20140922-高盛-NDR_takeaways__Growth_returning__market_overly_bearish__still_Buy_15页_438kb

Want Want China Holdings (0151.HK) Summary

Core Content

Want Want China Holdings (0151.HK) is a consumer goods company that has experienced a slowdown in sales growth, primarily due to challenges in the dairy sector. The company's management remains focused on maintaining margins, with a target range of 30-40% GPM, and is willing to reinvest excess margins into sales through distributor support. Despite this, the company maintains a positive outlook on its medium-term growth potential, projecting double-digit topline CAGR driven by existing product growth and new product contributions.

Main Points

• Growth Recovery: Hot Kid Milk sales returned to growth in August 2014 after inventory normalization. Management expects better performance in 2H14 compared to 1H14.
• New Product Contribution: New products historically contributed 1.5% to topline, but in 1H14 this increased to 5%. Management aims for a sustained 3-5% contribution from new products.
• Margin Trends: The company anticipates a rebound in Dairy Beverage GPM in 2015E due to falling global milk powder prices. It expects a 5ppt improvement, though only 4ppt is factored into forecasts due to potential promotional spending.
• Market Investment: To counter rising competition, the company is increasing marketing support and distributor rebates, leading to lower GPM but higher sales.
• Valuation: The current share price of HK$9.50 implies a 2015E EPS of US$0.052/sh, significantly below the analyst's base case scenario. The P/E ratio of 21.6x is one of the lowest since its re-listing in 2008.
• Investment Outlook: Despite the bearish valuation, the report maintains a "Buy" rating, citing positive catalysts such as favorable timing of Chinese New Year, lower milk powder prices, and new product launches.
• Financial Forecasts:
  • Sales Growth: Expected to rise to 1.8% in 2014E and 10.9% in 2015E.
  • NPAT Forecasts: Reduced by 1%, 4%, and 7.5% for 2014-16E respectively.
  • EBITDA Margin: Expected to decline slightly in 2014E but stabilize in 2015E and 2016E.
• Competitive Landscape: The company believes it faces little direct competition from peers like Mengniu and Yili. However, it acknowledges the impact of intensified competition on its margin strategy.

Key Financial Data

Key Risks

• Competition: Intensifying competition in the dairy sector.
• Raw Material Costs: Potential for rising milk powder prices.
• Food Safety: Ongoing concerns in the industry.

Investment Profile

• Investment List: Asia Pacific Buy List
• Price (HK$): 9.52
• 12-Month Price Target (HK$): 12.30
• Market Cap (HK$ mn / US$ mn): 125,852.7 / 16,236.6
• Foreign Ownership (%): N/A
• EPS Growth (%): 23.8 / (2.6) / 13.6 / 10.9
• Gross Margin (%): 41.5 / 40.4 / 41.6 / 41.5
• EBITDA Margin (%): 25.9 / 24.6 / 25.6 / 25.6
• EBIT Margin (%): 23.1 / 21.4 / 22.3 / 22.2
• Net Debt/Equity (%): (41.1) / (29.5) / (31.7) / (31.3)
• Free Cash Flow Yield (%): 3.6 / 1.8 / 3.8 / 3.8
• Dividend Payout Ratio (%): 67.1 / 67.1 / 67.1 / 67.1
• BVPS (HK$): 0.15 / 0.16 / 0.18 / 0.21

Strategic Initiatives

• Distribution Network: The company has split into 9 business units and 2811 sales regions to better focus on new product sales and existing SKU performance.
• Online Strategy: COO Matthew Tsai is personally overseeing the company's online strategy, with over 100 SKU's already available on platforms like Tmall.com and JD.com.
• Marketing Support: Increased A&P expenses are expected due to new product launches and competitive pressures.
• M&A: No plans for selling or forming partnerships, with a focus on acquiring quality assets with comparable margins.

Market Trends and Performance

• Impulse Food Growth: Slight rebound in July 2014, with some categories showing improvement.
• Dairy Beverage Growth: Expected to benefit from falling milk powder prices and favorable timing of CNY.
• Snack and Confectionery: Mixed performance with some categories showing softening growth, but others recovering.

Conclusion

Despite the current bearish market sentiment and lower NPAT growth expectations, the report maintains a "Buy" rating for Want Want China Holdings, citing positive catalysts and the potential for margin recovery and growth. The valuation appears undervalued, with the current P/E ratio below historical averages, suggesting an opportunity for investors.