Investment Highlights

A snack food chain retailer. Employing a chain store business model,Laiyifen is mainly engaged in the retailing of proprietary brand snackfoods. It is one of China’s largest directly operated snack food chainretailers with an extensive store network. Its products are divided intonine major categories spanning across 900+ SKUs （stock keepingunits）。 Given its solid industry experience coupled with strong brand,superior product quality and leading distribution channels, Laiyifen’searnings have grown steadily over the years. It posted operatingrevenue and net profit of Rmb3,127mn and Rmb132mn, respectively,for 2015. During 2013-15, the Company recorded operating revenueand net profit CAGR of 6.64% and 15.96%, respectively.

Regional strong brands may develop rapidly in the fast-growingsnack food industry. As of 2015, China’s snack food market hadsize of Rmb418.3bn, implying 2011-2015 CAGR of 9.5%. Innovativehealth food products will become increasingly important in the market,which will likely maintain rapid growth of c.10% in the future. Among thefour mainstream retail models （independent store, supermarket/department store, chain store, e-commerce）， chain stores （offline） ande-commerce （online） are the most promising ones on their considerablescale and specialization. Therefore, the integration of chain stores ande-commerce channels will be the development direction of the retailindustry. Currently, China’s snack food industry has a low concentrationratio, with Want Want, the industry leader, possessing a market share ofonly 9.8%. As such, industry leaders with strong brands will likely growrapidly in the future.

Steady growth on well-balanced product mix. 1） Product mix: As of2015, roasted seeds & nuts/bean products, meat products, andpreserved fruits and vegetables contributed 80% of sales revenue in theindustry, and boasted steady growth and well-balanced product mix.

Meanwhile, the rapid growth of high-profit-margin pastry products willlikely improve the overall gross margin. 2） Business mode: Theintegration of product development and chain store managementenables the Company to make quick responses to consumers’ demandand thus improve operational efficiency and customer experience. 3）Channels: Directly-managed stores contributed the most revenue （88%）to the Company, with the highest gross margin （48.41%） and averagerevenue of single stores （Rmb1.2614mn） among all channels.

E-commerce channel contributed 6.94% revenue to the Company, withCAGR of 100.5%, and will likely become a key profit growth driver. Byregion, Jiangsu/Zhejiang/Shanghai contributed over 90% revenue to theCompany. Going forward, the Company will focus on Beijing and Anhuimarkets, in a bid to transform from a regional leader into a nationwideleader in the snack food industry.

Investing in marketing network and optimizing logistics system. The Company plans to offer 60mnshares （25% of total equity after the offering） to the public in a bid to raise Rmb327mn for thedevelopment of its marketing network and Rmb348mn for production and warehouse construction. TheCompany aims to integrate regional resources, optimize existing marketing network and constructmodernized logistics system, thereby optimizing its product mix, enhancing capacity for innovation andimproving core competency.

Potential risks: Food safety incidents; risks in expansion into new markets; volatility of operationalperformance.

Earnings forecast and valuation. We forecast the Company’s 2016-18E EPS to be Rmb0.58/0.64/0.72（2015A: Rmb0.55）。 Given the steady expansion against exacerbating competition within the snack foodindustry over the past few years, we believe Laiyifen will see stable earnings in 2016, followed by greaterupsides in 2017. Taking into account the average valuation for both A-share and H-share snack foodcompanies, as well as the historical market cap range for Laiyifen, we set its target price at Rmb21.1 （33x2017E P/E） and initiate coverage with BUY rating.