Expecting profit margins to continue to improve in 2H24
　　Heading into 2H24, Tingyi is more likely to accelerate beverage sales as a result of hotter summer weather and more outdoor activities, coupled with easing base comps. Price hikes could be beneficial to sustainable earnings growth, despite near-term challenges of losing market share. We maintain BUY, believing that its current valuation (i.e. 14.9x FY24E P/E) does not seem excessive. Dividend yield also remains attractive.
　　Key Factors for Rating
　　FY24 guidance and 1H24 preview. We hosted Tingyi management NDR with investors on a virtual meeting on 11 July 2024. Tingyi looks for LSD%-to-MSD% YoY revenue growth in FY24, backed by LSD% YoY growth from instant noodles segment and MSD%-to-HSD% YoY growth from beverage segment. For instant noodles segment, demand from factory and construction site workers remained weak in 2Q24. Meanwhile, Tingyi raised channel investments in various outdoor consumption areas, incl. tourist sports, transportation hubs and highways. The management also sees future opportunities in specialty channels, incl. hospitals and schools. Bowl noodles could benefit from this trend, and flavour innovation will move forward. In addition, Tingyi’s zero-fried noodles and mini-cup options are grasping their target consumer groups, respectively. For beverage segment, RTD tea products are rapidly gaining popularity among Chinese consumers, and the management believes that Tingyi’s diverse mix is now capable of competing in a more crowded market. Notably, sugar-free products would grow even faster by launching “Master Kong Sugar-Free Oolong Tea” and the high-end sugar-free tea series “The Successor of Tea” one after another and leveraging its coverage of ~5m retail points of sale from higher-tier cities to small towns across China. By category, we expect YoY growth to be 9.7%, 5.5%, 2.0% and 2.5% for sales of RTD tea, packaged water, juices and carbonated drinks in FY24, respectively. For 1H24, based on our estimation, Tingyi’s total revenue should be RMB41.6bn, with YoY sales change of -2.4% and 4.0% from its instant noodles and beverage segment, respectively.
　　Comment on recent price hikes. For beverage segment, the ex-factory price of 1L-packed RTD tea and juices has been raised by a single-digit rate from April 2024 following the increase of RSP from RMB4 per bottle to RMB4.5-5 per bottle from November 2023. For instant noodles segment, the ex-factory price of classic bowls has been revised up MSD% from July 2024 following the increase of RSP from RMB4.5 per unit to RMB5 per unit from May 2024. Regarding the rationale behind price hikes, the management aims to offer upgraded products with more value to end users, underpin channel profit for distributors, and more importantly, build a bigger cushion for the Company to withstand input cost pressure. In our view, such price hikes may have near-term impacts on sales volume and market share, but in the long run, Tingyi could make its goal of margin expansion more manageable.
　　Key Risks for Rating
　　Risks: 1) weaker-than-expected consumption sentiment in China; 2) intensified market competition; 3) unfavourable movement in raw and packaging material prices; and 4) food safety issues.
　　Valuation
　　We have fine-tuned our revenue forecasts to factor in a mixed impact from price hikes for FY24-26. We have revised up our GPM forecasts for the instant noodles segment due to higher ASP. We have slightly raised our S&D expenses forecasts since Tingyi may need to further increase A&P investments to stabilise market share in a competitive environment. Overall, we have raised our FY24 and FY25 EPS forecasts by 2% and 4%, respectively.
　　Reiterate BUY since we reckon Tingyi as an undervalued F&B giant with a wide moat rooted from the foundation of backbone products (esp. in the mass market) and execution excellence in nationwide distribution. Our TP is HK$11.40, based on an unchanged 17.0x FY24E P/E.