BDA-爱洋葱Orion英语学习研究报告-20130928

OrionChina:Cutting-edgeR&D,EstablishedModernTrade,ImprovingTraditionalTrade&Branding;RMB10BNSalesIn2015E(6.6BNIn13E)InAllLikelihood

OrionKorea:FoodBusiness,BolsteredBySophisticatedR&D,AndBranding/ChannelTrailingOnlyLotte,HasLimitedDownsideRisk

BDAReportonOrion(KOSE:001800)29September2013©BDA20132TableofContentsExecutiveSummarySnapshotofOrionChinaBusinessInsightsKoreaBusinessInsightsOrionChina:thepackagedcakebusinesshaslongbeenplayingtheroleof“star”andprovidingsolidcashflowsforOrion’sstronggrowth;whiletheotherthreeproductlines(crispy,biscuitsandgum),despitecatchingupquicklyinthepastthreeyears,arestill“questionmarks”3SectorGrowth(09-12CAGR)RelativeM/S(2012)BiscuitsCrispyGumPackagedCake(Pie)BiscuitsGumCrispyFoodPackagedCakesMarketPositioningProfitabilityDistantleaderinoverallmarketandpiesectorTheonlyplayerinhigh-endsegment,highimitationbarriersfordomesticfollowersHighlyprofitable~40%GM&<10%A&POptimizedcoststructureduetoeconomiesofscaleNo.4inoverallmarketandNo.1insnackingbiscuitsectorPioneerofchildrensegmentModeratelyprofitable45%GM&>15%A&PModerateA&PinputandreducedyearbyyearNo.2inoverallmarketbutlagsfarbehindthedominantleaderNicheleaderinlarge-sizedbottlegumformatNo.3inoverallsectorClosefollowersinchipsandextrudedpelletssectorswithinnovativeproductsRelativelylow~50%GMand>25%A&PHighestA&PinputtoexpandM/S;yetreducedyearbyyearRelativelylow>50%GMand>20%A&PHighA&PlevelhavetobemaintainedtokeepmarketshareEvaluationofOrion’sExistingProductPortfolio(2012)StrategicPositioningbyBCGMatrixStarCashCowLeanDogQuestionMarkSource:BDAanalysis1234HistoricallyOrionhassuccessfullyachievedgrowthinChinathankstostrongproducts,solidmodernchannelexpansionandproperexecution;ThesefactorswillcontinuetohelpOrionsecurelong-termgrowthAfistfulofprovenmodelsandanoutstandinglocalizationcapabilityhavelaidagoodfoundationforOrion’ssuccessinChina.Aglobal-leadingR&Dcapabilityandafistfulofprovenmodelsinthepipeline.Orionistheworld’stopinnovatorinthepackagedcakemarketandisabletoimitateotherbrandsinallsectorsexceptchocolate.OrionhasplentyofproductmodelswithprovensalesrecordsinKorea,meaningtherearelotsofnewthingsthatcanbebroughttoChinainthefutureCarefullocalizationprocesstogiveOrionacompetitiveedge.Althoughotherinternationalbrandsconductcarefulmarketresearchandexcelinproductbranding,Orionissuperiorintermsofproductlocalization.Thiscapabilitymeansitwillcontinuetolaunchmoresuccessfulproductsandsecurefurthergrowth.4Reputableexecutioncapabilityleadstostrongteamperformance.Fairevaluationmechanism.Orionhasafairevaluationmechanism,sosalespersonsreceivegreaterrewardsiftheyachieveagoodperformance.Generallyspeaking,itssalesteammembersearnhighersalariesthanpeopleworkingforcompetitors.Internalpromotionsystem.Orionpromotesonlyfromwithin,thusensuringteamstability.ProductManagementChannelWell-definedmoderntradestrategyandeffectivein-storepromotionsensureOriontobeakeybeneficiaryofmoderntradeexpansionandapersistentleadingplayerinmodernchannelSolid“know-how”experienceandsufficientpromotionalresources.Orionconcentratesonpromotionsandhasastrongtrademarketingteam,itspecializesinutilizingmultiplein-storepromotionalmethodstoeffectivelyintroducenewproductsandstimulatesalesWellestablishedcloserelationshipwithmodernchannel.Intheearlydays,Orionfocusesondevelopingsupermarketsandhypermarketsinkeyregions,whichsuitOrion’shigh-endpositioningaswellasdrivingupsales.OrionhasapproachedfullcoverageinexistingPOSofhyper/supermarketsandagrowthrateinlinewithindustryaverageisensured,duetoexistingcloserelationshipsTheprovenexperienceoftraditionaltradeinNortheastregionsishighlyreplicableLessdependentonthequalityoflocaldistributors.Itiseasytofindlocaldistributorsinlowertiercitiesasdistributorsareonlyresponsibleforlogistics;Orion’slocalperformancewillnotbeaffectedbydistributors’operationalcapabilityHighersuccessratewhenmovingintolowertiercities.OrionwillconductscarefulresearchintraditionalchannelsinlocalmarketstoascertainthepotentialandlocalbranchofficeswillformulatedetailedmarketdevelopmentplansSource:BDAinterviewsandanalysisTobetterrealizeitsgrowthpotentialandmaintainitscompetitiveposition,Orionhastospeedthepaceatwhichitspendsonbranding,expandsitsSKUvariety,explorestraditionaltradeoptions,andconductbettermanagementcontrolAcceleratethespeedofSKUextension.

