Annual income growth slowed to 5.3% in the first half of the fiscal year, mainly affected by a high base, industry competition and exchange rate depreciation. The company reported interim results for the period to the end of September 2019, with revenue of HK $4.684 billion, an increase of 5.3 per cent year-on-year and 9 per cent excluding exchange rate effects. From a regional point of view, mainland China's income is 3.244 billion Hong Kong dollars, accounting for 69% of YoY+8.4%,. The slowdown is mainly due to a high base, fierce competition in the industry and the impact of RMB depreciation, with income growing by 14% in RMB terms. The Hong Kong-Macau market revenue of HK $1.137 billion was the same as the same period last year, accounting for 24%. Australia and New Zealand market revenue of HK $248 million, YoY-5.7%, accounted for 5%, affected by the devaluation of the Australian dollar and extreme drought weather. YoY+2.2%, accounts for 1 per cent of Singapore's market revenue of HK $56 million.
The gross margin increases, but increases the cost investment to make the net profit margin year-on-year-1.0pct. Benefiting from the falling prices of major raw materials such as sugar and wrapping paper, as well as the company's increased sales and production efficiency, the company's 1HFY20 achieved a gross profit of HK $2.556 billion, + 6% year-on-year; and gross profit margin 54.6%, year-on-year + 0.5pcts. The sales expense rate is from + 0.4pcts to 27.7%, the management expense rate is from + 1.1pcts to 8.0%, and the net interest rate is 11.4%, year-on-year-1pct. Profit attributable to shareholders was HK $533 million, up 3.0 per cent from a year earlier.
Capacity expansion in the mainland ensures long-term growth. 1HFY20's capital expenditure was HK $413 million, compared with HK $458 million in the same period last year, mainly for new plants in Dongguan, new production lines in Hong Kong and mainland China, as well as infrastructure investment projects in Hong Kong. The company's Dongguan factory started construction in 2017 and is expected to be put into production in mid-2020. The Shenzhen plant will gradually move to the new plant in Dongguan, which is expected to improve production efficiency. After the plant goes into production, it is expected to build new plants in North China or West China to support the regional expansion of the mainland business.
Our view: looking forward to the second half of the fiscal year, income growth in the mainland is expected to maintain the trend in the first half of the year, but the exchange rate impact is basically eliminated; income growth in Hong Kong may be under pressure; and Australia and New Zealand will still be affected by drought.
In the long run, the per capita consumption of the company's product portfolio in the mainland market is relatively low, and the market potential is huge; the company has a strong brand in South China, and with excellent product power, it is expected to expand in different places. with the release of production capacity in the future, the steady growth of the company can be guaranteed. In view of the accelerated slowdown in the company's revenue, we lowered the attributable net profit of FY2020/FY2021 by 10.9% to HK $732 million / HK $830 million, by 12.1%, and lowered the target price by 12% to HK $34.19, corresponding to FY2020/FY2021 's PE of 49x/43x, maintaining a prudent overweight rating.
Risk tips: fierce market competition in the soymilk industry; poor regional expansion in the mainland market; food safety problems; higher-than-expected fluctuations in raw material prices; rising rates of staff and advertising expenses
