Is Hwa Tai an investment opportunity?

Value Investing Case Study 91-1: Up 24% in revenue - Is Hwa Tai the sweetest undervalued stock on Bursa?   

Now and then, a company that has been flying under the radar starts showing signs of life. Hwa Tai Industries Bhd (Hwa Tai or the Group) might be one of them. Best known for its biscuits, Hwa Tai has been around for decades, but recent years have not been kind. Losses, high debt, and tough competition made it easy to overlook.

But in 2024, something changed. The company turned a profit, revenue jumped nearly 24%, and cash flow finally moved into positive territory. Is this just a blip or the start of a real turnaround?

Join me as I examine Hwa Tai’s numbers, compare them to its peers, and see what the valuation tells us. The goal is to determine whether Hwa Tai is still stuck in the past or quietly becoming a hidden gem in Bursa Malaysia.

My analysis shows that it is an underpriced stock. Should you go and buy it? Well, read my Disclaimer. 

Contents

• Company background

• Operating performance

• Financial position

• Valuation

• Conclusion

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Company background

Hwa Tai is one of the country’s pioneering and established biscuit manufacturers. Since its inception in 1973, Hwa Tai has grown from a local biscuit maker to a brand with a significant presence in domestic and international markets. Its biscuits are exported to over 60 countries.

Hwa Tai’s products are marketed under its flagship brand "Hwa Tai". The brand is well-known for its wide range of biscuits that include cream crackers, cookies, sandwich biscuits, and assorted specialty biscuits.

Over the past decade, the company has repositioned itself strategically in several key areas.

• Strategic reorientation. From a largely export-oriented model in the mid-2010s, the company began placing greater emphasis on domestic market growth post-2020.

• Operational modernization. Throughout the decade, the company made gradual upgrades to its manufacturing infrastructure. Together with improved cost discipline and risk management, this has helped enhance operational resilience.

• Brand positioning and domestic focus. The company has sharpened its brand positioning in Malaysia. This shift is evident in its financial recovery in 2024, attributed primarily to higher demand from domestic channels (about ¾ of the total revenue) rather than international sales.

Hwa Tai operates in a mature market, as exemplified by the following:

“Cookies (Sweet Biscuits) market in Malaysia registered a positive compound annual growth rate (CAGR) of 2.39% during the period 2012 to 2017” Research and Markets 

“Revenue in the Confectionery & Snacks market (Malaysia) amounts to USD 7.56 bn in 2025. The market is expected to grow annually by 7.29% (CAGR 2025-2030).” Statista

“The Malaysia biscuit and crackers market is estimated to grow at a CAGR of 4.9% during the forecast period (2020-2026).” 6W Research

Operating performance

From 2015 to 2024, Hwa Tai's revenue grew at 4.7 % CAGR. The positive picture was that PAT grew at a higher rate of 16.9 % CAGR over the same period. Refer to the left part of Chart 1. However, the profit growth was volatile.

• Hwa Tai’s loss in 2018 was not due to poor sales but rather due to higher costs, impaired assets, and ineffective cost absorption from marketing and international expansion initiatives.

• The losses from 2021 to 2023 were primarily due to cost structure mismatches, asset impairments, and operational inefficiencies.

• The stronger 2024 performance was due to increased domestic sales, stable operations, and a tax credit boost - all of which reversed the trend of losses seen from 2021 to 2023.

Chart 1: Performance Index and Margins

Given the profit picture, you should not be surprised to see volatile and declining returns. Refer to the left part of Chart 2. The positive sign is that the 2024 ROIC and ROE were higher than those in 2015. Can the 2024 turnaround be sustained?

Breakeven

The right part of Chart 1 gives a sense of the challenges faced by the company. The gross profit margin has been declining over the past decade. However, this was partly offset by the declining Selling, General, and Administration (SGA) margin. We thus have the picture as shown in the right part of Chart 2.

• While contribution margin declined from 2015 to 2022, there seemed to be an upturn thereafter.

• Fixed cost is about 1/3 of the total cost. Fixed cost grew at a lower rate than revenue.

With such a cost structure, as sales increase, a larger portion of the additional revenue contributes directly to profit rather than being absorbed by rising overheads. This positions Hwa Tai to scale more efficiently. It enhances the company’s resilience, as it can now reach its break-even point more quickly and withstand periods of revenue volatility with greater financial stability.

The losses for many years were because the Group was operating below the breakeven level. This is illustrated in the right part of Chart 2 where a loss occurs when revenue is lower than the total cost (fixed + variable). 

