Tingyi Holding Group (322.HK) BUY
Initial Coverage Research
03-NOV-2008
Tingyi Holding Group (322.HK)
Basic Information Sector
Consumer
Prev. Closed
8.10
Dept.
BUY
A dominate player in the world’s largest market
10.61
Tingyi, headquartered in Tianjin, is one of China’s leading food and beverage players. The company ’s started its instant noodle segment in 1992, and expanded into the bakery segment and beverage segment in 1996 which all owns the leading position in cert ain segments in China currently.
HK$ (Billion)
49.18
US$ (Billion)
6.35
52-week High
13.6
52-week Low
6.6
Target Price Market Cap
Shares outstanding
Initiation with a Buy; target price of HK$10.61: We initiate Tingyi Holdings Group with a “Buy” recommendation and set up a target price of HK$10.61 which implies a 23x 2009E EPS, based on our DCF analysis model.
5,589 Mn
Our target price
translates to 31.0% upside.
Performance (%) Relative
Absolute
Pleasant outlook for instant noodle industry; China is the world’s largest
Index
HSI
322.HK
instant noodle consumer which accounts for more than one-third of global consumption
1 month
20.0%
1.1%
in terms of volume. We believe the industry’s organic growth of 10% per year to persist
3 month
31.9%
(5.4%)
in the following 3-5 years due to (1) low per capita basis, (2) increasing demand from
12 month
31.5%
(21.4%)
Performance 30%
Charts
322 HK Equity
rural areas, and (3) rising quality attention to support ASP growth.
More healthy driven products in beverage market: Chinese beverage market size was roughly RMB 100bn in 2007 and grew at a CAGR of 20% over the past five years. We noted that ready-to-drink tea (RTD tea), bottle water, and juice grew at a
HSI Index
faster pace than carbonated drink as beverage buyers tend to pay more attention on their health.
0%
-30%
With more than 10 years operation experience in China, Tingyi has enjoyed a splendid
-60%
02/22
Strong brand name, rich sales network, and impressive gross margin:
04/07
05/22
07/06
08/20
10/04
growth at a CAGR of 20%+ since 2001 in terms of both sales and net profits attributed to shareholders. We believe the growth to persist, thanks to its (1) dominant position in the world’s largest market, (2) strong sales channel network, and (3) stable gross margin of 32-33% under restricted cost management.
Top pick in Chinese F&B sector: Tingyi is our top pick among Chinese F&B sector due to its largest economy of scale, dominant position in the market, better
A n a l ys t :
profitability, and strong management efficiency.
We forecast the company’s 2008
Sophie Fan
sales and net profits to grow 31.7% and 37.7% YoY, respectively. For 2009, we project
(852)2105-1112
sales to rise 23.8% YoY and net profit to increase 22.7%.
[email protected]
Initial Coverage Research
Dept.
Investment Summary We initiate Tingyi Holdings Group with a “Buy” recommendation and set up a target price of HK$10.61 which implies a 23x 2009E EPS, based on our DCF analysis model. With more than 10 years operation experience in China, Tingyi has enjoyed a splendid growth at a CAGR of 20%+ since 2001 in terms of both sales and net profits attributed to shareholders. We believe the growth to persist thanks to following reasons.
(1)
A dominant position in the world’s largest market.
The company has a leading
position in Chinese instant noodle and beverage markets supported by its high brand recognition. Currently, the company owns a 46.6% market share of Chinese instant noodle market. In terms of Tingyi’s super product, ready-to-drink tea of beverage segment, it holds a market share of 41.3%. (2)
Strong sales channel network. Tingyi has cultivated in its sales channel network by minimizing the number of layers between wholesalers and retail nodes which gives the company stronger pricing power and better understanding on customers’ consumption behavior.
(3)
Stable gross margin under restrict cost management.
Though raw material price
has flied since 2005, the company demonstrates its capability of cost management by maintaining gross margin at a stable and high level of roughly 32%.
We forecast Tingyi’s 2008 sales and net profits to grow 31.7% and 37.7% YoY, respectively. For 2009, we project sales to rise 23.8% YoY and net profit to increase 22.7%.
Exhibit 1. Tingyi's sales and gross margin from 2002 to 2009E HK$ mn
%
6,000
40
5,000
32
4,000 24 3,000 16 2,000 8
1,000 0
0 2002
2003
2004
Sales (LHS)
Source: CMoney
2005
2006
2007
2008E 2009E
Gross Margin (RHS)
Initial Coverage Research
Dept.
Investment Thesis The world’s largest market Chinese instant noodles market - a stable industry organic growth of 10%. China is the world’s largest instant noodle consumer.
According to China Food Industry
Association, Chinese instant noodle consumption accounts for more than one-third of global consumption in terms of volume. Total market size is worth approximately RMB 30bn per year.
In this huge market, top three players, Master Kong, Hualong, and Uni-President,
control 60% and 70% market shares by volume and value, respectively.
Over the last decade, Chinese instant noodles market has grown at a GAGR of 10% annually. We believe the industry’s organic growth of 10% per year to persist in the following 3-5 years due to three reasons. (1)
Low per capita basis. Although China is the largest instant noodle consumer in the
world, it only ranks at the fifth on a per capita basis.
