Maintain "Accumulate" rating on Vitasoy International (Vitasoy, or the "Company") with a TP at HK$13.20. We keep our earnings forecasts for FY24-FY26 unchanged at HK$0.149/ HK$0.263/ HK$0.377 in terms of EPS. For Vitasoy, although challenges remain ahead due to weak consumption sentiment, intensified market competition and lasting cost pressure, the management has shown more confidence in the Company's long-term perspective. Three fundamental pillars are innovation, execution and expansion. Currently, the pessimism has been priced in to a certain extent. In the short run, the management reiterated that Vitasoy would 1) deliver positive yoy top-line growth in 2HFY24; and 2) increase structural profitability in FY24. Our TP of HK$13.20 is based on 35x FY26F PER.

1HFY24 results in-line: In 1HFY24, Vitasoy's mainland China sales declined 11% yoy (or 6% yoy in terms of RMB) to HK$1,962 mn mainly due to high comparable base in 2QFY23. Hong Kong sales rose 4% yoy to HK$1,121 mn driven by strong momentum from on-the-go consumption behind both core and innovative products. Overall gross margin was up 2.8 ppts yoy to 50.5% as a result of price hikes and continuous cost control measures, beating market expectations. As a whole, shareholders' profit grew 15% yoy (or 99% yoy if excluding currency impact and COVID-19 related government subsidies) to HK$163 mn, basically in line with our previous expectation.

Expecting mainland China business to maintain profitable growth momentum in FY24. The management aims to restore positive yoy sales growth in 2HFY24. Amid macro headwinds, Vitasoy should continue to focus on aggressively consolidating market share in the mainland China market. Three aspects could be monitored. (1) Product innovation.

Since the market is more likely to stay competitive with more active investments and new entrants, the Company needs to drive its core portfolio by actively introducing new products. (2) Execution. The senior management reiterated the importance of brand building/ A&P events for offline distribution channels. For internal management structure, we are looking forward to seeing more changes since Ms. May Lo has been appointed as the Deputy Chairman of the Board with effect from 21 November 2023. (3) Expansion. In addition to its principal markets (such as south/ central/ east China), the Company may restart offline expansion in its emerging markets (such as north/ west China). Meanwhile, we think that the Company should further expand online sales on the basis of a more stabilized pricing system.

Expecting operating margin to gradually rise. Positives include economies of scale with lower D&A expenditure, price hikes, and declining packaging material prices and logistics costs, while negatives include high sugar price and potential S&D expense increases. Apart from ongoing cost optimization initiatives, the management will evaluate the ROI of A&P activities more carefully. We forecast Vitasoy's operating margin to rise 2.4 ppts/ 1.8 ppts/ 1.7 ppts YoY to 4.0%/ 5.8%/ 7.5% in FY24-FY26 respectively, still lower than the FY19-FY21 average of 11.3%.

Risks: Weaker-than-expected retail sales sentiment in Vitasoy's operating regions; slower-than-expected expansion in mainland China business segment; intensified competition.