EUR 850.00 For Business Accounts Only

Morningstar | Uni-President’s 2H 2018 Results in Line; Shares Overvalued to Our HKD 5.80 Fair Value Estimate

No-moat Uni-President China Holdings reported 2018 full-year results largely in line with our forecasts. Our long-term view for the company is unchanged, as we believe it will retain its number two position in terms of market share in the instant noodles and tea drinks markets. We retain our no moat and stable trend ratings and maintain our fair value estimate at HKD 5.80 per share. Given its demanding valuation, we view the shares as overvalued at current levels.

Revenue and operating profit increased 3.1% and 0.5% year on year, respectively, in the second half of 2018, decelerating from 6% and 18% year-on-year growth in the first half. As we expected, the Chinese consumption market has slowed down since the second half of last year because of the weaker consumer sentiment raised by the concerns of the ongoing trade tension between U.S. and China. Meanwhile, Uni-President increased its marketing and advertising expenses to solidify its market position, leading to a profitability erosion as competition intensified in the beverage sector. Gross margin in the second half was up 2 percentage points year on year to 33.5%, driven by improving product mix amid consumers’ trade-up to premium products. However, operating margin went down 10 basis points from last year to 3.8%, due to a higher operating expense ratio.

We expect the company will continue to focus on upgrading its existing products and expanding its product portfolios in order to drive its top-line growth. We project the company’s revenue and operating profit will grow at CAGRs of 5.2% and 7.7%, respectively, over the next five years, while we expect profitability will further improve due mainly to the gross margin expansion on the back of better product mix, with gross margin and operating margin averaging 34.4% and 6.8%, respectively, through 2023.

On the revenue front, the instant noodles and beverages business accounted for 39% and 58% of total sales, respectively. Revenue from the instant noodles business rose 3.5% year on year in the second half, driven by strong double-digit sales growth of its mid- to high-end product Soup Daren (Master Soup). As the company continued to focus on premium products, it launched a few new products, such as new flavor of fish soup with tofu and sour and spicy pig intestine noodles, which were well accepted by the market according to the management, in 2018. We forecast the instant noodles revenue to grow at CAGR of 5.2% over the next five years. We expect the sales growth driver will come from price hikes and increasing mix from premium products, while we think the volume growth for instant noodles will remain at a low-single-digit rate in the medium term, as we believe Chinese consumers have changed their appetites to other food options.

Beverages sales were up 1.8% year on year in the second half, driven by its classic Assam milk tea, Uni Ice Tea, and Uni Green Tea, while the juice segment continued to worsen. On the new product side, the company increased its cold chain beverages, such as fruit juice and iced tea, and expanded into the soy milk segment. It also increased its sales proportion of small size package in order to improve its profitability. We appreciate management’s efforts to drive its beverages business. However, we think the competition will remain fierce and it will be difficult for Uni-President to grow rapidly and gain meaningful market shares. We forecast beverages revenue to grow at CAGR of 5% over the next five years.