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Vitasoy isn’t a Great Buy Now, Even After Falling 30%

Investors should know these two risks before investing in Vitasoy International Holdings Ltd (SEHK: 345). – Vitasoy

Vitasoy International Holdings Ltd (SEHK: 345) is a food and beverage company, famous for its flagship Vitasoy-branded soya milk.

It has been a favourite among investors over the last decade, thanks to its ever-growing share price and dividend payments.

Lately, however, the company’s stock has declined more than a third from its all-time high reached in 2019, which might spark the interest of investors.

Still, I don’t think the company is a compelling stock to buy now despite the cheaper price. There are two reasons for that, which I will cover further here.

Financial performance

One of the main reasons behind Vitasoy’s strong stock performance is its solid track record of growing its business.

For example, in the last five years alone, Vitasoy grew its revenue from HK$5.1 billion (US$657.9 million) in 2015 to HK$7.2 billion in 2020. Also, its net profit grew from HK$372 million to HK$536 million during that period. The former was up by 41% while the latter surged 44%.

Despite the strong performance mentioned above, Vitasoy’s nearer-term performance has been quite negative.

Revenue and net profit declined by 4% and 23%, respectively, in the latest financial year when compared to the previous year thanks to the Covid-19 pandemic and ongoing social unrest in Hong Kong.

Going forward, Vitasoy will continue to face many of the challenges which include the ongoing Covid-19 pandemic and the trade war between the US and China.

Hence, there is a risk that it might not be able to return to its good old days of consistent growth, which could impact the stock’s valuation.

Valuation

As an investor, we try to buy a company’s stock at a price that is lower than its intrinsic value. Doing so not only offers a good margin of safety but also provides better upside potential.

In the case of Vitasoy, I think its valuation is too high to warrant any margin of safety. There are two ways to look at this.

Firstly, Vitasoy is currently trading at a price-to-earnings (PE) ratio of about 60x, which is on the higher end of its historical PE range. According to Y-chart, Vitasoy’s PE ratio has ranged between 22x and 72x over the last five years.

Secondly, its PE ratio of 60x is significantly higher than the market average PE ratio of around 13x – I’m using iShares MSCI Hong Kong Index Fund (NYSEARCA: EWH) as a proxy for the market average.

In other words, Vitasoy’s stock is trading at a huge premium even after accounting for the decline in the share price.

Not a great buy

Overall, I don’t think now is the best time to buy Vitasoy’s stock owing to its increasingly challenging business environment, and high valuation.

Thus, interested investors may want to wait for a better price before investing in the stock.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Lawrence Nga does not own shares in any companies mentioned.

The Motley Fool Hong Kong Limited(www.fool.hk) 2020

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