UPC reported 10.2% YoY shareholders’ profit growth on 6.0% YoY total revenue growth in 1H24. Implied 2Q core net profit increased 31% YoY to RMB509m, above our expectation principally due to higher GPM. We expect UPC to maintain solid growth momentum in 2H24. In the long run, we like its proven R&D capability for monetising on consumption trends and strengthening product portfolio. Besides decent upside potential, UPC’s current dividend yield is attractive. Reiterate BUY.
　　Key Factors for Rating
　　1H24 revenue in-line and net profit beat. Uni-President China’s (UPC or the “Company”) total revenue grew 6.0% YoY to RMB15,449m in 1H24, in line with our expectation. By segment, beverage sales grew 8.3% YoY and accounted for 65% of UPC’s total revenue, primarily driven by RTD tea (+11.8% YoY). Food sales recorded slight growth (+0.9% YoY), outpacing the industry average. GPM improved 2.7ppts YoY to 33.8% in 1H24, exceeding our expectation, mainly due to 1) price-based promotion cuts, 2) lower raw material procurement cost, and optimised utilisation rate. Operating expenses ratio was slightly down 0.2% YoY to 26.7%. As a result, shareholders’ profit grew 10.2% YoY to RMB966m, beat our expectation.
　　FY24 target. Management now looks for MSD%-to-HSD% (previous: HSD%- to-LDD%) YoY total sales growth for 2024, which is consistent with our previous expectation; and we still forecast UPC’s beverages and food segment to register YoY growth of 8.7% and 2.4% in 2024, respectively. Recurring NPM expansion primarily derives from 1) promotion cuts, 2) sales mix upgrade, 3) cost tailwinds, and 4) efficiency (e.g. marginal improvement in productivity & utilisation rates, disciplined SG&A expenses management). Capex remained quite aggressive at RMB426m in 1H24 (1H23: RMB496m), and is projected to be nearly RMB1bn for 2024-26E, attributable to 1) factory upgrade & maintenance and 2) incremental investment in display refrigerators.
　　Expecting RTD tea to continue to drive beverage sales. In 1H24, UPC’s RTD tea, juices and milk tea grew 11.8%, 8.2% and 3.3% YoY to RMB4,647m, RMB1,790m and RMB3,284m, respectively. 2024 would be another bumpy year for RTD tea in China, despite the impact from unfavourable weather conditions (esp. in Southern China) in 2Q24. In a competitive environment, UPC is likely to increase market share due to 1) continuous brand building and communications (e.g. distinct positioning of the scalable products, such as “Uni Green Tea” and “Uni Ice Tea”), 2) product diversification (e.g. successful launch of its new sugar- free “Spring Breeze Green Tea” with RSP at RMB4 per bottle), and 3) its effective channel mode for market penetration, with a rising number of point-of-sales. By category, we forecast RTD tea, juices and milk tea to see YoY growth of 13.4%, 9.2% and 3.7%, respectively, in 2H24.
　　Food segment growth could accelerate in 2H24. We expect UPC’s instant noodle sales to continue to outperform its largest rival who adopted price hikes over the past months. Instead of following price hikes, management looks for fewer price-based promotions. Although premiumisation appears to be slowing down (e.g. poor sales of “Kai Xiao Zao” and high-end noodles with ASP>RMB5 per serving), “The King of Tomato” and “Laotan” saw DD% YoY growth in 1H24, surpassing its noodle sales YoY growth of 1.9%. Heading into 2H24, UPC’s food segment could speed up sales turnover on a stronger product portfolio, coupled with sequentially easing base comps.
　　Key Risks for Rating
　　Risks: 1) intensified market competition; 2) challenges in strategy execution; 3) change in consumer preferences; 4) cost inflation pressures; and 5) food safety issue.
　　Valuation
　　Our 2024-26E revenue forecasts are unchanged. We elevate our GPM forecasts for 2024-26E by 1.6/1.6/1.4 ppt, respectively, to reflect 1) the fewer price-based promotions and 2) raw material cost savings (esp. from sugar and milk powder). We slightly revise down our SG&A expenses ratio forecasts. Overall, we elevate our net profit forecasts by 24-27% for 2024-26E. Our new TP is HK$7.60, based on 15.0x 24E P/E (previous: 17.0x), with a BUY rating.