Raw material price rise impacting net profit
- Uni-President China (UPC) announced that sales grew by 7.2% yoy to Rmb13.9bn in 1H21, in line with our expectation. But the net profit dropped by 27.5% yoy to Rmb614m, below our expectation, due to higher-than-expected raw material costs.
- Driven by the Covid volatility, we expect UPC’s noodle sales growth to reach c.20% yoy in 2Q22, from high-single digits yoy in 1Q22. We expect beverage sales to decline slightly yoy in 2Q22, from double-digit yoy growth in 1Q22.
- Cost pressure continued to increase qoq in 2Q22. We expect cost pressure to fall hoh in 2H22F, but to remain at a high level compared to the same period of last.
- We downgrade UPC from Add to Hold due to higher-than-expected cost pressure based on our estimates, and we lower our DCF-based TP to HK$7.1, since we cut our earnings forecasts for FY22F–24F
2Q22 earnings less than we expected due to higher costs
The Covid situation reduced outdoor activities, which negatively impacted UPC’s beverage sales in 2Q22. Beverage sales grew by 4.9% yoy in 1H22, but we estimate that beverage sales slightly declined yoy in 2Q22, from double-digit yoy growth in 1Q22. However, noodle sales increased by 14% yoy in 1H22. We estimate that noodle sales growth reached c.20% yoy in 2Q22, from high-single digits yoy in 1Q22. Total sales grew by 7.2% in 1H22. We estimate that growth was in the high-single digits for 1Q22 and mid- to high-single digit yoy growth in 2Q22. Management maintains its previous guidance of high-single digit top-line growth for FY22F. But the 2Q22 raw material cost pressure was higher than we expected. The gross margin dropped by 4.7ppt yoy to 30.7% in 1H22. UPC improved control of expenses in 1H22, and the distribution expenses and admin expenses ratio contracted by 1.8ppt and 0.4ppt yoy, respectively. Net profit decreased by 27.5% yoy in 1H22, a 39.3% and 12.8% yoy drop for 2Q22 and 1Q22, respectively. Management said in the analyst conference call both noodle and beverage channel inventories remain quite healthy.
Cost pressure to fall hoh in 2H22F but remain at a high level
Major raw material prices started to drop in July. Palm oil, domestic wheat, PET and domestic sugar prices increased by 55%, 20%, 31% and 7% yoy in 1H22, but fell by 30%, 1.8%, 7.2% and 1.3% yoy in July. The palm oil price dropped by 3.4% yoy, but the prices of domestic wheat, PET and domestic sugar increased by 8%, 11% and 2.8% yoy in July. We expect UPC’s cost pressure to fall hoh, but still remain at a high level in 2H22F. We now expect its gross margin to contract by 1.4ppt and 3.1ppt yoy to 28.7% and 29.4% in 2H22F and FY22F. Management said it will further improve the utilization rate and cut promotion expenses in 2H22F to partially mitigate the cost pressure. Currently, UPC maintains only one month’s inventory for its major raw materials.
Beverage sales growth back to yoy positive territory in July
Juice revenue was up by 25.7% yoy in 1H22, with the new kumquat lemon juice, in particular, achieving multifold sales growth. The hot weather this summer drove beverage growth; UPC’s beverage sales growth reached high-single digits yoy in July. Bottled water achieved quite high sales growth this summer (Jul and Aug). UPC expanded sales in the catering channel; sales grew by 80–100% yoy in 1H22, totaling 4–5% of beverage sales.
Downgrade from Add to Hold with a lower DCF-based TP of HK$7.1
We lowered our FY22F–24F EPS and forecasts by 8.2–13.8% to reflect the higher-than-expected cost pressure. We also downgrade our rating from Add to Hold. However, along with reduced cost pressure, we expect UPC to achieve margin expansion and better EPS growth in FY23F. Upside risk includes lower than expected raw material price increase in 2H22F.A downside risk is weak macro, impacting noodle and beverage consumption demand. Our TP is derived from DCF valuation with WACC:9% and g:3%.