OriontakesmuchlongertointroduceanewSKU(i.e.newflavor,newpackagingorpackagesize,etc.).Orionmayinevitablymisssomemarketopportunities,asittakesalongertimetoexpandproductlinesthanothercompetitors.5Balancetheperformancevs.opportunitycostsintraditionaltrade.SinceOrionisdedicatedtobuildingitsownsalesteamfortraditionaltrade,itwilltakealongertimeforittoestablishapresencehereandmightmeanitfacessomebusinessrisks.Payattentiontothelaborcostintraditionaltrade.Traditionaltradehasahugenumberofoutletsthatrequiremassiveinvestmentinhumancapital.Developingitsowntraditionaltradesalesteamsiscapitalintensive.ConductmorestrictinternalcontrolOrionadoptsaflexiblemanagementstyleacrossdifferentregions,andgiveseachregiontheauthorityandpowertoformulatetheirownmarketstrategiesandbudgetplans.Despitetheflexiblesalespolicygreatlyhelpedtoboostsalesintheearlydays,italsoleadstotherisksofcorruptions(e.g.“under-the-table”trade)andperformancevolatilityRecruittalentsskilledinbrandingandchanneldevelopmentChannelcheckfoundOrion’sbrandmarketingandtraditionaltradedevelopmentteamsarenotcompetentenough.ProductManagementChannelSource:BDAinterviewsandanalysisBrandImproveitsoverallbrandingpower.

