Tingyi reported 15.1% YoY shareholders profit growth on 0.7% YoY total revenue growth in 1H. GPM improvement was well above expectations due to benefits from ASP and sales mix, coupled with marginal relief on input cost pressure. Management prioritises quality growth with three pillars including profitability, returns and cash flows. We are bullish on Tingyi’s growth outlook, and believe that its current valuation (i.e. 15.8x FY24E P/E) does not seem excessive. Dividend yield of 7% is attractive. Maintain BUY rating.
Key Factors for Rating
1H24 revenue in-line and net profit slightly beat. Tingyi reported its 1H24results on 26 August after the market close and hosted an earnings briefing on 27 August. In 1H24, total revenue was up 0.7% YoY to RMB41.2bn, 0.9% below BOCIe. By segment, beverage sales increased 1.7% YoY and accounted for 66% of Tingyi’s total revenue, primarily driven by RTD tea (+13.0% YoY). Food sales saw small decrease (-1.0% YoY), slightly outpacing the industry average. GPM improved 2.1ppts YoY to 32.6%, attributable to higher ASP, mix upgrade, cost tailwinds, and optimised productivity & utilisation rates, with beverage and food segment GPM up 2.5ppts and 1.3ppts YoY, respectively, in 1H24. Overall SG&A expenses ratio increased 0.4ppt YoY. Shareholders’ profit was up 15.1% YoY to RMB1,885m, slightly exceeding our expectation.
FY24 guidance. Management now looks for LSD% (previous: LSD%-to-MSD%) YoY top-line growth in FY24, backed by nearly flat YoY noodle sales growth and LSD% YoY beverage sales growth. Going forward, margin expansion overweighs market share consolidation. Management now looks for low-to-mid-teen% YoY (previous: positive YoY) bottom-line growth in FY24. Other key strategic focuses include returns and cash flows. Maintain dividend payout ratio at 100% in FY24.
RTD tea achieved stellar growth in 1H and is likely to maintain strong momentum. In 1H24, Tingyi’s RTD tea saw accelerated growth and accounted for 42% of beverage sales, while bottled water, juices, and CSD & others shrunk 5.6%, 10.1%, and 3.2% YoY, respectively. For RTD tea, Tingyi has enriched its zero-sugar RTD tea portfolio, with its brand-new “Legend of Tea” priced at RMB6 per bottle, “Pure” sugar-free tea drinks priced at ~RMB4 per bottle, “Sugar-free Oolong Tea” and “Sugar-free Jasmine Green Tea” priced at RMB3-4 per bottle, and “Sugar-free Ice Tea” priced at RMB3 per bottle (extended from Tingyi’s top- selling sweetened tea “Master Kong Ice Tea”). By category, we forecast Tingyi’s RTD tea, bottled water, juices, and CSD & others to record YoY change of +12%, -8%, -6%, and +1%, respectively, in 2H24. For profitability, despite a YoY rise of 17% and 1% in sugar and PET price, respectively, in 1H24, beverage segment GPM climbed 2.5ppts YoY to 35.2%, well above our expectation, attributable to mix improvement and also the price hike of 1L-packed RTD tea and juices dated April 2024.
Instant noodle segment: recent price hike actions may have near-term impact on sales volume, but in the longer run, Tingyi is poised to make its goal of margin expansion more manageable. We see that the ex-factory price of classic bowls (packets) has been lifted by MSD% dated July following the increase of RSP from RMB4.5 (RMB2.8) to RMB5 (RMB3) per serving dated May 2024. The near-term impact on Tingyi’s sales volume might be overstated, given that its largest competitor also cut price-based promotions, in our view. Moreover, accompanied by ingredient upgrade, such price hike could then be perceived as acceptable by end users. Heading into 2H24, according to management, instant noodle sales should see LSD% YoY decline in July-August; and market share would rally from 4Q (simultaneously with easing base comps), based on lessons learned from its previous price hike in 2022.
Channel wise: Given a mixed picture, Tingyi would continue to invest in outdoor consumption scenarios (e.g. tourist spots, transportation hubs and highways) and seize opportunities in specialty channels (e.g. hospitals and schools), with an aim to compensate the loss of sales from factory and construction sites. Overall, we expect Tingyi to customise its portfolio strategy in different channels and underpin profit for distributors post price hike.
Product wise: In 1H24, premium and super-premium noodles (mainly “Express Chef’s” and “Dried Noodles Collection”) relied more on precision marketing to find target audience, besides flavour innovation. The introduction of “Mini Bucket” was successful since small portions (as refreshment or midnight snack food) are now popular among young people. “Golden Stock Beef Noodles” and “Tomato Egg Beef Noodles” registered solid YoY growth.
Cash flows and capex: In 1H24, Tingyi achieved 23.5% YoY growth in terms of net CFO, with a net-CFO-to-EBIT ratio of 118% (1H23: 115%). Capex reached RMB1,885m, representing 4.6% (1H23: 3.4%; FY23: 4.5%) of total revenue.
Key Risks for Rating
Risks: 1) weaker-than-expected consumption sentiment in China; 2) intensified competition; 3) unfavourable movement in raw or packaging material prices; and 4) food safety issue.
Valuation
We revise down our revenue forecasts for 2024-26E by 2.3%/3.4%/3.7% as we have turned more cautious towards the domestic consumer goods market outlook in general, and meanwhile, it could take a bit longer for Tingyi to regain market share post price hikes. We lift our GPM forecasts for 2024-26E by 1.1/1.1/1.2ppts primarily due to higher ASP assumptions. Also, we lift our S&D expense forecasts, believing that Tingyi may need to further expand its market reach and continue to invest in brand building in such a competitive environment. Overall, we revise up our net profit forecasts for 2024-26E by 0.7%/3.3%/5.1%.
Our new TP is HK$12.20, based on 17.0x 2024-25E average P/E (previous: 17.0x 2024E P/E), with a BUY rating. Tingyi remains our top pick for the F&B sector.