Annual instant noodles consumption per
person is 20 packets in 2007 that we believe it still has plenty of room to grow compared to Japan’s 80, Korea’s 45, Taiwan’s 44 packets, and Hong Kong’s 43 packets. (2)
Increasing demand from rural areas.
Due to low penetration rate, we believe further
instant noodle sales volume growth can be supported by rising demand from tier 2 and tier 3 cities. (3)
Rising quality attention to support ASP growth. Though street concerns instant noodle
market is likely to be saturated in urban areas, we believe buyers in tier 1 cities tend to shift consumption behavior from convenience attention to quality attention which leads to sustain sales value growth.
Exhibit 2. Chinese instant noodles market shares Market share by volume (%) 2007
2006
Master Kong
34.5
Hualong
16.8
Uni-President Bai-Xiang
Market share by value (%) 2007
2006
32.5
47
43.3
17.1
14.9
14.4
10.3
12.3
10.2
12.1
9.1
10.6
6.7
7.7
Source: AcNielsen
Chinese beverage market – more healthy products driven.
According to
ACNielsen, Chinese beverage market size was roughly RMB 100bn in 2007 and grew at a CAGR of 20% over the past five years. We noted that ready-to-drink tea (RTD tea), bottle water, and juice grew at a faster pace than carbonated drink as beverage buyers tend to pay more attention on their health.
In 2007, packing water comprised 53% of non-alcoholic
beverage sales volume, carbonated drink 22%, juice 13%, RTD tea 12%, and others 1%.
Initial Coverage Research
Dept.
Exhibit 3. Chinese beverage market breakdown in terms of products
RTD tea 12%
Others 1%
Juice 13% Bottle water 52% Carbonated drink 22%
Source: CMoney
Tingyi currently has no plan to enter into carbonated drink market since that is dominated by global big names, such as Coca-cola (US) and Pepsi (US). Instead, the company is the market leader in RTD tea and bottle water segment with a market share of 53.3% and 19.9% by volume, respectively.
We are positive on Chinese beverage market’s future and foresee two key trends in this industry. (1)
Rising ASP: We note that volume growth has dropped faster than value growth for all
segments of the Chinese beverage market, according to the company’s data.
That is
attributed to rising ASP supported by various new products launch, in our view. We expect this trend will continue and help beverage companies to improve their profitability. (2)
Market consolidation:: According to ACNielsen, top players in Chinese beverage market
keep grabbing market share from smaller players due to high brand recognition, aggressive marketing plan, and strong R&D team. We, thus, consider that big players such as Tingyi will be one of the key beneficiaries amid the trend of market consolidation.
Exhibit 4. Chinese beverage market shares - RTD tea Market share by volume (%)
Market share by value (%)
2007
2006
2007
2006
Master Kong
53.3
55.2
51.9
53.6
Uni-President
22.5
22.5
22.8
23.0
Wahaha
9.7
8.7
9.9
8.7
Coca Cola
5.3
5.5
5.6
5.9
Source: AcNielsen
Initial Coverage Research
Dept.
Exhibit 5. Chinese beverage market shares - Diluted juice Market share by volume (%)
Coca Cola
Market share by value (%)
2007
2006
2007
2006
25.9
21.0
29.6
24.5
Uni-President
25.7
31.5
24.3
29.2
Master Kong
18.1
18.8
16.5
17.1
Hui Yuan
8.8
8.1
7.5
7.7
Wahaha
2.7
4.0
2.6
3.8
Source: AcNielsen
Exhibit 6. Chinese beverage market shares - Bottle water Market share by volume (%)
Master Kong
Market share by value (%)
2007
2006
2007
2006
19.9
12.7
18.6
12.4
Wahaha
14.6
14.5
16.2
15.9
Farmer's Spring
10.2
10.2
11.0
10.7
Yi Bao
8.4
7.0
10.8
9.0
Coca Cola
5.0
6.3
4.5
5.7
Run Tian
3.2
3.1
2.8
2.7
Robust
2.4
3.3
2.4
3.3
Source: AcNielsen
Tingyi’s core competitive advantages Tingyi has enjoyed a splendid growth at a CAGR of 20%+ since 2001 in terms of both sales and net profits attributed to shareholders.
We view brand name and sales channels are the
company’s core competitive advantages
The most popular brand name – Master Kong. Tingyi markets almost all the products under its own “Master Kong” brand.
Master Kong are ranked as the most popular F&B brand
name in China with instant noodles, RTD tea, and bottle water market share of 34.5%, 53.3%, and 19.9%, respectively.
Meanwhile, low-end packet noodles are sold under another own “Fu
Man Duo” brand which is established to heighten the entry barrier of low-end instant noodles market. We are positive on Tingyi’s since the company owns the most popular brand name in the world’s largest market and is likely to continue grabbing market share from smaller players supported by its high brand recognition, large economy of scale, solid R&D team and, strong financial support in the future.
Solid distribution network. Tingyi owns 535 sales offices, 82 warehouses, 5,999 wholesalers, and 68,717 direct retailers nationwide as at the end of 2007 that is the richest distribution network among all F&B players in China. In order to have better control over the end retail nodes, Tingyi has worked hard on minimizing the layers of wholesalers in the supply chain. First, the company requires its salespeople to accompany its wholesaler clients to take
Initial Coverage Research
Dept.
orders from end-retailers. Second, the company has devoted itself to penetrate into tier 2 to tier 3 cities which has larger growth potential. The rich distribution network and control power over end retailer give the company stronger pricing power and better understanding on customers’ consumption behavior.
