Tingyi reported 31% YoY increase in 1H23 net profit to RMB1,638m on 7% YoY revenue growth, in line with our expectation. Thanks to the benefit of price hike （implemented in 1H22） and softened raw material price, noodle business saw 5.2ppts YoY GP margin expansion, 2.9ppts YoY EBIT margin expansion and 48% YoY NP increase, despite merely 3% revenue growth. This significantly outperformed industry and peers. Mgmt. maintained full-year group NP target of RMB3.5bn （incl. disposal gain from plant optimisation） in 2023. It also maintained the target of 100% dividend payout in the foreseeable future. Maintain BUY.
　　Key Factors for Rating
Noodle segment saw 48% YoY NP increase in 1H23. Noodle segment’s EBIT margin expanded by 2.9ppts YoY in 1H23, on 5.2ppts YoY GP margin expansion. The benefit of price hike and softened palm oil price more than offset increased channel investment. Noodle revenue grew by 3% YoY in 1H23, on flattish volume growth （outperforming peers and industry） and low single-digit ASP increase. Mgmt. indicated that volume growth in noodle segment stepped up in Jul/Aug, with further recovery in market share. Its full-price-range strategy and strong product innovation allow the company to capture diversified demands. Upon reopening and increased mobility of consumers, we expect demand of cup/bowl noodles （whose growth slowed in 1H23 due to weak consumer sentiment） to rise, paving way for continuous premiumisation. We expect revenue growth of noodle business to accelerate to mid-single digits in 2H23. We believe soft palm oil price will continue to benefit noodle segment margins in 2H23.
Beverage segment saw high single-digit revenue growth in 1H23. Beverage segment’s EBIT margin expanded by 0.9ppt YoY in 1H23, on 0.5ppt GP margin expansion and positive operating leverage. Revenue grew by 9.5% YoY in 1H23, driven by 16% and 15% YoY growth in juice and bottled water, with market share gain in both categories. RTD tea and carbonated drinks saw 9% and 6% YoY revenue growth in 1H23 with market share well maintained. The company launched sugar-free products in multiple categories （eg. RTD tea, coffee） to cater for consumers’ trade-up demands given their rising health awareness. Mgmt. aims to capture strong growth momentum of beverage products in peak season （i.e. summer） and demands from various consumption situations （e.g. catering, outdoor activities）。 However, mgmt. saw rising sugar price and PET price trend-up disfavour margins of beverage segment in 2H23, which might be partially offset by decreasing aluminum and fructose prices.
　　Key Risks for Rating
Downside risks: （i） commodity price rise; （ii） intensified competition; （iii） unsuccessful brand building; （iv） food safety incidents; and （v） unsuccessful execution of price hikes.
　　Valuation
　　We revised down our 2023/24/25E core NP forecasts by 5/4/3%, mainly to factor in lowered beverage GP margin. We derived our new TP of HK15.5 （up 9%）， based on 18x 2024E P/E （changed from 20x 2023E P/E, as we rolled forward one year）。