Orionhasinvestedmoreinin-storepromotionsthaninmediaadvertising,resultinginasolidsalesrecordbutamediocrebrandpowerinsectorsotherthanpie,andinregionsotherthannortheastChinaDespitesomeprogressinrecenttimes,Orionshouldspendmoreonbrandingtoimproveitsoverallbrandinfluenceandacquirepricingpower.Aftercarefullyexaminingthegrowthpotentialsandcompetitivenessineachsector,BDAbelievesthatthepackagedcakewillturnintothe“cashcow”andthecrispywillemergeasanew“star”.Biscuitsandgumarestill“questionmarks”,butgumfacestheriskofbeinga“leandog”inthelong-term6SectorGrowth(12-15CAGR)RelativeM/S(2015)SoftCandy(2015)Biscuits(2015)Biscuits(2012)Crispy(2015)Crispy(2012)Gum(2015)Gum(2012)PackagedCake(2015)PackagedCake(2012)EvaluationofOrion’sProductPortfolioin2015ECashCowSource:BDAanalysisConsequently,weenvisageOrionChina’srevenuetogrowtoRMB10BNin2015(prudentquantitativeanalysis;numberwithhigherconvictionlevel)withtheexistingproductportfolios,drivenbythestronggrowthofcrispyandbiscuitsbusiness…7CAGR:24%1,47520092,19732310,6544,5712,302CAGR:36%CrispyBiscuitPackagedCake908Gum2015E20125,5261,994Unit:RMBMNSource:Companydata,BDAinterviewsandanalysis26%31%18%Orion’sSalesbySegmentinChina,2009-2015ECAGR(2009-2012)CAGR(2012-2015E)83%12%30%16%32%Orion’stotalsaleswillincreasetoRMB10BN….anditsoperatingprofitislikelytoimproveby~4ppts.,thankstoitsslightlyimprovedgrossmarginandoptimizedOPEX,causedbyproductmixchangeandeconomicofscalesrespectively(moreofqualitativejudgment,numberwithlowerconvictionlevel)848%47%2015E33%201236%RevenueGrossMarginOPEX2015E2012Source:Companydata,BDAinterviewsandanalysisInaddition,itsOPEXwillbeloweredby~3pptduetoeconomicofscalesandchannelmixchange…anditsgrossmarginwillseeslightlyimprovementduetoproductmixchange123BDAestimatesthatOrion’soperatingprofitmightbeabletoreachRMB1.6BNin2015Unit:RMBMNOrion’sOperatingProfit,2012-2015E15%11%OPM1,8642,3687261,1342,176Meanwhile,OrionisoneofthetopfiveplayersinKorean’ssnackandconfectionaryfoodmarket9ProductLinesGlobalFootprintSource:CompanyInfoBiscuit,Crispy,Candy,Chocolate,GumBiscuit,Crispy,Candy,Chocolate,Gum,Ice-creamBiscuit,Crispy,Candy,GumNoodle,Crispy,DrinksBiscuit,Candy,Gum,Ice-cream,FrozenFoodsChina,Russia,Vietnam,Japan,etc.U.S,China,Russia,India,Vietnam,Japan,Philippines,etc.China,Russia,India,Vietnam,Japan,etc.U.S,China,Japan,etc.LimitedwithinKorea2012GlobalRevenue（KRWBN）SnapshotFoundedin1967,leaderintheKoreaconfectionarymarketandfamousforitsgumandchocolate.Foundedin1956,engagedintheconfectionery,entertainmentandsportsbusinesses.Establishedin1945,thefirstfoodcompanyfoundedbyKorea’sowncapitalandefforts.In2005,HaitaiwastakenbyCrownconsortium.Foundedin1947.Itishistoricallyanoldpopularbiscuitbrand.TopplayerincandymarketEstablishedin1965,famousforitsshrimpcrackersandinstantnoodlesHAITAIItiswidelybelievedtohavethestrongestproductdevelopmentcapabilityinsnackandpackagedbakerymarketandfollowsLotteintheconfectionerymarket…CategoryOrionLotteHaitaiCrownNongShimOverallPackagedbakeryNACrispyGumNAChocolateNACandyNA10Source:BDAinterviewsandanalysisEvaluationofKeyPlayers’R&DCapabilityfortheKoreanMarketStrongR&Dability;WeakR&Dability;OrionandLottearebelievedtohavethestrongestproductdevelopmentcapabilitiesinKorea.Theircapabilitiesarecomparabletothoseofgloballeadingplayers.Orionleadsproductinnovationinthesnackmarket(i.e.packagedbakeryandcrispy)andhasglobal-leadingskillsinproducingpackagedcakes.Itsproven“ChocoPie”modelhasbeensuccessfulinAsiancountriesforover30years.Lotteisstrongerinconfectionarysectors(i.e.gum,chocolateandcandy).ItintroducedtheXylitolconceptin2002andhasshapedgumindustrytrendssincethen.Theotherthreekeyplayers(Haitai,CrownandNongShim)areallfollowersinthemarket.