Digit marketing led to efficient expenses control
? UPC reported that revenue grew 10.8% yoy to Rmb25.2bn and that net profit decreased slightly by 7.7% yoy to Rmb1.5bn in FY21, both above our expectations. The better-than-expected results were due mainly to higher revenue growth and better control of the distribution expenses ratio.
? UPC raised the selling prices of its classic noodles in Feb 22 and reduced noodle promotions, but management said increasing the ex-factory prices will depend on market conditions.
? The Russia–Ukraine war has pushed up palm oil and PET prices, which is expected to increase UPC’s costs in FY22F. But management said it does not rule out the possibility of raising its beverage selling prices.
? Upgrade UPC from Hold to Add owing to a potential ASP hike and better expenses control, with a new DCF-based TP of HK$8.6.
FY21 results above our expectations
Total revenue grew 10.8% yoy to Rmb25.2bn in FY21, and food and beverage revenue was up by 1.1% and 17.3% yoy, respectively. Food revenue turned to positive growth of 14.1% yoy in 2H21, from -9.5% yoy in 1H21, as UPC successfully cleared channel inventory. Self-heated food Kai Xiao Zao achieved over a 100% yoy revenue CAGR in the past two years. Beverage revenue maintained solid growth of 9.5% yoy in 2H21 vs. 25.0% yoy in 1H21. Green Tea and Assam Milk Tea both achieved solid growth in FY21, and juice
revenue grew strongly by 40.6% yoy, driven by penetration into the catering channel. The gross profit margin dropped by 2.9ppt yoy to 32.6% in FY21, owing mainly to higher palm oil and PET prices. But UPC reduced its distribution expenses ratio by 1.5ppt yoy to 22.0% in FY21. Also, better expenses control helped net profit turn to positive yoy growth of 16.6% in 2H21, after a yoy drop of 20.5% in 1H21. For the first time in past five years, the Company achieved a net profit of Rmb12m in 4Q21 (4Q20: an Rmb58m loss). Management expects the Company to continue to achieve positive earnings in 4Q22F.
Premiumization and new product launches to drive growth
Management sees great growth potential for premium noodles with a retail price above Rmb5 and its self-heated food, Kai Xiao Zao. The segment revenue contribution from highend noodles, Soup Daren, and Kai Xiao Zao reached 16% in FY21. Premium noodles with a retail price above Rmb5 accounted for 36% of food segment revenue in FY21. Kai Xiao Zao almost reached breakeven in FY21. UPC will launch more tastes for Kai Xiao Zao in FY22F to drive growth. Management said that despite Covid volatility in 1Q22F, the Company still achieved solid revenue growth, and channel inventory remains at a healthy
level. We now expect UPC to achieve revenue and not profit growth of 6.9% and 7.8% yoy, respectively, in FY22F.
Cost pressure expected to remain high in FY22F
Palm oil, PET and flour account for c.4.2%, 7.6% and 4.3% of UPC’s COGS. Palm oil and PET prices increased 62%/32% yoy in FY21 and 42%/35% yoy in 2M22. The Russia– Ukraine war has pushed up palm oil and PET prices, which have increased UPC’s costs in FY22F. But management does not rule out the possibility of raising its selling prices for beverages. UPC raised the retail prices of its classic noodles (mid-end noodles, contributing 50–55% of food revenue) in Feb and reduced noodle promotions by 2–5%. Management said raising its ex-factory prices depends on market conditions.
Upgrade to Add with a new DCF-based TP of HK$8.6
We fine tuned our FY22F earnings forecast and raised our FY23F forecast by 4.8%. We also rolled over our forecast to FY24F. We upgrade our rating on UPC from Hold to Add, owing to stronger revenue growth and better distribution expenses control, as well as the possibility of increasing its selling prices. The key risk will be higher raw material prices.