The Motley Fool

Is Want Want a Safe Stock to Own for the Long Term?

Want Want China Holdings Ltd (SEHK: 151) is a food and beverage manufacturer in China. It produces many popular consumer products, which include Want Want Rice Crackers and Want Zai Milk Drink.

In the last five years, the company’s stock price has declined by close to 30% to HK$6.0, which suggests that now is probably a good time to look at the stock.

In this article, I’ll try to assess whether Want Want is a safe stock to buy now.

Business prospects

To begin with, Want Want manufactures products which are basics necessities for its customers, which include crackers, milk, snacks, and more. The consumption of these products tends to be stable, even during challenging times such as an economic downturn.

Financially, the company has also demonstrated a good track record. In the last decade, revenue improved by 74% to RMB 20.7 billion (US$2.92 billion) while net profit grew by 59% to RMB 3.5 billion.

Moreover, the company has remained profitable and also maintained dividend payments throughout the period.

Going forward, I believe Want Want is well-positioned to sustain (if not grow) its business through the deeper market penetration of existing products and new product releases.

Balance sheet strength

Another important factor that investors need to consider when assessing Want Want’s stock is to consider its balance sheet strength.

This is important since a strong balance sheet allows the company to withstand short-term challenges – such as the outbreak of Covid-19 – without compromising its long-term strategic goals.

A quick look at Want Want’s latest financial statements as of 31 December 2019, shows that total borrowings and cash and cash equivalents were at RMB 9.5 billion and RMB 17.1 billion, respectively.

In other words, Want Want has a net cash position of RMB 7.6 billion which indicates the strength of its balance sheet.

With its high-quality balance sheet, Want Want is well-positioned to weather the Covid-19 crisis, as well as to continue its investments for the future.

Valuation

Last but not least, investors should also consider Want Want’s current valuation before buying its stock. The idea here is to avoid overpaying for the stock, which will ensure a reasonable margin of safety.

And now some numbers. At today’s price of HK$ 6.0, Want Want is trading at price-to-earnings (PE) and price-to-book (PB) ratios of 18.8 and 4.5, respectively.

Comparatively, the market average PE and PB ratio are 13.0 and 1.2, respectively – I have used iShares MSCI Hong Kong Index Fund (NYSEARCA: EWH) as a proxy for the market.

From the above, we can see that Want Want stock is trading at a premium to the market average. On the one hand, investors may argue that such a premium is warranted considering Want Want’s high-quality business.  Still, paying at the current price means that an investor is not getting much margin of safety.

Foolish takeaway

Overall, I think Want Want is a safe stock to own in the long-run thanks to its solid business prospects and high-quality balance sheet.

One downside, however, is that the stock is priced slightly at the higher end which means investors have little margin of safety.

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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 Lawrence Nga doesn’t own shares in any companies mentioned.