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Summary of DBS Group Research Report on Tingyi Holding (322 HK)

Core Content

This report provides an update on Tingyi Holding (322 HK), a leading manufacturer of instant noodles, beverages, and baked products in the PRC. The report is based on the latest management briefing and includes detailed financial forecasts, performance analysis, and valuation metrics.

Main Points

1. Investment Recommendation

• Rating: BUY
• Price Target: HK$26.60 (12-month)
• Reason for Adjustment: Earnings adjustment, with the target slightly lowered from the previous HK$26.70.
• Growth Expectation: Management has reiterated its guidance for double-digit CAGR over the next five years, aligning with the company's strategy.

2. Performance Highlights

• 1Q14 Earnings Growth: 22.4% year-over-year, in line with consensus estimates.
• Beverages: Strong growth drivers, with RTD tea and water showing sales growth of 26% and 34% respectively. Gross margin improved by 3.7ppts due to favorable raw material prices.
• Instant Noodles: Sales growth was moderate, affected by input cost pressures and a shift in product mix toward mid-end noodles. However, operating cost ratios improved, maintaining net margin at 9%.
• Overall Performance: Positive outlook remains, with expectations of easing price competition and continued strong beverage sales.

3. Financial Forecasts (FY Dec)

4. Segmental Performance

• Noodles:
  • Sales growth: 4.1% in 1Q14, driven by snack noodles and mid-end packet growth, but constrained by flat performance in bowl and high-end packets.
  • Gross margin: 30.4% in 1Q14, impacted by raw material costs and product mix.
• Beverages:
  • Sales growth: 6.3% in 1Q14, with RTD tea and water as core performers.
  • Gross margin: 32.1% in 1Q14, improved due to favorable raw material costs (PET and sugar).
• Instant Food:
  • Sales declined by 7.3% in 1Q14 due to reduced cracker sales.
• Others:
  • Moderate growth with stable performance.

5. Strategic Outlook

• Beverages: Expected to spearhead growth, with volume expansion leading to better margins.
• Instant Noodles: Product innovation and upgrades will drive ASPs and long-term growth.
• Pepsi Integration: On track, with room for margin expansion.

6. Market Position and Competitors

• The report includes a peer table comparing Tingyi with other HK-listed companies in the beverage and food sector, including metrics such as PE, P/B, ROE, and market capitalization.

7. Ratings History

• The report tracks the company's historical ratings, indicating a Buy recommendation with a target price of HK$26.60 as of 20 May 2014.

8. Valuation Metrics

• The new target price of HK$26.60 corresponds to a P/E ratio of around 30x for FY15, in line with historical averages.

Key Information

• Company Focus: Tingyi Holding is a manufacturer of instant noodles, beverages, and baked products in the PRC.
• Growth Strategy: Management aims for 1.5–2x China's GDP growth, implying a CAGR of 15–20% over the next five years.
• Valuation: The report adjusts the target price and valuation metrics based on updated earnings expectations.
• Catalysts: Improved beverage margins, product innovation in noodles, and ongoing integration with Pepsi.
• Financial Health: Strong cash flow generation, with net cash increasing from 2013 to 2014, and a stable debt-to-equity ratio.

Conclusion

The report maintains a BUY rating on Tingyi Holding, citing strong performance in beverages, the potential for margin expansion, and the company's strategic focus on product innovation. The updated target price reflects adjusted earnings expectations, and the outlook remains positive despite current challenges in the instant noodle segment. The company's financials and operational performance are expected to improve in the coming quarters.