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Consumers in Asia are spoilt for choice when it comes to the plethora of food and beverage options out there in the market. When it comes to investing in consumer companies, investors in the region also have a variety of choices.
Consumer shares are popular because they are easy to understand (everyone needs to eat and drink). Usually, they are brands that we easily associate with as we go about our everyday lives. With that, I’ll be comparing two large Chinese consumer stocks to see which makes the better investment.
Giants of snacks
Both companies are big in their own right. The first, Tingyi (Cayman Islands) Holding Corp (SEHK:322), is the largest instant noodle producer in China. The group also specialises in the production and distribution of beverages, baked goods, and soft drinks. It sells products such as braised beef noodles and spicy beef noodles under the “Master Kong” brand.
The second company, Want Want China Holdings Ltd (SEHK:151), is the largest maker of rice cakes and flavoured milk in China. The group also manufactures snack foods and beverages.
I took a look at three aspects of each company – their margins, debt levels, and free cash flow generation – in order to determine which is the better investment.
Gross and net margins
As you can see, Want Want has much higher gross margins and net margins compared to Tingyi. This implies that Want Want has better pricing power than Tingyi and its products and brands have a stronger mind share with consumers.
As a result of the higher gross margin, Want Want also enjoys a much healthier net margin of 16.8%. At 4.1%, Tingyi’s net margin does not provide it with much wiggle room to navigate volatility in case expenses rise.
On the debt front, both Tingyi and Want Want have cash levels that exceed their total gross debt and both sport a net cash balance.
As consumer companies have high working capital requirements (due to constant manufacturing of perishable products), it’s important that they have adequate cash resources to tide them over in the event of a crisis. Both companies also have acceptable gross debt-to-equity ratios.
Free cash flow
Free cash flow is an important measure of how well businesses can generate sustainable cash flows for their shareholders, as well as their ability to continue paying dividends.
On this aspect, both Tingyi and Want Want reported a healthy level of free cash flows in their latest fiscal year. A quick check shows that both companies also reported free cash flow in the previous fiscal year, so this appears to be a healthy characteristic for both companies.
Higher margins win out
For me, Want Want is the clear winner in this case as it has much better margins than Tingyi, while both companies are tied on the other two aspects (of debt levels and free cash flows).
Of course, investors also have to dig deeper into each company’s product range, market share, and growth plans in order to determine its merits and risks.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Royston Yang doesn’t own shares in any companies mentioned.