Uni-President China’s Q3 Profit Fell Notably, but We Expect Turnaround in 2023; FVE Cut to HKD 6.90

No-moat Uni-President China, or UPC, reported third-quarter numbers that missed our net profit estimates despite stronger-than-expected revenue growth. Higher costs drove net profit down 17% year over year, although cost pressure was somewhat alleviated sequentially from the first half of the year. We think UPC’s products are positioned at economy price points and hence should be defensive during a sluggish economy. The company appeared to also have prepared a product pipeline that could drive positive mix shift when consumers trade up again. Nevertheless, we expect near-term earnings to continue to be constrained by rising costs, potentially through early next year. Although we have raised our top-line sales estimates for 2022, we have trimmed our net profit forecasts for the year. Together with a negative impact from currency movements, we lowered our fair value estimate to HKD 6.90 per share (from HKD 7.20 per share), which represents an implied forward 2023 P/E of 18 times, slightly below the five-year average of 20 times. While near-term sentiment could be suppressed by weak earnings, the stock is moderately undervalued and we expect the company to be able to turn around more meaningfully next year as the cost and demand environment improves.