- Players with decent pricing power and solid market share are in a better position to weather inflationary pressures to support margins
- Healthy cashflows and strong cash positions also help sail through lingering COVID-19 uncertainties
- With the Omicron outbreak, products that enhance immunity or increase convenience could also sustain higher demand.
- Our top picks are China Mengniu, UPC and Nissin Foods. We also upgrade COFCO Joycome to HOLD on hog price bottoming out
Dairies & instant foods to grow relatively faster in 2022. In times of COVID-19 resurgence and an inflationary environment, we prefer companies with (1) sound pricing power and strong products to pass on higher costs and enhance product-mix for supportive margins; and (2) resilient cashflows plus firm liquidity positions to sail through market volatilities. (3) Rising demand for quality foods to boost immunity given better health awareness, plus growing needs for convenience are also positive catalysts. As such, we believe industries with faster growth in 2022 could include a mid-teens y-o-y growth in dairies, driven by higher demand for low-temperature dairy categories and emerging cheese & butter products, and mid- to high-single digit growth in instant foods & beverages, fuelled by price hikes and slight sales volume uptick along with periodic tightening of social-distancing policies.
Cost pressure persists but could moderate in 2H22. One key concern for F&B players still rests on rising commodity prices. Various industry leaders with strong products & brand powers remain in better positions to raise average selling prices (ASP) to largely offset higher raw material costs. For instance, leading dairy, instant food, and condiment operators successfully initiating ASP hikes in China since a year ago, at low-single digit rate to 10%+ y-o-y to partially offset rising costs. While there could be time lags in price adjustments, we expect overall margin pressure to start easing into 2H22 on high base. Our house view currently forecast China inflation to rise by 2.5%/2.2% in 2022/23.
Selective upstream could also benefit. We prefer dairies and instant food beverages categories over pork sector under our coverage. On rising commodity prices, we anticipate pork prices to have bottomed-out since 4Q21 and could recover gradually as sow inventory has peaked. Hence, we upgrade COFCO Joycome to a HOLD, with the additional drivers of 15% increase in its hog production target this year and currently an undemanding valuation at 7x FY22F PE (vs. A-share peers at 20x FY22F PE and the overall F&B sector at about 21x FY22F PE.