Further noodle price hike to boost margins
? According to our channel check, Tingyi increased both the ex-factory and retail prices of its classic noodle products by 10–12% this week.
? We estimate that classic noodles account for c.60% of noodle sales and c.25% of total sales, and that Tingyi will achieve 0.4ppt yoy GPM expansion in FY22F.
? According to our channel check, its major competitor, Uni-president China, raised the retail price of its classic noodles this week, and will increase the ex-factory price soon.
? Upgrade Tingyi from Hold to Add with new DCF-based TP of HK$19.8, since we expect the price hike and less raw material pressure in 2H22F to help the Company achieve better margins.
Price hike expected to offset raw material cost pressure
According to our channel check, Tingyi increased both the ex-factory and retail prices of its classic noodle products by 10–12% this week. In Jul 2021, Tingyi also raised the selling price of its big-pack noodles by high single digits. We estimate that its classic noodles and big pack noodles account for c.60% and c.10% of its noodle sales and c.25% and c.5% of total sales, respectively. According to our channel check, its major competitor, Unipresident China, also raised the retail prices of its classic noodles this week. We expect the market to accept this price hike for classic noodles, as the No. 1 and No. 2 players, Tingyi and UPC, both raised their selling prices. In the mid- to low-end noodle segment, however, Tingyi still faces intense competition from Jinmailang.
Likely cost pressure reduction in 2H22F
The palm oil price increased by 30.47% yoy in FY21 and 17.86% YTD, and the PET price was up by 43.10% yoy in FY21 and 6.62% YTD. Palm oil accounts for c.7% and PET c.14% of Tingyi’s COGS. We expect the cost pressure to start to fall in 2H22F, since it started to increase in 2H21. Supported by the noodle price hikes and a continuous mix upgrade, we expect Tingyi’s GPM to expand by 0.4ppt yoy to 32.3% in FY22F. In addition, the Company will continue to increase production efficiency, by reducing the weight of the
PET boxes, etc. Tingyi will also control its distribution expenses ratio better to boost its OPM in FY22F. Management does not rule out the possibility of increasing the selling prices of its beverage products in FY22F. We now expect Tingyi’s OPM to expand by 0.3ppt yoy, leading to net profit growth of 13.8% yoy in FY22F.
Solid revenue growth in 2H21F and FY22F
Management said Covid volatility and extreme weather did not significantly impact its 2H21F revenue growth. Noodle sales growth turned to yoy positive in June, and we expect noodle sales growth to reach 7.2% yoy in 2H21F. Beverage sales growth also maintained strong momentum in 2H21, and we expect it to reach 9.4% yoy in 2H21. Tingyi’s bottled water, no-sugar tea and bubble juice all received good market feedback in 2021. Management said that owing to the earlier Chinese New Year this year, sales growth was good in Jan. We expect Tingyi to continue to achieve solid revenue growth of 8.2% yoy in FY22F (FY21F: 7.9% yoy), driven by price hikes, a mix upgrade, new product launches and further channel optimization.
Upgrade to Add with new DCF-based TP of HK$19.8
We raised our FY22F and FY23F earnings forecasts by 3.2% and 4.2%, respectively, to reflect better margins. We upgrade Tingyi from Hold to Add with a new DCF-based TP of HK$19.8, since we expect the price hikes and lower raw material pressure in 2H22F to help the Company achieve better margins in FY22F. The key catalysts include: 1) further price hikes for beverage products, and 2) stronger-than-expected sales growth. The key risks will be 1) higher-than-expected raw material prices, and 2) stronger price competition in the mid- to low-end product segments.