Competition slowed down growth. Vitasoy’s 1HFY20 sales rose 5.3% YoY toHK$4,684 million. Its sales in mainland China grew 8.4% YoY (14% YoY inRMB), notably slowing down, due to high base and intensified marketcompetition. The Company’s 1HFY20 gross margin improved 0.5 ppt YoY to54.6%. Due to intense market competition, Vitasoy’s selling expenses ratiorose 0.4 ppt YoY. Due to salary inflationary adjustments, the Company’sadministrative expenses ratio grew 1.1 ppt YoY. In 1HFY2020, Vitasoy’sshareholders’ profit increased 3.0% YoY to HK$533 million, lower thanexpected.
　　Is Vitasoy’s economic moat wide enough
We saw diversified competitionstrategies in the soymilk market as players intentionally launched products withclearly different packaging and selling points. However, encouraged by thehuge success of Vita Lemon Tea and its significant profit margin, dozens ofbrands introduced lemon tea products, which slowed down Vitasoy’s growth.
　　We believe the most critical advantage for Vitasoy is that it defines theauthentic taste and packaging of lemon tea, becoming the representative of thecategory. We believe that Vitasoy has its unique competitive advantage onproduct and brand, which has given the Company a longer period of time tofurther enhance its other competitive advantages by, e.g. investing in brandequity and constructing more sophisticated channels.
　　Due to lower earnings forecasts, we lower TP to HK$31.50. As Vitasoyexpands nationally step by step, it will continue to leverage its brand reputationto generate more revenue. We expect that the Company will grow at mid-teendigit percentage in the next five years. Therefore, we maintain "Accumulate"rating but lower TP to HK$31.50, which represents 46.5x/ 41.7x/ 36.7xFY20/ FY21/ FY22 PER.