Since it was introduced in 1940, Vitasoy International Holdings Ltd (345.HK) has become one of those classic Hong Kong brands whose products are caught up in the city’s pop culture and collective memory.

Over in the local stock market, Vitasoy is a famous ten-bagger over the past decade – during the “lost decade” of the Hang Seng Index since 2008, a term the legendary investor, Peter Lynch, coined for companies that returned more than 10 times the initial investment.

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Driven by China’s domestic consumption

Accounting for more than half of the revenue, the Mainland China market remains the growth engine of the group, but the depreciation of the Chinese Renminbi will be unfavourable when profit is reported in Hong Kong Dollars. For example, operating profit from China rose by 23% in local currency but was up only 8% in HKD terms.

Although Vitasoy has been promoting its signature milk products in the mainland over the last 20 years, it’s the VLT Lemon Tea drinks that captured the heart of Chinese consumers. VLT Lemon Tea beat out the world-famous Coca-Cola and household brand Wong Lo Kat to become the best-selling beverage brand on both Alibaba’s Tmall and JD.com in 2018.

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It’s been particularly popular among the younger generation since 2016. VLT Lemon Tea’s brand possesses a cachet among youngsters and many of them are said to be so addicted that they consume several packs a day!

Vitasoy hopes to further consolidate its popular brand image among the younger generation by being proactive, including having recently sponsored e-sports competitions. Mainland consumers are willing to pay double the price of Tingyi’s Lemon Black Tea for VLT Lemon Tea – indicating the strong price power of Vitasoy.

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Cash to drive its business

In fact, Vitasoy’s gross margin stands at a stunningly high level of 54%. Meanwhile, capital expenditure increased by 130% in FY19; mainly for the construction of new factories in Dongguan, China. I believe the penetration rate of Vitasoy in China is still extremely low and the development potential is enormous.

The exchange rate and raw material prices are cyclical, and companies with strong pricing power can easily pass on the cost to consumers. Therefore, the value of Vitasoy International ultimately depends on the long-term acceptance of the brand by its consumers.

Reference(s)

[1]https://www.fool.hk/en/2019/10/25/why-vitasoy-international-is-poised-to-keep-growing/

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