Company Reports

While narrow-moat Tingyi’s first-half 2024 revenue trailed our estimate, net profit exceeded our forecast thanks to better-than-expected gross margin and lower-than-expected operating expenses. An input cost tailwind and positive mix shift were major drivers of gross margin expansion across food and beverage segments. We lifted our 2024-25 net income estimates by 6%-7% to account for better gross margin but left our longer-term forecasts largely unchanged. We retain our fair value estimate at HKD 12.70 per share, which implies 19 times 2024 price/earnings, 8 times enterprise value/EBITDA, and a 5.3% dividend yield. Although management lowered its 2024 revenue growth guidance to low single digits, this is consistent with our estimate. Positively, Tingyi reiterated its 2024 dividend payout ratio target of 100%, which implies a 7% dividend yield based on the current share price. We continue to see the shares as undervalued.

Tingyi is a leading packaged-food and beverage producer in China, with the number-one market share in instant noodles and ready-to-drink tea. Apart from its own Master Kong brand, the company sells and distributes PepsiCo’s carbonated soft drinks and Gatorade in China. Tingyi’s portfolio primarily targets the mass market of convenience food and RTD beverages. Through its widespread point-of-sale coverage in the country, the company profits from economies of scale enabled by its nationwide distributors (80% of total sales).

We reviewed our 2024 estimates for narrow-moat Tingyi ahead of the release of its interim results. We think the company would still face headwinds in instant noodles sales due to sluggish consumer sentiment and reduced consumption by migrant workers. However, we expect these to be offset by stronger growth in the beverage segment. As such, our 2024 revenue and profit projections are unchanged. We retain our fair value estimate at HKD 12.70 per share, which implies 20 times 2024 price/earnings, 9 times enterprise value/EBITDA, and 4.9% dividend yield. We think the current share price is undervalued, supported by an attractive dividend yield of 6.5%.

Tingyi is a leading packaged food and beverage producer in China, with the number-one market share in instant noodles and ready-to-drink tea. Apart from its own "Master Kong" brand, the company also sells and distributes PepsiCo’s carbonated soft drinks and Gatorade in China. Tingyi’s portfolio primarily targets the mass market of convenience food and RTD beverages. Through its widespread point-of-sale coverage in the country, the company profits from economies of scale enabled by its nationwide distributors (80% of total sales).

Narrow-moat Tingyi reported 2023 results that fell short of our estimates on revenue and profit, as the company increased channel expenditures amid soft demand across instant noodles and beverages. We lowered our 2024 revenue and net income projections by 2% and 8%, respectively, and think top-line growth would trend below management’s guidance in the mid- to high-single-digit range. We left our long-term forecasts largely unchanged, as our prior view did not bake in aggressive growth. As a result, we retained our fair value estimate at HKD 12.70 per share, which implies 20 times 2024 P/E, 9 times EV/EBITDA, and a 5% dividend yield. We see shares as undervalued with a 2024 dividend yield of 7.5%, but we note some investors could be concerned about its muted top-line growth in the near term. Management also highlighted its intention to retain the 100% dividend payout ratio over the next few years. We think this can be maintained with Tingyi’s operating cash flow and stable capital expenditure.

Tingyi is a leading packaged food and beverage producer in China, with the number-one market share in instant noodles and ready-to-drink tea. Apart from its own "Master Kong" brand, the company also sells and distributes PepsiCo’s carbonated soft drinks and Gatorade in China. Tingyi’s portfolio primarily targets the mass market of convenience food and RTD beverages. Through its widespread point-of-sale coverage in the country, the company profits from the vast volume sold through nationwide distributors (80% of total sales).

We revised our earnings forecasts for narrow-moat-rated Nongfu Spring and Tingyi after a fresh look at their growth outlook in the China ready-to-drink, or RTD, beverage market. We lifted our 2023-24 net income forecasts for Nongfu Spring by 9%-16% but lowered estimates for Tingyi by 6%-22%. Nongfu Spring has gained market share over peers including Tingyi in the RTD tea category, resulting in robust revenue growth in the second half of 2023. We expect Nongfu’s operating outperformance in this segment to continue in 2024. Tingyi, on the contrary, is set to face sales headwinds across the beverage and instant noodle categories.

