20150512-美银美林-New_products___mix_upgrade_to_underpin_growth,_Up_to_Buy_11页_533kb

Summary of the Document: Upgrade to Buy for Uni-President China (UPC)

Core Content

This document is a research report by Bank of America Merrill Lynch (BofAML) analyzing the performance and future outlook of Uni-President China (UPC), a leading food producer in China focused on beverages and instant noodles. The report concludes with an upgrade to "Buy" from "Neutral" due to strong earnings expectations and a positive outlook for the company's growth strategies.

Main Points

• Earnings Performance:

  • UPC reported a 56% YoY increase in NPAT to RMB369 million in 1Q15, surpassing the previous and consensus estimates for FY15.
  • The strong performance was driven by lower input costs, more rational promotions, noodle ASP hikes, and the successful launch of new products.
  • New products contributed to a low-single-digit sales decline and higher gross profit margins.

• Earnings Outlook:

  • The report forecasts strong earnings growth for 2015 and 2016, with EPS estimates lifted by 29% and 37%, respectively.
  • The 2015 estimate is 56% above the consensus, and the 2016 estimate is 4.1% above the consensus.
  • The company is expected to outperform the market due to a mix upgrade, R&D focus, and branding efforts.

• Price Objective:

  • The price objective is set at HK$8.55, up from HK$6.95.
  • The target is based on a blend of P/E and DCF models, with no change to the target P/E multiple.
  • The P/E-based value is HK$8.1, and the DCF-based value is HK$9, considering a WACC of 10% and a 3% terminal growth rate.

• Key Risks and Upsides:

  • Upside risks include higher-than-expected price increases, better-than-expected top-line growth, easing inflation concerns, and potential M&A activity.
  • Downside risks involve further market-share loss, worse-than-expected cost pressures, and rising A&P expenses due to competition.

• Financial Performance:

  • UPC is expected to recover sales and achieve positive earnings growth in the coming quarters.
  • The utilization rate for beverages improved in 1Q15 to 57%, while instant noodles remained at 50%.
  • CAPEX for 2015 is expected to be RMB2.7 billion, a reduction from previous estimates.

Key Information

• Company Overview:

  • UPC is a subsidiary of Uni-President Group, a Taiwan-listed company.
  • It is the second-largest supplier of juice drinks and ready-to-drink tea, and the third-largest producer of instant noodles in China.

• Investment Thesis:

  • UPC is expected to experience an earnings upcycle due to top-line recovery and margin expansion.
  • The company is focusing on mix upgrades rather than volume growth to lay the foundation for future growth.

• Financial Highlights (2013A–2017E):

  • Net Income (Adjusted): Rises from RMB916 million (2013A) to RMB1,229 million (2017E).
  • EPS: Increases from RMB0.212 (2013A) to RMB0.284 (2017E).
  • Gross Margin: Improves from 33.3% (2013A) to 38.6% (2017E).
  • Operating Margin: Rises from 4.0% (2013A) to 5.7% (2017E).
  • Net Margin: Increases from 3.9% (2013A) to 4.7% (2017E).

• Valuation Metrics (Dec 2015):

  • P/E Ratio: Drops from 85.92x (2014A) to 25.85x (2015E), and further to 21.64x (2016E) and 19.99x (2017E).
  • Dividend Yield: Increases from 0.233% (2014A) to 1.50% (2017E).
  • EV/EBITDA: Drops from 79.69x (2014A) to 25.99x (2015E), and further to 19.91x (2017E).
  • Free Cash Flow Yield: Rises from -6.70% (2014A) to 1.43% (2015E), and further to 1.42% (2017E).

• Balance Sheet and Cash Flow:

  • Net Debt/Equity Ratio: Drops from 56.4% (2013A) to 35.4% (2017E).
  • ROE: Improves from 11.6% (2013A) to 9.7% (2017E).
  • Free Cash Flow: Rises from RMB-331 million (2015E) to RMB349 million (2017E).

Conclusion

The report highlights that UPC is on a positive trajectory with strong earnings growth, mix upgrades, and cost management. The upgrade to "Buy" reflects the firm's confidence in the company's ability to achieve sustainable growth and improve profitability. Investors are advised to consider the price objective and valuation metrics as part of their investment decision-making process, while also being aware of the potential risks related to market competition and cost pressures.