Investment Summary

Vitasoy International (00345.HK) reported revenue of HKD 3.443 billion for 1H2025FY, representing a year-on-year (YoY) growth of 2%. While overall topline growth remained modest, gross margin expanded significantly to 51.6% (1H2024FY: 50.5%), reflecting the positive impact of lower raw material costs and production process optimization. Operating profit surged by 50% to HKD 257 million, primarily driven by strong performances in Mainland China and Hong Kong. In Mainland China, the company leveraged an optimized online and offline sales mix and improved production efficiency, leading to a 15% increase in operating profit, with an operating margin of 11%. The Hong Kong segment also delivered robust results, with operating profit rising by 44%, supported by revenue growth and lower raw material costs. Meanwhile, the Australia and New Zealand markets resumed revenue growth as production issues were resolved, while the Singapore market saw increased revenue from its tofu business, leading to a significant narrowing of operating losses. Earnings per share (EPS) stood at HKD 0.159, reflecting a YoY increase of 4.6%. The company declared an interim dividend of HKD 0.04 per share, marking an impressive 186% YoY increase. This underscores management's confidence in the company's stable cash flow outlook and its commitment to maintaining a consistent shareholder return policy.

Revenue Growth and Margin Expansion Enhance Profitability

For the six months ended September 30, 2024, Vitasoy recorded revenue of HKD 3.443 billion, up 2% YoY. The Mainland China segment remained broadly flat at HKD 1.958 billion, reflecting intensified market competition. Notably, the decline in online sales exerted pressure on overall growth, attributed to increased competition on e-commerce platforms and evolving consumer purchasing behavior. However, through product portfolio optimization and enhanced production efficiency, the Mainland China segment achieved an operating profit of HKD 218 million, up 15% YoY, with an operating margin improvement to 11%.

The Hong Kong market remained resilient, with revenue increasing by 3% YoY to HKD 1.156 billion, driven by strong brand equity, broad market influence, and product innovation. Demand for new offerings, such as Vitasoy Banana Soy Milk, Vitasoy Strawberry Soy Milk, Vita 0 Sugar Lemon Tea, and Vita 0 Sugar Sparkling Lemon Tea, was robust, boosting sales volume. Operating profit in Hong Kong surged by 44% YoY to HKD 159 million, with an operating margin improvement to 14%. This strong performance was underpinned by core product sales growth and the tailwind from lower raw material costs. Additionally, increased demand from export markets provided incremental revenue support.

The Australia and New Zealand segment resumed revenue growth, rising 7% YoY to HKD 273 million. However, the business still recorded an operating loss of HKD 45.51 million, with the loss widening compared to the prior period. This was primarily due to operational disruptions in the first half, though management has successfully resolved the issues and restored production capacity. A return to profitability is anticipated in the second half.

The Singapore segment recorded revenue growth of 6% YoY to HKD 55.85 million, primarily driven by strong tofu export demand. Despite ongoing challenges in the beverage business, operating losses narrowed significantly to HKD 2.10 million, reflecting increased tofu revenue and improved cost control measures. Nevertheless, further strengthening of distribution channels will be required to restore overall profitability in this segment.

Benefiting from lower raw material costs and production process optimization, the group's gross margin expanded to 51.6%, marking a 1.1 percentage point improvement YoY. This highlights Vitasoy's strong cost management capabilities.

Solid Financial Position with Strong Cash Flow Generation

Vitasoy's cash flow position improved significantly during the period. As of September 30, 2024, cash and bank balances (net of bank borrowings) increased to HKD 935 million, a substantial 74% surge from HKD 538 million as of March 31, 2024. This improvement was primarily driven by enhanced operating cash flow and disciplined capital expenditure management.

While bank borrowings increased from HKD 256 million to HKD 405 million, the stronger cash position allowed the company to maintain a solid financial profile, with net cash holdings improving meaningfully. This demonstrates a reduced financial risk profile and enhanced liquidity resilience.

Investment Thesis and Valuation

A key challenge for Vitasoy in the second half of the fiscal year remains the intensifying competitive landscape in Mainland China. While the company has enhanced profitability through product mix optimization and production efficiency, the decline in online sales necessitates further strategic adjustments. Strengthening brand influence and refining e-commerce strategies will be crucial to sustaining long-term growth momentum. The Hong Kong market continues to perform steadily, but given a challenging retail environment, further strengthening of market positioning and exploring additional growth avenues will be necessary. The Australia and New Zealand segment is expected to return to profitability following the resolution of production issues, while the Singapore segment's performance hinges on the successful restructuring of its beverage distribution network.

Vitasoy delivered resilient earnings growth and strong cash flow improvements in 1H2025FY, while significantly increasing dividend payouts, reflecting management's confidence in the business outlook. Despite competitive pressures in China, the company has effectively managed product portfolio optimization and cost control, leading to a notable operating margin expansion. Based on Vitasoy's robust financial position, consistent earnings growth, and stable dividend policy, and we expect the company's earnings per share (EPS) for FY2025 and FY2026 to be HKD 0.221 and HKD 0.287, respectively. Our target price is set at HK$ 11.66, corresponding to a 40.7x forward P/E ratio for FY2026, which is in line with the company's five-year historical average valuation. Our investment rating is ¡§Buy¡¨.

Risk factors

1) Intensified Competition in Mainland China; 2) Cost Pressures and Gross Margin Risks; and 3) Uncertainty in Overseas Market Expansion.

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