The Group was profitable in 2024 mainly due to revenue growth.

Chart 2: Returns and Operating Profit

Note to Op Profit. I broke down the operating profits into fixed costs and variable costs.

• Fixed cost = SGA, Depreciation & Amortization and Others.
• Variable cost = Cost of Sales that excluded Depreciation & Amortization.
• Contribution = Revenue – Variable Cost.
• Contribution margin = Contribution/Revenue.

The 2024 turnaround seems to be underpinned by stronger fundamentals - growing sales, improving cost efficiency, better cash flow, and no reliance on non-recurring gains. Here are the key indicators pointing to the potential sustainability of the turnaround:

• Revenue growth is driven by core domestic demand.

• Operating leverage is kicking in. Fixed costs, which make up about one-third of total costs, have grown slower than revenue. This creates positive operating leverage, a key sign of scalable and sustainable operations.

• No one-off gains or unusual adjustments. The profit before tax reflects the underlying business performance.

• Cost controls are evident. Impairment losses, inventory write-downs, and other operational inefficiencies seen in previous years were largely absent in 2024.

• Improving cash flows. Hwa Tai posted a positive operating cash flow of RM 2.7 million in 2024, a reversal from the negative cash flows of previous years. Sustained positive cash generation is essential for funding growth and reducing reliance on borrowings.

However, exports remain weak, so the turnaround still relies heavily on Malaysia. Diversifying growth would enhance long-term resilience.

Peer comparison

I compared Hwa Tai’s performance with several Bursa companies in the snacks and confectionary sector. 

You can see from Table 1 that Hwa Tai ranked among the smaller ones in terms of Total Assets and Total Equity. 

Table 1: Peer Total Assets and Total Equity

Hwa Tai’s performance was worse than the sector median based on the following metrics:

• Hwa Tai's revenue and PAT were much smaller than the sector median. However, its PAT was less volatile than the sector. Refer to Chart 3.

• Hwa Tai had lower and more volatile returns than the sector median. Refer to Chart 4.

• Hwa Tai was less efficient as measured by the operating profit margin and gross profitability. Refer to Chart 5.

• Hwa Tai had lower Cash Flow from Operations and a higher Debt Equity ratio than the sector median. Refer to Chart 6.

Chart 3: Peer Revenue and PAT

Chart 4: Peer ROE and ROA

Chart 5: Peer Op Profit Margin and Gross Profitability

Chart 6: Peer Cash Flow from Ops and Debt Equity Ratio

In summary, Hwa Tai underperformed the sector median in key areas. It recorded lower revenue and profits, delivered weaker and more volatile returns, and operated with less efficiency. Additionally, it had lower operating cash flow and a higher debt-equity ratio, highlighting financial and operational challenges relative to its peers.

Case Notes Peer comparison is a powerful tool in fundamental analysis because it helps you evaluate a company relative to its competitors in the same industry. Here are the key benefits: Puts numbers into context. Identifies outliers. Improves risk assessment. By comparing with peers, you get a better feel for how well the company is positioned to handle industry cycles. Test management performance. Assesses competitive advantage or the lack of it. As you can see, there are many issues to consider when carrying out a fundamental analysis of companies in this sector. This requires expertise and time.  Visualizing a company’s business performance and investment risk (by comparing market price with intrinsic value) is one way to shortcut the process. The Fundamental Mapper helps investors make informed decisions as it provides such insights in an easy-to-see format. You can see the position of Hwa Tai as of 9 Mar 2025 in the Fundamental Mapper chart below. Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies PS: The Fundamental Mapper gives you a first-cut picture. For companies falling into the Quicksand quadrant, it is an obvious choice. The fundamental analysis presented in my article provides a more nuanced picture of the investment opportunity.

Case Notes

Peer comparison is a powerful tool in fundamental analysis because it helps you evaluate a company relative to its competitors in the same industry. Here are the key benefits:

• Puts numbers into context.

• Identifies outliers.

• Improves risk assessment. By comparing with peers, you get a better feel for how well the company is positioned to handle industry cycles.

• Test management performance.

• Assesses competitive advantage or the lack of it.

As you can see, there are many issues to consider when carrying out a fundamental analysis of companies in this sector. This requires expertise and time. 

Visualizing a company’s business performance and investment risk (by comparing market price with intrinsic value) is one way to shortcut the process. The Fundamental Mapper helps investors make informed decisions as it provides such insights in an easy-to-see format.

