FY23F guidance remains intact
- Tingyi participated in our 3rd Annual China Consumption Hybrid Corporate Day held during 6-7 Jul 2023.
- Management guided for weak noodle sales growth but strong beverage growth in 1H23. We expect sales of noodles to rise 2% and beverages to rise 9% yoy in 1H23F.
- We expect GPM to widen by 2.3% pts yoy to 30% in 1H23F due to lower palm oil and PET prices. This should support net profit rising 34.4% yoy to Rmb1,685m in 1H23F.
- Management expects noodles sales growth to accelerate hoh in 2H23F, and beverage sales to benefit from the hot weather this year.
- We reiterate our Add rating with an unchanged DCF-based TP of HK$16.1.
Weak noodle sales but strong beverage growth in 1H23
Noodle sales were weak in 1Q23 but improved mom since May 23, according to management. We now expect noodle sales to rise by 2.0% yoy and beverage sales to grow by 9.0% in 1H23F. Management said that overall sales performance improved qoq in 2Q23 and that it expects 2H23F sales to be better than in 1H23F, driven by strong beverage growth and noodle sales recovery. We now forecast total sales to rise by 6.5% yoy in 1H23F and 8.6% in FY23F. Management maintains its guidance of mid to high single digits yoy sales growth, with low to mid-single digits yoy for noodles and high single digits yoy for beverages in FY23F. Management also maintained its guidance of net profit of Rmb3.4bn-3.5bn in FY23F. The pickled noodle sales have recovered to c.80% vs. before the incident in Mar 2022. Management expects it to fully recover by end-FY23F. Noodle market share has been gradually improving mom since 4Q22, and management expects the momentum to continue in FY23F.
Benefitting from decreasing raw material cost
Tingyi raised its noodle ASP in Feb, Apr and Jul 22, which dampened noodle sales volume, but benefitted noodle gross margin. In our view, the beverage segment should benefit from the resumption of offline traffic, hot weather in Jun-Oct, and higher ASP for carbonated drinks and water. We expect overall GPM to expand in 1H23F and FY23F, driven by price hikes and lower raw material prices for palm oil and PET. Management expects raw material costs to continue their downward trend in 2H23F, except for the domestic sugar price. Fluctuating sugar prices may have some impact in 2H23F, but management said the impact should be manageable.
New product launches to drive product mix upgrades
Tingyi plans to roll out new products in the noodle segment and lower-sugar and zero sugar products in the beverage segment from 2H23F. Tingyi launched frozen noodles in FY22 to ToB (to business) channels like restaurants. The current utilisation rate for noodle is slightly higher than 50% and for beverage is over 40%. Tingyi has also started to penetrate more into the catering channel this year (mainly for beverages). Management guided for stable or slightly lower SG&A expenses ratio in FY23F. Tingyi paid Rmb2.5bn special dividend in FY22, but management said the possibility of another special dividend in FY23F is not high.
Reiterate Add with an unchanged DCF-based TP of HK$16.1
We keep our Add call due to Tingyi’s strong margin expansion potential driven by the reducing raw material costs in FY23F. Our DCF-based target price remains at HK$16.1 (WACC: 10.8%, terminal growth rate: 3%). The re-rating catalysts include quicker noodle sales recovery in 2H23F and better margin expansion. Key downside risks include 1) weak consumption recovery dampening sales growth, 2) higher raw material costs narrowing GPM, and 3) higher than expected SG&A expenses ratio reducing earnings