3 Reasons I’m Watching Dali Foods in 2020 and Beyond

Dali Foods Group Company Limited (SEHK: 3799) is a food and beverage manufacturer in Mainland China. It offers a variety of products such as cakes, chips, biscuits, herbal tea, plant-based and milk beverages, energy drinks and more.

In this article, I’ll look at three reasons why I’m keeping Dali Foods on my stock watchlist in 2020 and beyond.

Solid financial track record

To start with, I like the solid track record that Dali Foods has achieved in the last few years. Here are some numbers that investors should take note of.

From 2014-2018, the company grew its revenue from RMB 14.9 billion (US$2.17 billion) to RMB 20.9 billion. Similarly, net profit increased from RMB 2.1 billion to RMB 3.7 billion. The former was up by 40.3% while the latter improved by 76.2% during that period.

Such performance is commendable, given the company’s already-significant business size.

High return on invested capital (ROIC)

One of the most important questions that investors should answer before investing in any company is whether the company is a good business.  There is no quick answer to the question since investors can look at it from a number of perspectives.

Yet, one way to look at it is to use my favorite ratio – known as return on investedd capital, or ROIC. The simple idea behind the ROIC is that high-quality businesses tend to have high ROICs while the reverse is true – a low ROIC is often associated with a low-quality business.

In the case of Dali Foods, I calculated that its ROIC was 77.2% for the year ended 31 December 2018. The company’s ROIC of 77.2% is above-average, based on the ROICs of many other listed companies I have studied in the past.

Owner-operator structure

Another thing to like about Dali Foods is its owner-operator structure. For those who are new to this, an owner-operator refers to significant shareholders who are also the management of a company.

In the case of Dali Foods, the senior management team owns about 85% of the company’s existing shares. See below for details.

Source: Dali Foods’ 2018 annual report

From the table above, we can see that Mr Xu ShiHui (founder, chairman, and CEO) owns 85% of Dali Foods’ shares. As the founder CEO, Xu’s long-term financial interest is well aligned with external shareholders.

Conclusion

In all, I think Dali Foods is an interesting company to watch for 2020 and beyond, mainly due to its solid financial track record, high ROIC and owner-operator structure.

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