Successful price hike to drive growth
? Want Want raised the selling prices for 80% of its products by mid-single digits effective from 1 Jan 2022. We expect the price hike to drive top-line and margin improvement in FY3/23F.
? Want Want achieved strong revenue growth in Oct–Dec 2021 because of the early Chinese New Year. Management said it will closely watch retail market sales and channel inventory in Feb and Mar 2022.
? Reiterate Add with a higher DCF-based TP of HK$8.7, since we expect Want Want to achieve better growth in the medium term, driven by selling price increases, new product launches, and new distribution channel expansion.
Selling price increase to drive growth in FY3/23F
Want Want raised the selling prices for 80% of its products by mid-single digits effective from 1 Jan 2022 – mid-to-high single digits for rice crackers and dairy products and low single digits for snacks. Management said if raw material prices remain at the current level, it expects this round of price hikes to be enough to offset the cost pressure. We now expect Want Want’s GPM to improve by 0.6ppt yoy to 47.4% in FY22F because of a mix upgrade and price hikes. In Jan and Feb 2022, the Company will return 80% of the price increases to its distributors if the distributors meet certain sales targets, so that Want Want can guarantee smooth progress for the selling price increases and better motivate distributors. We now expect Want Want to achieve sales growth of 6.3% and net profit growth of 8.6% yoy in FY3/23F. Management expects the OPM to gradually improve in FY3/23F, owing to improved operating leverage and a lower administrative expenses ratio.
Strong revenue growth from Oct to Dec 2021
Want Want achieved strong revenue growth in Oct–Dec 2021 because of the early Chinese New Year and distributors building up some inventory before the price hike. Management said it will closely watch end market sales and channel inventory and will not allow distributors to over-stock. Currently, we maintain our forecasts for top-line growth of 10.8% and bottom-line growth of 9.3% yoy for 2HFY3/22F. Management said 2HFY3/22F cost pressure is higher than that in 1H, since Want Want previously had five to six months milk powder inventory at a lower price.
New products and channels to improve growth in the medium term
Currently, new products account for c.10% of Want Want’s total sales. The Company will continue to launch new higher-end products with more social functions to attract the attention of younger customers. It will also launch different products for different channels. For example, Want Want launched different candy products for different channels to better meet the specific needs of its target customers. Emerging channels now account for 10% of total sales, with e-commerce accounting for 6%. In 2021, Want Want set up special sales teams to cooperate with Hema Supermarket and Tiktok. Want Want has successfully used
emerging channels to promote new products.
Reiterate Add with a new DCF-based TP of HK$8.7
We raised our earnings forecasts for FY3/23F and FY3/24F by 2.5% and 4.1%, respectively, to reflect the selling price hike and a better margin outlook. Management aims to achieve mid-to-high single digit revenue growth in the next 3–5 years, driven by 1) price hikes and a mix upgrade, 2) new product launches, and 3) expansion in new emerging channels. In FY3/22F, management expects new emerging channels to drive overall sales growth by 2–3%. The key catalysts include: 1) stronger revenue growth and 2) lower-than-expected raw material prices.