Impressive gross margin Though raw material price has flied since 2005, the company demonstrates its capability of cost management by maintaining gross margin at a stable and high level of roughly 32%. In 1H08, gross margin of instant noodles, beverages, and bakery business increased 1.9 ppts, 0.54 ppts, and 1.1 ppts, to 26.0%, 38.9%, and 38.3%, respectively.
Management indicated the improving numbers are supported by better product
mix and restricted cost control. We estimate that 2008 and 2009 gross margin will maintain at the health level of 32.86% and 32.60%, respectively.
Exhibit 7. Tingyi’s major raw material price trends RMB/Ton 12000
10000
8000
6000
4000
2000
0 1Q/02
1Q/03
1Q/04
1Q/05
1Q/06
1Q/07
1Q/08
PET Resin:60% of PET drink cost
Palm Oil:12-15% of noodle cost
Flour:12-18% of noodle cost
Sugar 10% of PET drink cost
Source: CMoney; CSC Securities
Why Master Kong? Tingyi vs. Uni-President China In China, Uni-President China (220.HK; UPC) is the only one F&B player which has the same product lines (instant noodles and beverage) with Tingyi. We, thus, refer to UPC in our peer comparison.
Larger economy scale; larger market share. For 1H08, Tingyi achieved sales of HK$16bn which was 3 times larger than UPC. In terms of market share, Tingyi stands at No. 1 ranking in instant noodles, RTD tea, and bottle water segments which enjoy market share of 34.5%, 53.3%, and 19.9% which is significantly higher than UPC’s 10.3%, 22.5%
Initial Coverage Research
Dept.
and less than 2%, respectively.
Exhibit 8. Peer comparison - Tingyi vs. UPC (numbers as of 1H08) HK$ mn
Tingyi Holdings
Uni-President China
15,984.2
5,716.7
36.4
13.1
1H08 Sales YoY (%) 1H08 Profits attributed to shareholders
995.3
240.8
YoY (%)
33.2
-18.4
Gross margin (%)
32.9
34.3
Operating margin (%)
10.9
6.0
ROE (%)
11.8
3.8
Source: CMoney; CSC Securities
Higher operating profit margin secured by austere cost control. Compared to UPC which main product is beverage with sales contribution of 75%, Tingyi has less sales contribution from beverage products of 50% which carry higher gross margin than instant noodles (gross margin of beverage and instant noodles are roughly 38% and 28%, respectively, according to management).
UPC, thus, possesses higher gross margin
than Tingyi by approximately 1-2 ppts. However, we noted that Tingyi has a better operating margin of 10.9% than UPC’s 6%, which supported by lower administration expenses, depreciations, and finance costs. This demonstrates that Tingyi has better capability of cost control and working efficiency.
Better ROE. Over the past 3 years, Tingyi’s ROE of 15-18% has performed better than UPC’s 8-10%. Tingyi has had no growth in equity during this period while UPC’s equity has increased by 20%. In 1H08, Tingyi’s capital is HK$8.3bn, which is 129% larger than UPC’s HK$6.4bn. UPC.
On the other hand, Tingyi’s net profit has been 4 times higher than
This implies that Tingyi has better profitability and management efficiency than
peers.
Exhibit 9. ROE of Tingyi vs. UPC % 20 16 12 8 4 0 2005
2006
Tingyi Holdings
Source: CMoney; CSC Securities
2007
1H08
Uni-President China
Initial Coverage Research
Dept.
For the reasons above, we are of the opinion that investors who are interested in the China F&B industry should keep an eye on Tingyi.
Company Overview Started in 1992 and listed in 1996, Tingyi Holdings is one of the leading instant noodles and beverage manufacturers in China.
Major shareholders are Ting Hsin Holdings Corp. and
Sanyo Foods Co. which each holds a 33.2% stake of Tingyi. The former one is a holding entity which controlled by Tingyi’s founder Wei family and the latter one is a major Japanese instant noodle manufacturer.
Instant noodle business – main growth driver. In 1H08, turnover for the instant noodle business was US$982mn, increased by 49.4% from last year and representing 47.94% of the group’s total turnover.
Instant noodle business remains to be the major growth driver of
the company, especially on high margin products. Turnover of high-end noodles grew by 55.49% over the same period of last year where growth rate is impressively higher than the company’s overall sales growth of 36.36%.
Master Kong gained 62.6% and 68.1% market
share respectively for container noodles and high-end packet noodle. We expect instant noodle sales to grow 38.16% and 30.28% YoY in 2008 and 2009, respectively,
Beverage business – slowing growth. In 1H08, beverage business presented a YoY sales growth of 25.19% to US$942mn which accounted for 46.02% of the group’s total sales. Management indicated that slowing growth was due to change in the purchasing structure of consumers, abnormal weather, and intensified competition. We forecast 2008 and 2009 sales of beverage business will increase 24.64% and 18.40% YoY, respectively.
Gross margin will
maintain at a relatively high level of 38-39% compared to the company’s overall gross margin of 32-33%.
Beverage business – yet to take off. The turnover of the bakery business in the first half of the year amounted to US$67mn, an increase of 42.99% YoY and made up 3.31$ of total sales. We attributed the strong growth to its low base and consider that there is no sign showing that the business is going to take off due to fierce competition from global big names such as Kraft.
