What Investor Must Know About Vitasoy International Holdings Limited
February 26, 2020
Vitasoy International Holdings Limited (“Vitasoy”) (HKG:0345) is the largest non-carbonated beverage and food manufacturer in Hong Kong. Vitasoy’s products were originally centered on the high-protein soy milk drink that the Group first produced. Over the years, the Group has expanded into a wider variety of beverages such as fruit juices, tea, milk tea, water and tofu, under the brand name “Vita”.
The Group founded Vitaland Services
Limited in 1991 to operate tuck shops and concessions in Hong Kong primary and
secondary schools. Later in 2001, Hong Kong Gourmet Limited was established to
provide commercial catering services and school meal services.
As of 14 February 2020, Vitasoy has
a market capitalisation of approximately HK$32.82 billion. In this article, we will
take a closer look at the business, management and financial aspects of the
Group, to see if it is worth an investment.
Founding history and revenue distribution
Vitasoy was founded in 1940 by Dr. Lo
Kwee-seong with door-to-door delivery of soy milk selected as a product because
many Chinese people are lactose intolerant. The Group ceased operations from
1941 to 1945 during the Japanese occupation of Hong Kong and re-emerged after
the war ended.
The soy milk was first delivered to
peoples’ homes on bicycles, but then began selling through retail outlets. By
1950, with sales increasing, Vitasoy established a new factory. In 1953, it
adopted a sterilization technology enabling the drinks to be stored without
refrigeration. In 1975, Vitasoy became the first Hong Kong company to introduce
Tetra Pak packaging technology for drinks production. This involves UHT
(ultra-heat treatment) sterilization of the production and packaging in aseptic
cartons so the drink could be kept for months without refrigeration.
Vitasoy expanded into overseas
markets in the 1980s and 1990s. Today, its products are sold in approximately
40 markets around the world including Mainland China, Hong Kong, Macau,
Australia, New Zealand, U.S., Canada, Europe and South-East Asia. Revenue
distribution wise, Mainland China is the largest contributor at 62%, followed
by Hong Kong (Hong Kong, Macau and Exports) at 30%, Australia and New Zealand
at 7% and finally, Singapore at 1%, for the financial year (“FY”) ended 31
Source: 2019 annual
Mainland China: Vitasoy’s growth engine
Vitasoy’s growth in Mainland China
has been remarkable. The Group has benefitted from China’s increasing household
incomes and a shift towards healthier drinks and is now a leading player in
China’s soymilk market, which is valued at 9 billion yuan (US$1.3 billion) in
2018 by market research firm Euromonitor International.
The Group began exploring
opportunities in Mainland China in 2012, making its way into regions beyond
Guangdong province, including Hubei province in central China and the southern
provinces of Fujian and Guangxi. An e-commerce boom over the past few years accelerated
the Group’s growth. Revenue and profits from Mainland China grew at a compound
annual growth rate (“CAGR”) of 24.67% and 37.92% respectively from FY2015 to
Vitasoy’s management attributes its
success in Mainland China to its well-paced expansion and an unwavering focus
on improving its plant-based drinks. Demand for its products has been so strong
that Vitasoy had decided to invest 1 billion yuan (US$145 million) in building
a brand-new factory in Dongguan, Guangdong province, in order to keep up with
the orders. The Dongguan plant, scheduled to be put to use in
2021, will span 100,000 square metres and will become Vitasoy’s largest factory
in Mainland China.
Building brand recognition amid increasing competition
Over the years, Vitasoy has
successfully developed a special attachment with Hong Kong people. Many
Hongkongers find it impossible to remain impartial when it comes to Vitasoy and
its products, often referring to the brand as “childhood in a box”. The Group’s
marketing campaigns have no doubt played a role in Vitasoy’s longevity and
ubiquity by playing on themes of health and nostalgia. An example is its “Stand
By Me” campaign launched in 2015.
In China, the rapid development of
mobile internet has given the Group a huge boost in gaining national
recognition. The unexpected trending of funny internet memes about its lemon
tea drink has helped expose Vitasoy to a much wider audience. The memes usually
feature cartoon figures grabbing a box of Vita Lemon Tea and gulping it with a
straw complemented with the jingle, “维他柠檬茶，爽过吸大麻” (“Drinking Vita Lemon Tea is cooler than
smoking marijuana)”, which rhymes in Chinese.