You can see the position of Hwa Tai as of 9 Mar 2025 in the Fundamental Mapper chart below.

Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies

PS: The Fundamental Mapper gives you a first-cut picture. For companies falling into the Quicksand quadrant, it is an obvious choice. The fundamental analysis presented in my article provides a more nuanced picture of the investment opportunity. 

Case Notes

Peer comparison is a powerful tool in fundamental analysis because it helps you evaluate a company relative to its competitors in the same industry. Here are the key benefits:

• Puts numbers into context.

• Identifies outliers.

• Improves risk assessment. By comparing with peers, you get a better feel for how well the company is positioned to handle industry cycles.

• Test management performance.

• Assesses competitive advantage or the lack of it.

As you can see, there are many issues to consider when carrying out a fundamental analysis of companies in this sector. This requires expertise and time. 

Visualizing a company’s business performance and investment risk (by comparing market price with intrinsic value) is one way to shortcut the process. The Fundamental Mapper helps investors make informed decisions as it provides such insights in an easy-to-see format.

You can see the position of Hwa Tai as of 9 Mar 2025 in the Fundamental Mapper chart below.

Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies

PS: The Fundamental Mapper gives you a first-cut picture. For companies falling into the Quicksand quadrant, it is an obvious choice. The fundamental analysis presented in my article provides a more nuanced picture of the investment opportunity. 

Case Notes

Peer comparison is a powerful tool in fundamental analysis because it helps you evaluate a company relative to its competitors in the same industry. Here are the key benefits:

• Puts numbers into context.

• Identifies outliers.

• Improves risk assessment. By comparing with peers, you get a better feel for how well the company is positioned to handle industry cycles.

• Test management performance.

• Assesses competitive advantage or the lack of it.

As you can see, there are many issues to consider when carrying out a fundamental analysis of companies in this sector. This requires expertise and time. 

Visualizing a company’s business performance and investment risk (by comparing market price with intrinsic value) is one way to shortcut the process. The Fundamental Mapper helps investors make informed decisions as it provides such insights in an easy-to-see format.

You can see the position of Hwa Tai as of 9 Mar 2025 in the Fundamental Mapper chart below.

Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies

PS: The Fundamental Mapper gives you a first-cut picture. For companies falling into the Quicksand quadrant, it is an obvious choice. The fundamental analysis presented in my article provides a more nuanced picture of the investment opportunity. 

Financial position

I would not consider the Group as financially strong. While the Group has some positives like recent profit and cash on hand, the high leverage, inconsistent operating cash flow, and reliance on debt to fund operations weigh more heavily.

Its positives were:

• As of Dec 2024, it had RM 8 million in cash. This is equal to 8 % of its total assets. 

• It has an average negative Reinvestment rate over the past decade. This meant that the amount spent on CAPEX was more than offset by the Depreciation & Amortization.

• From 2013 to 2024, it generated RM 4 million in cash flow from operations compared to the total loss after tax of RM 17 million. This is a reasonable cash flow conversion ratio.

I see the following as its negative points:

• As of Dec 2024, it had a debt-capital ratio of 138 %. While high, it has come down from its 2022 high of 196 %.

• Over the past decade, it generated positive cash flow from operations in 6 out of the 10 years.

• It had a challenging capital allocation plan. Refer to Table 2. The cash flow from operations was not sufficient to fund its CAPEX.

Table 2: Sources and Uses of Funds 2015 to 2024

Valuation

My analysis showed that Hwa Tai is undergoing a turnaround. In valuing Hwa Tai, I assumed that the turnaround could be sustained based on the following picture:

• The base revenue would be the 2024 revenue. Revenue would grow at 11 % in Year 1 based on the past 3 years' average revenue growth rate. Thereafter, it would reduce proportionately to reach the terminal growth rate of 4% in Year 6.

• The base contribution margin would be the 2024 margin. I assumed that there would not be any improvement in the contribution margin over the valuation period.

• The base reinvestment rate would follow the past decade average and increase proportionately to reach the one given by the fundamental growth equation in the terminal year.

• The base fixed cost would be the 2024 value, growing at 4% per annum.

• The tax rate would be the average 2015 to 2024 positive tax rate.

On such a basis, I obtained an intrinsic value of RM 1.43 per share compared to its market price of RM 0.51 per share (27 Mar 2025). There is more than a 30% margin of safety.

Valuation model

I valued Hwa Tai based on a multi-stage valuation model, as shown in Table 4. 

The basic equations used in the model are:

Free Cash Flow to the Firm or FCFF = EBIT(1 – t) – Reinvestment.