Valuation Initiation with a Buy; target price of HK$10.61. We initiate Tingyi with a Buy rating and a target price of HK$10.61, based on the DCF valuation since it is more comfortable to reflect the company’s stable operation.
Our assumption of DCF analysis is a WACC of
10.07% and terminal growth rate of 3% which is along with industry average.
Initial Coverage Research
Dept.
The target price implies a 23.1x 2009E PE and a PEG of 1.02x which is above the average of peer group’s 14.2x 2009E PE. We believe Tingyi deserves a valuation premium due to its (1) dominant position in the world’s largest F&B market, (2) solid sales channel network which leads to a stronger pricing power and R&D capability of new product development, (3) better financial management among peers.
We forecast the company’s 2008 sales and net profits to grow 31.7% and 37.7% YoY, respectively. For 2009, we project sales to rise 23.8% YoY and net profit to increase 22.7%. Our target price translates to 31.0% upside. We recommend investors to accumulate the stock on weakness.
Exhibit 10. DCF sensitivity analysis of target price WACC
Target price (HK$)
Terminal growth rate
9.07%
9.57%
10.07%
10.57%
11.07%
2.00%
10.91
10.59
10.28
9.98
9.69
2.50%
11.08
10.75
10.44
10.13
9.84
3.00%
11.26
10.93
10.61
10.30
10.01
3.50%
11.46
11.12
10.80
10.48
10.18
4.00%
11.67
11.33
11.00
10.68
10.37
Source: CSC Securities
Exhibit 11. Peer group comparison in terms of valuation Share price
Stock code
Company name
322.HK
PE
EV/EBITDA
(10/31)
2008E
2009E
2008E
2009E
Tingyi
8.10
21.64
17.63
8.83
7.23
220.HK
Uni-President China
1.65
10.61
7.09
1.92
1.57
168.HK
Tsingtao Brewery
13.54
22.30
17.78
11.48
9.78
151.Hk
Want-want
2.89
18.57
14.86
13.51
10.58
2319.HK
China Mengniu
7.35
34.82
15.35
10.05
6.13
1068.Hk
Yurun Food
9.00
12.02
10.17
10.90
8.38
1216.TT
Uni-President
28.00
17.13
15.44
40.76
37.09
1201.TT
Wei Chuan
15.65
13.32
10.30
--
--
2897.JP
Nissin
2785
16.01
17.20
7.30
6.88
2503.JP
Kirin
1067
8.79
16.61
7.16
6.67
17.52
14.24
12.43
10.48
Average Source: Bloomberg; CSC Securities
Initial Coverage Research
Dept.
Ta b l e 、 I n c o m e Sta t e m e n t (US$ MN except EPS)
2005
2006
2007
2008E
2009E
Revenue
1,846
2,332
3,215
4,233
5,240
Gross Margin
578
752
1,016
1,391
1,708
Operating Profit
180
230
309
460
556
Pretax Income
188
237
317
460
561
Net Income
124
149
195
268
329
0.022
0.027
0.035
0.048
0.059
.Of Revenue
25.82
26.34
37.90
31.65
23.78
.Of Gross Margin
EPS Growth (%)
42.88
30.14
34.97
36.99
22.80
.Of Operating Profit
(39.27)
27.41
34.49
48.74
20.81
.Of Pretax Income
(36.59)
25.97
34.01
44.96
21.90
.Of Net Income
(56.87)
20.56
30.83
37.65
22.74
31.33
32.27
31.58
32.86
32.60
9.78
9.86
9.62
10.86
10.60
10.18
10.15
9.87
10.86
10.70
6.69
6.39
6.06
6.34
6.28
2005
2006
2007
2008E
2009E
Inventory
102
112
155
202
250
Current Asset
418
478
647
863
1,135
Ratio (%) .Of Gross Margin .Of Operating Profit .Of Pretax Income .Of Net Income
S O U R C E ： Ti n g y i ， C S C S e c u r i t i e s e s t i m a t e s
Ta b l e 、 B a l a n c e S h e e t (US$ MN )
Total Asset
1,549
1,840
2,334
2,992
3,728
Current Liability
485
696
925
1,416
1,965
Total Liability
677
927
1,307
1,931
2,617
Equity
872
913
1,028
1,061
1,111
Liability Ratio (%)
43.70
50.37
55.98
64.54
70.20
Debt-to-Equity Ratio
17.49
29.35
38.77
53.48
62.12
Solvency
S O U R C E ： Ti n g y i 1
This publicat ion is issued by CSC Securities (HK) Limited ( “CSCSL”), a licensed corporation to carry on Type 1, 2 & 4 regulat ed activities unde r Securities and Futures Ordinance (CAP. 571) in Hong Kong, for sophisticated investors who understand the meaning of risks in investments and is p rodu ced so lely fo r i n fo rmation p u rpo ses and shou ld not be con st ru ed as an o ffer to buy o r sell an y secu rit ies o r co mmodit ies. Inv esto rs must ma ke their own det ermination in relation to the app rop riat eness of an in vest ment in any secu riti es referred to herein base on th e legal, tax, accountin g con sid eration s and inv est ment st rateg y app li cab le to such investo rs . The info rmation, opin ion s, and projectio ns contai ned in thi s rep o rt are ba sed upon sources believed to be reliable, but they have not been independent ly verified. Neit her CSCSL, nor any of the companies of the Capit al Company, nor any individual connected with the Company shall accept responsibility or liability for any loss occasioned by reliance placed upon t he content s hereo f. The in fo rmation a nd opin i on cont ain ed in thi s repo rt a re sub ject to chan ge w ithout n otice. Th e Capita l Co mp any of whi ch CS CS L is member, and/or their affiliat ed companies and/or directors, representat ives, employees or officers as such, may from time to time perform invest ment , advisory, or other services for the companies ment ioned in this publication, and where the applicable law permit s, the above- mentioned entities or individ ua ls may hav e used the resea rch mat eria ls befo re pub licat ion o r may hav e position s (as p rincipa l o r oth erwi se) in, o r oth erwi se be mat eria lly interested in, any o f th e secu rities ment ion ed herein. Th is rep o rt may not b e rep roduced, di st ribut ed o r pub lished i n any mediu m fo r a ny pu rp ose without prior written approval.
