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Pet Economy Surge: Pet King's 6x Profit Leap Reveals Growth Logic

The consumption of cats and dogs has a better outlook than human consumption.

Domestic substitution and going global are advancing side by side. This is the most typical two major directions that the domestic pet economy has taken after nearly a decade, and it is also the most considerable two major growth logics.

As a second and third-tier domestic pet food brand, A-share listed company Petie Shares also welcomed another performance release in 2024 based on these two core logics.

Recently, Petie Shares announced its financial report. The data shows that it achieved a total operating income of 1.32 billion yuan in the first three quarters, a year-on-year increase of 44.34%; net profit soared 6.3 times year-on-year, reaching 150 million yuan, close to the 170 million yuan annual total profit forecasted by institutions.

For the continuous rapid growth in performance, the company gave two major reasons: First, the recovery of overseas market demand has driven the release of production capacity and improvement of operational efficiency in foreign factories; second, the continuous development of the domestic market has driven the sustained growth of its self-owned brand business.

From a loss of tens of millions of yuan for the whole year last year to returning to hundreds of millions of yuan in profit, what has Petie Shares experienced in this year?

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The recovery of external demand drives a major repair of Petie Shares' performance.

As the first listed company in the domestic pet track, Petie Shares is a small track leader that has gone out from Shuitian Town, Pingyang County, Wenzhou, known as "China's Leather Capital."

Earlier, it galloped in the overseas market with the ODM model of dog chews and was a core supplier for internationally renowned pet brand merchants such as American Spectrum and Walmart.

It was not until 2018 that Petie Shares began to return to the Chinese market with a "dual-wheel drive" strategy. At that time, considering that the domestic pet economy was just in its infancy, there were opportunities at all levels of the industry. Petie Shares chose the highly demand-driven main food subfield internally and began to operate its self-owned brand.As of now, Petit has two core businesses: pet chews and pet food.

Among them, livestock skin chews and plant-based chews are the core categories, with shipments ranking among the top globally and contributing to the main source of revenue for Petit. In 2023, these two businesses accounted for nearly 60% of its total revenue, reaching 850 million yuan.

As of the first half of this year, this proportion has further increased to 66%, with total revenue increasing from 280 million yuan in the same period of 2023 to 560 million yuan, nearly doubling.

Following this trend, it is not difficult to guess that in the first three quarters of this year, Petit's total revenue growth of 44.34% is mainly due to the increase in chew business.

Another factor that cannot be ignored is the repair of its overseas business this year.

Starting from the third quarter of 2023, the destocking cycle of the overseas pet industry has been gradually ending, and the order demand from downstream large customers has also been recovering, which has brought the continuous warming of pet enterprises' overseas business.

According to the data of the General Administration of Customs, from January to September 2024, the cumulative export value of dog or cat food feed in retail packaging in China still maintained a year-on-year growth rate of 21.08%.

In this regard, Petit has stated that in 2024, for the export business of pet snacks, the market risks in 2023 have been fully released, and this year will return to a normal order level and increase, which can rely on the advantages of Southeast Asian factories, helping to surpass the industry growth rate. The commissioning of the New Zealand main food factory will also bring a certain increase this year.

The domestic independent logic is gradually being realized.

In fact, the New Zealand main food factory is not just a production capacity point, it is essentially a logical line for Petit to strengthen its own brand.According to public data, in 2023, the urban pet consumption market in China reached a scale of 279.3 billion yuan, and it is expected to leap to 361.3 billion yuan by 2026, with the market size continuously expanding.

Among them, pet staple food, as a core sub-track with a very strong rigid demand in pet food, accounts for more than 52.3% of the overall market size. However, the entry barrier for this track is very low, and even the competition in the high-end market is relatively dispersed.

So far, there has not been a truly absolute leading enterprise in this field. In contrast, the concentration of the global pet food market is higher. As of 2023, Mars and Nestle Purina in the United States accounted for 21% and 20% respectively.

At the same time, according to the calculation of the international consulting agency Azoya, in the Chinese pet food market in 2023, foreign enterprises such as Acana, Vital Essential, and Blue Buffalo accounted for about 50% of the share.

