Equity Research January 15, 2018

Want Want Sales growth continues in 3QFY17

Company Update Maintain BUY

What's new Ticker 00151.HK We learned from ’s post-1HFY17 NDR that the company CICC investment rating BUY maintained growth across major product categories in both October Last close HK$6.55 and November and only Rice Crackers suffered from a sales retreat in CICC target HK$7.34

December due to the Chinese New Year (CNY) effect. We estimate its 52wk price range HK$6.94~4.75 sales growth continued in 3QFY17 (or 4Q17) at ~2% YoY and we Market cap (bn) HK$82 expect faster growth in 4QFY17 (or 1Q18) thanks to a late CNY this Daily value (mn) HK$91.48 February and a low comparison base in 1Q17. Shares outstanding (mn) 12,466 Free float (%) 100 Daily volume (mn sh) 14.41 Comments Business sector Food & Beverages Market cultivation and channel expansion contributed to the top line recovery in FY17. Cultivation throughout the total 7,522 Small 00151.HK HSCEI Standard Markets (SSMs) started in FY17 and up to date almost 1,000 144 SSMs have been addressed by a similar number of wholesalers. 133

Stable margin HoH may help FY17 earnings beat current consensus. 122

The stable GP margin QoQ in 3QFY17 suggests costs have peaked and 111

we expect a slight margin expansion in 4QFY17 as more gift pack (%) Value Relative 100 sales during the CNY season improves the sales mix. As a result, GP 89 margin in 2HFY17 could be flat with 1HFY17, while a likely stronger Jan-2017 Apr-2017 Jul-2017 Oct-2017 Jan-2018 top line increase YoY in 2HFY17 may narrow the earnings drop to ~5% from 9.9% in 1HFY17. (Rmb mn) 2016A 2017E 2018E 2019E

New products and distribution efforts could give more momentum Revenue 19,710 20,362 23,139 25,487 to the recovery in FY18. (+/-) -7.9% 3.3% 13.6% 10.1% Net profit 3,519 3,185 3,568 4,032 Opportunities in overseas markets will be a plus, but are more likely (+/-) 4.0% -9.5% 12.0% 13.0% to come at a later time. EPS 0.28 0.25 0.29 0.32 See our comments in full on page 3. BPS 0.98 1.11 1.27 1.47 DPS 0.12 0.13 0.14 0.16

CPS 0.41 0.34 0.31 0.35 Valuation and recommendation P/E 20.9 22.0 18.5 16.4 We maintain our FY18–19 sales and earnings forecasts for the P/B 6.0 5.0 4.1 3.6 company. We believe a likely rebound extending from the top line in EV/EBITDA 12.5 12.5 10.4 9.1 FY17 to the bottom line in FY18 will help boost its valuation (now at Dividend yield 2.1% 2.3% 2.7% 3.1% merely 18.5x 2018e EPS due to the overly cautious consensus ROAA 13.6% 11.0% 10.9% 12.7% earnings pointing to a YoY decline for FY18). We thus reiterate our BUY rating for Want Want and our end-18 DCF-based TP of HK$7.34. ROAE 28.9% 24.3% 23.9% 23.5%

Risks Recovery weaker than expected and resurgence of cost inflation. Source: Wind, Bloomberg, company data, CICC Research

Paul Feiyang YUAN Analyst [email protected] SAC Reg. No.: S0080511030012 SFC CE Ref: AIZ727

Please read carefully the important disclosures at the end of this report CICC Research: January 15, 2018