03-NOV-2008
Tingyi Holding Group (322.HK)
Basic Information Sector
Consumer
Prev. Closed
8.10
Dept.
BUY
A dominate player in the world’s largest market
10.61
Tingyi, headquartered in Tianjin, is one of China’s leading food and beverage players. The company ’s started its instant noodle segment in 1992, and expanded into the bakery segment and beverage segment in 1996 which all owns the leading position in cert ain segments in China currently.
HK$ (Billion)
49.18
US$ (Billion)
6.35
52-week High
13.6
52-week Low
6.6
Target Price Market Cap
Shares outstanding
Initiation with a Buy; target price of HK$10.61: We initiate Tingyi Holdings Group with a “Buy” recommendation and set up a target price of HK$10.61 which implies a 23x 2009E EPS, based on our DCF analysis model.
5,589 Mn
Our target price
translates to 31.0% upside.
Performance (%) Relative
Absolute
Pleasant outlook for instant noodle industry; China is the world’s largest
Index
HSI
322.HK
instant noodle consumer which accounts for more than one-third of global consumption
1 month
20.0%
1.1%
in terms of volume. We believe the industry’s organic growth of 10% per year to persist
3 month
31.9%
(5.4%)
in the following 3-5 years due to (1) low per capita basis, (2) increasing demand from
12 month
31.5%
(21.4%)
Performance 30%
Charts
322 HK Equity
rural areas, and (3) rising quality attention to support ASP growth.
More healthy driven products in beverage market: Chinese beverage market size was roughly RMB 100bn in 2007 and grew at a CAGR of 20% over the past five years. We noted that ready-to-drink tea (RTD tea), bottle water, and juice grew at a
HSI Index
faster pace than carbonated drink as beverage buyers tend to pay more attention on their health.
0%
-30%
With more than 10 years operation experience in China, Tingyi has enjoyed a splendid
-60%
02/22
Strong brand name, rich sales network, and impressive gross margin:
04/07
05/22
07/06
08/20
10/04
growth at a CAGR of 20%+ since 2001 in terms of both sales and net profits attributed to shareholders. We believe the growth to persist, thanks to its (1) dominant position in the world’s largest market, (2) strong sales channel network, and (3) stable gross margin of 32-33% under restricted cost management.
Top pick in Chinese F&B sector: Tingyi is our top pick among Chinese F&B sector due to its largest economy of scale, dominant position in the market, better
A n a l ys t :
profitability, and strong management efficiency.
We forecast the company’s 2008
Sophie Fan
sales and net profits to grow 31.7% and 37.7% YoY, respectively. For 2009, we project
(852)2105-1112
sales to rise 23.8% YoY and net profit to increase 22.7%.
[email protected]
Initial Coverage Research
Dept.
Investment Summary We initiate Tingyi Holdings Group with a “Buy” recommendation and set up a target price of HK$10.61 which implies a 23x 2009E EPS, based on our DCF analysis model. With more than 10 years operation experience in China, Tingyi has enjoyed a splendid growth at a CAGR of 20%+ since 2001 in terms of both sales and net profits attributed to shareholders. We believe the growth to persist thanks to following reasons.
(1)
A dominant position in the world’s largest market.
The company has a leading
position in Chinese instant noodle and beverage markets supported by its high brand recognition. Currently, the company owns a 46.6% market share of Chinese instant noodle market. In terms of Tingyi’s super product, ready-to-drink tea of beverage segment, it holds a market share of 41.3%. (2)
Strong sales channel network. Tingyi has cultivated in its sales channel network by minimizing the number of layers between wholesalers and retail nodes which gives the company stronger pricing power and better understanding on customers’ consumption behavior.
(3)
Stable gross margin under restrict cost management.
Though raw material price
has flied since 2005, the company demonstrates its capability of cost management by maintaining gross margin at a stable and high level of roughly 32%.
We forecast Tingyi’s 2008 sales and net profits to grow 31.7% and 37.7% YoY, respectively. For 2009, we project sales to rise 23.8% YoY and net profit to increase 22.7%.
Exhibit 1. Tingyi's sales and gross margin from 2002 to 2009E HK$ mn
%
6,000
40
5,000
32
4,000 24 3,000 16 2,000 8
1,000 0
0 2002
2003
2004
Sales (LHS)
Source: CMoney
2005
2006
2007
2008E 2009E
Gross Margin (RHS)
Initial Coverage Research
Dept.