…andithaslongbeenrankedsecondintermsofbrandpowerinKoreaCategoryOrionLotteHaitaiCrownNongShimOverallPackagedbakeryNACrispyGumNAChocolateNACandyNA11Source:BDAinterviewsandanalysisStrongbrandingpower;WeakbrandingpowerEvaluationofKeyPlayers’BrandPowerintheKoreanMarketLottehasthestrongestbrandpowerthankstoitslongtrackrecordinmanyofKorea’sconsumergoodsandservicesmarkets,includingsnacksandconfectionery.OrionandNongShimestablishedtheirbrandpoweronthestrengthofafewoftheirstarproducts.ThebrandingpowergapbehindLotteisobviouslyverylargeandwillnotnarrowinthenearfuture.Orion’sChocoPiehasthehighestscoreinbrandrecognitionintheconfectionerycategoryaccordingtoabrandevaluationcarriedoutbyBrandstockin2013.NongShimisfamousforitsShrimpCrackers,themostclassiccrispyfoodinKorea.ItspositioninthecrispymarketisthesameasOrion’sChocoPieinthepackagedbakerymarket.Likewise,Orion’schanneldevelopmentcapabilitylagsbehindLotte’sbutthecompanyfaresslightlybetterthanotherkeyplayersintermsofshelfspaceandposition12POSCoverage:OrionhasenteredallthemoderntradechannelsinKorea,includingLotteMart.ShelfSpaceandPosition:Lotte’sproductsenjoylargershelfspaceandbetterpositionthantheotherplayers(incl.Orion)inLotteMart(asubsidiaryofLotteGroup);whileOrionenjoybetterpositionthanotherkeyplayersinchannelsexceptLotteMart.E-mart(Shinsegae)Homeplus(Tesco)LotteMart(Lotte)90Homeplus(Tesco)LotteSuper(Lotte)GS(GS)232FamilyMart(BGF)GS25(GS)711(711)BuytheWay(Lotte)MiniStop(Aeon)5.3635.0262.9441.6521.402HyperSuper1CVSOutletNumbersofTopRetailersinKorea,2010Top3Top3Top5ChannelStructure:Korea’sretailchannelsaredominatedbythemoderntrade(>80%retailvalue).Themodernchannelisverymatureandfeaturessevenmajorretailers;LotteMart(asubsidiaryofLotteGroup)isoneoftheseseven,andoperatesinallthreeformats,accountingforamarketshareof18%.Note:1.Theretailer“Hanaro”(>2,000outlets)isnotincludedhereasitmainlyoffersfreshfruitandvegetablesandnotpackagedfoods.Candy15%0%Crispy25%CrownHaitaiOrionLotteNongShimOthersGum15%0%3%PackagedBakery25%0%5%Chocolate10%5%0%AverageShelfSpaceofKeyPlayersbyChannelCheckSource:BDAinterviewsandanalysis,channelcheckBDAreckonsthatOrionKorea’scorefoodbusinessistogrow5%eachyear,reachingKRW829BNin2015;SportsTOTOtosell-out13PackagedBakeryCrispyFoodConfectionary2015E82941720127173662009566290Unit:KRWBNSource:Companydata,BDAinterviewsandanalysisOrion’sSalesRevenuebySegmentinKorea,2009-2015ECAGR(2009-2012)CAGR(2012-2015E)4%1%12%2015E20122009Others18%-38%2Note:1.Orion’sotherbusinesslinesincludeSportsTOTOandShowbox.ItscontracttooperateSportsTOTOwillendin2014.8%8%4%8%5%Althoughweanticipatelimiteddownsideriskonwhole,Orion’soverallimpulsivefoodbusinessmayfacechallengefromfurtherregulationstomodernchannel,anditscandybusinessisthreatenedbytheshrinkingmarket14Moreregulationsonhypermarkets/supermarketsmaybeappliedinthefuture,leadingtothesalesdeclineinthosechannels.Theregulationofmandatoryclosureofhyper/supermarketonSunday(everyotherSunday)hasbeenimplementedsinceApril2012,withtheaimofprotectingtraditionaltradeandsmallbusinessowners.Inaddition,theregulationalso

