Recommendation on the acquisition of Vitasoy

Dividend discount model

Discounted free cash flow model

Comparable companies analysis

Company value

Overview of the food and beverage industry in HK and mainland China

Features Highly-mature, 6256 establishments and 49040 employments in manufacturing and import-export trade 95% of Food supplies relies on imports and produce around US$79m worth of fresh produce items, selling in both domestic and 30+ overseas market Trends Rising concerns for safety and health, e.g., preference for organic and fresh products over GM food among customers Leading companies appoint distributors and/or establish overseas offices to promote overseas markets. Drivers Excellent brand exposure, and reputation of culinary capital Skilled workforce, strong intellectual property protection and pro-business regulation, novelty and convenient service despite highly mature domestic market.

Overview of Vitasoy
Overview Vitasoy International(HK.00345) is the main manufacture and distributor of non-alcoholic beverages in HK market. Productions are sold under the brand of Vitasoy and Vita.

Industry Total assets Turnover Gross profit EBIT Net income Net margin
Stock price EPS P/E DPS ROE

Food and beverages-soft drinks 2, 946m HKD 4, 051m HKD 1, 925m HKD 447m HKD 303m HKD 7.48% 9.68 HKD (closing price on 17/09/13) 0.296 HKD 32.7x 0.198 HKD 18.45%

Overview of Vitasoy
Sales Sales SalesSales Analysis by Reven Reven Reven Categories ue, ue, ue, Tofu, Juice Others Dairy 9%, Drinks , 3%, milk, 9% , 3%, 3% 4%, 4% 3%
Sales Reven ue, Soymi lk, 49%, 49%

Sales Reven ue, Soymilk Distill ed Tea water, 4%, Tofu 4%

Lunch box and snacks Dairy milk Distilled water Juice Drinks Others

Sales Sales Chart Title HK and Sales Macau Analysi Analysi Analysi s by s by s by Mainland China Locatio Locatio Locatio ns, North ns, America ns, Sales Sales AustraliaAnalysi and Analysi New Zealand s by s by Singapore Locatio Locatio ns, ns, Price relative in the last five years

Sales Reven Sales ue, Reven Lunch ue, box Tea, and 22%, snacks 22% , 6%, 6%

Dividend Discount Model

Assumptions
Constant change of payout ratio (-2% annually) Capital structure and cost of debt remain unchanged Constant growth after five years

Formulas
ROE (t) = 0.001063162t+0.180247352 ROE growth rate (2013-2018) = ROE(t) * plowback ratio Cost of equity (t) = dividend payment/ current market price + growth rate (t)

Results

Terminal value ROE growth rate (after 2018) = D (2019) / (ROIC constant = growth rate of 2013 growth rate of ROE)

Discount rate (t) =ROIC(t) =WACC (t)

9, 965, 229, 880 Current price ( end of 2013) HKD =D1/(1+r1)+D2/((1+r1)(1+r2))+ 9.97B HKD +(Dn+Pn)/((1+r)(1+r2)(1+rn))

Discounted Free Cash Flow Model

Assumptions
Constant change of total revenue (multiply by 1.09 annually) Tax rate, D&A, Net working capital, ratio of CAPEX over total revenue, and cost of debt all remain unchanged

Formulas

Results

EBIT growth rate(t) (2013-2018) = reinvestment rate(t) * ROIC(t) =CAPEX(t) / depreciation * WACC(t) Free cash flow (t) = NOPLAT(t)+ D & A change in net working capital capital expenditure(t) Terminal value Constant growth after five = FCF (2019) / (ROIC(2019)years constant growth rate of ROE(2019)) Discount rate (t) Current price (end of 2013) 10, 666, 072, 970 = ROIC (t) =FCF1/(1+r1)+FCF2/((1+r1)(1+r2))+ HKD = WACC (t) +(FCFn+FFCF)/((1+r1)(1+r2)(1+r 10.67B HKD) n))

Discussion on valuation methods

DDM is superior to DCF model
Vitasoy is a solid growing company in HK, therefore has predictable and reliable dividends. DCF model is more suitable for high-growth company with uncertain dividends payment but foreseeable increasing cash flow. DCF model relies on much more assumptions, thus is more susceptible to the change of

Neither model is perfect

ROE(t) is yielded from linear regression. Both payout ratio and stable growth rate are assumed. Both revenue growth rate and the ratio of CAPEX over revenue are observed only from two years data. WACC formula is largely simplified. Take expectation of the two results would be more accurate

factors.

Modification on the result Current price = 70% * DDM +30* DCF=10, 175, 482, 810 HKD

Comparable companies analysis

Company Vitasoy Intl Hld Want Want China Hld Ltd. China Mengniu Da Ticker 0345.HK 0151.HK 2319.HK Mkt Cap (B HKD) 9.91 153.13 62.29 119.43 28.04 74.56 P/E 32.70 35.41 38.66 33.92 26.32 33.40

Domestic market Tingyi Cayman Islands Hld Co. 0322.HK Uni-President China Hld Ltd. Industrial average 0220.HK

The Coca-Cola Company

Overseas market Pepsico,Inc. Nestle

KO
PEP NESR.DE

171.86
125.94 160.93

20.43
19.24 13.89

Mojo Organics.Inc
Industrial average

MOJO

37.15
101.16

24.57
22.17

Lack of market capital is the key problem ! Recommend for the acquisition.