FY20 NP rose 5% YoY to RMB3,649mn, in line with consensus and our estimate. Payout ratio rose 82% to 99% on strong operating cash flow. Sales trend recovered to normal with double-digit revenue growth in Apr and May. Share price fell 17% YTD (vs peers’ +7%). While sales recovered to positive growth, the stock is still trading at 16.4x FY21E P/E (at low-end of 16-24x P/E range beginning from FY14). We think such underperformance is unjustified. Maintain BUY.
- Results in line. Revenue fell 3% YoY to RMB20,095mn, 4%/2% below consensus/our estimate. Before COVID-19, the whole business recorded high single-digit growth YoY for the period of 90 days leading to CNY holidays. GPM expanded 2.7ppt to 48.0%, in line with consensus but 0.6ppt above our estimate, which was driven by product mix optimization (new products and emerging channels) and VAT reduction. Selling expenses ratio fell 0.5ppt to 13.9% led by 0.2ppt/0.3ppt decline of A&P/staff expenses ratio. OP rose 5% with OPM rose 1.8ppt to 23.9%.
- Generous dividend payout. Including special dividend, total dividend per share rose 22% to US$0.042. Payout ratio increased from 82% to 99%, backed by 11% growth of operating cash flow and 10% growth net cash. Management reiterates to return excess cash inflow to shareholders by dividend and share buyback. Since listing, around 83-85% FCF has been returned to shareholders.
- Sales recovered in Apr and May. Revenue fell 20%+ YoY in Feb and Mar. During epidemic, the Company introduced incentive policies and cooperated with banks to launch financial relief to distributors to help resume normal operations. Led by channel products replenishment and increased distributor confidence, the Company achieved double-digit sales growth in Apr and May. Channel inventory level is very healthy currently according to management.
- New products and channel diversification to drive growth. (1) Emerging channels: Sales from emerging channels increased by mid-teens in FY20, with channels’ contribution reaching mid single-digit of total revenue. (2) New products: The Company will continue to launch new and healthy products to meet consumers’ demand. For examples, the Company launched “Baby Mum-Mum”, “Fix Body”, ”Prime of Love” and “Shi Ji Yan” to target consumers (from babies to young people to elderly) looking for low-sugar, low-calorie, no additives and new tastes snacks. New products and emerging channels generally possess higher GPM, which supported 1.2ppt GPM YoY expansion in 2HFY20.
- Maintain Buy, raised TP to HK$7.80. We raised FY21/22E NP estimates by 5% driven by revising up GPM estimates by 1.4/1.8ppt. Our TP was upped from HK$7.60 to HK$7.80, based on 21.2x FY21E P/E (vs 21.7x previously, still at historical average beginning FY14). Catalysts: (1) better-than-expected revenue/margins; (2) share purchase by company or major shareholders. Risks: (1) keen competition; (2) food safety issues; (3) unfavorable raw materials prices.