EBIT = Revenue X Contribution margin – Fixed cost. The earning was based on the business model shown in the left part of Chart 2.

Reinvestment was derived from the Reinvestment margin.

Table 3: Sample calculation

Notes

a. Proportionate reduction

b. Pegged to growth rate

c. Assumed no improvement

d. Assumed growth at terminal rate

e. Revenue X Margin and after accounting for Fixed costs

f. Assumed proportionate improvement

g. b X f

h. FCFF for each year = e - g

j. Assumed constant D/E ratio. Refer to the WACC table

k. NPV for each year = (h X j)

l. Terminal for the year discounted at terminal growth rate

m. 5 years NPV + terminal value

n. Inclusive of any excess TCE. Non-operating assets, MI, and Debt

o. Based on the number of shares

The cost of funds was based on the first page results of a Google search for “Hwa Tai WACC”. Refer to Table 4.

Table 4: Estimating the cost of funds

Risks and limitations

I believe that I have taken an optimistic approach in my valuation, as illustrated in Chart 7

• The projected FCFF is much larger than the historical one. The historical FCFF is also more volatile.

• The projected fixed cost margin averaged 23% compared to the past decade average of 32%.

• The average projected EBIT margin of 7% is much higher than the 2024 EBIT margin of 3%.

• The average projected ROIC of 9 % is also much higher than the 2024 ROIC of 6%.

Chart 7: Projection vs History

The biggest challenge in valuing Hwa Tai is estimating the growth rate. If the growth rate in Year 1 was reduced to 7.7 %, the intrinsic value reduces to the market price.

While I have assumed the past 3 years' average growth rate of 11% for Year 1, I would like to point out that the revenue growth rate in 2024 was about 24%. Seen in this light, you may think that my 11% does not look unreasonable.

However, I hasten to add that Hwa Tai is operating in a mature sector. To grow at the projected growth rate, it has to gain market share. I am not sure whether competitors are going to sit by and allow Hwa Tai to gain market share. 

Conclusion

Hwa Tai's turnaround in 2024 signals a positive shift underpinned by stronger fundamentals.  There were rising domestic demand, operating leverage, improved cost controls, and better cash flow. However, the company still faces structural weaknesses in its financial position. It also continues to lag behind peers in terms of scale, margins, and returns.

Valuation-wise, the stock appears significantly underpriced based on optimistic but not unreasonable assumptions of sustained growth and operating efficiency. The derived intrinsic value of RM 1.43 per share offers more than a 30% margin of safety against the current market price.

Yet, there are risks. 

• The company operates in a mature and competitive industry. The sustainability of the turnaround hinges on gaining market share and maintaining cost discipline. 

• The valuation is highly sensitive to growth assumptions, and a modest reduction in the forecast can erase the margin of safety.

Investment thesis

Hwa Tai offers a potential value investing opportunity backed by a credible turnaround. In 2024, the company returned to profitability, driven by stronger domestic demand, improved cost efficiency, and positive operating leverage. 

Importantly, the recovery was underpinned by core business improvements, not one-off gains. The company’s focus on Malaysia’s growing snacks and confectionery market, coupled with ongoing investments in automation and digital channels, supports the case for sustained growth.

Despite these, the market has yet to re-rate the stock. Based on conservative assumptions, Hwa Tai’s intrinsic value provides more than a 30% margin of safety. But risks remain - high leverage, limited export traction, and competition from larger peers.

Case Notes An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions.  It defines your reasoning. A clear thesis encourages disciplined decision-making. It helps assess risks. It provides a benchmark to evaluate whether the investment is performing as expected. An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

Case Notes

An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions. 

• It defines your reasoning.

• A clear thesis encourages disciplined decision-making.

• It helps assess risks.

• It provides a benchmark to evaluate whether the investment is performing as expected.

An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

Case Notes

An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions. 

• It defines your reasoning.

• A clear thesis encourages disciplined decision-making.

• It helps assess risks.

• It provides a benchmark to evaluate whether the investment is performing as expected.

An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

Case Notes

An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions. 

• It defines your reasoning.

• A clear thesis encourages disciplined decision-making.

• It helps assess risks.

• It provides a benchmark to evaluate whether the investment is performing as expected.

An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

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If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from Amazon, Kobo and Google Play.

PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. 

Disclaimer & Disclosure

I am not an investment adviser, security analyst, or stockbroker.  The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies.   Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. 

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. 

I may have equity interests in some of the companies featured.

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