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Morningstar | Want Want’s First-Half Results Slightly Miss; Cutting Our FVE to HKD 6.10 Due to CNY Depreciation

Narrow-moat Want Want China Holdings’ fiscal 2018 first-half (April to September) results slightly missed our expectations, with revenue and net profit up 3% and 7% year on year, respectively. Top-line growth was lower than we anticipated, owing to sluggish sales from the rice crackers and dairy products segments, down 1% and up 3%, respectively. Profitability was largely in line, as gross margin improved from better product mix, but operating margin declined due to higher advertising and promotion costs, coupled with additional foreign exchange loss.

We are trimming our fair value estimate by 6% to HKD 6.10 per share from HKD 6.50, mainly reflecting the depreciation of the Chinese yuan against the Hong Kong dollar. While the uncertainty of the ongoing U.S.-China trade tensions will continue to weigh on Want Want’s short-term operations, we believe the personal tax cut measure will likely to increase consumption demand and offset the negative impact. Our five-year revenue and net profit growth forecasts remain unchanged at 5% and 7%, respectively. We project the gross margin and operating margin to average at 44.2% and 21.1%, respectively, driven by consumption upgrades and higher average selling prices, partially offset by higher operating expenses for expanding e-commerce and modern channels. We view the shares as fairly valued relative to our new fair value estimate.

On the revenue front, the dairy products and snacks segments grew 3% and 7% year on year, respectively, to CNY 4.69 billion and CNY 2.68 billion, while the rice crackers business dropped 1% from last year to CNY 1.86 billion. The disappointing rice cracker sales performance was owing to weak shipments for its sub-brand products. Meanwhile, dairy product sales were slightly lower than our forecast, as the demand from traditional channel was still under pressure. Snacks revenue growth was better than we expected, thanks to double-digit growth in the candy category.

Gross margins saw broad improvement across three main businesses, up 70, 70, and 180 basis points, respectively, for the rice crackers, dairy products, and snacks segments. On the negative side, operating profit only grew 1% year on year to CNY 1.77 billion and operating profit margin slightly dropped 40 basis points year on year to 19.2% in the first half, owing to an 80-basis-point higher operating expense ratio for the e-commerce and modern channels and additional CNY 519 million foreign exchange loss (compared with CNY 168 million gain from the year-ago period). Net profit was up 7% year on year to CNY 1.36 billion.