Tingyi is a leading packaged food and beverage producer in China, with the number-one market share in instant noodles and ready-to-drink tea. Apart from its own "Master Kong" brand, the company also sells and distributes PepsiCo’s carbonated soft drinks and Gatorade in China. Tingyi’s portfolio primarily targets the mass market of convenience food and RTD beverages. Through its widespread point-of-sale coverage in the country, the company profits from the vast volume sold through nationwide distributors (80% of total sales).

Tingyi is a leading packaged food and beverage producer in China, with the number-one market share in instant noodles and ready-to-drink tea. Apart from its own "Master Kong" brand, the company also sells and distributes PepsiCo’s carbonated soft drinks and Gatorade in China. Tingyi’s portfolio primarily targets the mass market of convenience food and RTD beverages. Through its widespread point-of-sale coverage in the country, the company profits from the vast volume sold through nationwide distributors (80% of total sales).

Narrow-moat Tingyi posted first-half 2023 results that slightly outpaced our expectations, primarily due to better-than-expected margins in the instant noodles segment. However, we lower our fair value estimate to HKD 14.30 from HKD 14.90 on currency headwinds and lower midterm profit assumptions due to higher sugar prices. Otherwise, we maintain our view that the company should reach its 2023 sales and net profit guidance. We also retain our long-term view that volume in beverages and prices in instant noodles are key top-line growth drivers for Tingyi. Overall, we think the share price is attractive versus historical multiples. Management expects 100% payout over the next few years.

Tingyi is a leading packaged food and beverage producer in China, with the number-one market share in instant noodles and ready-to-drink tea. Apart from its own "Master Kong" brand, the company also sells and distributes PepsiCo’s carbonated soft drinks and Gatorade in China. Tingyi’s portfolio primarily targets the mass market of convenience food and RTD beverages. Through its widespread point-of-sale coverage in the country, the company profits from the vast volume sold through nationwide distributors (80% of total sales).

Narrow-moat Tingyi reported 2022 results that were below Refintiv consensus on the top line and net profit, but slightly above our estimates. Management guided to 2023 net profit that was below consensus estimates, as the company intends to raise channel expenses in order to gain back market share. We think the company’s net profit guide is cautious and it could benefit from reviving foot traffic as well as lower input costs in 2023. While there could be near-term headwinds to the share price with the below-consensus profit guidance, we maintain our fair value estimate at HKD 14.9 per share (19 times 2023 P/E) and believe investors could consider the stock price correction as an entry point opportunity.

Tingyi is a leading packaged food and beverage producer in China, with the number-one market share in instant noodles and ready-to-drink tea. Apart from its own "Master Kong" brand, the company also sells and distributes PepsiCo’s carbonated soft drinks and Gatorade in China. Tingyi’s portfolio primarily targets the mass market of convenience food and RTD beverages. Through its widespread point-of-sale coverage in the country, the company profits from the vast volume sold through nationwide distributors (80% of total sales).

We spoke with management of narrow-moat Tingyi ahead of the Lunar New Year and revised our 2022 profit estimates due to higher cost assumptions, but we broadly retain our 2023 sales and net income forecasts. We think improving foot traffic and channel expansion could help drive mid-single-digit top-line growth this year and a slightly higher net income versus 2021. Tingyi’s shares are trading at 16 times 2023 P/E, which is below the five-year historical average of 19 times. The company’s stock has lagged food and beverage peers over the past few months, likely due to investors’ concern about the impact from the pickled noodles sales decline following its food safety incident. We think the company could recover its instant noodle sales through other product lineups and benefit from lower palm oil prices in 2023. Normalizing foot traffic should also boost beverage sales. As a result, we retain our fair value estimate at HKD 14.90 per share and think shares are attractive at the current price.