bannedhyper/superfromoperatingbetweenmidnightand8:00a.m.Thisregulationhasledtoa3-4%declineinSSSgrowthofhypermarketsin2012andinturna1.5-2%declineinOrion’ssales,consideringthat50-80%ofsnackandconfectionerypurchasesaremadeathypermarkets/supermarketsandhighcustomertrafficonSunday.Thereareproposalsoffurtherstrengtheningsuchbanfromthegovernment,yetvoicesfromconsumersarerejectingthoseproposalsoreventheoriginalban,whichmakesitlesspredictablefornow.Source:BDAresearchandanalysisChallenge1–RegulationstoModernChannelDownsideRiskAnalysisVeryChallenging;NotVeryChallengingOrion’scandybusinessisfacingdownsideriskasKoreancandymarketisconstantlyshrinking.Koreancandymarketisconstantlyshrinking,duetoafallinthenumberofchildren,heavycandyconsumers,causedbythedecreasingnew-bornratesincethebeginningof21thcentury.Inaddition,consumers’interestinsoftsweetshasfadedastheyhavebecomemorehealth-conscious.However,sincecandyisonlyasmallsegmentinOrion’sportfolio(7%),theshrinkingmarketwon’thurtOrionmuch.Challenge2–ShrinkingCandyMarket15Inthemeantime,BDAestimatesthatOrionKorea’sfoodbusinesswillmaintainstablefutureoperatingmarginsNongshimCOGSOPEXOperatingMargin100%75%57%Crown60%OrionKoreaLotteConfectionery100%100%100%55%CostStructureofKeyKoreanPlayers,2012DifferentproductmixledtoCOGSgaps:After20+yearscompetition,keyplayershaveestablishedstablepositioningandbusinesssizeineachsector,hencealreadyachievedoptimizedCOGSstructure.ConditionstheoptimizedCOGSstructureiswellsharedbytopplayers,theoverallCOGSdisparitybetweenplayersismainlyduetotheproductmixdifferenceOrionandCrownhaverelativelylowerCOGSasbothofthemservehighmargincategories.Besides,Orion’spremiumstrategyhassecureditanevengreaterCOGSadvantage.OrionhaspotentialtolowerCOGSlevel:theriseofpremiumproductsinthemixcanhelpOriontomaintainitsgrossmarginleveldespitethecostpressureandpooreconomicconditions.HigherOPEXdueanemphasisonA&P:Comparedtootherleadingplayers,OrionhasslightlyhigherA&P%inKoreaduetoitspremiumproductstrategyOrionpromotesnewproductsmoreoftenthanotherkeyplayers,soitsA&Pcostsarealittlehigher.LottehasanadvantageinchannelcostssinceLotteGrouprunsitsownmodernchannels.OPEXtobestableoverthenextfewyears:Channelcheckfoundthatleadingplayers’shelfspaceandlocationsarerelativelystableinthedominatemodernchannel(>80%retailvalue),andkeyplayersspendequalproportionsofpromotionalexpensesovertheyears.Giventhesteadyrelationshipbetweenthefewkeyplayersandthefewmodernchannels,it’llbeuneconomicalforoneplayertoaggressivelyexpandshelfspaceinmodernchannel.Source:CompanyInfo,BDAinterviewsandanalysisConfectioneryBakeryCrispyConfectioneryBakeryCrispyDairy,DrinksConfectioneryBakeryNoodleCrispyOPEXCOGS16TableofContentsExecutiveSummarySnapshotofOrionChinaBusinessInsightsKoreaBusinessInsightsTheOrionCorporation(KOSE:001800)isengagedintheconfectionery,entertainmentandsportsbusinessesinKoreaandabroad;Confectionerymakesupthebulkofrevenueandprofit17+20%20122,1031,75220111,7271,44220101,3791,16820091,209895Orion’sBusinessSegment,2012ConfectioneryManufacturingandsellingofpackagedbakerygoods,snacksandconfectionerySport/LeisureSportspromotionlotteryissuanceandotherrelatedsubsidiariesEntertainmentFilminvestmentsanddistributionOtherBusinessSmallbusinesssegments,includingconstruction,