Financial summary

Financial statement (Rmb mn) 2016A 2017E 2018E 2019E Financial ratios 2016A 2017E 2018E 2019E Income statement Growth ability Revenue 19,710 20,362 23,139 25,487 Revenue -7.9% 3.3% 13.6% 10.1% COGS -10,286 -11,306 -12,811 -14,184 Operating profit 5.8% -8.7% 11.1% 11.4% Selling expenses -2,740 -2,912 -3,494 -3,848 EBITDA 6.0% -7.5% 9.6% 10.2% Administrative expenses -2,389 -2,267 -2,470 -2,533 Net profit 4.0% -9.5% 12.0% 13.0% Other ops income (expense) 430 430 430 430 Profitability Operating profit 4,811 4,393 4,880 5,437 Gross margin 47.8% 44.5% 44.6% 44.3% Finance costs 91 97 149 245 Operating margin 24.4% 21.6% 21.1% 21.3% Other income (expense) 0 0 0 0 EBITDA margin 29.1% 26.0% 25.1% 25.1% Profit before income tax 4,896 4,483 5,023 5,676 Net margin 17.9% 15.6% 15.4% 15.8% Income tax -1,378 -1,300 -1,457 -1,646 Liquidity Minority interest 2 2 2 2 Current ratio 1.93 1.59 1.66 2.26 Net profit 3,519 3,185 3,568 4,032 Quick ratio 1.65 1.38 1.42 1.80 EBITDA 5,727 5,299 5,809 6,399 Cash ratio 1.32 1.15 1.21 1.46 Recurrent net income 3,519 3,185 3,568 4,032 Liabilities / assets 54.7% 54.4% 54.2% 34.9% Balance sheet Net debt / equity net cash net cash net cash net cash Cash and bank balances 11,557 15,036 18,447 12,378 Return Trade and bill receivables 1,271 1,313 1,492 1,019 RoA 13.6% 11.0% 10.9% 12.7% Inventories 2,453 2,696 3,715 3,971 RoE 28.9% 24.3% 23.9% 23.5% Other current assets 1,620 1,643 1,738 1,819 Per-share data Total current assets 16,901 20,688 25,392 19,188 EPS (Rmb) 0.28 0.25 0.29 0.32 Fixed assets and CIP 9,940 9,537 9,112 8,854 BPS (Rmb) 0.98 1.11 1.27 1.47 Intangible assets and others 368 364 360 356 DPS (Rmb) 0.12 0.13 0.14 0.16 Total non-current assets 10,308 9,902 9,472 9,211 Cash flow per share (Rmb) 0.41 0.34 0.31 0.35 Total assets 27,209 30,589 34,865 28,399 Valuation Short-term borrowings 4,013 7,852 9,436 3,395 P/E 20.9 22.0 18.5 16.4 Trade and bill payables 1,345 1,479 1,676 1,277 P/B 6.0 5.0 4.1 3.6 Other current liabilities 3,413 3,713 4,154 3,800 EV/EBITDA 12.5 12.5 10.4 9.1 Total current liabilities 8,772 13,044 15,266 8,472 Dividend yield 2.1% 2.3% 2.7% 3.1% Long-term borrowings 5,890 3,365 3,402 1,224 Total non-current liabilities 6,116 3,591 3,628 1,450 Total liabilities 14,888 16,634 18,893 9,922 Share capital 12,271 13,907 15,925 18,433 Retained profit 0 0 0 0 Equity 12,271 13,907 15,925 18,433 Total liabilities & equity 27,209 30,589 34,865 28,399 Cash flow statement Pretax profit 4,896 4,483 5,023 5,676 Depreciation & amortization 916 906 930 962 Change in working capital 633 125 -656 -618 Others -1,337 -1,294 -1,451 -1,640 Cash flow from operations 5,108 4,221 3,846 4,380 Capital expenditure -444 -503 -503 -703 Others -850 -3 -3 -3 Cash flow from investing -1,295 -506 -506 -706 Equity financing 0 0 0 0 Bank borrowings 1,326 1,313 1,621 -8,218 Others -2,969 -1,549 -1,550 -1,524 Cash flow from financing -1,643 -236 71 -9,743 Foreign exchange gain (loss) 15 0 0 0 Net changes in cash 2,185 3,479 3,411 -6,069 Source: Company data, CICC Research

Company description

Want Want China Holdings Limited is one of China's leading food and beverage manufacturers, and is also the country’s largest maker of rice crackers. Several of the company’s products are market leaders in China, the most famous of which is Wangzai milk. The Company has a diversified product portfolio, its main products are rice crackers, dairy products & beverages, snack foods and other products.

Please read carefully the important disclosures at the end of this report 2 CICC Research: January 15, 2018

Comments in full

Market cultivation and channel expansion contributed to the top line recovery in FY17.

Cultivation throughout the total 7,522 Small Standard Markets (SSMs) started in FY17 and up to date almost 1,000 SSMs have been addressed by a similar number of wholesalers. We believe that market cultivation contributed to the mid-single-digit top line growth in 1HFY17 especially on general trade as the total POS number was reported to increase 2% in 1HFY17 and could further expand in 2HFY17.

Expansion to modern trade and special channels including MBS and e-commerce was a new initiative in FY17. Thanks to a successful development of tailored products to the new channels, sales growth was reported at ~20% for modern trade in 1HFY17 and remained fast even in 3QFY17 when overall sales growth slowed to ~2% from ~6% in 1HFY17. Sales through MBS and e-commerce even doubled YoY in 1HFY17 probably due to a low base (only 2–3% of total sales) and this momentum continued in 3QFY17.

