20130809-巴黎银行证券-Worse_than_expected_margins_13页_890kb

Uni-President China (220 HK) 1H13 Results Summary

Core Content

Uni-President China (UPC) reported weaker-than-expected results for the first half of 2013 (1H13), with sales growth and margin contraction impacting its financial performance. The report highlights the challenges faced by the company in a slowing food and beverage (F&B) market, competition, and operational costs.

Main Points

• Sales Growth:

  • UPC's total sales increased by 14.6% y-y to RMB12,204m, slightly below the analysts' estimate.
  • Beverage sales grew by 16.1% y-y to RMB8,262m, representing 67.7% of total sales.
  • Noodle sales rose by 10.4% y-y to RMB3,777m, or 30.9% of total sales.

• Profit Decline:

  • Recurring pre-tax profit dropped by 16.2% y-y to RMB649m, below the estimate by 28.7%.
  • Net income increased by 13.9% y-y to RMB575m, primarily due to a RMB213m disposal gain, but still fell 21.6% short of the estimate.

• Segment Performance:

  • Beverage Segment:
    • Gross profit increased by 19.1% y-y to RMB2,966m.
    • Gross margin improved to 35.9% from 35.0% in 1H12, driven by a better product mix and lower raw material costs.
    • Operating profit rose by 4.8% y-y to RMB449m, with an operating margin of 5.4%.
  • Noodles Segment:
    • Sales grew by 10.4% y-y to RMB3,777m, but the segment recorded a RMB60m loss in 1H13, compared to a RMB178m profit in 1H12.
    • Gross margin dropped to 30.4% from 34.3% in 1H12, due to product upgrades, discounts, and packaging changes.
    • EBIT margin turned negative to -1.6% from 5.2% in 1H12.

• Margin Contraction:

  • Overall gross margin declined to 34.0% from 34.6% in 1H12.
  • Operating margin dropped to 3.3% from 5.1% in 1H12.
  • Net margin decreased to 4.7% from 5.8% in 1H12.
  • The tax rate increased to 21.2% from 18.0% in 1H12.

• Industry Outlook:

  • The F&B market experienced slower growth, with overall sales growth at 4.5% y-y for noodles and 8.0% y-y for beverages.
  • Non-milk RTD tea sales declined by 8.7% y-y in 1H13, compared to 4.7% in 2012.
  • UPC gained market share in juice, tea, and noodles, but the overall industry growth was below expectations.

• Valuation:

  • The stock was downgraded from Hold to REDUCE, with the target price cut from HKD7.60 to HKD6.00.
  • The target price is based on a 20x FY14E P/E.
  • The current price is trading at 23.2x FY13E P/E and 23.7x FY14E P/E.

• Strategic Focus:

  • UPC's strategy includes market share gains, inventory control, and reducing capex.
  • The company plans to reduce capex due to weaker sales growth, although its balance sheet is supported by divestments.
  • The Jinmailang disposal is expected to contribute to profit and cash flow in 2014.

• Analyst Comments:

  • A hot summer in 3Q13 may help boost RTD tea sales, but inventory control remains a key concern.
  • UPC expects less inventory adjustment in 4Q13 compared to previous years.
  • The noodles business could face short-term margin pressure due to the focus on market share and increased marketing spend.

• Key Earnings Drivers:

  • Raw material cost is a significant factor affecting earnings.
  • A 1ppt change in gross margin impacts net profit by 23.0% in 2013.

• Peer Valuation:

  • The report compares UPC with other F&B players, including Tingyi (322 HK), China Huiyuan Juice Group (1886 HK), and others.
  • UPC's valuation is lower compared to peers, with a recurring P/E of 23.7x for 2014.

Key Information

• Target Price: HKD6.00 (from HKD7.60)
• EPS 2013: RMB0.18 (from RMB0.28)
• EPS 2014: RMB0.23 (from RMB0.32)
• Market Share:
  • Noodles: 16.9% in 1H13 (up from 15.1% in 1H12)
  • RTD tea and juice: market share gains
• Inventory Management:
  • UPC aims for healthier inventory levels and expects less inventory adjustment in 4Q13.
• Disposal Gains:
  • RMB213m from selling facilities in Beijing and Kunshan to Ton Yi Industrial.
• Capex:
  • Original capex for 2013 was RMB5.0b, but it may be lower due to weaker sales growth.
• Risks:
  • Weaker sales momentum
  • Fierce competition
  • Margin contraction
  • Economic weakness

Summary

Uni-President China (UPC) faced a challenging 1H13 with weaker-than-expected margins and slower industry growth. Despite some market share gains in juice, tea, and noodles, the company's sales growth and profit declined due to higher expenses, product upgrades, and increased marketing investment. The noodles segment was particularly affected, with a significant loss and margin contraction. The beverage segment showed more resilience, with growth in premium water and coffee. The stock was downgraded to REDUCE with a target price of HKD6.00, reflecting the pressure on margins and weaker-than-expected performance. The divestment of Jinmailang is expected to support profit and cash flow in 2014, and inventory control remains a key focus for the company.