consulting,basketball,etc.TotalRevenueUnit:USDMNSource:Companyinfo,BDAAnalysis183193156113102993-10221Note:1.Oriondidn’tdiscloseitssegmentprofituntil2010,sothisfigure“USD22BN”referstothetotalprofitoftheyear2009NetIncomeOrion’sKeyFinancials,2009-2012NetMargin7.4%5.9%13.3%1.8%ROE15.1%10.9%23.5%7.9%Fortheconfectionerybusiness,KoreaandChinaarethetwomajormarkets;In2011ChinasurpassedKoreaandbecomeOrion’slargestrevenuegenerator18Russia63+25%+12%ChinaKoreaVietnamOthers492009895319

(36%)444

(50%)20121,7523551382008842875

(50%)638

(36%)224

(27%)488

(58%)423434111042007774131

(17%)551

(71%)20111,4421832200669291

(13%)635

(44%)617

(43%)538

(78%)43202005168359857

(9%)491

(82%)42242010200448629

(6%)426

(88%)1,168454

(39%)48162003451560

(48%)2723

(5%)405

(90%)11Source:Companyinfo,BDAAnalysisUnit:USDMNOrion’sConfectioneryRevenuebyRegion,2003-2012CAGR(09-12)13%40%10%27%27%Benefitingfromthesuccessfullaunchofpremiumproductsandpricehikes,theconfectionerybusinesshasbecomeasubstantialandstablerevenuesourceforOrionKorea19998683201089364820099665662008ConfectioneryOtherBusiness20121,1117172011660537Orion’sSalesRevenueinKorea,2008-2012TheconfectionerybusinesshasachievedstablegrowthwithonlyrarefluctuationsDemandforconfectioneryisratherstableandcanbedrivenupbynewproductsormajorpromotions,andsoiseasilymanageable.Otherbusinesssectors,suchassportsandfilms,areinherentlyseasonalandhighlyreliantonexternalfactorssuchasclimateandpopculture.SuccessfullaunchofpremiumproductsandpricehikesarethekeydriversOrionhasestablisheditsstrongmarketpositioninpremiummarketbycontinuouslaunchingpremiumproducts(MarketOandDr.You,etc.)andpromotinghealthyconcept,thuslessaffectedbytheeconomicconditions.Orionalsohadseveralpricehikesduring2010-2012,whicheffectivelyboostedsalesSource:Companyinfo,BDAAnalysisCAGR(08-12)Unit:KRWBN8%38%Orionstarteditsbusinessin1956;ItisnowKorea’ssecondlargestconfectionerycompanywithitsHQinSeoul20HeadquartersLocatedinSeoul,alsoresponsibleforR&DFourFactoriesResponsiblefortheproductionofgoodssoldinKoreaandJapan20+SalesOfficesCoverallthemajorcitiesinKorea.Responsibleforsalesinoneorseveralnearbycities.Source:Companyinfo195619741990s2005Establishedin1956,itlauncheditsfirstcandyproductthenextyearLaunchedtheclassicproduct“ChocoPie”,whichsavedthecompanyfrombankruptcyExpandedoverseas,andstartedsportsbettingandrestaurantbusinessesHittheUSD100MNglobalsalesmark,withexportstomorethan60countries.SecondlargestconfectionerycompanyinKoreaOrion’sKeyMilestonesOrion’sFootprintsinKorea(SnackandConfectionaryBusiness)Graduallyabandonsotherbusinessesandconcentratesonsnacksandconfectionery.2010+Atpresentthecompanyoperatesinsixsectors,producing40+brandsand300+SKUfortheKoreanconfectionerymarket21AvailableBrandsTypicalProducts25%26%30%SalesContributionSource:ACNielson,expertinterviews,companyinfo,BDAanalysisPackagedCakes1GumBiscuits1CandyChocolateSegmentOrion’sKoreanMarketPortfolio,2013CrispyFoodSectorPositioninginKoreaNo.1No.2No.5No.3No.2No.3Note:1.BDAcombined“packagedcake”and“biscuits”asonecategory“packagedbakery”intheanalysisthatfollowed,duetotheuniqueconsumptionstyleofKoreans.OrionwasfirstinvolvedinChinain1993,bymeansofexports;SincethenOrionhasbeengoingthroughacomprehensiveprocessoflocalizationandexpansionintheChinesemarket221993199620022005201119992008Pilot

