Higher-than-expected cost pressure
- We expect Tingyi to face higher-than-expected cost pressure in 1H22F. Although the palm oil price has fallen recently, Tingyi still has over two months inventory.
- Instant noodle sales have not been impacted by the pandemic control measures, but beverage sales were slightly impacted in 1H22F.
- We now expect noodle and beverage sales to grow by 5.5% and 7.5% yoy, respectively, in 1H22F, but due to large cost pressure, net profit to drop by 34% yoy.
- Downgrade from Add to Hold with a new DCF-based TP of HK$14.4.
1H22F cost pressure higher than expected
Palm oil, flour and PET prices jumped by 14.2, 8.8% and 20.4% yoy, respectively, in 1H22F, higher than we expected. We now expect Tingyi’s GPM to drop by 3.4ppt yoy to 27.7% in 1H22F. Although the palm oil price fell by 31.1% mom in Jul, Tingyi said it still has over two months inventory, which means the lower palm oil price will benefit Tingyi from late Sep. Since raw material prices are likely to remain at a relatively high level, we expect the GPM to drop by 1.4ppt yoy to 28.4% in 2H22F. But we expect the cost pressure to be considerably less in FY23F, and Tingyi’s GPM to expand by 1.2ppt yoy to 29.3%, leading to strong net profit growth of 34.8% yoy in FY23F.
Top-line growth should be largely in line in 1H22F
As Tingyi produces daily necessities, its instant noodle production and transportation have not been impacted by the lockdown policy since Mar. We now expect instant noodle sales to grow by 5.5% yoy in 1H22F and 6.2% yoy in 2H22F. While the outdoor consumption of beverages was impacted by the pandemic situation, we don’t expect beverage sales growth to reach double-digits in FY22F. We expect beverage sales to grow by 7.5% yoy in 1H22F and 8.2% yoy in 2H22F. We expect this year’s hot summer in China to benefit Tingyi’s beverage sales in 2H22F. Management said Tingyi’s current channel inventory level is normal for both noodle and beverages, at 1 months and 1-2 months, respectively. Tingyi launched new high-end noodle products from Apr to July to enhance its product mix. On the beverage side, the Company launched a zero sugar tea product in Apr.
Price hikes may not fully mitigate cost pressure
Tingyi raised the selling prices of its classic noodles (60% of noodle sales) by 10–12% in early Feb. In Apr and Jul, Tingyi said it further increased the selling prices of its mid-end noodles and big pack noodles by high single digits; each segment accounts for about 10% of noodle sales. Tingyi said it will increase the rebate to distributors in 1–2 months after the selling price hikes. In addition, Tingyi raised selling prices by low single digits for bottled water with a retail price of Rmb1/bottle, and in Apr and May, Tingyi increased the selling prices for big pack beverages and Pepsi products by mid-single digits. However, we believe these price hikes are still not enough to fully offset the cost pressure in FY22F.
Downgrade to Hold due to higher cost pressure
We downgraded Tingyi from Add to Hold due to higher-than-expected cost pressure that affects margins. We cut our FY22F-24F earnings forecasts by 19.7%, 9.0% and 3.6%, respectively, and downgraded Tinyi to Hold with a new DCF-based TP of HK$14.4 (riskfree rate: 4.0%, beta: 0.9, WACC: 10.8%) to reflect the margin pressure. However, we expect the cost pressure to moderate in FY23F. In the longer run, Tingyi will likely continue to improve its product mix and distribution network to drive growth. Upside risks are 1) lower-than-expected raw material prices, driving up revenue, and 2) a likely special dividend for FY22F. The main downside risks are 1) weaker-than-expected consumption demand, which would affect revenue growth, and 2) a higher expenses ratio, which would affect margins (see p.4 for details).