Investment Thesis The world’s largest market Chinese instant noodles market - a stable industry organic growth of 10%. China is the world’s largest instant noodle consumer.
According to China Food Industry
Association, Chinese instant noodle consumption accounts for more than one-third of global consumption in terms of volume. Total market size is worth approximately RMB 30bn per year.
In this huge market, top three players, Master Kong, Hualong, and Uni-President,
control 60% and 70% market shares by volume and value, respectively.
Over the last decade, Chinese instant noodles market has grown at a GAGR of 10% annually. We believe the industry’s organic growth of 10% per year to persist in the following 3-5 years due to three reasons. (1)
Low per capita basis. Although China is the largest instant noodle consumer in the
world, it only ranks at the fifth on a per capita basis.
Annual instant noodles consumption per
person is 20 packets in 2007 that we believe it still has plenty of room to grow compared to Japan’s 80, Korea’s 45, Taiwan’s 44 packets, and Hong Kong’s 43 packets. (2)
Increasing demand from rural areas.
Due to low penetration rate, we believe further
instant noodle sales volume growth can be supported by rising demand from tier 2 and tier 3 cities. (3)
Rising quality attention to support ASP growth. Though street concerns instant noodle
market is likely to be saturated in urban areas, we believe buyers in tier 1 cities tend to shift consumption behavior from convenience attention to quality attention which leads to sustain sales value growth.
Exhibit 2. Chinese instant noodles market shares Market share by volume (%) 2007
2006
Master Kong
34.5
Hualong
16.8
Uni-President Bai-Xiang
Market share by value (%) 2007
2006
32.5
47
43.3
17.1
14.9
14.4
10.3
12.3
10.2
12.1
9.1
10.6
6.7
7.7
Source: AcNielsen
Chinese beverage market – more healthy products driven.
According to
ACNielsen, Chinese beverage market size was roughly RMB 100bn in 2007 and grew at a CAGR of 20% over the past five years. We noted that ready-to-drink tea (RTD tea), bottle water, and juice grew at a faster pace than carbonated drink as beverage buyers tend to pay more attention on their health.
In 2007, packing water comprised 53% of non-alcoholic
beverage sales volume, carbonated drink 22%, juice 13%, RTD tea 12%, and others 1%.
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Dept.
Exhibit 3. Chinese beverage market breakdown in terms of products
RTD tea 12%
Others 1%
Juice 13% Bottle water 52% Carbonated drink 22%
Source: CMoney
Tingyi currently has no plan to enter into carbonated drink market since that is dominated by global big names, such as Coca-cola (US) and Pepsi (US). Instead, the company is the market leader in RTD tea and bottle water segment with a market share of 53.3% and 19.9% by volume, respectively.
We are positive on Chinese beverage market’s future and foresee two key trends in this industry. (1)
Rising ASP: We note that volume growth has dropped faster than value growth for all
segments of the Chinese beverage market, according to the company’s data.
That is
attributed to rising ASP supported by various new products launch, in our view. We expect this trend will continue and help beverage companies to improve their profitability. (2)
Market consolidation:: According to ACNielsen, top players in Chinese beverage market
keep grabbing market share from smaller players due to high brand recognition, aggressive marketing plan, and strong R&D team. We, thus, consider that big players such as Tingyi will be one of the key beneficiaries amid the trend of market consolidation.
Exhibit 4. Chinese beverage market shares - RTD tea Market share by volume (%)
Market share by value (%)
2007
2006
2007
2006
Master Kong
53.3
55.2
51.9
53.6
Uni-President
22.5
22.5
22.8
23.0
Wahaha
9.7
8.7
9.9
8.7
Coca Cola
5.3
5.5
5.6
5.9
Source: AcNielsen
Initial Coverage Research
Dept.
Exhibit 5. Chinese beverage market shares - Diluted juice Market share by volume (%)
Coca Cola
Market share by value (%)
2007
2006
2007
2006
25.9
21.0
29.6
24.5
Uni-President
25.7
31.5
24.3
29.2
Master Kong
18.1
18.8
16.5
17.1
Hui Yuan
8.8
8.1
7.5
7.7
Wahaha
2.7
4.0
2.6
3.8
Source: AcNielsen
Exhibit 6. Chinese beverage market shares - Bottle water Market share by volume (%)
Master Kong
Market share by value (%)
2007
2006
2007
2006
19.9
12.7
18.6
12.4
Wahaha
14.6
14.5
16.2
15.9
Farmer's Spring
10.2
10.2
11.0
10.7
Yi Bao
8.4
7.0
10.8
9.0
Coca Cola
5.0
6.3
4.5
5.7
Run Tian
3.2
3.1
2.8
2.7
Robust
2.4
3.3
2.4
3.3
Source: AcNielsen
Tingyi’s core competitive advantages Tingyi has enjoyed a splendid growth at a CAGR of 20%+ since 2001 in terms of both sales and net profits attributed to shareholders.
We view brand name and sales channels are the
company’s core competitive advantages
The most popular brand name – Master Kong. Tingyi markets almost all the products under its own “Master Kong” brand.
Master Kong are ranked as the most popular F&B brand
name in China with instant noodles, RTD tea, and bottle water market share of 34.5%, 53.3%, and 19.9%, respectively.