StartedtoexportchocolatepiestoChinaAuthorizedanationalgeneraldistributor

forsalesinChinaProductLocalizationEstablisheditsfirstfactoryinChinatoproducechocolatepies;changedthepackagingcolorandformulatosuitChineseconsumers’tasteandgainedagoodreputationIntroducedgumtoChinabutthisfailedduetofiercecompetitionSetupOrion’sChinesesubsidiaryinBeijingandShanghaitobettermanagethesupplychainandleadsalesChangeditsnationaldistributionsystemintoaregionally-basedone,andselectedoneortwopowerfullocaldistributorsineachareaStartedtopromoteitsbrandinChinaCategoryExtensionEstablishedtwomorefactories;allproductssoldinChinawereproducedlocally;graduallyceasedimportsfromKoreaDevelopedadedicatedproductlocalizationprocessintheChinesemarket;introducedcrispyandbiscuitsproductsSetuptheGuangzhouandQingdaoofficestobettermanagelocalsalesforces/distributorsFocusedonmoderntradeandallocatedplentyofmarketingresourcestoin-storepromotionsAcceleratedthelocalizationoftheChinaoperationsteamChannelExpansionEstablishedtheShenyangfactorytoexpandcapacityAddedSKUvarietiesandalteredthepackagingofexistingproductsSetuptheShenyangofficetomanagetheNortheastmarketAchieved90%+coverageofthemodernchannelandstartedtotapintothetraditionalchannelOrion’sMilestonesintheChineseMarket,1993-2013Source:CompanyinfoandBDAanalysisAfter20yearsofoperations,thecompanyhasnowestablishedanintegratedvaluechainandanationwidedistributionnetwork…23Source:CompanyinfoOrion’sFootprintsintheChineseMarketTwoR&DCentersResponsibleforproductinnovation,modificationandlocalizationFiveFactories200+SalesOfficesResponsibleforsalesinoneorseveralnearbycities.1000+DistributorsResponsibleforgoodssupplytoretailersandtraditionalchannelsResponsiblefortheproductionofthegoodssoldinChinaandexportedtootherregions.2000+CitiesCoveredNorthandNortheast(38%)CentralandNorthwest(18%)EastandSouthwest(27%)South(17%)…andhassofarintroducedfourproductlines(outofsix)and17brandstotheChineseconfectionerymarket24AvailableBrandsYearStartedinChinaTypicalProducts19932005200320062014/2015NotIntroducedSalesContributionSource:Companyinfo,BDAanalysisPackagedCakes(Pie)GumCrispyFoodBiscuitsCandyChocolateSegmentOrion’sPortfolioinChinaandKoreaMarket,20135%0%7%0%30%36%26%20%25%27%7%17%KoreaChinaThankstoitsstrongproductlocalizationcapabilityandanambitiouspromotionpolicy,thecompanyhasenjoyedverystronggrowthinChina…25Source:ACNielson,Companydata,BDAinterviewsandanalysisOrion’sSalesRevenueinChina,2001-2012Unit:RMBMN20122011201020092008200720062005200420032002200135%34%41%40%56%38%56%94%24%24%13%YoYGrowthLeadingpositionwellstrengthenedinallthefoursectors37%CAGRwasachievedinthepastfiveyears,fueledbythesuccessfulexpansionofitsproductrange(especiallyinthecrispyandbiscuitsectors),arapidlygrowingmoderntradepenetration(90%+)andawidecoverageofPOSinNorthChina.Specifically,Orionhasstrengtheneditsmarketpositioninallthefoursectors–1stinpackagedcake(35%m/s,improving),2ndingum(8%m/s,stable),3rdinsnack(10%m/s,rampingup)and4thinbiscuits(6%m/s,rampingup)in2012.Successstoryshapedbystrongproductlocalizationcapabilityandanambitioussales/promotionpolicyThesufficientprovenmodels,dedicatedlocalizationandassuredsupplychainhelpedOriontomaintainhighsuccessrateinintroducingproductstoChina.Heavyinvestmentinpromotionalexpensesandamoreflexiblesalespolicyeffectivelypromotedsalesgrowthinmoderntrade....despitethechannelstuffinginlate2012,channelcheckssuggestthattheinventorylevelhasreturnedtonormalin2Qandthecompanyisexpectedtoachieve~18%growthin2013261.41.61.51.11.21.31.4Source:BDAChannelcheck,ACNielsen,companydata,BDAinterviewsandanalysis4Q13E3Q13E2Q131Q134Q123Q122Q121Q12Unit:RMBBNOrion’sSell-inandSell-throughValueComparison(1Q12-4Q13)Sell-inValueSell-throughValueInordertoachievetheRMB5.6BNsalestargetin2012,Orionoverloadedabout20-25daysofinventoryprimarilyin4Q2012.Sincethebeginningof2013,Orionhasstartedtodestockanddistributorssuccessfullyrelievedtheirinventorypressure.Ourchannelcheckshowsthatdistributors’inventorylevelarereturningtonormalinearly3Q13.Reasonableinventorylevel2012+20%2013EOrion’sRevenue