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Morningstar | Uni-President’s 48% Profit Growth in 1Q Beat; Shares Remain Overvalued to Our HKD 5.80 FVE

No-moat Uni-President China Holdings reported unaudited first-quarter profits of CNY 380.5 million, up 48% year on year, that exceeded our expectation. We think the strong profit stemmed from mix and gross margin expansion, while the revenue growth was at a mid-single-digits rate. Premium products continued to outperform, with Soup Daren for instant noodles and milk tea for the beverage segment growing at double digits. Although the upbeat first-quarter profit marked a good start for the year, it is a typical slow season for beverages business, which accounts for 70% of its total profits. We are keeping our forecast unchanged and maintain our fair value estimate at HKD 5.80 per share, as we expect the margin will be normalizing.

We expect the price hikes improved the average selling prices and lower operating expense/sales ratio were the key positive factors driving the margin improvement, while the raw material prices were stabilized. However, we expect the competition remains severe and the low operating expense ratio will not be sustainable. We believe the company will need to increase its marketing and advertising costs to retain its market shares. In addition, the price hikes effect will fade from the second quarter onward, as the price hikes started from the second quarter last year. We think the shares are overvalued at current levels, trading in 2-star territory.