Stable margin HoH may help FY17 earnings beat current consensus.

The stable GP margin QoQ in 3QFY17 suggests costs have peaked and we expect a slight margin expansion in 4QFY17 as more gift pack sales during the CNY season improves the sales mix. As a result, GP margin in 2HFY17 could be flat with 1HFY17, while a likely stronger top line increase YoY in 2HFY17 may narrow the earnings drop to ~5% from 9.9% in 1HFY17. The full-year net profit may thus come in above Rmb3.1bn, in line with our forecast of Rmb3.18bn but better than the current market consensus of Rmb3.08bn.

New products and distribution efforts could give more momentum to the recovery in FY18.

We believe SSM cultivation will continue in this year and lay a solid base for existing products to extend top line growth by another year. Channel expansion may account for 4–5ppt out of the total 10–15% top line growth expected for this year, with the remaining 5–10% sales accretion coming from the new product launches scheduled for FY18.

A limited number of new products launched in each of the past few years merely contributed ~2% of the company’s annual sales. However, new product launches will be escalated this year with a pipeline SKU number of more than 20 and may start from this March. In addition to new product development, Want Want will also seek to improve the performance of the products that sold poorly in the past year.

We learned the top line recovery in FY17 was mainly driven by the distribution efforts including market cultivation and channel expansion, but was little helped by the new products. We expect both the top and the bottom line to improve in FY18, considering that efforts on the distribution side will continue, the number of new products in the pipeline has more than tripled that in any previous year, and the margin pressure can be largely removed in the coming year.

Opportunities in overseas markets will be a plus, but are more likely to come at a later time.

We learned that overseas markets now contribute 4% of the company’s sales and the company intends to develop the ASEAN market with a local production model. Both Indonesia and Thailand have been identified as the destinations to build two plants, but we expect the contracting and construction work to take 2–3 years before they commence production.

The top management has mentioned overseas acquisitions many times as an option to achieve product category expansion, which is a KPI for snack food makers. We expect the company may also consider acquiring plants in the ASEAN market to serve as its local production bases.

Please read carefully the important disclosures at the end of this report 3 CICC Research: January 15, 2018

Figure 1: YTD performance of Hot Kid Milk in modern trade channels

200 (Rmb mn) 2016 2017 YoY growth (RHS) 80% 180 60% 160 140 40% 120 20% 100 0% 80

60 -20% 40 -40% 20 0 -60% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: MoC, CICC Research

Figure 2: Price of Fonterra WMP Figure 3: China’s sugar prices

2013 2014 2015 2016 2017 YTD Rmb/tonne 2013 2014 2015 2016 2017 YTD US$/tonne 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 5,500 7,500 5,000 4,500 6,500 4,000 1Q17: 6,776 2Q17: 6,755 3Q17: 6,556 4Q17: 6,429 1Q17: 3,171 2Q17: 3,173 3Q17: 3,693 4Q17: 3,219 3,500 5,500 1Q16: 5,346 2Q16: 5,528 3Q16: 5,943 4Q16: 6,703 3,000 1Q16: 2,148 2Q16: 2,163 3Q16: 2,643 4Q16: 3,158 1Q15: 4,792 2Q15: 5,354 3Q15: 5,124 4Q15: 5,318 1Q15: 2,906 2Q15: 2,754 3Q15: 2,210 4Q15: 2,391 2,500 4,500 1Q14: 5,114 2Q14: 4,696 3Q14: 3,775 4Q14: 2,900 1Q14: 4,653 2Q14: 4,675 3Q14: 4,369 4Q14: 4,346 2,000 1Q13: 4,064 2Q13: 4,750 3Q13: 4,895 4Q13: 5,038 1Q13: 5,538 2Q13: 5,461 3Q13: 5,380 4Q13: 5,325 1,500 3,500 3/Jan 3/Apr 3/Jul 3/Oct 5-Jan 5-Apr 5-Jul 5-Oct

Source: Fonterra, CICC Research Source: Bloomberg, CICC Research

Figure 4: Price of palm oil Figure 5: Price of PET resin

US$/tonne 2013 2014 2015 2016 2017 YTD Rmb/tonne 2013 2014 2015 2016 2017 YTD 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1,000 12,000 11,000 900 10,000 800 9,000

