20160830-DBS_Group-康师傅控股-00322.HK-Tingyi_Holding_No_light_at_the_end_of_the_tunnel_11页_829kb

Tingyi Summary: Financial Performance and Valuation Analysis

Core Content

This document is a research report by DBS Group Research on Tingyi, a leading Chinese food and beverage company. The report discusses the company's financial performance, market position, and valuation, with a focus on the first half of 2016 (1H16) and forecasts for the following years.

Main Points and Key Information

Financial Performance in 1H16

• Earnings Below Expectations: Tingyi's 1H16 earnings were significantly below market expectations, with net profit plunging by 65% year-on-year to US$69.7 million.
• Revenue Decline: Total turnover declined by 14% to US$4.2 billion, primarily due to weaker sales in both instant noodles and beverages.
• Segment Performance:
  • Instant Noodles: Sales declined by 14% year-on-year, with market share dropping by 3.6ppts in volume and 3.9ppts in value.
  • Beverages: Sales also declined by 14%, with all sub-segments showing negative growth. Tea beverages saw a 2.7ppts volume decline and 4.1ppts value decline.
• Market Share Shifts: Competitors like UPC and Farmer Spring gained market share, while Tingyi's market share in both segments decreased.

Financial Position

• Gearing: Net gearing improved to 26% as of June 2016 from 49% in December 2015.
• Capital Expenditure: Capex guidance for 2016 was reduced to US$300 million from approximately US$500 million in 2015.
• Free Cash Flow: Free cash flow is expected to remain positive, indicating a relatively stable financial position.

Valuation

• Price Target: The price target for 12 months is HK$5.50, representing a 30% downside from the last traded price of HK$7.91.
• PE Ratio: The company is currently trading at 26x FY17F PE, which is considered expensive.
• Valuation Method: The target price is based on an unchanged 19x FY17F PE, pegged to 1SD below its historical average.

Key Risks

• Market Share Recovery: The report suggests that market share recovery could only occur in FY17F at the earliest.
• Macro Environment: Weak consumer demand is expected to continue affecting top-line growth.
• Raw Material Costs: Rising prices for palm oil and sugar could impact margins.
• Food Safety: Any food safety concerns may have a negative impact on sales.
• Foreign Exchange: Potential forex losses due to RMB fluctuations could affect earnings.

Share Price Drivers

• New Product Launches: Expected to drive top-line growth and improve market share.
• Weather Conditions: Improved weather in 3Q may help beverage sales.
• Strategic Alliances: Partnerships with Starbucks and the Shanghai Disneyland contract could be long-term growth drivers.

Company Background

• Market Leader: Tingyi is a market leader in the production and distribution of instant noodles, beverages, and instant food products under the Master Kong brand.
• Expansion: The company expanded into beverages and instant food products in 1996.
• Partnerships: Strategic alliance with PepsiCo and a partnership with Starbucks for RTD coffee in China.

Main Viewpoints

• Downgrade: The report downgrades Tingyi from HOLD to FULLY VALUED due to weak earnings and lack of competitiveness in the medium run.
• Earnings Forecast Cut: Earnings forecasts for FY16-17 were cut by 22-30% due to weaker-than-expected sales.
• Profitability Concerns: Despite efforts in advertising, the company has not seen better profitability or stabilization in market share.
• Future Outlook: The company is expected to see a recovery in FY17F, but the current valuation is deemed too high.

Summary Table

Metric	FY15A	FY16F	FY17F	FY18F
Turnover (US$ m)	9,103	8,303	8,839	9,313
EBITDA (US$ m)	1,055	852	901	929
Pre-tax Profit (US$ m)	471	304	382	442
Net Profit (US$ m)	256	138	212	249
EPS (HK$)	0.35	0.19	0.29	0.34
EPS Growth (%)	-36.0	-46.0	53.2	17.5
PE (X)	22.3	41.3	26.9	22.9
EV/EBITDA (X)	7.7	9.1	8.2	7.5
Net Dividend Yield (%)	2.2	1.2	1.9	2.2
P/Book Value (X)	2.0	2.0	1.9	1.8
Net Debt/Equity (X)	0.4	0.3	0.1	0.0
ROAE (%)	8.6	4.8	7.1	8.0

Recommendations and Ratings History

S.No.	Date	Closing Price (HK$)	12-mth Target Price (HK$)	Rating
1	16-Oct-15	13.80	13.20	Hold
2	17-Nov-15	11.96	12.60	Hold
3	23-Feb-16	8.00	8.40	Hold
4	23-Feb-16	8.00	8.40	Hold
5	3-Mar-16	7.46	8.40	Hold
6	23-Mar-16	7.34	7.60	Hold
7	27-May-16	7.21	6.90	Hold

Conclusion

The report highlights the challenges Tingyi faces in maintaining its market position and profitability, particularly in the instant noodles and beverages segments. Despite some strategic initiatives and potential catalysts, the company's current valuation is considered too high, leading to a downgrade to FULLY VALUED. The analysts emphasize the importance of effective product upgrades, advertising strategies, and favorable market conditions for any recovery in the company's performance.