Vitasoy’s soaring stock: A potent investor beverage or a takeover target?

The iconic Hong Kong drink maker’s shares have risen sharply since last September on takeover speculation, as it continues to post solid financial results

Key Takeaways:

• Vitasoy’s revenue rose 1% in its latest fiscal year, but its net profit more than doubled on greater efficiencies and other improvements 
• The beverage maker’s stock has doubled since last September on rumors of a potential takeover bid that now appears to be on hold

By Lau Chi Hang

“More than just a soda” was once a popular jingle for Vitasoy International Holdings Ltd. (0345.HK), one of Hong Kong’s most recognizable brands known for its soy milk and other drinks. Indeed, after decades in the business, Vitasoy’s beverage portfolio is quite diverse. Its Vita Lemon Tea once swept across the border into Mainland China, fueled by a viral online campaign that said the drink was “more refreshing than marijuana.” With so much cache to its name, it came as little surprise that the Ng family, a well-known Hong Kong real estate dynasty behind the Sino Land empire, appeared to be setting its sights on the drink maker.

Last year, the Ng family aggressively purchased Vitasoy shares in the market, driving the stock price up from around HK$4.50 in late September to HK$12.88 in less than two months. The massive 170% surge also created some major fizz in the company’s price-to-earnings (P/E) ratio, sending it to more than 100 times at one point. While prices have cooled since then to the HK$9 range, the P/E ratio remains lofty at over 80 times.

Soaring profits

As many were feeling the valuation was unjustifiably high, Vitasoy released earnings for its latest fiscal year through March that looked quite solid. The company’s revenue edged up 1% year-on-year to HK$6.27 billion ($7.99 million) during the 12-month period, even as its profit grew far more strongly, doubling to HK$235 million. That strong profit seemed to at least partly justify the high P/E ratio, bringing it down by about half to around 40 times. That showed the stock gains were driven not only by takeover speculation, but also by solid fundamentals for the popular brand.

Vitasoy’s strong profit growth despite a sluggish economy was driven by improved efficiencies in its two main markets in Mainland China and Hong Kong. Its Mainland revenue grew modestly for the year, but its operating profit jumped 41% on greater operational efficiency, lower raw material costs, strict cost controls and incremental revenue from innovative products like strawberry- and banana-flavored soy milk and sugar-free lemon tea.

Despite a challenging retail environment in Hong Kong, the company’s sales in its home market also increased on broader coverage and product innovation. Higher production efficiency and lower raw material prices further lifted its operating profit in Hong Kong by 24%.

Adding to the good news, Vitasoy’s operations in Australia and New Zealand also improved on stabilized production and optimized logistics, reducing its operating loss in those markets by 4%.

The company also remained quite cash-rich, with HK$1.27 billion at the end of March, up 37.4% from a year earlier. Rounding out its picture of solid financial health, Vitasoy’s gearing ratio, excluding lease liabilities, was also quite low at just 10% .

Takeover buzz 

Beyond its strong financials, rumors of a potential takeover bid from the Ng family continue to support the stock. The family’s Philip Ng and associated entities, which have ties to Singaporean beverage company Yeo Hiap Seng, hold 12.26% of Vitasoy. Combined with the 5.10% stake held by his brother, Sino Land Chairman Robert Ng, the Ng family’s total Vitasoy stake exceeds 18%.

Vitasoy’s Chairman Winston Lo, along with the foundation established by Vitasoy founder Lo Kwee Seong and other Lo family members, still collectively hold over 25% of the company, which is large but far from absolute.

Two institutional investors, Mitsubishi UFJ (MUFJ) Financial Group and Global Alpha Capital Management, were also previously among the company’s largest non-family shareholders. MUFJ once held over 10% of the company, but its stake has now fallen below 5% following a gradual sell-down. Observers suspect the shares it sold were acquired by the Ng family.

Global Alpha Capital Management still owns 5.05% of Vitasoy’s stock. But it could potentially sell some or all of that to the Ng family for the right price, potentially further boosting any Ng family bid for control of the company. If faced with the risk of losing control, the Lo family could try to increase its stake to defend its position. Any battle for control could send the share price even higher.

Good for the Ng family either way

Vitasoy has also been actively buying back its shares, repurchasing 4.2 million over the last year. Such shares are subsequently canceled, reducing the total number in circulation, which effectively increases the ownership percentage of existing shareholders. Some see such purchases as a strategic move by the Lo family to consolidate its control of the company. Such repurchasing also lifts earnings per share, which benefits all shareholders.

At Vitasoy’s briefing to discuss the latest financial report, Chairman Winston Lo, when asked about the takeover talk, noted that the Ng family had described their stake as a long-term investment. He added, “You’ll have to ask them what they are really up to.”

At the end of the day, the Ng family’s motivations are likely twofold: they may be attracted to Vitasoy’s business, hoping an acquisition could bolster Yeo Hiap Seng; and they could also see the company as a good longer-term investment. Even if the Ng family fails to gain control of Vitasoy, its nearly 20% stake has already more than doubled in value. When all is said and done, that’s quite a good return over such a short period.

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