Vitasoy’s success has certainly caught the attention of its competitors. Mainland Chinese food giants such as Dali Foods Group Co Ltd (HKG: 3799) and China Mengniu Dairy Company Limited (HKG: 2319) have both ventured into soymilk, entering markets in northern China, where Vitasoy has yet to make a strong presence. Nevertheless, Vitasoy first mover’s advantage and strong brand recognition should allow it fend off its competition and charge a premium for its products, which boost profits.
Vitasoy is led by the Lo Family. Collectively,
the family owns approximately 36.60% of the Group, and have the following
family members on the board of directors:
Mr. Winston Yau-lai LO (Executive Chairman)
Ms. Yvonne Mo-Ling LO (Non-executive Director)
Mr. Peter Tak-shing LO (Non-executive Director)
Ms. May LO (Non-executive Director)
Even though this is a family business, management of day-to-day operations has been handed over to Mr. Roberto Guidetti, who acts as the Group’s Executive Director and Group Chief Executive Officer (CEO). Mr. Guidetti has 24 years of experience in the fast-moving consumer goods industry, having worked previously worked with Procter & Gamble Company (NYSE: PG) (1988 – 2007) and The Coca-Cola Company (NYSE: KO), China (2007-2013), before Vitasoy tapped him to step in as CEO in 2013.
We are pleased to note that Mr. Guidetti
owns 4,974,000 shares, which at present is worth close to HK$153.45 million. With
a significant part of his net worth tied up with the Group, we trust that Mr.
Guidetti is properly incentivised to ensure its continued success.
Measure 1: Growth in revenue and profits
Vitasoy has achieved notable CAGR of
10.48% in revenue and 16.94% in profits for the past 5 years, from FY 2015 to
FY2019. Whether the Group is able to sustain this pace of growth in FY2020
remains to be seen as its core markets of Mainland China, Hong Kong, Macau and
Singapore may be impacted in the short-term by the Covid-19 (novel coronavirus)
As events are still unfolding,
investors should closely monitor the developments of this health crisis and
assess its potential impact on the business before considering an investment.
Measure 2: Profitability
Vitasoy’s gross profit margins have
increased each year from 49.7% in FY2015 to 53.7% in FY2019; meanwhile, net
profit margins have also increased from 7.4% in FY2015 to 9.2% in FY2019. The
improvements in profitability demonstrate that the Group has considerable
pricing power and is also able to manage and control costs appropriately. In
addition, return on equity ratios are averaging above 15.0% over the past 5
years, clearly, management is efficient in allocating and converting every
dollar of investor capital into profit.
Measure 3: Liquidity
No major concerns here as Vitasoy has
a relatively strong balance sheet and has recorded positive current and cash ratios
for the past 5 years. In fact, the Group has zero borrowings, and cash and cash
equivalents of approximately HK$1.01 billion as of 31 March 2019.
Round 4: Dividends payout
Vitasoy has been paying increasing
dividends each year as its dividend per share has risen from $0.244 in FY2015
to $0.419 in FY2019. The dividend increase is in line with the Group’s performance
and shows that the management is willing to reward shareholders as the business
With a closing share price of HK$30.85
as at 14 February 2020, Vitasoy is trading at a price of earnings (PE) ratio of
46.60, with an indicative yield of 1.35%. Despite its lofty valuation, Vitasoy
is a quality business run by competent management and may be of particular
interest to growth investors.
As a side note, Vitasoy was recently
attacked by short-seller Valiant Varriors. The activist investors alleged that
the Group had inflated its net profit and capital expenditure in Mainland China
and Australia. The allegations were immediately refuted by Vitasoy and you can
read their clarification announcement here.
An accountant by training, F.I.R.E 2030 is a student of value investing since 2012. She believes that successful investing requires discipline and patience. But with the right knowledge and temperament, ordinary investors can achieve extraordinary results. These articles are her journals on stocks and the investing journey toward financial freedom in 2030.