Morningstar | 00151 Updated Star Rating from 11 Oct 2018
We expect narrow-moat Want Want’s revenue in the first half of fiscal 2019 will only meet the lower end of management’s guidance (5%-10% year-on-year growth), given the longer-than-expected time for the price hike process and mediocre performance of its newly launched products. Although the modern sales channels saw encouraging improvements, sales from the traditional distribution network remained stagnant. On the profitability front, we believe the company’s gross margin will gradually improve due to price hikes and improving product mix, as the negative impact from the rising input costs started to recede in the near term. Prices of milk powder and sugar were flattish compared with the year-ago period, while the higher costs for packaging paper seemed to have stabilized. That said, our long-term forecast for Want Want’s earnings are unchanged and our HKD 6.50 fair value estimate is intact. We view the shares as fairly valued at the current levels, trading at a 12% discount to our fair value.We estimate the firm’s revenue to grow at 5%-6% year on year in the first six months, stemming from 2%-3% price hikes and 2%-3% volume growth from the new products. The dairy product segment is the biggest business unit to the firm, accounting for nearly half of total sales, and we expect it to deliver about 6% sales growth in the first half, which is broadly in line with the industry’s 6.6% volume growth during April to August, according to National Bureau of Statistics. The company raised its selling price since April to adjust for the higher input costs. Given the weaker-than-expected consumption demand and intensifying competition from other local players, we expect consumers would need a bit more time to digest the price hikes. We anticipate gross margin to improve 40 basis points to 43.5% in the first half. Meanwhile, the operating expense ratio is expected to remain flattish compared with last year. As a result, we expect profits to increase by 5%-6% year on year.
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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