Singapore tycoon buys the dip in Vitasoy

Vitasoy International was once a super bull stock in the Hong Kong market, rising steadily from 2001 to 2019, with its stock price only moving north.

In July 2021, following the police assault incident in Hong Kong, Vitasoy's inappropriate statement caused the company's situation to take a sharp turn for the worse.

Three years have passed, and recently Vitasoy's stock price rebounded along with the Hong Kong stock market. However, it did not follow the market's adjustment and instead continued to surge, seemingly different from its performance over the past three years, nearly doubling from its low point.

Is Vitasoy preparing for a turnaround?

1. The King of Soy Milk

The Vitasoy soy milk brand was established in Hong Kong in 1940, boasting a long history.

In 1975, it began selling soy milk in Tetra Pak packaging, and in 1976, the Vitasoy juice series was launched. In 1979, the company pioneered lemon tea in Hong Kong.

Gradually, the company's products were divided into two major brands: the soy milk products launched under the "Vitasoy" brand and the tea drinks, juices, and bottled water products launched under the "Vita" brand.

In 1994, Vitasoy was listed in Hong Kong and, in the same year, extended its reach to the mainland market by establishing a factory in Shenzhen, maintaining steady growth.

In 2008, the milk industry was hit hard by the melamine scandal, providing an unprecedented growth opportunity for the domestic soy milk market. Vitasoy capitalized on its keen insight into the domestic market and past investments, with performance continuously climbing since 2008, becoming an indispensable beverage choice for many in Guangdong. From 2008 to 2019, Vitasoy's sales in mainland China had a compound annual growth rate of 26%, far exceeding the growth rates in other markets.

Vitasoy has several markets: mainland China, Hong Kong and Macau, Australia and New Zealand, and Singapore. The Hong Kong market is relatively mature, with revenue maintaining single-digit moderate growth over the past decade, while the markets in Australia, New Zealand, and Singapore have been lukewarm. The only market with growth potential is mainland China.

By 2016, Vitasoy's sales in mainland China had begun to surpass those in Hong Kong, making mainland China Vitasoy's largest market, a status that remains to this day. With a market share of 41%, it became the undisputed "King of Soy Milk" in mainland China at that time.

The mainland market has vast potential, and benefiting from continuous expansion in this market, the company's revenue growth has been very stable, with market expectations for Vitasoy's growth remaining high. It can be seen that in 2017, Vitasoy's valuation was about 23 times PE, reaching 61 times PE by 2019.

From the perspective at that time, Vitasoy's brand influence was very strong, especially in the Hong Kong market, where product penetration was extremely high. The company's market share in the Hong Kong soft drink industry reached 14.2%, far ahead of other brands. Vitasoy has a long brand history, high recognition, and a deep moat. The gross profit margin of the company's main products can remain at around 50%, which is a high level in the industry for a long time. In mainland China, the performance has been good, and growth is sustainable. With the expansion of production capacity and the opening up of channels, there is a very large outlook for the future. Moreover, Vitasoy's lemon tea product is unique, with virtually no competitors in the market, and is expected to become a unique super product.

This logic was completely unfalsifiable at the time, and as the revenue proportion from the mainland exceeded 50%, the overall performance growth of the company could further improve. For long-term value investors, buying into such a solid and still-growing consumer beverage brand at a discounted cash flow valuation is a win.

II. Winds of Change

However, unexpectedly, 2019 marked the peak for Vitasoy, with annual revenue reaching a peak of HKD 7.538 billion.

In 2020, the pandemic hit, and in 2021, the brand faced a major crisis.

The police assault incident in Hong Kong in 2021 and Vitasoy's inappropriate statement led to a sharp decline in its image in the mainland market.

Consumer boycotts, removal from shelves by retailers, and termination of contracts with endorsers created a series of chain reactions that plunged Vitasoy into a whirlpool of public opinion, with brand crises looming, putting Vitasoy in its biggest predicament ever.

Since then, Vitasoy's stock price and performance have been on a downward trend.

In the following year, the fiscal year 2022 saw Vitasoy's revenue in the mainland market plummet by 23% to HKD 3.838 billion, resulting in a massive loss of HKD 340 million. For this fiscal year, the profit attributable to equity holders of the company recorded a loss of HKD 159 million, marking Vitasoy's first loss in its 26 years of listing.

By the fiscal year 2024, Vitasoy's revenue continued to decline, and the two previous heads of the company had no choice but to resign.

The brand crisis led to the collapse of the originally high expectations, and the previous high valuation became a nightmare for the stock price.

However, two points from the latest financial report indicate that despite the decline in revenue, the company's net profit achieved a year-on-year increase. In the fiscal year 2024, the company's net profit increased by 154.5% year-on-year, reaching HKD 116 million. This was mainly due to the control of operating costs and a reduction in selling expenses.

At the same time, the company's receivables and inventory have continued to decline compared to the previous two years.

It can be said that from an asset perspective, Vitasoy has recovered some health compared to before. However, from an operational perspective, as its semi-annual report for the fiscal year has not yet been released, based on previous financial report data, it is still in an adjustment period. ** Especially in the mainland market, whether to rely on time to restart the brand image or actively repair it, and how to repair it, is a major challenge. However, the good news is that the adjustment has been gradually slowing down, providing an opportunity to gradually hit the bottom.

