Plant Based Nutrition Shift Will Drive Strong Channel Expansion And Earnings Upside

Catalysts

About Vitasoy International Holdings

Vitasoy International Holdings is a branded food and beverage company focused on plant based drinks, teas and tofu across Greater China and key Asia Pacific markets.

What are the underlying business or industry changes driving this perspective?

• The company is accelerating its pivot to faster growing channels in the Chinese Mainland, including online commerce, club stores, snack and on premise chains, which is intended to unlock higher volume growth and improved operating leverage in the group’s largest profit pool, supporting topline recovery and earnings expansion.
• A global and regional consumer shift toward plant based nutrition, combined with Vitasoy’s established brand positions in soy, almond and other plant milks, may help the company participate in category premiumisation and regain share, which could support revenue growth and gross margins over time.
• Ongoing cost optimisation, manufacturing efficiency initiatives and disciplined corporate expense control are helping to cushion weaker markets and are aimed at further supporting group operating margin and net margins as volumes stabilise.
• The scaling of higher growth markets such as Australia, New Zealand, Singapore and the Philippines, where plant based beverages and tofu are gaining penetration, is expected to diversify earnings and gradually increase group revenue and return on capital employed.
• The company’s balance sheet, characterised by low gearing, cash on hand and continued investment in capacity and route to market, provides financial flexibility to support innovation, channel expansion and selective market development, with the aim of sustaining revenue and earnings growth.

Assumptions

This narrative explores a more optimistic perspective on Vitasoy International Holdings compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Vitasoy International Holdings's revenue will grow by 2.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.9% today to 4.1% in 3 years time.
• The bullish analysts expect earnings to reach HK$264.7 million (and earnings per share of HK$0.25) by about December 2028, up from HK$235.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 54.8x on those 2028 earnings, up from 28.8x today. This future PE is greater than the current PE for the HK Food industry at 13.0x.
• The bullish analysts expect the number of shares outstanding to decline by 1.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.9%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Structural slowdown in the Chinese Mainland plant milk and tea categories, with plant milk already declining by 10% and tea growth decelerating sharply, could lead to a prolonged volume and pricing headwind in the group’s largest market, pressuring revenue growth and limiting operating leverage.
• Intensifying competition and weaker demand in key channels in China, including higher trade spend and more aggressive pricing from rivals in both traditional general trade and newer online and snack channels, may erode brand pricing power and compress gross profit margin and operating margin.
• Execution risk in shifting from slowing general trade to fast developing channels such as online commerce, social and instant commerce, club stores and snack chains, means that if capability building is slower than market evolution, Vitasoy could lose share in both old and new channels, negatively impacting revenue and earnings growth.
• Persistent underperformance or only gradual improvement in smaller but loss making or challenged units such as Australia, Singapore, Macau, Vitaland and North American exports, despite ongoing cost reduction, could dilute group profitability and delay any meaningful expansion in group operating margin and return on capital employed.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Vitasoy International Holdings is HK$11.66, which represents up to two standard deviations above the consensus price target of HK$8.31. This valuation is based on what can be assumed as the expectations of Vitasoy International Holdings's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$11.66, and the most bearish reporting a price target of just HK$7.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be HK$6.5 billion, earnings will come to HK$264.7 million, and it would be trading on a PE ratio of 54.8x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of HK$6.52, the analyst price target of HK$11.66 is 44.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.