The Company reported 33.2% YoY net profit growth on 10.6% YoY total revenue growth in 1H25, slightly above BOCIe. We like its strong brand equity, proven R&D capability, increased efforts for penetration, as well as in-depth interaction with diversified channels and end users, which combine to drive market share gain at this stage. Management believes that long-term growth logic is intact. However, short-term outlook has turned somewhat uncertain, esp. post the food delivery battle in China.
　　Key Factors for Rating
　　1H25 results in-line. UPC’s total revenue rose 10.6% YoY to RMB17,087m in 1H25, slightly above BOCIe. By segment, beverage sales was up 7.6% YoY and accounted for 63.1% of UPC’s total revenue, mainly fueled by RTD tea (+9.0% YoY). Remarkably, UPC’s sugar-free RTD tea grew MDD% YoY, despite fiercer market competition. Food sales witnessed robust growth momentum, with YoY growth of 8.8% in 1H25, gaining more market share from its largest competitor. Other revenue surged 91.8% YoY to RMB916m and accounted for 5.4% in 1H25. Overall GPM improved 0.5ppt YoY to 34.3% (beverage: 39.4%, up 1.4ppts YoY; food: 26.8%, down 0.4ppt YoY) in 1H25. S&A expenses ratio was down 1.4ppts YoY (due to promotion cut & efficiency optimisation), which is a positive surprise. Shareholders’ profit surged 33.2% YoY to RMB1,287m, slightly above BOCIe.
　　Outlook. Management expects UPC’s long-term top-line growth to be 6%-8% YoY. In the short term, escalated competition (esp. post the food delivery battle) may drag down its beverage and food sales growth in 2H25. OEM business will sustain robust growth in 2025-27, given that China’s F&B OEM market size may double over the next two years, along with the development of emerging channels such as Pangdonglai and Sam’s Club, according to management. NPM expansion will continue to rely on 1) portfolio upgrade, 2) promotion cut, and 3) efficiency gain. Cost of raw materials should remain controllable in general, despite a recent rebound in palm oil price.
　　Key Risks for Rating
　　Risks: 1) intensified competition; 2) challenges in strategy execution; 3) change in consumer preferences; 4) cost inflation pressures; and 5) food safety issue.
　　Valuation
　　We fine-tuned our revenue forecasts for 2025-27, mainly factoring in 1) faster- than-expected other revenue growth and 2) near-term pressure from escalated competition. We slightly revised up our NPM forecasts, factoring more disciplined expenses control (despite lower GPM assumptions due to increased portion of low-margin OEM business). Maintain our TP at HK$10.40, implying 18.2x/16.2x 25-26E P/E, with an upside of 12%. Investment rating is BUY.