FY23 still challenging but valuation now looks more reasonable; Upgrade to HOLD
Just like its peers, we believe the 1HFY23 operating performance of WWC would be under considerable pressure, as demand was constrained by COVID-19 outbreaks and intensified competition.
Nonetheless, we see the cost pressure faced by WWC should moderate for 2HFY23 and FY24, which may offer some breathing space for its margins. Still, it will be important to watch for management’s guidance on its outlook, and whether their new product launches could reap some success. Considering the less challenging headwind and the correction over the past half a year, we consider the current valuation of WWC more justified. Upgrade to HOLD.
Key Factors for Rating
1HFY23 likely challenged. For Apr-Sept 2022, we expect that Want Want China (WWC) should face similar pressure like its peers. For its dairy products and beverage sector, given the challenges faced by Yili (600887 CH, NR) in 3Q22, we believe WWC would also face moderated demand under COVID-19 outbreaks nationwide. Meanwhile, snacks companies such as Three Squirrels (300783 CH, NR) and Laiyifen (603777 CH, NR) also reported anemic 3Q22 top-line growth, and deteriorating net profit. This may be a negative signal for WWC’s snacks and rice cracker business. We therefore expect WWC should also report 1HFY23 results with similar pattern.
GPM pressure likely lessened. Previously in June 2022, mgmt. of WWC commented that its GPM would face pressure in the next 6-9 months. We believe such pressure has already shown some signs of relief, since prices of some raw materials, especially New Zealand milk powder and palm oil, have retreated after 2Q22. With its previous price hike effective since Jan 2022, it could imply the GPM could have bottomed in FY23, and may recover in FY24.
What to watch for 1HFY23? In addition to comment from mgmt. on the margins, we believe the expansion in new retail channels and Southeast Asia would be the key catalysts to watch, which could support the growth of WWC and to avoid the direct competition from Chinese dairy giants.
Valuation
Share price of WWC has already retreated by more than 30% from its recent high of HK$8.0 in March 2022. With the risks of margin erosion due to input costs lessened, we believe the valuation now more justified. Upgrade to HOLD.
While our EPS forecast unchanged, our TP is lowered to HK$5.7, based on 14x FY24 P/E (unchanged) and HKDRMB rate of 0.92 (previous: 0.85).