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Vitasoy International Holdings Ltd (SEHK: 345) shares have had a great run. From 2015 to the middle of 2019, shares of the soya milk beverage maker rallied from around HK$11 to over HK$45 as the company consistently reported strong growth rates and high returns on capital employed.
Unfortunately, Vitasoy shares reversed this trend in June when the company reported disappointing earnings results and the stock is around 35% below its June levels. Looking back, Vitasoy’s stock clearly got ahead of itself.
Yet over the long-term, the company is well-known among local investors as being a ten-bagger investment. But can the company regain its magic, “Midas”, touch again?
Earnings report that disappointed
In June 2019, Vitasoy shares fell after the company reported fiscal year 2018/2019 sales growth of 16% year-on-year and profit growth of 19% year-on-year. The company’s mainland Chinese sales rose 25% year-on-year – below that of many analyst estimates.
Interim report showed even slower growth
Vitasoy’s growth hasn’t accelerated in the interim period since the earnings report. For the six months ended 30 September 2019, Vitasoy’s sales rose 5% year-on-year to HK$4.68 billion (US$601 million).
Profit attributable to equity shareholders rose just 3% compared to the previous interim period. Vitasoy’s profit growth for the first half of fiscal 2019/2020 was a substantial deceleration of its profit growth for the first half of fiscal 2018/2019, when its bottom line grew 30%.
Management noted that mainland China grew “more moderately during the first half… reflecting intensified market competition”. Sales for the period rose only 8% in mainland China and 14% in local currency year-on-year. By comparison, Vitasoy’s mainland China operations grew 30% in local currency in last year’s interim period.
Despite the sharp slowdown in earnings growth and the dip in its stock price, Vitasoy trades at a price-to-earnings (PE) ratio of around 43.
Keurig Green Mountain analogy
Growth stocks sometimes crash. Perhaps the greatest analogy in terms of consumer beverage stocks is Keurig Green Mountain; a home coffee equipment maker. Like Vitasoy, Keurig Green Mountain shares soared due to quarter after quarter of blistering growth and a large estimated market.
Due to the growth, investors were willing to pay high multiples on valuation as long as the growth continued and shares of Keurig Green Mountain made a then peak of around US$115 per share in September 2011.
Later, when Keurig Green Mountain’s growth decelerated below estimates, shares fell sharply. Due to a sharp slowdown, shares of Keurig Green Mountain fell all the way to around US$15 in the middle of 2012.
Driving growth again
Vitasoy’s current situation is arguably analogous to where Keurig Green Mountain was between September 2011 and the middle of 2012. Its growth has slowed below estimates due to competition and its stock has fallen.
Through good execution, however, Keurig Green Mountain management turned the company around and its growth beat estimates.
The company’s stock rebounded and in 2014, Keurig Green Mountain received a strong stamp of approval after Coca Cola agreed to buy a stake in the company. Later, Keurig Green Mountain would sell itself to a European conglomerate for US$92 per share in 2015.
Can Vitasoy bounce back?
Vitasoy certainly has the potential to bounce back. Given the company’s high per capita consumption rate in Hong Kong, Vitasoy has a lot of potential to gain market share in China because Hong Kong and China’s ethnic demographics are similar.
If the per capita consumption in China is anywhere near the per capita consumption in Hong Kong, Vitasoy stock will likely be many multiples higher.
One way to get the stock rising again is for Vitasoy’s China sales to beat estimates. Currently, it’s not clear if the company can shake off its competition. If Vitasoy’s growth in China continues to slow in the next few quarters, its exceptional growth story might be over.
Vitasoy’s competitors aren’t going to give up territory to the firm easily in mainland China. The stock could take a lot longer to bounce back. If the growth in China comes in better than expected or reaccelerates, the company’s stock price could go higher.
Vitasoy shares have fallen due to slower growth in China. Given its still-high valuation, the company will likely need to show it can handle the new competition in China and grow at a fast rate in order for the stock to re-rate higher.
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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 Jay Yao doesn’t own shares in any companies mentioned.