Maintain investment rating as "Accumulate" on Tingyi (the "Company") with a TP at HK$13.50. We maintain our earnings forecasts for 2023-2025 unchanged at RMB0.622/ RMB0.725/ RMB0.796. Our TP of HK$13.50 is based on 20x 2023F PER.
　　1H2023 results in-line: In 1H2023, Tingyi's revenue rose 7.0% YoY to RMB40,907 mn. To be specific, sales of instant noodles/ beverages rose 3.0% YoY/ 9.5% YoY, respectively, in line with market expectations. Main growth drivers include mid-end noodles, bottled water and juices. Overall gross margin rose 2.3 ppts YoY due to large decline in raw materials, mainly palm oil. Shareholders' profit was up 30.7% YoY to RMB1,638 mn, also in line with market expectations. Tingyi did not recommend the payment of an interim dividend (1H2022: an interim special dividend of RMB44.38 cents), in line with our previous expectation.
　　Tingyi's instant noodles segment saw continuous restoration of market share. In the short run, structural changes in consumer buying behavior has painted a mixed picture - snack noodles and mid-priced noodles (particularly for those cost-effective products with large-portion offerings) sustain a robust growth, while high-end packet/ bowl noodles are still faced with challenges owing to softened consumer spending. Looking forward, the management is optimistic about the Company's instant noodles business outlook with more efforts on brand rejuvenation, product innovation and distribution channel optimization. For its beverages segment, we expect juices and bottled water to maintain solid growth momentum in 2H2023. The former has been a staple in many diets of a growing number of health-conscious consumers (especially in at-home scenarios and restaurants), and the latter is the most obvious beneficiary from the booming outdoor activities at this stage. To sum up, we expect its beverage/ instant noodle sales growth to further accelerate during 3Q2023/ 4Q2023, respectively.
　　Stronger gross margin would allow some room for Tingyi to increase A&P investments. Due to ongoing material cost stabilization (in particular palm oil and PET resin), we forecast its overall gross margin to be 30.3%/ 30.7% in 2023/ 2024. With an aim to consolidate its market share by building brand awareness and streamlining distribution channel, the Company is more likely to keep its S&D expenses ratio at present levels for 2023-2024. Its CAPEX may also remain stable (with 2/3 for recurring maintenance and 1/3 for increasing the number of commercial refrigerators). Regarding higher net borrowing cost and more balance sheet pressure, Tingyi may not declare special dividends, but we think that Tingyi will be able to maintain an annual dividend payout ratio of 100%.
　　Risks: unexpected price movement in raw materials/ packaging components; intensified market competition; food safety issues.