20150708-高盛-中国旺旺-00151.HK-Company_visit_affirms_progress_but_no_fundamental_change__Neutral_11页_355kb

Want Want China Holdings (0151.HK) Summary

Core Content

Want Want China Holdings has been visited by Goldman Sachs analysts to assess its progress and competitive strategies amidst slowing topline growth. The company's P/E ratio has dropped to 21X, its lowest since 2009, due to recent de-rating. Despite some improvements in dairy beverage sales and Modern Trade (MT) penetration, the analysts remain cautious about the company's long-term growth prospects.

Main Points

• Recent Performance:

  • Dairy beverage sales improved sequentially in 2Q15 compared to 1Q15 due to lower inventory levels.
  • MT progress was noted, but the company's overall topline growth remains sluggish.
  • The company is facing increased competition in both dairy and snacks sectors, with 7-8 new competitors entering the market in 1H15.
  • Consumer preferences are shifting towards healthier and functional products, which Want Want is underexposed to.

• Management Strategy:

  • The company is not pursuing M&A at this time, maintaining a conservative stance.
  • Management has increased promotional sales staff, centralized product resources, and improved staff retention through better compensation and training.
  • Retailer partnerships are being used to maintain pricing uniformity and support sales in MT channels.

• Financial Outlook:

  • Sales growth is expected to be 3% for FY2015 and 5.2% for FY2016.
  • NPAT growth is forecasted at 4% for FY2015 and 3.1% for FY2017.
  • EBITDA and EBIT are expected to grow by 5.3% and 4.0% respectively for FY2015, but these figures are projected to slow in subsequent years.
  • Gross margin is expected to increase slightly, while SG&A expenses are rising, leading to a reduction in EPS growth.

• Valuation:

  • The analysts have lowered the 12-month target price to HK$8.30 from HK$8.70.
  • The valuation is based on an unchanged 2016E P/E multiple of 21.85X, which is 5% below the Staples sector average.
  • The company is currently in the 4th quartile in terms of EPS CAGR compared to its peers, and the discount is widening.

Key Financials

Metric	Current	2015E	2016E	2017E
Price (HK$)	7.58	8.30	-	-
Market Cap (HK$ mn)	100,206.2	-	-	-
EPS ($)**	0.05	0.05	0.05	0.05
EPS Growth (%)	4.3	0.2	3.1	-
P/E (X)	29.4	19.9	19.9	19.3
P/B (X)	8.9	5.9	5.2	4.7
EV/EBITDA (X)	20.1	13.2	12.9	12.4
Dividend Yield (%)	1.7	3.0	3.0	3.1
ROE (%)	31.1	30.4	27.8	25.8
CROCI (%)	28.5	27.3	25.7	24.6

Key Risks

• Increased competition in dairy and snacks.
• Rapid shift in consumer preference towards healthier snacks.
• Raw material inflation.

Investment Profile

• Coverage View: Neutral
• Analysts: Lisa Deng and Lincoln Kong
• Dividend Payout Ratio: 60%
• Free Cash Flow Yield: 4.9% in 2015E, 4.1% in 2016E, and 4.5% in 2017E
• Net Cash: Estimated at c. US$495mn at current dividend payout and share buyback levels

Channel Mix

• Want Want's MT penetration is currently at 11% (up from 10% in 2014), but it is still significantly lower than regional peers like Orion (62%) and Glico (60%).
• The company's high exposure to Traditional Trade (TT) contributes to its higher margins, but this could be a risk as MT grows.

Catalysts for Upside

• Modern Trade Progress: Continued efforts to increase MT penetration and improve sales through better retailer support.
• M&A Potential: While not currently pursuing M&A, the company's strong cash flow could allow for strategic acquisitions in the future.
• Dividend and Buyback: Current high dividend payout and share buyback could be a source of investor confidence.

Summary

Want Want China Holdings continues to face challenges in maintaining growth and margins, despite some positive developments in specific product lines and retail strategies. The company's conservative approach to M&A and its current focus on maintaining dividend payouts and share buybacks are key aspects of its strategy. The valuation reflects concerns over slower growth and a declining return outlook, with the P/E ratio now at 21X, below the historical average. The analysts maintain a Neutral rating, emphasizing the need for stronger signals on management's ability to counteract slowing topline growth and increased competition.