Meanwhile, low-end packet noodles are sold under another own “Fu
Man Duo” brand which is established to heighten the entry barrier of low-end instant noodles market. We are positive on Tingyi’s since the company owns the most popular brand name in the world’s largest market and is likely to continue grabbing market share from smaller players supported by its high brand recognition, large economy of scale, solid R&D team and, strong financial support in the future.
Solid distribution network. Tingyi owns 535 sales offices, 82 warehouses, 5,999 wholesalers, and 68,717 direct retailers nationwide as at the end of 2007 that is the richest distribution network among all F&B players in China. In order to have better control over the end retail nodes, Tingyi has worked hard on minimizing the layers of wholesalers in the supply chain. First, the company requires its salespeople to accompany its wholesaler clients to take
Initial Coverage Research
Dept.
orders from end-retailers. Second, the company has devoted itself to penetrate into tier 2 to tier 3 cities which has larger growth potential. The rich distribution network and control power over end retailer give the company stronger pricing power and better understanding on customers’ consumption behavior.
Impressive gross margin Though raw material price has flied since 2005, the company demonstrates its capability of cost management by maintaining gross margin at a stable and high level of roughly 32%. In 1H08, gross margin of instant noodles, beverages, and bakery business increased 1.9 ppts, 0.54 ppts, and 1.1 ppts, to 26.0%, 38.9%, and 38.3%, respectively.
Management indicated the improving numbers are supported by better product
mix and restricted cost control. We estimate that 2008 and 2009 gross margin will maintain at the health level of 32.86% and 32.60%, respectively.
Exhibit 7. Tingyi’s major raw material price trends RMB/Ton 12000
10000
8000
6000
4000
2000
0 1Q/02
1Q/03
1Q/04
1Q/05
1Q/06
1Q/07
1Q/08
PET Resin:60% of PET drink cost
Palm Oil:12-15% of noodle cost
Flour:12-18% of noodle cost
Sugar 10% of PET drink cost
Source: CMoney; CSC Securities
Why Master Kong? Tingyi vs. Uni-President China In China, Uni-President China (220.HK; UPC) is the only one F&B player which has the same product lines (instant noodles and beverage) with Tingyi. We, thus, refer to UPC in our peer comparison.
Larger economy scale; larger market share. For 1H08, Tingyi achieved sales of HK$16bn which was 3 times larger than UPC. In terms of market share, Tingyi stands at No. 1 ranking in instant noodles, RTD tea, and bottle water segments which enjoy market share of 34.5%, 53.3%, and 19.9% which is significantly higher than UPC’s 10.3%, 22.5%
Initial Coverage Research
Dept.
and less than 2%, respectively.
Exhibit 8. Peer comparison - Tingyi vs. UPC (numbers as of 1H08) HK$ mn
Tingyi Holdings
Uni-President China
15,984.2
5,716.7
36.4
13.1
1H08 Sales YoY (%) 1H08 Profits attributed to shareholders
995.3
240.8
YoY (%)
33.2
-18.4
Gross margin (%)
32.9
34.3
Operating margin (%)
10.9
6.0
ROE (%)
11.8
3.8
Source: CMoney; CSC Securities
Higher operating profit margin secured by austere cost control. Compared to UPC which main product is beverage with sales contribution of 75%, Tingyi has less sales contribution from beverage products of 50% which carry higher gross margin than instant noodles (gross margin of beverage and instant noodles are roughly 38% and 28%, respectively, according to management).
UPC, thus, possesses higher gross margin
than Tingyi by approximately 1-2 ppts. However, we noted that Tingyi has a better operating margin of 10.9% than UPC’s 6%, which supported by lower administration expenses, depreciations, and finance costs. This demonstrates that Tingyi has better capability of cost control and working efficiency.
Better ROE. Over the past 3 years, Tingyi’s ROE of 15-18% has performed better than UPC’s 8-10%. Tingyi has had no growth in equity during this period while UPC’s equity has increased by 20%. In 1H08, Tingyi’s capital is HK$8.3bn, which is 129% larger than UPC’s HK$6.4bn. UPC.
On the other hand, Tingyi’s net profit has been 4 times higher than
This implies that Tingyi has better profitability and management efficiency than
peers.
Exhibit 9. ROE of Tingyi vs. UPC % 20 16 12 8 4 0 2005
2006
Tingyi Holdings
Source: CMoney; CSC Securities
2007
1H08
Uni-President China
Initial Coverage Research
Dept.
For the reasons above, we are of the opinion that investors who are interested in the China F&B industry should keep an eye on Tingyi.
Company Overview Started in 1992 and listed in 1996, Tingyi Holdings is one of the leading instant noodles and beverage manufacturers in China.
Major shareholders are Ting Hsin Holdings Corp. and
Sanyo Foods Co. which each holds a 33.2% stake of Tingyi. The former one is a holding entity which controlled by Tingyi’s founder Wei family and the latter one is a major Japanese instant noodle manufacturer.
Instant noodle business – main growth driver. In 1H08, turnover for the instant noodle business was US$982mn, increased by 49.4% from last year and representing 47.94% of the group’s total turnover.
Instant noodle business remains to be the major growth driver of
the company, especially on high margin products. Turnover of high-end noodles grew by 55.49% over the same period of last year where growth rate is impressively higher than the company’s overall sales growth of 36.36%.
