We lowered FY20/21/22E net profit estimates by 9%/4%/4% to reflect impact of COVID-19 outbreak. Share price has dropped 15% at most since person-to-person spread of COVID-19 was confirmed on 20 Jan. We think the impact of virus outbreak could be priced in. Maintain BUY.
- Operations affected by COVID-19 outbreak. Most factories and operations have gradually resumed operation since 10 Feb 2020, excluding those in Hubei. Due to the suspension or limited transportation in certain areas, sales is affected in a short period. That said, logistics in Hubei has begun to recover slightly since late Feb. On the other hand, the Company has been donating food and beverage products and necessary supplies to fulfill its social responsibility (>RMB10mn expenses).
- Expenses for destocking gift pack channel inventory. At company’s level, the sales of gift packs was completed before CNY holiday. However, the COVID-19 outbreak deterred people from gathering during CNY holiday, which affected retail sales of gift packs. The Company has been working with distributors and channels to promote sales of gift packs. Therefore, we expect certain expenses would be incurred in FY20E.
- Earnings revision. As business operations and production activities are gradually recovering and it needs time to destock channel inventory, we assume sales would resume to mid-single-digit growth beginning 1 Jun. We lowered FY20/21/22E revenue estimates by 4%/2%/2% and net profit estimates by 9%/4%/4% to reflect sales impact and expenses for donation and channel inventory destocking.
- Channel diversification and new products to drive growth. Sales mix from emerging channels increased from 5% in 1HFY19 to mid-to-high single-digit in 1HFY20, driven by rapid growth in e-commerce, maternity stores, themed stores and vending machines channels. Overseas market is another growth driver. The Company has established sales branch in Vietnam and is working in other Southeast Asian markets (Thailand and Indonesia). The factory in Vietnam is expected to commence operation in early 2021. New products sales mix accounted for around 9% of revenue in 1HFY20. For new products, the Company has launched “Fix Body” and “Shi Ji Yan” to target consumers looking for low-sugar, low-calorie snacks and young consumers looking for new tastes, respectively, in 2HFY20E. New products generally have higher GPM than old products.
- Lower TP to HK$7.60. We revised our TP from HK$7.70 to HK$7.60, based on 21.7x FY21E P/E (still at historical average) as we roll forward our valuation basis. Want Want is trading at 4.2% yield in FY20E (vs peers’ average of 2.2%). We think this should provide downside cushion. Catalysts: (1) share purchase by company or major shareholders; (2) better-than-expected margins. Risks: (1) keen competition; (2) food safety issues; (3) unfavorable raw materials prices.
