Easing competition and declining costs support Chacha Food's earnings recovery; Goldman Sachs upgrades to Buy

Overview

This report focuses on the nuts and sunflower seeds segment of China's snack industry, with Goldman Sachs' rating adjustment for Chacha Food as its core subject. The report believes that the two major factors that previously weighed on Chacha Food's share price and earnings—channel disruption and intensified competition, as well as rising raw material costs in 2025—are showing marginal improvement. It therefore upgrades Chacha Food from Sell to Buy. Meanwhile, Goldman Sachs maintains a Neutral rating on Three Squirrels but lowers its target price to Rmb16.0.

Core views

The core views include: first, Three Squirrels is shifting from low-price expansion toward profit quality, reducing the intensity of online competition and creating a healthier competitive environment for Chacha Food to gain sales share; second, Chacha Food is actively adapting to emerging channels such as value retail and membership-based KA, with value retail already contributing approximately 10% of sales, while its margin target has been adjusted to a more sustainable 8%-10%; third, easing sunflower seed supply-demand conditions and lower procurement costs should drive gross margin recovery; fourth, Chacha Food's current valuation of approximately 13x 2026E P/E, approximately 5% dividend yield and potential for a higher payout ratio make its risk-reward profile more attractive.

Analysis framework

The report combines the company's rating framework, competitive landscape tracking, channel research, high-frequency online GMV tracking, 618 discount changes, value retail store expansion forecasts, sunflower seed supply-demand and procurement cost analysis, P/E valuation, DCF cross-checking, and dividend/free cash flow yield analysis to form a relative assessment of Chacha Food and Three Squirrels.

Methodology notes

• Valuation methodsTarget P/E valuation

  Derive the 12-month target price using 2026E EPS and the target P/E multiple.

  Chacha Food's target price of Rmb22.5 is based on 16x 2026E P/E; Three Squirrels' target price of Rmb16.0 is also based on 16x 2026E P/E.

• Valuation cross-checkDCF

  Use a discounted cash flow model to test the implied equity value.

  The report conducts a DCF cross-check for Chacha Food, indicating an implied share price of Rmb31.4 under assumptions of a 6.7% cost of equity and 0.5% terminal growth rate.

• Competition and channel analysisHigh-frequency online GMV tracking and channel checks

  Assess competitive intensity through changes in online sales, discounts, channel mix and competitor strategies.

  Goldman's online tracking shows that Three Squirrels' online YTD GMV declined by more than 30% YoY, while snacks were the only consumer category to reduce discounts during 618, supporting the view that competition is easing.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Chacha Food Co. (002557.SZ)

  Core upgraded stock

  Strengths

  Marginal easing of competitive pressure, expansion of value retail and membership-based KA channels, declining sunflower seed costs, recovery in 2026E earnings and net margin, and strong potential for higher dividend yield and payout ratio.

  Weaknesses

  Sales declined 8% YoY in 2025, the historical channel mix was disrupted by emerging channels, and nut costs remain under pressure.

  Comparison

  Compared with Three Squirrels, Chacha Food benefits from its competitor scaling back low-price expansion and has a clearer earnings recovery and dividend enhancement thesis.

  Risks

  Renewed competition, raw material costs above expectations, and weaker-than-expected growth in emerging channels.

• Three Squirrels (300783.SZ)

  Key competitor and comparison stock

  Strengths

  Leading market share in nuts, a strategic shift toward profit quality, and potential improvement in earnings quality from pricing and organizational adjustments.

  Weaknesses

  Online YTD GMV declined by more than 30% YoY, revenue estimates were lowered, and restructuring and the ramp-up of new businesses will take time.

  Comparison

  The report believes Three Squirrels' strategic shift provides Chacha Food with a healthier competitive environment, but Three Squirrels' own growth visibility has declined.

  Risks

  The effectiveness of offline channel recovery, the pace of capacity ramp-up, and raw material price changes may each create upside or downside risks.

Key data

• Chacha Food ratingUpgraded from Sell to BuyGoldman Sachs believes the company is entering an earnings recovery phase.
• Chacha Food target priceRmb22.5Previous target price Rmb20.9; 12-month target price, implying approximately 20% upside.
• Three Squirrels target priceRmb16.0Previous target price Rmb22.1, down 28%; rating maintained at Neutral.
• Chacha Food 2026E net profit growth120% YoYThe report expects a significant earnings recovery.
• Chacha Food 2026E net margin expansion4.3pptThe margin target is returning to a more sustainable range.
• Sunflower seed procurement costsDown more than 10% YoY in 2026Procurement coverage extends through September 2026 demand.
• Sunflower seed gross marginApproximately 30% in 2026E, approximately 25% in 2025Cost improvements support gross margin recovery.
• Three Squirrels online YTD GMVDown more than 30% YoYReflects its shift from GMV growth toward profit quality.
• Chacha Food value retail channel contributionApproximately 10% of total salesSales through this channel doubled in 2025.
• Long-term payout ratio potentialRising from approximately 60% to approximately 80%Supported by an 8%-10% free cash flow yield.

Impact & implications

For Chacha Food, easing competition, channel adaptation and declining costs jointly improve earnings visibility, supporting the rating upgrade and valuation re-rating. For Three Squirrels, the strategic adjustment should improve profit quality, but revenue and earnings growth will take time to materialize; therefore, its target price was lowered while the rating remained Neutral. For the industry, disruption from online low-price competition and rapid value retail expansion may be entering a cooling phase, giving leading brands an opportunity to shift from price wars toward more sustainable profit recovery.

Risks

• Industry competition could be higher than expected, with online brands, regional brands or Douyin merchants again increasing discounts and promotions, eroding Chacha Food's margins.
• Adverse weather could cause sunflower seed or nut raw material costs to exceed expectations, weighing on gross margin recovery.
• Growth in emerging channels such as value retail and membership-based KA could be weaker than expected, affecting Chacha Food's revenue recovery.
• A greater-than-expected slowdown in value retail store expansion could weaken sales growth from related channels.
• Slower-than-expected execution of Three Squirrels' restructuring and new initiatives could affect assessments of the industry competitive landscape.

What to watch

• Whether Chacha Food's 2026 revenue and net margin recover in line with the report's expectations.
• Whether sunflower seed costs continue to follow a favorable trend during the next procurement cycle.
• Three Squirrels' online GMV, discount strategy and execution of its margin targets.
• Growth in value retail channel stores, GMV growth and changes in Chacha Food's channel mix.
• Whether Chacha Food's payout ratio rises from approximately 60% toward a higher level.