As the brand power of Vitasoy has been damaged, along with the continuous rise of other consumer brands and products, Vitasoy's moat seems not as deep as it used to be.

The new generation of consumers is eager to try new things but has low brand loyalty. The lifecycle of fast-moving consumer goods (FMCG) is continuously shortening. In recent years, the proportion of new products with a lifespan of less than three years in the FMCG industry has increased from 66% ten years ago to nearly 72% in the past three years, while the proportion of new products with a lifespan of less than one year has reached as high as 70% among short-lifecycle new products.

Vitasoy and its flagship products like Vitasoy Lemon Tea have a long lifecycle, but the environment has changed.

Now, brands like Dali Foods' "Dou Ben Dou" and Yili Soy Milk are also rising strongly, with many brands laying out in the healthy plant-based beverage sector. On the other hand, sugar-free teas are thriving, with brands like Dongfang Shuye becoming strong contenders in the health beverage market. Under such trends, the lemon tea sector seems to be deviating from the mainstream.

Vitasoy has also made some changes, continuously launching new products such as sugar-free lemon tea and high-fiber soy milk in various flavors. There are also products like sugar-free cold brew tea entering the sugar-free tea sector, but the competition in the mainland tea beverage market is indeed very fierce.

At the same time, there is some bad news: Vitasoy's largest shareholder, Mitsubishi UFJ Financial Group, has significantly reduced its holdings in Vitasoy this year. In the second and third quarters of this year, it reduced its holdings by more than 100 million shares. After the reduction, Mitsubishi UFJ's shareholding ratio dropped from 18% to 7.82%.

Given the unclear operating conditions and future expectations, is it appropriate for Vitasoy's stock price to surge?

3. Singapore's Richest Man Takes a Stake

From a PE perspective, Vitasoy's valuation after the surge is around 80 to 90 times, and before the surge, it was about 40 times, which is clearly not cheap. Although Vitasoy has a high gross margin, its net profit margin is relatively low in the industry because the company has many operations in Hong Kong and overseas, where labor costs are much higher than in the mainland.

At the same time, Vitasoy has significant depreciation on properties, factories, and equipment each year, so looking solely at net profit may distort the quality of the business.

However, from a cash flow perspective, it can be seen that Vitasoy's cash flow is quite good, with operating cash flow of HKD 791 million for the fiscal year 2024. Moreover, the company's capital expenditure has been continuously declining in recent years, with only HKD 146 million in capital expenditure for the fiscal year 2024. Valuing the company based on a free cash flow of HKD 645 million, Vitasoy before the surge was only valued at HKD 5 billion, about 7.78 times, which can be considered quite cheap After the continuous surge, it has reached a relatively reasonable multiple of around 15 times.

Some sell while others buy. Cheap is the hard truth; if the major shareholders don't want it, there will always be capital looking to pick up bargains.

Information disclosed by the Hong Kong Stock Exchange shows that on October 7, Huang Zhixiang, the chairman of Sino Land, reported for the first time that his brother Huang Zhida, through his company Yang Xiang Cheng and his family office, collectively holds over 5% of Vitasoy's shares.

Yang Xiang Cheng is a publicly listed food and beverage company in Singapore, founded in 1900 in Zhangzhou, Fujian, and listed in Singapore in 1969. Its main products include soy milk, water chestnut drinks, and lemon tea, which overlap with Vitasoy's main business, but the market areas they focus on are different, primarily in Southeast Asia. Revenue from the Chinese market accounts for less than 10%.

Yang Xiang Cheng is currently controlled by the family of Huang Tingfang, who was once Singapore's richest person. Moreover, the Far East Organization, controlled by his family, is one of the largest real estate developers in Singapore. Huang Tingfang's eldest son, Huang Zhixiang, mainly manages the Hong Kong-listed real estate company Sino Land; his younger son, Huang Zhida, stays in Singapore to handle the business of the Far East Organization.

Regarding the investment in Vitasoy, Yang Xiang Cheng stated, "The increase in holdings aligns with the policy of investing in leading enterprises in the Asian region, enhancing the company's investment in the plant beverage industry in mainland China and Hong Kong." He also mentioned that the company may consider further investments.

Just after they finished speaking, they continued to increase their holdings without pause.

It can be seen that when Huang Zhida made the announcement on October 7, the institution under him had just exceeded 5% of the shares. By October 24, it had already surpassed 10%, and his brother Huang Zhixiang and the Far East Organization also held 5% of the shares. This means that the Huang family collectively holds over 15% of the shares.

When Huang Zhida made the announcement, the original largest shareholder, Mitsubishi UFJ Financial Group, was still reducing its holdings, truly a case of "mutual understanding."

From the complete list of shareholders, the Roche family still holds a significant portion of Vitasoy's shares, firmly keeping the company in their hands.

The Huang family has purchased so many shares in a short period, directly hitting the bottom, clearly well-prepared, perhaps valuing the foundation of Vitasoy in the mainland market. The Huang family's strategy allows for acquisition discussions, potential win-win collaborations, or purely financial investments. Their calculations are sound, ensuring no losses regardless of the outcome.

Conclusion

Although Vitasoy has gone through a major crisis, a skinny camel is still bigger than a horse; the foundation is still decent. From the perspective of assets and cash flow, the overall situation has improved and the price is not high. With the Huang family's entry, how things will develop next depends on the Huang family's ultimate intentions