Arisaig Comments On Dali Foods

Arisaig Partners recently released their letter for March, which is available for download from their website. Their Asia Consumer Fund is now up 15.4% for the year, driven largely by a broad-based market recovery in India in 2017. The fund has significant exposure to the retail sector in India, which was one of the relatively few short-term beneficiaries of demonetisation. The letter also discusses their investments in China (Foshan Haitian, Dali Foods) and Bangladesh (Olympic Industries).

Dali Foods (Dali) is an interesting name to follow. The company’s full year revenue grew by 5.8% while net profit grew by 7.7%, very respectable results given the fast-moving and increasingly competitive packaged food & beverage sector in China. Revenue for their bread, cakes and pastries segment, which is currently the largest contributor to revenue, was flat versus last year. The company saw stronger growth in other areas of its portfolio, however, including in biscuits, energy drinks and herbal tea. The energy drinks segment (Hi-Tiger) saw full year revenue grow by 43%. Hi-Tiger was launched in 2013 and is currently only available for sale in around 50% of Dali’s outlets, so there is still a significant growth ramp ahead.

The company’s strategy is increasingly focused on premium, branded product categories aimed at health conscious consumers in China. One example is soy milk. Most existing products in the market are bulk soy milk, which are typically unbranded and difficult to preserve. In 2017, Dali is formally launching its own range of branded soy milk products under the “Doubendou” label, with a branding emphasis on health and nutrition. It will probably come up at some point against Vitasoy (which seems to be moving in the same direction) so it will be very interesting to see how that plays out.

Dali currently at trades at ~16x earnings, which is at a discount to listed regional peers in the branded food & beverage sector. Arisaig says this is because the “market is still in assessment mode” on the company, which only went public at the end of 2015 (Arisaig was one of their cornerstone investors). They believe that a re-rating is dependent on whether Dali can maintain its track record of successful product innovation and launches, particularly in premium categories (such as soy milk).