues companies can witness—the larger the industry, the greater the revenue potential for the companies within itFurthermore, sectors that exhibit rapid growth typically allow associated companies to accelerate their own growth trajectories, although positive growth can also be consistent without being rapid.
Evidence from the pet food market indicates a remarkable expansion pathIn 2024, the projected size of China's pet food market is estimated to reach a remarkable ¥158.5 billion, which marks an 8% increase from the previous year and reflects a compound annual growth rate of 11% from 2017 to 2024. On a global scale, data from Euromonitor showcases that between 2017 and 2022, the global pet food market expanded from $88.1 billion to $123.5 billion, reflecting a compound annual growth rate of approximately 7.0%. This expanding sector aligns perfectly with our understanding of a "big industry".
While it’s easy to see the opportunities presented by smaller firms in a large sector, we should clarify that "small companies" do not mean that these firms are miniature, but rather that prominent players in the industry have a relatively low market share, ideally less than 5%. Low market share indicates substantial room for growth, particularly when accompanied by a stable growth rate within the industryOften, the leading companies can surpass this industry growth, leveraging their positions for enhanced expansion.
Examining the global pet food landscape, we find concentrated market dynamics at playIn 2021, the top five firms accounted for about 52.5% of the market, comprising major titans like Mars, Nestlé, Colgate-Palmolive, Smucker's, and General Mills, which held market shares of 21.2%, 19.8%, 4.9%, 3.4%, and 5.2% respectively
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However, this landscape sharply contrasts with China's pet food market where the top ten companies only command a collective market share of 24%. Notably, global leader Mars has a mere 8% market share in China, indicating a more fragmented competitive environmentEarly domestic enterprises in this sector primarily operated through OEM and ODM models, with listed companies like GuaiBao Pet and ZhongChong Co. recording revenues of ¥4.327 billion and ¥3.747 billion in 2023, respectively, but still facing substantial headroom for growth.
Applying the “big industry, small company” logic, let’s consider if a domestic enterprise achieves ¥10 billion in revenues with a net profit margin of 15%. This scenario produces a net profit of ¥1.5 billion, yielding a market valuation of approximately ¥60 billion at a P/E (price-to-earnings) ratio of 30. Should this company double its revenues to reach ¥20 billion, its net profit could rise to ¥3 billion, pushing its market cap to around ¥100 billion—showcasing straightforward logical projections.
When assessing the competition among companies in the pet food sector, a thorough comparison of their financial performance is essential.
Currently, among A-share listed companies involved in pet food production, GuaiBao Pet, ZhongChong Co., Petty Co., and Yuanfei Pet stand outIn a financial comparison, GuaiBao Pet emerges as the most notable performer, while ZhongChong Co. exhibits consistent stabilityIn contrast, Petty Co. and Yuanfei Pet still show potential for improvement.
Analyzing these peer companies, the critical metric remains growth potential—while historical growth patterns are assessed, they still provide valuable insightsGuaiBao Pet showcases exceptional historical growth, with a revenue leap from ¥1.221 billion in 2018 to ¥4.327 billion in 2023, representing a compound annual growth rate of 29%. Over the same span, their net profit has ballooned from ¥0.042 billion to ¥0.422 billion, reflecting an impressive compound growth of 59%. For the first three quarters of 2024, GuaiBao reported revenues of ¥3.671 billion, marking an 18% year-over-year increase and a net profit of ¥0.443 billion, up 42% year-over-year.
ZhongChong Co. also experienced commendable growth, maintaining an upward trajectory from ¥1.412 billion in revenues in 2018 to ¥3.747 billion in 2023, equating to a 22% compound annual growth rate
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Nevertheless, its net profit experienced some fluctuations, starting from ¥0.058 billion and rising to ¥0.225 billion, ultimately achieving a compound annual growth rate of 31%. Notably, in the initial three quarters of 2024, they achieved revenues of ¥3.189 billion, reflecting an 18% increase with a net profit of ¥0.242 billion, also an impressive 42% increase year-over-year.
Petty Co. has unfortunately faced some growing pains, witnessing revenue declines of 19% in 2023. However, it bounced back in 2024's first three quarters, with revenues reaching ¥1.323 billion—a staggering 44% jump—and a net profit improvement, representing a remarkable 596% increase year-over-yearTheir volatility, however, casts doubt over stability relative to the aforementioned companies.
Lastly, Yuanfei Pet saw its revenues grow from ¥0.435 billion in 2018 to ¥0.991 billion in 2023, showcasing an 18% compound growth rate, albeit less impressive when compared to GuaiBao and ZhongChong.
The data illuminates that GuaiBao Pet excels with its financial positioningDissecting revenue sources reveals substantial differences among companiesIn 2022, GuaiBao’s primary revenue streams came from pet snacks and staple foods, bringing in ¥1.954 billion and ¥1.388 billion respectively, with gross margins of 33.5% and 42%—contributing to 58% and 41% of revenues respectively, with international sales amounting to ¥1.34 billion or 39%. Conversely, ZhongChong Co. had revenues from snacks, canned food, and staple food at ¥2.141 billion, ¥0.6 billion, and ¥0.36 billion with gross margins of 19%, 26%, and 20% respectivelyTheir international sales made up 69% of total revenues.
Yuanfei Pet's revenues comprised ¥0.382 billion and ¥0.472 billion from snacks and traction tools, with gross margins differing at 13% and 33%, showing a strong foreign market dependency
Petty Co., meanwhile, derived most of its revenue from staple foods and snacks with ¥0.16 billion and ¥1.572 billion respectively, but struggled with lower gross margins of 19% and 23%. The investigation yields clear insights: product lines like traction aids possess higher gross margins, while domestically sourced revenues yield better margins than overseas sales, creating a key understanding in the framework of successful pet brands.
Ultimately, focusing on cultivating strong brand identities is essential for companies to communicate their narratives compellinglyThe future landscape is defined by the firms that manage to build their own brands domestically and extend them internationally--a scenario that transcends the typical "big industry, small company" framework because these brands will become stories of success and growth on a global scale.
GuaiBao Pet, due to its recent listing in 2023, carries a high valuation, with its PE ratio seldom dipping below 30, climbing above 60 times recently, presenting challenges for prospective investors seeking prime buying opportunities unless they are adept in identifying growth stocksIn contrast, ZhongChong Co. has presented favorable investment opportunities, particularly in mid-2024 when its market cap briefly fell below ¥6 billion, equating to a modest 20 times PE based on an anticipated profit of ¥0.3 billionWith expectations for full-year net profits reaching between ¥0.36 billion and ¥0.4 billion in 2024, this translates to a favorable PE ratio of around 16 times, underpinning the share price's remarkable performance.
Thus, the fundamental principle underlying the investment logic surrounding "big industry, small company" underscores the importance of understanding market potentialThe ceiling for valuation in the pet food sector remains high, but investors should also remain vigilant, as overvalued assets can lead to market corrections
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