Results missed amid the pandemic lockdown
? Want Want reported FY3/22 revenue growth of 9.0% yoy and net profit growth of 1.1%
yoy, below our expectations, because of weak 2H FY3/22 sales amid Omicron
outbreaks and margin pressure because of raw material price hikes.
? We expect Want Want’s margin pressure to linger in the next 6–9 months as raw
material prices are higher than management’s previous expectations, and the sales
price hikes since Jan 1, 2022 are not enough to fully offset the cost pressure.
? Downgrade to Hold with a new DCF-based TP of HK$7.6 to reflect the Omicron impact
and margin pressure amid raw material price hikes.
FY3/22 results below expectations
In FY3/22, sales of rice crackers, dairy and beverages, snacks, and others grew by 0.2%,
16.9%, 1.6% and 32.9% yoy, respectively. Sales of rice crackers in 2H FY3/22 recovered
after a sales drop in 1H FY3/22, as sales in overseas markets recovered to mid-single digit
growth amid an improved pandemic situation. Sales growth of dairy and beverages
dropped from 23.5% in 1H FY3/22 to 10.8% yoy in 2H FY3/22 because the pandemic
lockdowns affected outdoor consumption. Affected by higher raw material prices, its
FY3/22 gross margin was 44.8%, down 3.4% pt yoy. The administrative expenses ratio fell
by 0.9% pt yoy, reflecting better cost control. The distribution expenses ratio rose by 0.5%
pt yoy, driven by a 0.4% pt increase in the advertising and promotion expenses ratio. Its
operating profit margin dropped by 3.3% pts yoy to 22.8% in the period. It announced a
final dividend of US$2.10 cents/share and a special dividend of US$2.94 cents/share,
reaching a full year dividend payout ratio of 112%.
Selling price hikes not enough to mitigate cost pressure
Want Want raised the selling prices of 70–80% of its products by mid-single digits effective
on 1 Jan 2022 – mid- to high-single digits for rice crackers and dairy products and lowsingle digits for snacks. Management expects the stimulation of price hikes on revenue to
start to show in Apr/May, which will be recorded in the 1H FY3/23F results. However,
because of the lockdown measures in several cities, channel inventory piled up in the
lockdown areas, and this needs to be consumed before implementing more sales price
hikes. According to management, current channel inventory levels in the areas that were
under lockdown in the previous months is about 35 days, versus 25–30 days in the areas
that were not locked down. We expect Want Want’s margin pressure to linger for a while,
as raw material prices are still on an upward trend. We expect the GPM to drop yoy in 1H
FY3/23F but to see some recovery in 2H FY3/23F.
Active overseas market expansion
Sales in overseas markets recovered to mid-single-digit yoy growth in 2H FY3/22. To
strengthen its overseas sales, Want Want is actively setting up offices in major overseas
markets, and its Vietnam factory will start operations this year. Want Want will try to enter
the mass market in South East Asia. The sales contribution from emerging channels
improved to c.10% in FY3/22, but their OPM is 3–5% lower than in traditional channels.
Downgrade to Hold with a new DCF-based TP of HK$7.6
We cut our net profit forecasts for FY3/23F and FY3/24F by 12.1% and 9.4%, respectively,
and adjusted down our DCF-based TP to HK$7.6 (risk-free rate: 4.0%, beta: 0.60, WACC:
8.6%), to reflect the Omicron impact and raw material cost pressure. Downgrade to Hold
as we believe Want Want will still take some time to recover from the margin pressure.
Upside risks include: stronger revenue growth because of successful price hike and lowerthan-expected raw material prices. Downside risks include: further raw material price hikes,
which will hurt margins, and further pandemic rebounds and failure sales price hike, which
will hurt revenue growth.