What Vitasoy's epic fall can teach investors about Hong Kong's red hot consumer stocks

• 9 consumer stocks have shot up by more than 50 per cent this year
• But a bad report can send them plummeting, like what happened to Vitasoy

First, the share price of Hong Kong-listed Vitasoy International Holdings grew threefold in three years. Then, it plummeted by 23 per cent in just eight trading sessions, after the soymilk and lemon tea maker reported disappointing annual earnings. The roller-coaster ride of Vitasoy and other unexpected recent plunges are timely warnings for investors about Hong Kong's consumer stocks, which have returned some stunning gains this year, analysts say. "Many consumer stocks have risen a lot this year, and their valuations have become quite high," said Kenny Wen, wealth management strategist at Hong Kong brokerage Ever-bright Sun Hung Kai. While some stocks are still a good buy, analysts say, investors need to pay attention to the potential risks of the sector, with valuation levels being the most important one. "When the valuations are high, the market will be very sensitive to any sign of trouble," said Cyrus Tai, a consumer analyst at Orient Securities based in Hong Kong. Hong Kong investors betting on the consumer sector have won big this year. The Hang Seng Composite Consumer Goods Index climbed by 15.8 per cent since the beginning of this year, making it the best performing among the 11 subindices. (Overall, the Hang Seng Index is up 10.4 per cent for the year.)

Investors get hungry for consumer stocks

As many as nine consumer stocks tracked by the index have returned more than 50 per cent this year. The top gainer is Li Ning, the eponymous sports apparel and shoes brand founded by a former Chinese Olympic gymnast, which shot up 121 per cent this year. Yihai International, which supplies condiments to famous hotpot chain Haidilao, soared 113 per cent, growing a jaw-dropping twelvefold since its listing three years ago. Meanwhile, Cofco Meat, a unit of China's state-owned food group that raises pigs, surged 79 per cent. Behind the rallies is a broad surge in investors' interest in the sector. As the US-China trade war has raged on for more than a year, traders have shifted their focus to stocks less exposed to trade and external uncertainties. In addition, the market still believes that the rise of Chinese spending power in the long run will enable companies to hike up the prices of products from beer to sports shoes. But Vitasoy's fall has called the market frenzy into question.

Mind the gap

Investors piled into the stock as the company shifted its focus to expand into mainland China starting a decade ago. Its income from the China market grew more than eightfold to HK$4.7 billion last year from HK$564 million in 2009. Its share price made an astonishing journey from less than HK$5 apiece 10 years ago to a historic high of HK$47.15 on June 13. Along with the stock price, Vitasoy's valuation level also soared above the roof. The price-to-earnings (PE) ratio soared from 44 times at the beginning of this year to an all-time high of 71 earlier this month. That made it more expensive than internet giant Tencent Holdings, with a PE ratio of 36, and insurer AIA Group, at 50. So investors bailed out when the company announced on June 20 its annual revenue was only HK$7.53 billion last year, falling short of the market expectation of HK$7.59 billion, according to a Bloomberg poll. What worried the market even more was a significant drop in the growth of its China business, which grew 25 per cent in revenue in the year ended March 31, down from 39 per cent the year earlier. "The rise was too dramatic. When things reach an extreme, they can only move in the opposite," said Wen, citing a common Chinese idiom. The subsequent sharp fall in Vitasoy's shares brought its PE ratio to 55.4 on Friday. Other consumer names have also come under unexpected pressure recently. Bosideng International Holdings, China's largest down clothing maker, fell the most on record in intraday trading by 28 per cent on Monday, after activist short seller Bonitas Research accused the company of fabricating its financials. The stock rebounded by 14 per cent on Tuesday, following a clarification statement by Bosideng that denied the allegations as "false and misleading". Going forward, analysts recommend that investors pick stocks with cheap valuations and high dividend issuance. Tai of Orient Securities said instant noodle and drink maker Uni-President China is one of his top picks. The company reported a bright first quarter this year, and is very creative in developing new products that could become a national hit, he said. Another company Tai likes is baked goods and soymilk producer Dali Foods Group, which has a low valuation level and a solid track record of net profit and revenue, he said. Tai also advised investors to shift their attention to Hong Kong local consumer companies from mainland Chinese ones, as worries over the nation's slowing economy linger on. "To make safe, defensive bets amid rising volatility in the market, investors can set their eyes on Hong Kong companies from mainland Chinese ones," Tai said. Companies such as fast food chains Fairwood Holdings and Cafe de Coral Holdings are good defensive bets, he said. Their valuations, at 17 and 23 times earnings respectively, are cheap, and profit growth has been stable at low single digits. Wen of Everbright Sun Hung Kai advises investors to stay on the sidelines until prices cool down a bit. The PE ratios of Li Ning and Haidilao, for example, have risen to 55 and 81 respectively, making them unappealing to Wen, even with their strong business growth prospects. Investors should wait for the prices to correct by at least 5 per cent to 10 per cent before buying, he said. Wen also picked dairy products maker China Mengniu Dairy and Japanese instant noodle producer Nissin Foods, as they look set to benefit from increasing demand due to China's urbanisation. But even for the two of his favourite stocks, investor need not rush into the market as prices have risen quite a bit, he said. "The biggest risk now is definitely earnings," he said. If a consumer company reports disappointing results, the market will be under greater pressure to sell, he said.

Based on the above-given article, answering the following question.

Question 1: Summarise what happen to the stock price of Vitasoy and relevant causes.

Question 2:Divide your academic explanation into two parts.The first part is an elaboration of relevant theoretical support.The second part is an explanation on how the theory / knowledge help to explain what happen to the stock price of Vitasoy.