700 8,000 1Q17: 7,924 2Q17: 7,065 3Q17: 7,883 4Q17: 8,046 1Q17: 831 2Q17: 728 3Q17: 714 4Q17: 691 7,000 1Q16: 6,198 2Q16: 6,622 3Q16: 6,511 4Q16: 7,173 600 1Q16: 640 2Q16: 694 3Q16: 698 4Q16: 791 1Q15: 601 2Q15: 580 3Q15: 547 4Q15: 577 6,000 1Q15: 6,688 2Q15: 7,582 3Q15: 6,744 4Q15: 6,242 500 1Q14: 8,863 2Q14: 8,796 3Q14: 9,265 4Q14: 7,813 1Q14: 766 2Q14: 737 3Q14: 634 4Q14: 626 5,000 1Q13: 710 2Q13: 710 3Q13: 712 4Q13: 768 1Q13: 10,990 2Q13: 9,940 3Q13: 9,979 4Q13: 9,521 400 4,000 6/Jan 6/Apr 6/Jul 6/Oct 4-Jan 4-Apr 4-Jul 4-Oct

Source: Bloomberg, CICC Research Source: Bloomberg, CICC Research

Please read carefully the important disclosures at the end of this report 4 CICC Research: January 15, 2018

Figure 6: Valuations of comparable companies Stock Target Market cap P/E (x) P/B (x) ROE (%) Dividend Yield (%) EV/EBITDA Company Ticker Rating 2018/1/15 price HKD mn 2016A 2017E 2018E 2016A 2017E 2018E 2016A 2017E 2018E 2016A 2017E 2018E 2016A 2017E 2018E Food & Beverage China Foods 0506.HK 4.74 5.56 13,259 BUY 26.5 38.2 29.3 2.4 2.3 2.1 9.2 6.0 7.3 0.5 0.0 1.0 14.2 10.6 8.8 WH Group 0288.HK 8.95 10.51 131,245 BUY 16.2 15.5 13.1 2.7 2.4 2.2 16.4 15.8 16.8 3.0 3.1 3.7 8.5 8.2 7.4 Tingyi 0322.HK 15.34 15.92 86,107 BUY 59.3 39.8 29.9 3.8 3.6 3.3 6.4 9.0 11.2 0.8 1.3 1.7 11.8 11.1 9.4 Dali 3799.HK 6.87 8.06 94,079 BUY 24.1 21.8 19.1 5.5 5.0 4.4 22.6 22.9 23.3 2.9 2.7 3.1 14.5 12.8 11.0 H&H International 1112.HK 47.00 33.70 29,941 HOLD 25.1 27.6 22.5 7.5 5.9 4.7 29.9 21.4 20.7 0.0 0.0 0.0 13.8 13.9 12.1 Yashili 1230.HK 1.47 1.47 6,976 HOLD n.m n.m 89.5 1.0 1.0 1.0 -5.6 -3.2 1.1 0.0 0.0 0.3 n.m n.m 18.9 Mengniu 2319.HK 24.40 20.24 95,828 BUY n.m 32.4 22.7 3.7 3.4 3.0 -3.6 10.4 13.2 0.5 0.7 1.0 70.5 16.6 14.5 Modern Dairy* 1117.HK 1.46 2.57 8,952 BUY 17.5 n.m 8.4 1.0 1.1 1.1 5.9 2.4 13.5 0.0 0.0 0.0 14.6 13.4 7.8 China Shengmu 1432.HK 1.31 1.39 8,324 HOLD 9.8 24.2 17.7 1.3 1.2 1.1 12.7 4.9 6.3 0.0 0.0 0.0 6.8 10.1 8.4 Want Want 0151.HK 6.55 7.34 81,650 BUY 20.9 22.0 18.5 6.0 5.0 4.1 28.9 24.3 23.9 2.1 2.3 2.7 12.5 12.5 10.4 UPC 0220.HK 6.65 5.94 28,724 HOLD 38.1 29.3 28.5 1.9 1.8 1.7 5.0 6.2 6.1 0.5 0.7 0.7 9.9 9.3 8.6 Yihai 1579.HK 8.86 10.58 9,276 BUY 44.5 29.5 20.3 6.6 4.9 3.6 26.5 18.8 20.1 0.4 0.7 1.0 30.9 16.6 10.6 ZHOUHEIYA 1458.HK 8.10 9.72 19,303 BUY 21.7 20.5 18.3 3.6 3.8 3.3 16.4 18.3 17.8 1.9 1.7 2.0 12.9 11.8 10.3 Average 27.6 27.3 26.0 3.6 3.2 2.8 13.1 12.1 14.0 1.0 1.0 1.3 18.4 12.2 10.6