Narrow-moat Tingyi reported first-half earnings with resilient sales growth but a more sluggish bottom line suppressed by inflationary pressure. Our below-consensus net profit estimates have assumed a lower-than-normalized net margin level for the period but beverage growth outpaced our expectations. The EBIT margin contraction in the first half was a result of rising cost pressure, inventory write-off and increased channel expenses. We think the company’s margin level could normalize next year as these headwinds dissipate. We raised our 2022 sales estimates to mid-single-digit growth but keep our net income assumption broadly unchanged. Our fair value estimate remains at HKD 14.90 per share, which imply 25 and 18 times 2022 and 2023 P/E multiples, respectively. The current valuation has likely priced in sluggish net income trends in 2022. Management updated full-year net income guidance that trailed Refinitiv consensus but our pre-earnings forecast was within the guided range. We think the updated guide is achievable. In our view, the stock could have potential upside as the market looks through the headwinds this year and focuses on a more normalized profit level in 2023.

We are increasing our moat rating for Tingyi to narrow from none but lowering our fair value estimate to HKD 14.90 per share from HKD 15.90 due to a lower structural growth assumption. Although we now believe Tingyi’s distribution network and entrenched relationship with retailers warrants a narrow economic moat, we do not see material upside to the stock versus our fair value estimate. The recent lockdowns in China have hampered beverage sales due to reduced foot traffic, whereas food quality issues have weighed on flagship instant noodle sales. Rising input costs will further exacerbate margin pressure in 2022. We see risks to 2022 sales growth guided by management in the first quarter, especially for the beverage segment. Our fair value estimate implies 25 times forward P/E, which is close to Tingyi’s historical average. Despite being priced at a slight discount versus our fair value estimate, we think there is near-term risk of growth undershooting company expectations.

Tingyi is a leading packaged food and beverage producer in China, with the number-one market share in instant noodles and ready-to-drink tea. Apart from its own "Master Kong" brand, the company also sells and distributes PepsiCo’s carbonated soft drinks and Gatorade in China. Tingyi’s portfolio primarily targets the mass market of convenience food and RTD beverages. Through its widespread point-of-sale coverage in the country, the company profits from the vast volume sold through nationwide distributors (80% of total sales).

Since its 1992 inception, Tingyi has expanded rapidly, evolving into one of China's best-established packaged-food manufacturers. For more than a decade, Tingyi remains the market leader in instant noodles and ready-to-drink tea beverages based on sales, with 45.4% and 42.1% volume market share, respectively, in 2020. It is also one of the top-five juice and bottled water producers, with 17.5% and 6.2% market share, respectively.

Tingyi reported a strong top line in 2021 of CNY 74 billion, up 10% from last year, but the operating margin fell below our expectations at 5.5%, mainly due to higher input costs. We are lowering Tingyi’s fair value estimate to HKD15.9 per share from HKD 17.7 per share, after revising downward our fiscal 2022 and medium-term margin forecasts. The Russia-Ukraine conflict has exacerbated raw material price hikes, weighing on the near-term profit outlook. A food safety-related scandal involving one of Tingyi’s instant noodle suppliers has further dampened the sales outlook in our view. Shares are undervalued versus our fair value estimate as we think longer-term fundamentals remain unchanged. But we expect the near-term share price to remain pressurized due to the above headwinds on margins over the next 12 months.

The recent acceleration in commodity prices as a result of the Russia-Ukraine conflict has exacerbated the margin pressure on packaged food companies brought about by supply disruptions throughout 2021. Various food and beverage companies in China have engaged in price hikes since the third quarter last year to mitigate margin compression. We continue to highlight Yili as our top pick, with our fair value estimate at CNY 46 per share, as we think the premiumization trend and continued penetration of dairy products in China are unchanged. The raw milk cost curve continued to moderate in early March, which should mitigate margin pressure observed since the second half of 2021. Robust sales reported for January and February at 15% growth year on year also confirm our constructive view. We expect categories with more room to maneuver on premiumization and higher concentration of share to command stronger pricing power and face lower margin pressure in the near term.