Want Want China: Lower Input Cost a Tailwind to Fiscal-Year 2023 Margins; Shares Undervalued

Narrow-moat Want Want China 00151 reported fiscal 2022 (ending March 31, 2023) results that slightly missed our estimates on the top line but met our expectations on operating profit. The dairy segment dragged revenue, but moderating input costs pressure lifted fiscal second-half gross margin. We left our fiscal 2023 (ending March 31, 2024) revenue and operating profit estimates largely unchanged despite the revenue miss. In our view, Want Want should face a favorable input cost environment as palm oil and milk powder prices moderate. The firm also delivered steady progress in transitioning to emerging channels and new products. We retain our HKD 6.0 per share fair value estimate, which implies 16 times 2023 P/E and is broadly in line with its three-year average. We think Want Want is poised to see margin expansion in the upcoming fiscal year, and shares are undervalued.

Revenue fell 4% year on year to CNY 22.9 billion, slightly below our estimates, due to sluggish dairy sales, which more than offset growth in the snack food and rice crackers segments. We anticipated soft dairy revenue due to a high base in fiscal second-half 2021 (ending March 31, 2022), but the decline was sharper than expected. Rice crackers and snacks growth were driven by rebounding gifting demand during Chinese New Year and strength in popsicles. Gross margin increased sequentially in fiscal second-half thanks to price hikes and an improved input cost environment.

In fiscal 2023, we think gross margin across all segments will expand with declining palm oil and milk powder prices. Our analysis shows the historical year-on-year trend of milk powder price had an inverse relationship with gross margin of the dairy segment, where the latter had a six-month lag. As a result, we project continued gross margin improvement for the dairy segment in fiscal 2023. We also project 5% sales growth for the three reporting segments. Operating profit is set to increase 15% year on year thanks to operating leverage.