The Motley Fool

An Investor’s Guide to Want Want China’s Business

Want Want China Holdings Ltd (SEHK: 151) is a Chinese snack food giant. The group has a market capitalisation of around HK$83 billion (US$10.7 billion) and it is the largest manufacturer of rice crackers and flavoured milk in China.

Want Want’s other business segments also manufacture and sell a variety of snack foods and beverages such as yogurt drinks, herbal tea, juices, beans and nuts, candies and popsicles.

Investors had a glimpse earlier of whether Want Want was a great business to own. While the conclusion was that the group provided stability and long-term growth, investors who want to understand more about the business may wish to dig deeper. The best way to understand the business in greater detail is to look into its various business segments.

For Want Want, the business has four main segments: rice crackers, dairy products and beverages, snack foods and “other products”. Here’s a rundown on each of these divisions and how they are contributing to both revenue and profits for Want Want.

Segment revenue

Looking at the numbers over both fiscal years, it’s clear that dairy products and beverages take up the lion’s share of revenue for the group. Although Want Want is probably best known for its delicious rice crackers, the group actually derives most of its revenue from dairy products.

Rice crackers and snack foods are almost a tie when it comes to revenue contribution, while other products only contribute a minute portion to total group revenue.

It’s also interesting to note that all segments enjoyed year-on-year revenue growth for FY 2019, though the three main divisions only saw low single-digit increases. Other Products started off from a low base, hence the 51% year-on-year increase looks impressive but does not translate into any meaningful contribution for the group.

Segment profit

Now, it’s time to drill down into what matters – the profitability of each segment. No surprises here as the table above shows that dairy products and beverages also contribute to the bulk of segment profit, at close to 60%. Rice crackers and snack foods contributed the exact same proportion (20.4%) of segment profit, while other products took up just a tiny portion.

On a year-on-year basis, the increases in segment profit were actually higher than the increases in segment revenue. All the increases for the three major divisions were in the mid-to-high single-digit levels, signalling an increase in margins across all divisions.

An added bonus was that “Other Products” also turned the corner, registered a tiny profit as compared to a small loss in the previous year.

Segment margin

After computing the segment margins across both fiscal years, it can clearly be seen that there were improvements across all key divisions year-on-year, which is good news for investors. It’s also clear that dairy products had the highest segment margin at 30%, while surprisingly, rice crackers had the lowest at 17.6% among the three major divisions.

This seems to imply that even though Want Want is renowned for its rice crackers, the group is probably better off boosting its dairy division as it is both the largest contributor to group profit and boasts the highest segment margins.

Foolish conclusion

Investors now understand Want Want’s business on a deeper level. By digging into the segment details, an investor can find out the revenue and profit contribution for each division, as well as the growth rates for both.

Also, being aware of the segment margin helps the investor to understand the key driver for profits, and whether the group is channelling efforts into the right divisions for growth.

Here's 1 China stock that's riding the long-term growth in a MASSIVE US$400 billion industry. Find out why we think this market is so exciting and how investors can benefit, right here.

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.