Company Reports

Narrow-moat Want Want China’s fiscal 2023 (ending March 31, 2024) revenue and net income were below our estimates, but we observed constructive results in management’s channel execution and product development. We also see potential for the company to expand its presence in overseas markets. We think these could help Want Want to achieve higher long-term growth and thus forecast a fiscal 2024-28 sales CAGR of 3.9%, versus 3.1% during fiscal 2023-27. Our fiscal 2024-27 net profits are also increased by 4% to 8%. Consequently, we lift our fair value estimate to HKD 6.40 per share, from HKD 6.00, which implies 15 times fiscal 2024 price/earnings, 10 times EV/EBITDA, and a 5.1% dividend yield. We reiterate our view that shares are undervalued now as we think management’s execution could help the company to navigate through the current adverse operating environment.

Want Want China derives revenue and profit mainly through a few flagship packaged food and beverage products that it developed decades ago, including Hot-Kid milk, sugar-coated rice crackers, savory senbei and QQ candies. The company’s products have particularly been popular among children. Margins are maximized through scaling these flagships with its nationwide offline distribution channel. Leveraging on its brand and the vast distribution network, the company has been able to achieve higher levels of gross profit and operating margin compared with domestic peers, with the majority of earnings distributed to shareholders.

Want Want China derives revenue and profit mainly through a few flagship packaged food and beverage products that it developed decades ago, including Hot-Kid milk, sugar-coated rice crackers, savory senbei and QQ candies. The company’s products have particularly been popular among children. Margins are maximized through scaling these flagships with its nationwide offline distribution channel. Leveraging on its brand and the vast distribution network, the company has been able to achieve higher levels of gross profit and operating margin compared with domestic peers, with the majority of earnings distributed to shareholders.

We retain our fiscal 2023 (ending March 2024) projections for narrow-moat Want Want China, with revenue and net income growing 5% and 23% year on year, respectively. We expect a sharp rebound in fiscal 2023 earnings as fiscal 2022 was hit by elevated milk powder and palm oil prices as well as operating deleverage for the dairy segment. We estimate that second-half fiscal 2023 top-line growth would be driven by gifting demand during Lunar New Year as Want Want launched gift pack stock-keeping units across the dairy and food categories. Subsequent channel restocking should also lift sales to distributors for the fiscal period. We keep our fair value estimate of HKD 6 per share, which implies 15 times fiscal 2024 P/E, 9 times enterprise value/EBITDA, and a 5.7% dividend yield. We think the company’s shares are undervalued with an attractive 2024 dividend yield of 7.3% based on the current price.

Want Want China derives revenue and profit mainly through a few flagship packaged food and beverage products that it developed decades ago, including Hot-Kid milk, sugar-coated rice crackers, savory senbei and QQ candies. The company’s products have particularly been popular among children. Margins are maximized through scaling these flagships with its nationwide offline distribution channel. Leveraging on its brand and the vast distribution network, the company has been able to achieve higher levels of gross profit and operating margin compared with domestic peers, with the majority of earnings distributed to shareholders.

Narrow-moat Want Want China's fiscal 2023 (ending March 31, 2024) interim results were broadly in line with our expectations thanks to stable top-line growth and alleviating input costs. Operating profit rose by 20% year on year as the company improved channel efficiencies. We left our fiscal 2023 forecasts largely unchanged and retain our fair value estimate of HKD 6.00 per share, which implies 16 times fiscal 2023 price/earnings and 9 times EV/EBITDA. We think its shares are undervalued, with market's concern about slower medium-term growth priced in. In our view, the adverse impact from its reliance on legacy products is not new. We expect Want Want to modestly refresh its portfolio and enter new channels to protect its current margins, but such an approach would result in muted top-line and profit growth.

Narrow-moat Want Want China reported fiscal 2022 (ending March 31, 2023) results that slightly missed our estimates on the top line but met our expectations on operating profit. The dairy segment dragged revenue, but moderating input costs pressure lifted fiscal second-half gross margin. We left our fiscal 2023 (ending March 31, 2024) revenue and operating profit estimates largely unchanged despite the revenue miss. In our view, Want Want should face a favorable input cost environment as palm oil and milk powder prices moderate. The firm also delivered steady progress in transitioning to emerging channels and new products. We retain our HKD 6.0 per share fair value estimate, which implies 16 times 2023 P/E and is broadly in line with its three-year average. We think Want Want is poised to see margin expansion in the upcoming fiscal year, and shares are undervalued.

Want Want China derives revenue and profit mainly through a few flagship packaged food and beverage lineups that it developed decades ago, including Hot-Kid milk, sugar-coated rice crackers, savory senbei and QQ candies. The company’s products have particularly been popular among children. Margins are maximized through scaling these flagships with its nationwide offline distribution channel. Leveraging on its brand and the vast distribution network, the company has been able to achieve higher levels of gross profit and operating margin compared with domestic peers, with the majority of earnings distributed to shareholders.

Narrow-moat Want Want reported fiscal 2022 (ending March 31, 2023) first-half results with the top line moderately below our estimates and net profit lower than our forecasts. Revenue fell year on year as a result of weak demand for its dairy products, while elevated costs and operating deleveraging dragged margins. Management expects gradual improvement in fiscal second-half margin levels, but casts a cautious tone regarding demand outlook.

Want Want China derives revenue and profit mainly through a few flagship packaged food and beverage lineups that it developed decades ago, including Hot-Kid milk, sugar-coated rice crackers, savory senbei and QQ candies. The company’s products have particularly been popular among children. Margins are maximized through scaling these flagships with its nationwide offline distribution channel. Leveraging on its brand and the vast distribution network, the company has been able to achieve higher levels of gross profit and operating margin compared with domestic peers, with the majority of earnings distributed to shareholders.

