Vitasoy Intl’ （Vitasoy） continues to maintain growth momentum in PRC with thestrategy of “Go Deep Go wide”。 The new Dongguan plant, which is currently underconstruction, will be Vitasoy’s largest production base. It will commenceoperation in 2021 to support the overwhelming demand on top of the salesvolume growth in PRC. We revise up the target price from HK$27.2 to HK$30.5based on our DCF-model. The current price is HK$34.7 at FY2019E PE of 51x, whichwe believe is richly valued. Therefore, we downgrade to HOLD.
1HFY2019 results surpassed management’s internal growth target. Vitasoyannounced its 1HFY2019 results on 21st Nov 2018 and continued to deliver decentoperating results based on the robust performance in PRC. Vitasoy achieved yoy growthof 22% in revenue and 30% in profit attributable to equity shareholders. The gross profitmargin increased by 1.4% yoy to 54.1%, which is mainly driven by improvedmanufacturing efficiency and favorable material costs.
Mainland China continues to be a strong growth driver. Looking towards 2HFY2019, webelieve the sales volume in PRC sustains to grow significantly with the productexpansion across wider regions and more distribution channels. The company is alsorapidly gaining its market share in east and central China. However, the sales growth willslow down as compared to 1HFY2019 due to the high-base effect and the fluctuation inRMB/HKD exchange rate.
Strong net cash position. Vitasoy always keeps their debt level low. The debt-to-equityratio was 0.9% in 1HFY2019. Strong business operations not only support its CAPEXexpansion to secure a solid market, but also ensure decent dividend payouts.
Richly-valued PE ratio. Vitasoy is now penetrating into east and central China and webelieve its sales have great growth potential. Given its sound track record （over 78 years）and strong reputation, we are not surprised that Vitasoy is trading at a premium.However, it is now trading at a richly-valued PE ratio of 51x as compared to Tingyi’sheyday PE of 30x-53x.
Downgraded to HOLD rating. We expect the sales performance in PRC will continue tobe the key growth driver for the Company, with a moderate sales increase in Hong Kongand a steady growth in Australia and Singapore. Its top-line/bottom-line increases by18.5%/20.3% yoy in FY2019E. We lift our target price from HK$27.2 to HK$30.5 basedon our DCF-model. The current price is HK$34.7 at FY2019E PE of 51x, which we believeis richly valued. Therefore, we downgrade to HOLD.