FY21 results in line with our expectations
Want Want China announced FY21 (March 31 year-end) results: Revenue rose 9.0% YoY to Rmb23.98bn and attributable net profit grew 1.1% YoY to Rmb4.20bn, in line with our expectations.
　　Growth in dairy product and beverage segment continues in 2HFY21; rice crackers and snack foods return to growth; profit margin under pressure from elevated raw material prices. The firm continued to focus on its channels and diversification of businesses in 2HFY21, and recorded solid revenue growth of 7.7% YoY despite the impact of COVID-19 resurgence and other factors. Specifically, revenue contribution from dairy products and beverages maintained rapid growth in 1HFY21, up 10.8% YoY. Rice crackers and snack foods returned to growth, up 3.5% and 6.9% YoY, due to improved exports and the normalized base. In 2HFY21, the firm’s gross margin fell 5.2ppt YoY to 43.0%, resulting in a 4.2% decline in attributable net profit, due to price hikes of raw materials such as whole milk powder, palm oil, tinplate and paper.
　　Trends to watch
　　Solid growth driven by strong sales of dairy products and beverages; growth momentum to continue amid easing COVID-19 conditions. Dairy product and beverage segment registered double-digit growth from a high base, thanks to the robust growth of enhanced traditional channels as well as emerging channels. We think the growth in this segment bolsters the firm’s overall solid growth. We note that the recent COVID-19 resurgence has impacted the firm’s sales, and expansion of sales network and vending machines. However, we expect the firm to maintain healthy growth in FY22, as its marketing activities may recover amid easing COVID-19 conditions.
　　Rising cost pressure from whole milk powder; watch effect of price increases. The firm’s gross margins for dairy products and beverages, rice crackers and snack foods fell 6.5ppt, 4.4ppt and 3.3ppt YoY in 2HFY21, due to rising raw material and packaging material prices. In particular, we see a sharp impact from rising prices of whole milk powder. Recently, the price of palm oil fell, but we think there is still uncertainty over prices of other raw materials. We expect the pressure on the cost side to persist in the next six months. In addition, the firm raised its product prices in January 2022, and we think the price increases will boost the firm’s FY22 results. We note that some regions that were hit hard by the recent COVID-19 resurgence are under pressure from reducing inventories. We think the payment collection is slower, but it is progressing steadily. Overall, we expect the firm’s 2HFY22 earnings to outperform that in 1HFY22.
　　Implementing product differentiation and channel diversification strategies; bolstering long-term sustainable earnings growth. The firm adheres to its product differentiation and channel diversification strategies, despite the operational challenges resulting from COVID-19 resurgence and fluctuations in consumption in the near term. We believe this bolsters the firm’s mid- to long-term earnings growth. We expect the firm’s overseas business to contribute incremental growth as it is strengthening the operations in the overseas markets.
　　Financials and valuation
　　The stock is trading at 17.5x and 16.0x FY22e and FY23e P/E. We largely maintain FY22 earnings forecast and introduce FY23 earnings forecast at Rmb5.18bn. We lift TP 14% to HK$8.3, implying 18.7x and 17.1x FY22e and FY23e P/E with 7% upside, due to rising average market valuations. 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.