Therefore, in this stage, competing for top brands has also become the core of competition for enterprises with diversified brand matrix and scale product line advantages, such as China Pet, Guaibao, and Pet.

So far, Pet has built two independent brands: Jue Yan and Hao Shijia, which are respectively positioned in the mid-to-high-end meat food and mid-range nutritional food.

Among them, the dog snack can product Jue Yan launched in 2023 has achieved good market performance. In 2024, Pet's strategy is to rely on the existing large customer base to continue to enrich its staple food products, try to achieve a satisfactory user conversion rate on existing customers and channels, which is expected to greatly increase the final new product increment.

Of course, the key behind this is that its New Zealand annual production of 40,000 tons of high-quality staple food production line has entered the commercial operation and production stage. As the core increment direction of Pet in the future, the proportion of its independent brand with higher gross profit margin will be accelerated, and increasing revenue and creating profit has become the general trend.

It is reported that at present, one of the incremental production bases, the New Zealand staple food factory, has already reserved orders from customers in Australia, the United States, and Europe, which will become a new growth point for Pet.

In addition, its domestic Wenzhou base's new staple food capacity is expected to release some capacity at the end of this year, and it can be officially put into use next year. In Pet's plan, it will make new research and development and layout according to the capacity characteristics in the expansion of independent brand categories, and strive to achieve the goal of independent brands.Under the joint drive of domestic and foreign demand, Peti's revenue and profit have continued to grow significantly in the first three quarters, indicating a high degree of certainty for future growth.

Previously, it planned to gradually increase investment expenses after May, aiming to focus on creating domestic blockbuster products, thereby improving the gross margin level and cost conversion efficiency. In such demand-driven catalysis, the utilization rate of Peti's overseas production base is also bound to be significantly improved.

Peti stated in the investor research notes that the current operation of the Vietnamese base is mature and efficient, and it is currently operating at full capacity. The Cambodian base is in the stage of increasing production capacity. In the first half of 2024, the Cambodian base achieved a net profit of 18.4 million yuan, and it is expected to enter the profit track for the whole year.

The rapid improvement in production and sales utilization rate has brought about a significant improvement in its comprehensive gross margin.

The financial report shows that in the first three quarters of 2024, Peti's comprehensive gross margin increased by 11.2 percentage points year-on-year to 28.01%; the same period's expense ratio also decreased by 4.62 percentage points to 13.87%.

Thanks to the increase in gross margin and the decrease in expense ratio, its net profit margin attributable to the parent company increased by 14.88 percentage points year-on-year to 11.7%, thereby achieving a year-on-year increase of 630.9% in net profit attributable to the parent company.

Combining the current external situation, the company's current actual situation, and customer situation, the utilization rate of the Vietnamese factory will continue to remain high in the second half of the year, and the production capacity of the Cambodian factory will continue to be released. Based on its work arrangements for raw material inventory management and optimization of the proportion of high-gross-profit product shipments, the market expects its gross profit level to continue to remain high.

Conclusion

Domestic substitution is a major direction with stable expectations.

In the research report, CICC pointed out that the barriers to research and development in pet animal protection are high, and the profit space is large, and the domestic market has high growth potential. As the research and development results such as domestic cat triple vaccines gradually enter the cashing period, domestic enterprises enter the market with differentiated products and channel competition, and 2024 is expected to become the first year of import substitution.In the medium to long term, drawing on the growth history of overseas leaders such as Zoetis, the pet animal health industry is expected to produce highly profitable, large-scale, and high-valued leaders.

Whether it's the manufacturing industry like semiconductors or consumer industries such as pets and automotive vehicles, they all cannot avoid the two major incremental logics of domestic substitution and going global. What companies need to do is to continuously strengthen their internal logic from various aspects such as products, services, brands, and supply based on the characteristics of their respective industries.

This is also why even a small pet company can have an immeasurable future. The consumer value behind the vast number of pets in China is, to some extent, not weaker than that of humans.

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