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Vitasoy International Holdings Ltd (SEHK: 345) is one of Greater China’s leading makers of soy milk.
Previously, Vitasoy was a high-flying growth stock and its stock did very well from 2000 to the middle of 2019, with its stock being more than a 10-bagger.
Due to growth deceleration and the company not meeting expectations, however, shares of Vitasoy have fallen from around HK$46.45 in June of 2019 to HK$29.90 now (at the time of writing).
Given that Vitasoy recently reported its annual report for the fiscal year ended 31 March 2020, here’s more on how the company did, management’s outlook, and whether there is still upside for investors.
For the fiscal year ended 31 March 2020, Vitasoy’s sales fell 1% year-on-year and its profit to shareholders fell 20% year-on-year, in local currency terms.
When including currency fluctuations, Vitasoy did worse with sales falling 4% year-on-year and profit to shareholders fell 23% year-on-year. The depreciation in the Chinese yuan hurt Vitasoy’s performance in Hong Kong dollar terms.
Vitasoy’s second-half numbers were worse than its first-half numbers due to Covid-19, which began doing damage in 2020.
Due to the coronavirus, demand weakened in mainland China and Hong Kong in the quarter ended 31 March and the company’s supply chain was negatively affected.
Although Vitasoy’s e-commerce segment reported very strong growth, Vitasoy’s overall fundamentals slowed and management cut the total annual dividend.
For the fiscal year ended March 2020, Vitasoy paid a total dividend of 32.2 HK cents per share, down from 41.8 HK cents per share in the previous fiscal year.
Individual segment performance and outlook
In terms of its individual segments, mainland China made up 62% of Vitasoy’s total sales, versus 29% for Hong Kong & Macau.
In terms of mainland China, Vitasoy’s operating sales rose 1% year-on-year and operating profits declined by 24% in RMB terms.
Although Vitasoy’s mainland China business didn’t do well, Vitasoy gained market share in both the tea and soy markets and management said “Mainland China has started a recovery in April-June”.
In terms of its Hong Kong operations, Vitasoy sales fell 7% year-on-year and its profits fell 14% year-on-year due to social unrest and Covid-19.
The company continued to gain market share in core categories, which is impressive given the high consumption rate. In terms of outlook, management said:
“Notwithstanding the continuing challenges posed by the Covid-19 pandemic in particular, the long term outlook for the Group remains very promising.”
Overall, management believes the company will gradually restore its growth trajectory.
Is there upside?
Based on earnings estimates and the earnings of fiscal year 2018/2019 (when Covid-19 wasn’t around), Vitasoy looks pretty expensive right now at HK$29.9 per share.
According to Reuters, the stock trades for 55 times forward price-to-earnings (PE) estimates and 46 times FY18/19 diluted normalised EPS of HK$0.65. That’s pretty pricey for a company that isn’t growing.
Fortunately, management believes the company will continue to grow in the future and the long-term outlook is very promising.
At its current valuation, I think the market is assuming that Vitasoy will approximately double its mainland China market share.
In FY2019/2020, mainland China accounted for 58% of Vitasoy’s operating profits. Assuming Vitasoy’s mainland China operation can be twice as big, Vitasoy’s overall operating profits would be 1.58 times larger.
Assuming net profits rise the same amount as operating profits, Vitasoy would have 1.58 times more profits, and it would trade at 29.1 times FY18/19 diluted normalized EPS in this scenario.
Because Vitasoy is spending more than normal on expenses such as marketing to grow faster, its normalised profits would actually be higher, and its normalised valuation would be even lower.
The end result would be Vitasoy trading for a much more reasonable valuation for a leading consumer staple player if its mainland China market share were twice what it is.
So the question for investors is; can Vitasoy can more than double its mainland China market share?
Massive room for growth
Given that Vitasoy’s consumption rate in Hong Kong and Macau is so high, there is certainly the potential.
The population of mainland China is around 170 times larger than it is in Hong Kong and Macau and yet Vitasoy only gets 2.14 times more sales from the region.
Previously, Vitasoy reported a mainland China growth rate of 27% year-on-year for the year ended 31 March 2019 (in local currency terms).
So, it would take about three years for Vitasoy to double its mainland China operations at that rate.
I think post Covid-19, if management gets the growth rate to 20%+ and keeps it there for several years, the stock will be a great buy at current prices.
All it really takes for the market to expect that is one good earnings report and a strong outlook. That’s still going to take execution to get though.
Due to the coronavirus outbreak, Vitasoy has had a tough fiscal year.
Nevertheless, Vitasoy has a lot of potential, and management just needs to execute. If the growth rate goes higher than expected or the outlook is better than expected, the stock can easily go 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.