Want Want China derives revenue and profit mainly through a few flagship packaged food and beverage lineups that it developed decades ago, including Hot-Kid milk, sugar-coated rice crackers, savory senbei and QQ candies. The company’s products have particularly been popular among children. Margins are maximized through scaling these flagships with its nationwide offline distribution channel. Leveraging on its brand and the vast distribution network, the company has been able to achieve higher levels of gross profit and operating margin compared with domestic peers, with the majority of earnings distributed to shareholders.

Want Want China reported fiscal 2021 (ending March 31, 2022) revenue and net profit that are broadly consistent with our estimates. Gross and net margin fell slightly short of our expectations due to elevated input costs. We expect such headwinds to continue weighing on fiscal 2022 earnings (ending March 31, 2023) and drag margins slightly lower versus fiscal 2021. We raised our medium-term growth outlook based on management's latest updates regarding progress in emerging channels. We expect a CAGR of 3% in top-line and net income growth, respectively, through 2026 (versus 2% and 1% in prior estimates). We raised our fair value estimate to HKD 6.90 per share, which implies 17 times forward P/E. We think Want Want’s shares are fairly valued following the correction post earnings, which was likely due to worries on margin compression by higher costs. Near-term share price could be supported by the generous special dividend.

Want Want China derives revenue and profit mainly through a few flagship packaged food and beverage lineups that it developed decades ago, including Hot-Kid milk, sugar-coated rice crackers, savory senbei and QQ candies. The company’s products have particularly been popular among children. Margins are maximized through scaling these flagships with its nationwide offline distribution channel. Leveraging on its brand and the vast distribution network, the company has been able to achieve higher levels of gross profit and operating margin compared with domestic peers, with the majority of earnings distributed to shareholders.

The recent acceleration in commodity prices as a result of the Russia-Ukraine conflict has exacerbated the margin pressure on packaged food companies brought about by supply disruptions throughout 2021. Various food and beverage companies in China have engaged in price hikes since the third quarter last year to mitigate margin compression. We continue to highlight Yili as our top pick, with our fair value estimate at CNY 46 per share, as we think the premiumization trend and continued penetration of dairy products in China are unchanged. The raw milk cost curve continued to moderate in early March, which should mitigate margin pressure observed since the second half of 2021. Robust sales reported for January and February at 15% growth year on year also confirm our constructive view. We expect categories with more room to maneuver on premiumization and higher concentration of share to command stronger pricing power and face lower margin pressure in the near term.

We transfer coverage of Want Want China, maintaining our narrow moat rating but lowering our moat trend rating to negative from stable as we think the current portfolio and channel composition could gradually erode the company’s ROIC going forward. We lower our fair value estimate to HKD 6.50 per share, from HKD 7.00 per share, which implies a forward P/E of 14 times, below its historical average, reflecting our more muted growth assumptions. Our fair value estimate also implies an EV/EBITDA of 10 times and FCF yield of 7%, broadly in line with domestic peers. We think its share price has largely priced in any positive catalysts from the recently announced price hikes and we remain cautious on its longer-term prospects based on the current business strategies.

Want Want China derives revenue and profit mainly through a few flagship packaged food and beverage lineups that it developed decades ago, including Hot-Kid milk, sugar-coated rice crackers, savory senbei and QQ candies. The company’s products have particularly been popular among children. Margins are maximized through scaling these flagships with its nationwide offline distribution channel. Leveraging on its brand and the vast distribution network, the company has been able to achieve higher levels of gross profit and operating margin compared with domestic peers, with the majority of earnings distributed to shareholders.

Narrow-moat Want Want reported first-half fiscal 2021 earnings with revenue and net profit growing at 11% and 7% year on year, respectively, above our fiscal 2021 growth estimates of 9%. Gross margin fell short of consensus and our estimate by 110 basis points, dragged by rising input costs across all product segments. Resilience in dairy & beverages as well as robust growth in emerging channels drove the top line strength. Management highlighted its plan for raising prices across all categories from Jan. 1, 2022, with transitory channel rebates to smooth potential market impact. The firm also announced an increase in interim dividend and share buyback. We left our fiscal 2021 revenue forecast broadly unchanged but lowered our EPS outlook to CNY 0.36 from CNY 0.37 to reflect the margin pressure posed by a raw material cost hike. We maintain our fair value estimate of HKD 7 per share and expect the market to view the results favorably.

Want Want is one of China's earliest established packaged-food manufacturers. Given its strategic focus on consumers between the ages of 3 and 15, the firm has encountered minimal competition during its early stages of development. Want Want had business partnerships with around 8,000 distributors, and its total annual sales had reached CNY 22 billion in fiscal 2020. The company’s revenue contributions from rice crackers, dairy products and beverages, and snack foods amounted to 25%, 50%, and 24% of revenue, respectively, in fiscal year 2020 (year ended March 31, 2021).

Want Want reported respectable results for year ending March 31, 2021 (fiscal 2020), beating our forecasts for revenue growth but falling short of Pitchbook consensus estimates. The gross margin was 40 basis points above our forecasts and 20 above consensus--this led to similar upside at the EBIT margin. EPS of CNY 0.34 was in line with our and consensus forecasts. We lower our estimates of revenue growth and gross margin in fiscal 2021, primarily due to raw material cost inflation and the modest beat in fiscal 2020.

Want Want is one of China's earliest established packaged-food manufacturers. Given its strategic focus on consumers between the ages of 3 and 15, the firm has encountered minimal competition during its early stages of development. Want Want had business partnerships with around 8,000 distributors, and its total annual sales had reached CNY 20 billion in fiscal 2019. The company’s revenue contributions from rice crackers, dairy products and beverages, and snack foods amounted to 28%, 49%, and 23% of revenue, respectively, in fiscal year 2019.