On May 20, the food and drink sector rose sharply, and Vitasoy International (00345), which had been dormant for a long time, also presented a “performance show” to investors — in early trading on the same day, Vitasoy's stock price rose strongly, and soared 15.5% during the intraday period. At the close, the stock price surged 11.54% to HK$7.25.

According to the news, Vitasoy announced its latest performance forecast, according to which the Group expects profit attributable to equity holders to be HK$106 million to HK$126 million for the fiscal year ending March 31, 2024, an increase of approximately 132% to 176% over the previous year. According to the announcement, the main reason for the increase is a sharp increase in operating profit from mainland China business.

Surging profits ≠ recovering the mainland market

How to recover the mainland market has always been a “big problem” on VitaDai's mind. This can also be seen from its latest financial report.

However, the “butterfly effect” brought about by this negative incident did not stop there.

In terms of stock prices, the Zhitong Finance App noticed that since Vitasoy's stock price hit a time-high of HK$46.2 in June 2019, the “Long Bull” trend came to an abrupt end and was in a state of fluctuation.

According to financial data, in fiscal year 2022, the company's revenue was HK$6.501 billion, a year-on-year decrease of 13.55%; net profit was -159 million HK$159 million, a sharp drop of 129%. Notably, this is Vitasoy's first loss in nearly 20 years.

In fiscal year 2023, the company's revenue was 6.341 billion yuan, down 2% year on year; net profit was 49 million yuan, which improved compared to the loss performance in FY2022, but it is undeniable that revenue continued to decline. Among them, the Mainland's revenue for the period was

3.509 billion yuan, a year-on-year decrease of 9%.

By the middle of the 2024 fiscal year, Vitasoy's overall revenue was 3.391 billion yuan, down 7% year on year, and net profit was 163 million yuan, up 15% year on year. During the period, the revenue of Vitasoy's international mainland market continued to decline. Revenue was recorded at 1,798 billion yuan, down 6% year on year. Fortunately, profits showed an upward trend, increasing 36% year on year to 190 million yuan. It can be seen from this that after the brand crisis broke out, although profits were reversed, revenue growth became a major problem for the company.

According to the latest performance forecast, Vitasoy's performance on the sharp increase in profit is due to a sharp increase in operating profit in mainland China, but to be honest, the increase in profit also represents an increase in revenue. The increase in profit may be due to cost reduction and efficiency. Judging from the revenue perspective, the company has not actually recovered to the mainland market.

Is there limited room for an “inner volume” + an underrated track to bounce back?

Although repairing the mainland market is the key for Vitasoy to resolve the bottleneck of slowing revenue, it is not easy to “talk about repairing the market” in an increasingly “rolling” beverage circuit.

Most beverages under Vitasilk International belong to the soft drink circuit. Soft drinks mainly refer to non-alcoholic beverages with an ethanol content of 0.5% or less, including packaged drinking water, fruit and vegetable juices and their beverages, protein drinks, carbonated drinks (soft drinks), special purpose drinks, flavored drinks, tea (type) drinks, coffee (type) drinks, plant drinks, and solid drinks.

In recent years, the three most important factors for consumers when choosing a diet are “health,” “diversity,” and “balance,” and nutritious and healthy eating habits have become the current food consumption trend. Due to the popularity of “tea culture” and “health culture”, it has promoted the rapid development of the soft drink segment, the tea beverage industry, and the vegetable protein drink industry.

Judging from the size of the market, the current soft drink circuit is already showing a mature stage of “slow growth”.

According to relevant research data, the market size of China's soft drink industry grew from 372.61 billion yuan in 2018 to 463.79 billion yuan in 2022, with a compound annual growth rate of 5.6%. In the future, the market size of China's soft drink industry will be relatively stable, showing a slight upward trend. The market size of China's soft drink industry is estimated to be 471.9 billion yuan in 2027, with a compound annual growth rate of 0.3% from 2022 to 2027.

It should be noted that due to the large number of soft drink segments, the market is scattered, and competition within the industry is fierce.

For example, the two main products of vitamin milk, “vitamin soy milk” and “lemon tea,” are also facing fierce competition.

According to China Report Network data quoted by Guohai Securities, in 2020, the market share of soybean milk in mainland China was 20.7%, leaving only 16.9% of the market share of vitamin milk. Furthermore, according to Euromonitor International data, by the end of 2021, the market share of beans in mainland China reached 23%, further expanding the market share. More than that, in addition to facing fierce competition from the “old rival,” Mamondou, brands such as Zuming, Weiyi, and Yili Select are also sharing the market share of vitamin milk.

Let's take another look at the “lemon tea” market. As consumers' health awareness increases and market education matures, sugar-free tea drinks have become a new growth engine for the beverage industry at a high growth rate. Lemon tea, which was a hit, is also declining, and various sugar-free tea drink brands are constantly grabbing market share.

Influenced by these industry trends, Vitasoy has also begun to launch new products to find new growth possibilities. For example, in recent years, we have tested the waters for high-end soy milk products such as the “Multi-Camp” vegetable milk series, sugar-free drinks, and the Coffee Master Tea Master series. However, at present, there is no effect of scale to help increase performance.

Back in the secondary market, the current beverage sector is relatively undervalued, and it will take time for the valuation to stabilize. Among them, Guotai Jun An pointed out that in 2023, the consumer industry flourished from flourishing at the beginning of the year to weakening spending power in Q2. As a result, valuations of beer, popular products, etc. have reached historic lows, and the valuation of liquor has reached close to the historical 30% quartile. PE of mainstream companies has fallen to less than 20 times in 2024, and valuations have fallen below the historical low. The industry is relatively undervalued in the short term, but long-term steady state valuations are still waiting for future expectations to stabilize.

In summary, at a time when valuations have not stabilized and on an increasingly “rolling” circuit, there is probably limited room for a rebound in the mainland market for Vitamin Milk, which has yet to actually recover.