Weaker noodle sales in 4Q23F
- We estimate Tingyi’s noodle sales fell by 10.4% yoy in 2H23F as many plants were shut down and workers had temporarily moved back to their rural hometowns.
- Management said key raw material prices are likely to remain low in FY24F, which should benefit Tingyi’s margin expansion.
- Management said it will maintain 100% dividend payout over the next 3-5 years.
- Reiterate Add due to likely margin expansion in FY24F and high dividend yields of 9.3% in FY24F.
Weaker noodle sales growth in 4Q23F
We think revenue growth was likely weaker in 2H23F than in 1H23 due to the weak economic outlook and consumption in China. Noodle demand was sluggish as many plants were shut down and workers returned to their hometowns in rural areas. We estimate noodle sales fell by 10.4% yoy in 2H23F and beverage sales rose by 4.8% yoy, leading to overall sales dipping 1.1% in 2H23F and rising 2.8% yoy in FY23F. Tingyi continued to gain noodle market share in 2H23F despite industry sales tumbling further, according to management. For beverages, the company reduced its channel inventory in 3Q23 and saw better sales volume growth yoy in 4Q23F. We expect higher sales growth in 1Q24F due to Chinese New Year occurring later in 2024 vs. 2023. Tingyi said it had healthy channel inventory of one month for noodles and 1-2 months for beverages as at end-Dec 23. Tingyi also said it saw solid revenue growth from the catering channel in FY23F and plans to continue expanding into this and other emerging channels, such as live broadcasting, in FY24F. Overseas expansion revolved mainly around export sales, according to Tingyi, which accounted for a low single-digit proportion of total sales in FY23F. We think Tingyi’s sugar-free beverages did not perform well in FY23F, based on our channel checks. Nevertheless, the company plans to launch more sugar-free beverages in FY24F and invest in its marketing and channel promotions.
Raw material prices likely to be low in FY24F
As for raw materials, sugar prices have increased since Apr 2023, negatively affecting margins in 2H23F. However, the prices of other raw materials, such as palm oil, PET, etc. maintained their downward trend in 2H23F. Hence, we believe GPM expanded by 0.2% pt yoy to 30.1% in 2H23F and 1.2% pts yoy to 30.3% in FY23F. Management said its previous net profit target of Rmb3.5bn for FY23F is unlikely to be met; we now pencil in a net profit of Rmb3.06bn for FY23F. Management sees positive sales growth yoy in FY24F, with net profit growth surpassing revenue growth. We now forecast sales to rise 4.5% yoy and net profit to rise 13.0% yoy in FY24F, driven by relatively low raw material prices and better expense control. With sugar prices starting to fall since Dec 23, management forecasts more favourable raw material prices in FY24F and GPM expanding yoy.
100% dividend payout to be maintained over the next 3-5 years
The company stopped paying special dividends in FY23F but plans to maintain a 100% dividend payout ratio over the next 3-5 years. It aims to improve its opex ratio in FY24F- 25F, hence NPM improvement is likely to come from GPM expansion and a slight reduction in its expense ratio. Based on our EPS forecasts, we expect a dividend yield of 8.2% in FY23F and 9.3% in FY24F.
Reiterate Add with a lower DCF-based TP of HK$11.7
We reiterate Add on Tingyi due to its likely margin expansion in FY24F and relatively high dividend yield vs. peers. We cut our FY23-25F EPS forecasts by 10.7-17.9% to reflect likely weak noodle sales. Hence, our DCF-based TP falls to HK$11.7 (WACC: 10.8%, terminal growth rate: 3%). Potential re-rating catalysts include better-than-expected GPM expansion and expense control. Key downside risks are 1) weaker-than-expected sales growth, 2) higher-than-expected raw material cost pressure, impacting GPM, and 3) higher-than-expected distribution expenses, impacting its net profit.
