UPC’s net profit in 1Q25 rose 32% YoY to a historical high of RMB602m, beating expectations. The strong NP beat was supported by accelerated sales growth (in both beverage & food segments) and beverage segment GPM expansion. We esp. like its proven R&D capability and execution stability for monetising on F&B consumption dynamics. Maintain BUY.
　　Key Factors for Rating
　　1Q25 performance review. UPC’s reported net profit was RMB602m in 1Q25, up 32% YoY, beating expectations. According to management, in 1Q25, UPC’s beverage sales achieved LDD% YoY growth, with Uni Ice Tea, Uni Green Tea, Haizhiyan and Uni Crystal Sugar Pear Drink up by DD% YoY. Key drivers include: 1) industry tailwinds, 2) continuous product upgrade & innovation, and 3) higher sales turnover per PoS in particular supported by heavier investment in display refrigerators during 2024-1Q25. In 1Q25, UPC’s food sales achieved HSD% YoY growth, with the King of Tomato, Lao Tan Pickled Cabbage & Beef Noodles and Uni Stewed Beef Flavoured Noodles up by DD% YoY. Soup Daren also returned to LSD% YoY growth. Overall GPM increased c.0.5ppt YoY in 1Q25. To be more specific, beverage segment GPM was up c.2.0ppts YoY (mainly due to PET and sugar cost tailwinds), whilst food segment GPM was down c.1.0ppt YoY (mainly due to higher procurement price of palm oil). Operating expenses ratio slightly went down on efficiency and improving ROIC of A&P investment. NPM expanded c.1.0ppt YoY to above 7.0% in 1Q25.
　　QTD update. For beverage segment, sales value maintained robust momentum, with a slight deceleration of YoY growth from LDD% in 1Q25 to nearly +10% in April. For instant noodles segment, UPC continued to outpace its peers, with YoY sales growth in April similar to 1Q25’s HSD%. Channel stock level stays healthy.
　　Outlook. Management reiterates that UPC’s core competitive strengths include improving product matrix, precision in A&P, and excellence in channel execution (e.g. stable pricing system), from a long-term perspective. Management looks for 1) top-line growth of 6%-8% YoY as baseline guidance for 2025 and 2) GPM expansion of more than 0.5ppt YoY for 2025.
　　Market competition. Management noted that competition will be essential to watch (esp. for beverage subcategories such as RTD tea) given a rising number of new entrants as well as accelerated product launches. Promotion measures such as QR code scan for 2nd bottle with RMB1 or RMB2 become more common for high-margin SKUs by leading beverage firms.
　　New product development. According to management, sales value of Spring Breeze Green Tea surpassed RMB100m in 1-4M25, with a new flavour launched, and is targeted to double vs. c.RMB200m in 2024. Huan-Shen Energy Drink also looks promising, with sales value exceeding RMB100m in 1-4M25.
　　Key Risks for Rating
　　Risks: 1) much fiercer competition; 2) challenges in strategy execution; 3) cost inflation pressures; and 4) food safety issue.
　　Valuation
　　We fine-tuned our revenue forecasts for 2025-27. We raised our GPM forecasts for 2025-26 by 0.3-0.4ppt to factor in generally lower material price assumptions. Thus, we slightly raised shareholders’ profit forecasts for 2025-26 by 3%-5%.
　　Looking at the bigger picture, demand for instant food & soft beverages is non- cyclical and resilient. The Company may continue to outpace its peers with solid brand awareness, well-positioned product family (plus effective interaction with channel and end users in depth), and increasing efforts for penetration, despite competition. Our new TP at HK$10.40 is based on 19.0x 25E P/E (previous: 18x 25E P/E), and investment rating is BUY.