EUR 850.00 For Business Accounts Only

Morningstar | Uni-President’s First-Half 2018 EBITDA Beats Our Forecast; Shares Remain Unattractive

No-moat Uni-President China Holdings’, or UPCH’s, 13% EBITDA increase in first-half 2018 was better than we expected, driven by higher gross margin on the back of its premiumization strategy. Revenue came in at CNY 11.2 billion, up 6% year on year, largely in line with our 5.2% growth forecast, bolstered by double-digit sales growth in higher-end instant noodles (Soup Daren) and classic tea drinks (Uni Ice Tea and Uni Green Tea). Gross margin saw a 1.7-percentage-point increase from last year to 33.5%, attributable to higher average selling prices, stemming from price hikes and product mix change. Meanwhile, the operating profit grew 18% year on year to CNY 932.5 million, with operating margin expanding 90 basis points, partly offset by higher selling expense ratio.

We retain our fair value estimate for UPCH at HKD 5.60 per share, after taking into account higher gross margin assumptions (to 34.9% from 34.4% previously), completely offset by the depreciation of the Chinese yuan. We attributed the 12% share price plunge following the first-half result to the weak beverage sales, given that the market had a higher expectation on the price hikes, as the company had raised its ex-factory prices for beverage products earlier this year. Nevertheless, we think the shares remain unattractive at current levels, trading at a 35% premium to our fair value estimate.

The 8% year-on-year sales growth in the noodle segment was higher than our 4% forecast, thanks to the strong growth in its premium product Soup Daren, and its newly launched product Teng Jiao. The profit margin for the noodle business also increased 50 basis points from the prior year to 5.4%.

In contrast, sales from the beverage segment grew 5% year on year, slightly lower than our 5.8% anticipation, driven by the robust volume growth in the (lower-priced) classic tea drinks and partially from the milk tea drinks. While Uni Ice Tea and Uni Green Tea delivered double-digit revenue growth during the period, sales in the higher-end products, such as Classmate Xiaoming and Haizhiyan, continued to struggle. On the good side, the segment profit margin went up 2.4 percentage points from the prior year to 13.1%.