FY1H21 results beat
　　Want Want China announced its FY1H21 (March 31 year-end) results: Revenue grew 10.5% YoY to Rmb11.38bn and attributable net profit rose 7.1% YoY to Rmb2.09bn, beating our expectations, mainly due to faster- than-expected growth of the dairy & beverage segment.
　　Dairy & beverage segment impressive; profit margin under pressure due to rising raw material costs. FY1H21 revenue contribution from rice crackers fell 5.8% YoY, while that from the dairy and beverage segment rose 23.5% YoY and that from snack food dropped 2.6% YoY. Revenue from rice crackers and snack food declined slightly from a high base in FY1H20, while dairy and beverage segment continued its high growth from FY2H20, recording impressive growth from a high base in FY1H20.The firm’s FY1H21 gross margin fell 1.4ppt YoY to 46.8%, mainly due to higher costs of certain key raw materials such as palm oil, paper, tinplate, etc. FY1H21 operating expense ratio stood at 24.5%, down slightly by 0.3ppt YoY.
　　Trends to watch
Dairy and beverage segment drives solid growth in FY1H21; we expect continued growth in FY2H21. Sales of the dairy & beverage segment grew rapidly and recorded double-digit growth in all channels thanks to channel enhancement, vivid marketing, new flavor development, and expansion of emerging channels. Sales of rice crackers fell due to a high base and weaker overseas markets affected by the COVID-19 pandemic, but still recorded low single-digit growth in the traditional channel. In FY2Q21, its sales in the traditional channel recovered to double-digit growth. The snack food segment also declined from a high base in FY1H20 due to delayed shipments amid the COVID-19 pandemic.Despite facing challenges of COVID-19 resurgence and power rationing in FY2H21, the firm expects the dairy and beverage segment to maintain its growth momentum, and for the rice crackers and snack food segments to recover from the weak performance in FY1H21 during the Chinese New Year peak season.
　　Profit margin under pressure due to rising raw material prices; each segment raising prices in response to cost pressure. Rising raw material and packaging material prices weighed on the firm’s profit margin.Gross margin of the rice crackers and snack food segments fell 5.3ppt and 3.6ppt YoY. Gross margin of the dairy & beverage segment stayed at 49.4% thanks to healthy inventory of low-priced powdered milk. The firm expects to increase prices for 90% of dairy & beverage products, 80% of rice cracker products, and nearly 50% of snack food products by mid- single-digits from January 1, 2022 in response to cost pressure. We expect the effect of price increases to be mainly reflected in FY22, considering the firm’s channel support in 2M22. We think the firm’s gross margin may be under pressure in FY2H21, but we expect the firm to offset cost pressure through upgrades in product mix and expense control.
　　Continuously expanding channels and diversifying products.Revenue from emerging channels a high-single-digit figure to total revenue in FY1H21, becoming one of the key revenue growth drivers of the firm. Meanwhile, the firm has been developing multi-branded differentiated products to meet the needs of different consumer groups.Revenue generated from the new products launched in 2018 and thereafter, in aggregate, accounted for nearly 10% of its total revenue. In addition, we expect the firm’s Vietnam plant to start operation in 2022, further strengthening its presence in overseas markets.
　　Financials and valuation
　　The stock is trading at 15.9x and 15.0x FY21e and FY22e P/E. As growth in the dairy & beverage segment reflects the effectiveness of the firm’s strategies, we raise FY21 and FY22 earnings forecasts 2.6% and 3.5% and TP 11% to HK$7.3, implying 17.6x and 16.6x FY21e and FY22e P/E with 11% upside. We maintain an OUTPERFORM rating.
　　Risks
　　Sharp rise in raw material prices; COVID-19 resurgence; disappointing contribution from new products and/or emerging distribution channels.