Want Want China：snacks and beverages wanted

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED ON THE LAST TWO PAGES OF THIS REPORT. Global Equity Research Company Report 13 September 2010 (No. of pages: 24)Want Want China (151 HK) Food, beverage & tobacco: China 6-mth rating: 2Target price: HK$7.28Share price: HK$6.20 (10 Sep)Nicolas Wang, CFA(852) 2848 4963nicolas.wang@hk.daiwacm.comInitiation of coverage: snacks and beverages wanted Coverage initiated with an Outperform rating ƒ We initiate coverage of Want Want China (WWCH) with a 2(Outperform) rating and DCF-based six-month target price of HK$7.28, which is equivalent to a PER of 27.0x on our 2011 EPS forecast. We forecast an EPS CAGR of 19.5% for 2010-12. Good control of its gross-profit margin ƒ WWCH had control over its gross-profit margin from 2006-1H10, which it kept relatively stable during the period in the consumer staple sector, at 37.7-40.5%, despite volatile raw-material costs, such as those for sugar and palm oil. ƒ The company uses its discretion when raising the average selling prices (ASPs) of its products. Management said it plans to increase the ASPs of some rice-cracker products by 5-7% in 2H10, and the ASPs of some dairy products by 3% in 4Q10. Higher ROE than peers ƒ We forecast an ROE of 36.2% for 2010, significantly higher than the average for the China consumer staple sector, based on the Bloomberg-consensus forecasts.The high ROE is attributable to the company’s high net-profit margin. ƒ As a leading niche market player, WWCH not only enjoys a higher gross-profit margin, but also spends relatively less on advertising and promotions (A&P) than its mass-market peers. We forecast its A&P expenses to be within 4% of revenue for2010-12. Reuters code 0151.HK Market data HSI 21,257.39 Market cap (US$bn) 10.54 EV (US$bn; 10E) 10.26 3-mth avg daily T/O (US$m) 14.87 Shares outstanding (m) 13,212 Free float (%) 51.3 Major shareholder Tsai Eng-Meng (48.8%) Exchange rate US$/US$ 1.000 HK$/US$ 7.769 Performance (%)* 1M 3M 6M Absolute 1.8 2.8 5.8 Relative 2.8 (5.5) 5.6 Source: Daiwa Note: *Relative to HSI Investment indicators 2010E 2011E 2012E PER (x) 28.4 23.1 19.9 PCFR (x) 29.2 21.5 18.9 EV/EBITDA (x) 20.1 16.2 13.7 PBR (x) 9.9 8.8 7.5 Dividend yield (%) 2.8 3.0 3.0 ROE (%) 36.2 40.4 40.6 ROA (%) 21.3 24.8 25.6 Net debt equity (%) net cash net cash net cash Source: Daiwa forecasts Price and relative performance 2.003.505.006.508.0007/908/308/909/309/910/310/9(HK$)50113175238300Rel to HSISource: Bloomberg, Daiwa Income summary Revenue EBITDA Net profit EPS EPS CFPS DPS DPS Year to 31 Dec (US$m) (%) (US$m) (%) (US$m) (%) (US$) (%) (HK$) (US$) (US$) (HK$) 2008 1,554 42.0 353 27.2 263 48.6 0.020 45.5 0.155 0.014 0.020 0.153 2009 1,711 10.1 408 15.7 313 19.0 0.024 18.3 0.184 0.052 0.021 0.163 2010E 2,179 27.3 510 24.9 372 18.9 0.028 18.8 0.218 0.027 0.023 0.175 2011E 2,695 23.7 633 24.1 457 23.0 0.035 23.0 0.269 0.037 0.024 0.188 2012E 3,234 20.0 743 17.3 531 16.1 0.040 16.1 0.312 0.042 0.024 0.187 Source: Company, Daiwa forecasts Nicolas Wang, CFA (852) 2848 4963 Want Want China 2 Contents The three most important charts in this report ... ..............................................................3 Executive summary...........................................................................................................4 Want Want China – financial summary............................................................................5 Valuation and recommendation ........................................................................................6 The 1H10 results at a glance .............................................................................................9 Peer comparison..............................................................................................................10 Control of gross-profit margin ........................................................................................12 Earnings forecasts and financials....................................................................................15 Risks................................................................................................................................17 Company profile .............................................................................................................18 Appendix I: business model...........................