Source: Bloomberg, company data, CICC Research

Figure 7: DCF model (Rmb mn) 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E EBIT 4,880 5,437 5,856 6,180 6,489 6,748 6,951 7,090 7,146 7,146 7,146 YoY Chg (%) 11.1% 11.4% 7.7% 5.5% 5.0% 4.0% 3.0% 2.0% 0.8% 0.0% 0.0% Operating FCF 3,189 3,427 4,245 5,793 6,082 6,326 6,515 6,646 6,699 6,699 6,699 YoY Chg (%) -11.8% 7.5% 23.9% 36.5% 5.0% 4.0% 3.0% 2.0% 0.8% 0.0% 0.0%

Terminal growth rate 0.0% NPV of free cash flow 40,259 WACC 8.6% PV of terminal value 33,922 Cost of debt after tax 4.5% Enterprise Value 74,181 Cost of equity 8.6% Net Cash (Debt) 5,609 Risk-free rate 2.8% Equity Value 79,790 Risk-premium rate 5.5% Beta 1.1 Value per share (HK$) 7.34 Target leverage 0.0% Source: Company, CICC Research

Figure 8: Forward P/E Figure 9: Forward P/B

35 X Want Want-Forward P/E Ratio 10 X Want Want-Forward P/B Ratio 9 +1 SD 30 +1 SD 8 7 25 6 Average -1 SD Average=20.1 5 20 4 3 15 2 -1 SD 1 10 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Bloomberg, company data, CICC Research Source: Bloomberg, company data, CICC Research

Please read carefully the important disclosures at the end of this report 5 CICC Research

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Xiamen Lianyue Road Branch Wuhan Zhongnan Road Branch Qingdao Middle Hongkong Road Branch 4th Floor, Office Building, Paragon Center 4301-B, Poly Plaza 11th Floor, Shangri-La Center 1 Lianyue Road, Siming District 99 Zhongnan Road, Wuchang District Block 9, Hongkong Road (M), South District Xiamen 361012, P.R. China Wuhan 430070, P.R. China Qingdao 266071, P.R. China Tel: (86-592) 515-7000 Tel: (86-27) 8334-3099 Tel: (86-532) 6670-6789 Fax: (86-592) 511-5527 Fax: (86-27) 8359-0535 Fax: (86-532) 6887-7018

Chongqing Honghu Road (West) Branch Tianjin Nanjing Road Branch Dalian Gangxing Road Branch 1st & 10th Floors, Ourui Lanjue Center 10th Floor, Tianjin Global Trading Center 16th Floor, Wanda Center Block 9, Honghu Road (W), New North District 219 Nanjing Road, Heping District 6 Gangxing Road, Zhongshan District Chongqing 401120, P.R. China Tianjin 300051, P.R. China Dalian 116001, P.R. China Tel: (86-23) 6307-7088 Tel: (86-22) 2317-6188 Tel: (86-411) 8237-2388 Fax: (86-23) 6739-6636 Fax: (86-22) 2321-5079 Fax: (86-411) 8814-2933

Foshan Jihua 5th Road Branch Yunfu Xinxing Dongdi North Road Branch Changsha Chezhan Road (North) Branch 12th Floor, Trend International Business Building 2nd Floor, Service Building C1, Wens Science & 3rd Floor, Annex Building, Securities Tower 2 Jihua 5th Road, Chancheng District Technology Garden, Dongdi North Road 459 Chezhan Road (North), Furong District Foshan 528000, P.R. China Xincheng Town, Xinxing County Changsha 410001, P.R. China Tel: (86-757) 8290-3588 Yunfu 527499, P.R. China Tel: (86-731) 8878-7088 Fax: (86-757) 8303-6299 Tel: (86-766) 2985-088 Fax: (86-731) 8446-2455 Fax: (86-766) 2985-018

Ningbo Yangfan Road Branch Fuzhou Wusi Road Branch Xi’an Yanta Branch 11th Floor, Building Five, 999 Yangfan Road 38th Floor, Henglicheng Office Building 21th Floor, Capitaland West Tower, Hi-tech Industrial Development Zone No.128 Wusi Road, Gulou District No.64 Second Ring South Road West Section, Ningbo 315103, P.R. China Fuzhou 350001, P.R. China Yanta District, Xi'an 710065, P.R. China Tel: (86-574) 8907-7288 Tel: (86-591) 8625 3088 Tel: (+86-29) 8648-6888 Fax: (86-574) 8907-7328 Fax: (86-591) 8625 3050 Fax: (+86-29) 8648-6868