Master Kong gained 62.6% and 68.1% market
share respectively for container noodles and high-end packet noodle. We expect instant noodle sales to grow 38.16% and 30.28% YoY in 2008 and 2009, respectively,
Beverage business – slowing growth. In 1H08, beverage business presented a YoY sales growth of 25.19% to US$942mn which accounted for 46.02% of the group’s total sales. Management indicated that slowing growth was due to change in the purchasing structure of consumers, abnormal weather, and intensified competition. We forecast 2008 and 2009 sales of beverage business will increase 24.64% and 18.40% YoY, respectively.
Gross margin will
maintain at a relatively high level of 38-39% compared to the company’s overall gross margin of 32-33%.
Beverage business – yet to take off. The turnover of the bakery business in the first half of the year amounted to US$67mn, an increase of 42.99% YoY and made up 3.31$ of total sales. We attributed the strong growth to its low base and consider that there is no sign showing that the business is going to take off due to fierce competition from global big names such as Kraft.
Valuation Initiation with a Buy; target price of HK$10.61. We initiate Tingyi with a Buy rating and a target price of HK$10.61, based on the DCF valuation since it is more comfortable to reflect the company’s stable operation.
Our assumption of DCF analysis is a WACC of
10.07% and terminal growth rate of 3% which is along with industry average.
Initial Coverage Research
Dept.
The target price implies a 23.1x 2009E PE and a PEG of 1.02x which is above the average of peer group’s 14.2x 2009E PE. We believe Tingyi deserves a valuation premium due to its (1) dominant position in the world’s largest F&B market, (2) solid sales channel network which leads to a stronger pricing power and R&D capability of new product development, (3) better financial management among peers.
We forecast the company’s 2008 sales and net profits to grow 31.7% and 37.7% YoY, respectively. For 2009, we project sales to rise 23.8% YoY and net profit to increase 22.7%. Our target price translates to 31.0% upside. We recommend investors to accumulate the stock on weakness.
Exhibit 10. DCF sensitivity analysis of target price WACC
Target price (HK$)
Terminal growth rate
9.07%
9.57%
10.07%
10.57%
11.07%
2.00%
10.91
10.59
10.28
9.98
9.69
2.50%
11.08
10.75
10.44
10.13
9.84
3.00%
11.26
10.93
10.61
10.30
10.01
3.50%
11.46
11.12
10.80
10.48
10.18
4.00%
11.67
11.33
11.00
10.68
10.37
Source: CSC Securities
Exhibit 11. Peer group comparison in terms of valuation Share price
Stock code
Company name
322.HK
PE
EV/EBITDA
(10/31)
2008E
2009E
2008E
2009E
Tingyi
8.10
21.64
17.63
8.83
7.23
220.HK
Uni-President China
1.65
10.61
7.09
1.92
1.57
168.HK
Tsingtao Brewery
13.54
22.30
17.78
11.48
9.78
151.Hk
Want-want
2.89
18.57
14.86
13.51
10.58
2319.HK
China Mengniu
7.35
34.82
15.35
10.05
6.13
1068.Hk
Yurun Food
9.00
12.02
10.17
10.90
8.38
1216.TT
Uni-President
28.00
17.13
15.44
40.76
37.09
1201.TT
Wei Chuan
15.65
13.32
10.30
--
--
2897.JP
Nissin
2785
16.01
17.20
7.30
6.88
2503.JP
Kirin
1067
8.79
16.61
7.16
6.67
17.52
14.24
12.43
10.48
Average Source: Bloomberg; CSC Securities
Initial Coverage Research
Dept.
Ta b l e 、 I n c o m e Sta t e m e n t (US$ MN except EPS)
2005
2006
2007
2008E
2009E
Revenue
1,846
2,332
3,215
4,233
5,240
Gross Margin
578
752
1,016
1,391
1,708
Operating Profit
180
230
309
460
556
Pretax Income
188
237
317
460
561
Net Income
124
149
195
268
329
0.022
0.027
0.035
0.048
0.059
.Of Revenue
25.82
26.34
37.90
31.65
23.78
.Of Gross Margin
EPS Growth (%)
42.88
30.14
34.97
36.99
22.80
.Of Operating Profit
(39.27)
27.41
34.49
48.74
20.81
.Of Pretax Income
(36.59)
25.97
34.01
44.96
21.90
.Of Net Income
(56.87)
20.56
30.83
37.65
22.74
31.33
32.27
31.58
32.86
32.60
9.78
9.86
9.62
10.86
10.60
10.18
10.15
9.87
10.86
10.70
6.69
6.39
6.06
6.34
6.28
2005
2006
2007
2008E
2009E
Inventory
102
112
155
202
250
Current Asset
418
478
647
863
1,135
Ratio (%) .Of Gross Margin .Of Operating Profit .Of Pretax Income .Of Net Income
S O U R C E ： Ti n g y i ， C S C S e c u r i t i e s e s t i m a t e s
Ta b l e 、 B a l a n c e S h e e t (US$ MN )
Total Asset
1,549
1,840
2,334
2,992
3,728
Current Liability
485
696
925
1,416
1,965
Total Liability
677
927
1,307
1,931
2,617
Equity
872
913
1,028
1,061
1,111
Liability Ratio (%)
43.70
50.37
55.98
64.54
70.20
Debt-to-Equity Ratio
17.49
29.35
38.77
53.48
62.12
Solvency
S O U R C E ： Ti n g y i 1
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