EUR 850.00 For Business Accounts Only

Morningstar | Raising Uni-President’s FVE to HKD 5.80 owing to TVM and CNY Appreciation; Shares Remain Overvalued

We slightly increase our fair value estimate for no-moat Uni-President China Holdings to HKD 5.80 per share from HKD 5.60 after taking account into the time value of money and the appreciation of the Chinese yuan. Our long-term investment theme remains intact that the company will continue to benefit from the consumption trade-ups, given its advancing market share and recognition of high product quality. However, the shares remain overvalued at current levels, trading at 20% premium to our fair value estimate. We also think business uncertainty for this no-moat company will escalate as the economic growth weakens, along with intensifying industry competition.

Although the trend of premiumization continues to drive the sales growth, the industry is experiencing some headwinds from the weak consumer sentiment in the second half of 2018. We believe the company will not be immune to slowing economic growth and we expect to see operating profits decelerating in the last quarter of 2018. We lower our full-year 2018 revenue and operating profit forecasts to CNY 22.35 billion (from CNY 22.52 billion) and CNY 1.41 billion (from CNY 1.44 billion), respectively. Meanwhile, operating profit margin is expected to arrive at 6.4% (10 basis points lower than our previous estimate), given higher selling expenses due to intensifying competition. After the forecast revision, our five-year revenue and operating profit growth forecasts are now changed to 5.3% and 7.6%, respectively, from 5.5% and 7.8% through 2022, with operating profit averaging at 6.2%.

We anticipate the instant noodles sales only grew at low single digits rate in the second half, slowing from 8% year-on-year increase in the first half. Despite the strong performance of its premium noodle product Soup Daren, revenue was affected by sluggish sales volume of the mainstream products, in our view. Similarly, the beverages segment is also expected to increase at low single digits rates during the same time, as the improving sales of the classic tea (Uni Ice Tea and Uni Green Tea) and Assam milk tea drinks was offset by the deteriorating juice sales.

We project the company’s gross margin continuing improve from last year (more than 100 basis points) in the second half, on the back of higher average selling prices and lower raw material costs. On the other hand, we expect operating expenses to rise as the competition intensified due to weaker consumption growth, which weighted on the firm’s profitability.