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Morningstar | Strong Beverage Sales and Better Product Mix Boosted Tingyi's 2Q Result; Raising FVE to HKD 13

Since its 1992 inception, Tingyi has expanded rapidly, evolving into one of China's best-established packaged-food manufacturers. In 2017, Tingyi was the market leader in instant noodles and ready-to-drink tea beverages based on sales value, with 50.2% and 43.6% market share, respectively. It is the also third-ranked bottled water and diluted juice producer, with 12.7% and 19.1% market share, respectively.Over 2014-16, the once-robust growth of China's instant noodles and beverages market has showed signs of slackening. Such attenuated growth triggered more fierce competition for market share. Direct competitor Uni-President rolled out a series of promotional and advertising campaigns to stimulate sales. The success of Uni-President's flagship products also narrowed its market share gap with bellwether Tingyi. However, both instant noodles and beverage segments begin to bottom out in 2017, with industry sales increasing 3.6% and 10.2%, respectively. We think Tingyi’s turnaround is a good sign of recovery and believe the growth reacceleration will sustain in the medium term, bolstered by its ongoing distribution restructuring strategy and the promising growth of premium products.Additionally, Tingyi’s much lower operating costs as a percentage of sales (22.8% in 2017) compared with those of Uni-President epitomise its extensive distribution network in terms of logistics, bargaining power with distributors, promotions, and advertisements. By launching similar-flavoured products to competitors’ flagship products and exerting tighter control on distribution channels, Tingyi’s ability to defend its leadership position is strong enough to earn our confidence. Over the long haul, Tingyi may benefit from milder price competition as market concentrations improve.We are conservative about Tingyi’s business prospects, as well as the narrowing market share gap between Tingyi and Uni-President. Tingyi was unable to sustainably achieve premium pricing to ensure meaningful returns on invested capital, and faced deteriorating adjusted ROIC, which plunged to 4.1% in 2016 from 13.4% in 2011. Hence, we believe Tingyi no longer benefits from brand strength and cost advantage.