Morningstar | Want Want’s Long-Term Outlook Remains Intact; Raising Our FVE to HKD 6.40 due to CNY Appreciation
We increase our fair value estimate for narrow-moat Want Want China Holdings to HKD 6.40 per share from HKD 6.10, principally as a result of the appreciation of the Chinese yuan against the Hong Kong dollar, and also for the time value of money. Our long-term view of the company is intact, as we believe it will continue to grow moderately (with contributions from new sales channel penetration and new product launches) and retain its market share in the packaged food industry, bolstered by its intangible brand assets. The shares are fairly valued at current levels.In the short term, we expect the mid-single-digit price hikes will boost its gross margin in the second half of fiscal 2018 (September 2018-March 2019), but partially offset by soft volume growth due to weaker consumer sentiment. We make minor adjustments to our fiscal 2018 forecasts after taking a fresh look. We trim our revenue forecast to CNY 21.15 billion (from 21.27 billion previously) and revise up net profit forecast to CNY 3.29 billion (from CNY 3.28 billion previously), from a higher gross margin projection (up to 43.7% from 43.5% previously).
We expect revenue growth in the second half of fiscal 2018 to remain at a low-single-digit rate, mainly stemming from price hikes, with sales volume flat from last year. The positive effect of the price hikes, which was implemented in the first half, should increase the profitability in the second half, as the subsidies paid to the distributors ended in September, while the raw material prices remained stable.
Management expects half of the growth will come from new product sales and new sales channels, such as e-commerce and maternity stores. The company also implemented a multibrand strategy, offering a channel-specific product mix. We believe this not only lowers the conflict with traditional distributors, but also increases the margins.
Want Want China Holdings is an investment holding company. Through its subsidiaries, Co. is engaged in the manufacturing, distribution and sale of rice crackers, dairy products and beverages, snack foods and other products. Co.'s activities are primarily conducted in the People's Republic of China, Taiwan, Japan, Singapore and Hong Kong. Co. produces and markets its products under the Want Want brand. As of Dec 31 2014, Co.'s operations are mainly organized into four business segments, including manufacturing and sale of: rice crackers, dairy products and beverages, snack foods and other products.
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