Time To Invest In Toilet Paper?

Johann Christoph Michalski is the chief executive officer (CEO) of Vinda International Holdings Limited (HKG: 3331). Vinda International is a major hygiene company and a key toilet paper supplier in China. He was incredulous when word started spreading on social media in early February that toilet paper was about to run out in Hong Kong. In an interview with the South China Morning Post, Michalski said that whatever shortage reported at the shops were “actually created by panic buying”. The ability of the industry to produce the products is not affected. 

The panic hoarding of toilet paper goes some ways to explain why Vinda’s shares have soared 45.6% this year on the Hong Kong stock exchange. However, as rational investors, we should temper the excitement and assess if the company is worth an investment now. 

(Source: Google Finance)

Business Overview

Vinda is a major hygiene company in Asia. The company was founded in 1985 by Mr. Li Chao Wang in Xinhu, Guangdong, and was listed on the Hong Kong Stock Exchange in 2007.

Svenska Cellulosa Aktiebolaget (SCA), a major paper manufacturer from Sweden became a shareholder of Vinda in 2007. It invested CNY366 million for a 15% stake in the company after its IPO. SCA gradually increased its holdings on the open market in subsequent years. It finally acquired a stake of 31% from Vinda’s founding shareholder and current chairman Mr. Li and public shareholders for HKD11 per share in 2013.

After becoming Vinda’s majority shareholder in, SCA transferred its own businesses in Mainland China, Hong Kong and Macau to Vinda International. In 2016, Vinda incorporated SCA’s business in Malaysia, Taiwan and South Korea into the company. At present, Mainland China contributes three-quarters of Vinda’s annual sales, with Malaysia and Hong Kong making up the biggest markets outside the country.

Vinda runs 4 core business segments, namely tissue, incontinence care, feminine care and baby care under key brands, Vinda, Tempo, Tork, TENA, Dr. P, Libresse, VIA, Libero and Drypers. Vinda’s products hold market leading positions in China, Hong Kong, Taiwan, Singapore and Malaysia.

(Source: 2019 annual results presentation slides)

Vinda has a total of 14 state-of-the-art production bases (10 in Mainland China, 2 in Malaysia, 1 in Taiwan, and 1 converting factory in Australia). Current capacity is at 1.25 million tons, which is expected to increase by approximately 10% in 2020 – 2021. Future capacity expansion will be directed at the premium tissue segment. 

(Source: 2019 annual results presentation slides)

In 2019, sales through traditional channels (i.e. distributors) was the largest contributor of the company’s revenue at 31%. E-commerce, key accounts (i.e. hypermarkets, supermarkets) and B2B (i.e. corporate clients) accounted for 29%, 25% and 15% respectively. Vinda’s e-commerce channel is growing in prominence with double-digit sales growth. Its e-commerce channel now contributes more than 37% of China sales.

(Source: 2019 annual results presentation slides)

Major Shareholders

(Source: 2018 annual report) 

Today, Essity Group Holdings BV is the largest shareholder of Vinda with a 51.95% equity stake. Essity Group Holdings BV is wholly-owned by Essity Aktlebolag (publ), a global hygiene and health company, with its headquarters in Stockholm, Sweden. 

Essity was part of the hygiene and forest products company SCA until 2017, before the company spun off its hygiene operations and listed that as a separate company on Nasdaq Stockholm.

Meanwhile, Fu An International Company Limited (Fu An) is the second largest shareholder of Vinda with a 22.71% equity stake. Fu An is held by Sentential Holdings Limited, Join Pride International Limited and Daminos Management Limited, with equity stakes of 74.21%, 15.79% and 10.00% respectively. 

Sentential Holdings Limited, Join Pride International Limited and Daminos Management Limited is held by Mr. Li Chao Wang, Ms. Yu Yi Fang and Mr. Dong Yi Ping, who serve as the Chairman, Vice Chairman and Chief Technology Officer – Mainland China of Vinda.

Leadership Team

Vinda’s key leadership team are as follows:

• Mr. Li Chao Wang (Chairman) – Mr. Li is a founder of the company. In his current capacity, he spearheads overall corporate development and strategic planning of the company. Mr. Li has almost 30 years of experience in the household paper industry and executive business management. 

• Ms. Yu Yi Fang (Vice Chairman) – Ms. Yu is co-founder of the company, and has almost 30 years of corporate administration and financial management experience in China’s household paper industry. She is responsible for the strategic development of the company.

• Mr. Johann Christoph Michalski (CEO) – Mr. Michalski has over 20 years of experience in leadership roles in business development and strategy, consumer marketing and production innovation in the consumer goods industry.
  
  Mr. Michalski was previously the President of SCA Global Hygiene Category overseeing the global marketing and research & development and the President of SCA’s Asia Pacific business unit based in Shanghai, China. 

• Ms. Li Jielin Karen (Deputy CEO, President – North Asia & CHO) – Apart from Executive Director and Deputy CEO, Ms. Li also serves as the Chief Human Resources Officer and President, North Asia.

• Mr. Dong Yi Ping (Chief Technology Officer – Mainland China) – Mr. Dong has over 20 years of experience in equipment operations and safety, quality control, and research & development. 

Financials  

Measure 1: Growth in revenue and profits

Vinda has doubled its revenue over the past 6 years from HK$7.9 billion in 2014 to HK$16.1 billion in 2019. Vinda’s profits on the other hand, shot up significantly in 2018 and 2019 due to lower wood pulp prices and the company’s focus on premium brand portfolio. 

Measure 2: Profitability

Vinda’s gross profit margins were relatively stable during the past 6 years between 28.1% – 31.7%. However, its net profit margins fluctuated between 3.9% – 7.0% for the same period. As pulp accounts for roughly 60% of Vinda’s costs of sales, a surge in pulp prices could squeeze Vinda’s gross profit margins. Separately, Vinda’s return on equity ratios ranged between 6.4% – 11.8%, which is reflective of the capital-intensive industry in which the company operates. 

Measure 3: Liquidity

Vinda gearing level is healthy at 0.4x in 2019. While the company’s current and cash ratios are on the low side, it should not face liquidity issues since it has a cash conversion cycle of 63 days (roughly 2 months).   

Round 4: Dividends payout

Vinda is a consistent dividend payer. Its dividend per share has increased from HK$0.16 in 2014 to HK$0.28 in 2019.  

Conclusion

With a closing share price of HK$21.00 as at 6 March 2020, Vinda is trading at a price of earnings (PE) ratio of 22.06, with a market capitalisation of HK$25.14 billion. Vinda’s products are evergreen, and investors searching for a defensive consumer company at these uncertain times can monitor it closely. 

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