Want Want China

The sweet combo of differentiated strategy and steady cash flow

Despite the headwinds in consumer market, WWC's FY24 results were in-line with our estimates, thanks to its strong cost control initiatives and lower raw material cost. We believe the results have shown WWC's products are more counter-cyclical and resilient than most dairy peers. In the coming fiscal year, we expect WWC would continue to benefit from its inventory of low-cost milk powder. Hence, we expect GPM would be even higher, supporting earnings growth. We reiterate BUY as we like WWC's commitment to shareholder return, and its defensive nature. With an expected dividend yield of 7% and a ROE of 26% in FY25, we believe the current valuation at 11x FY25 P/E attractive.

Key Factors for Rating

FY24 earnings supported by lower COGS. While full year revenue grew only by 2.9% YoY to RMB23.6bn as 2HFY24 revenue was only up 1.8% YoY, WWC's full year net profit was up 18% YoY to RMB39.9bn, in-line with our expectations. The key drivers for such earnings growth were: (1) a 2.7ppt YoY improvement of GPM to 46.6%, thanks to high S.D. decline of milk powder price, and (2) strong control of distribution cost, being almost flattish at RMB3.02bn, accounting for 12.8% of FY24 revenue (FY23: 13.2%).

Higher GPM expected as lower cost of milk powder being locked-in. Mgmt. expected that GPM for FY25E is likely to remain stable or even go higher, as they have already locked in the price of New Zealand milk powder, with a volume sufficient for the sales of coming 2-3 quarters. Given that milk powder accounted for c.20% of COGS, and the powder cost for WWC is expected to decline by mid-to-high S.D. YoY, we expect this should support WWC's GPM to hit to 47.2% in FY25E, a four-year high.

Reaping rewards on differentiated products. WWC's star product Hot-kid Milk achieved high S.D. revenue growth in FY24, outperforming many dairy categories. We believe this could be attributed to double-digit growth of canned Hot-kid Milk, as this product, with a much longer shelf life, could be distributed in vendor machines and other channels more effectively. Moreover, even with big events such as Olympics, WWC remains committed to its differentiated low cost promotion, which could generate strong return and cash flow to support dividends in FY25E, and we expect the payout ratio could be around 80%.

Overseas market being a highlight. WWC's overseas market achieved mid- to-high teens growth in FY24, and its mgmt. expected this momentum to remain strong due to penetration into mainstream retail outlets. While mgmt. did not rule out the possibility of M&A in overseas market, we believe the key highlight would continue to be its organic operations in Vietnam, as its products are appealing to overseas Chinese community, as well as clients for OEM manufacturing.

Key Risks for Rating

Major downside risks to our view include: (1) weaker-than-expected sales due to weak economy; (2) market share decline being quicker than market expected; and (3) a surprise sharp increase in raw material costs.

Valuation

We slightly revise up our EPS forecast by 2-3% after the results, and our TP (unchanged at 15.5x FY25 P/E) is slightly lifted to HK$6.2.