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F&B Sector Review: 1H15 Summary

Core Content Overview

This report provides a detailed analysis of the performance and valuation of the Food & Beverage (F&B) sector in the first half of 2015, highlighting key challenges, strategic moves, and investment opportunities.

Main Points and Key Information

1H15 Performance

• Overall Weakness: The sector experienced more misses than hits, with flat sales growth of -0.8% and a 2% increase in SG&A expenses.
• Earnings Decline: Most companies reported earnings declines ranging from 4% to 15%, with only China Mengniu and China Food showing growth.
• Macroeconomic Impact: A deteriorating macroeconomic environment is expected to keep demand soft in the near term, thus maintaining subdued performance in 2H15.
• Cost Efficiency and Product Mix: Companies are focusing on product differentiation and cost-efficiency improvements. Tingyi is restructuring Pepsi, and Mengniu is streamlining its distributor system.
• Share Buybacks: Some companies, such as Tingyi and Want Want, have initiated share buybacks, which may support their share prices.

Valuation

• Sector Valuation: The F&B sector's valuation (16.4x PE) is at a 6-year low, but offers opportunity for long-term investors.
• Company-Specific Valuation:
  • China Mengniu (2319 HK): Current price HK$25.75, target price HK$36.90, 43% upside, BUY recommendation, FY16 PE 13.5x.
  • China Foods (506 HK): Current price HK$3.68, target price HK$3.95, 7% upside, BUY recommendation, FY16 PE 24.9x.
  • China Modern Dairy (1117 HK): Current price HK$11.98, target price HK$13.20, 18% upside, BUY recommendation, FY16 PE 7.8x.
  • Bright Dairy (600597 CH): Under review due to weak 1H15 performance.
• Other Companies: Most companies are under HOLD recommendation with varying upside and PE ratios.

Shareholding Changes

• Tingyi (322 HK): Sanyo Group increased its shareholding to 33.6% through multiple buybacks.
• Huishan Dairy (6863 HK): Yang Kai (Chairman) has been actively increasing his shareholding, with multiple transactions in August and July 2015.
• China Mengniu (2319 HK): Commonwealth Bank of Australia had both add and reduce transactions in August 2015.

Investment Recommendations

• BUY Recommendations: China Mengniu and China Foods.
• Under Review: Bright Dairy due to weak performance.
• HOLD Recommendations: Tingyi, Want Want, Tsingtao, Vitasoy, Uni-President.

Market Context

• HSI (Hang Seng Index): 20,841 as of 4 September 2015.
• Valuation Trends: The F&B sector is undervalued compared to historical averages, with potential for recovery.

Summary Table

Conclusion

Despite the weak performance in 1H15, the sector is undervalued, offering potential for long-term investors. Companies like China Mengniu and China Foods are highlighted as BUY recommendations due to their strategic initiatives and improved valuations. Share buybacks and restructuring efforts indicate a focus on long-term growth, while the macroeconomic environment remains a challenge for near-term performance.