Instant noodle maker Tingyi faces headwinds as mainlanders opt for healthier choices

Instant noodle sales in China have slipped over the past year, leaving some analysts pessimistic on the fortunes for Tingyi

PUBLISHED : Tuesday, 06 December, 2016, 4:17pm
UPDATED : Tuesday, 06 December, 2016, 10:12pm

Food delivery services and a growing move towards healthy eating may be good for the well-being of urban Chinese, but it could be hurting the mainland’s instant noodle industry.

Chinese food and beverage maker Tingyi has been on a downwards spiral for the past year, with its core business - instant noodles - in hot water.

Third quarter sales for Tingyi, one of the leading producers of instant noodles, beverages and convenience foods in China, showed instant noodle sales slipping 8.75 per cent in the third quarter year on year, and high-end pack noodles slipping 18 per cent.

But bottled tea and water sales rose 3.55 per cent thanks in part to unseasonably hot weather, helping to narrow the decline in net profit to 1 per cent.

Unfortunately for Tingyi, which sells many of its products under the Master Kong brand, Chinese consumers appear to be losing their taste for instant noodles, with sales volumes slipping 12.5 per cent in 2015 on year, according to a report from consultancy Bain & Company.

Rawen Huang, founder and portfolio manager at Petrel Capital, said the growth in online delivery services were having a big impact on instant foods companies, including Tingyi.

“They don’t need to eat noodles anymore. They can get boiling noodles [delivered] if they want,” he told the Post.

Huang said an awareness of health was growing in importance among Chinese, so Tingyi would need to promote a healthier image to appeal to consumers.

However, Tingyi’s move to sponsor gold medallist volleyball player Zhu Ting was unlikely to combat the noodle buying slump, he said.

“I think they need new products to attract new customers,” Huang said, adding that was something Tingyi’s major competitor, Taiwanese brand Uni-President, did well, although the company was still being affected by the dwindling interest in processed foods.

“When Uni-President wanted to do well, they put out new products, whereas Tingyi just raised prices on people,” Huang said.

Huang said there were indications both Uni-President and Tingyi had suffered a bad month during October, and he wasn’t optimistic about Tingyi’s ability to turn its fortunes around next year.

Other analysts agreed that Tingyi had suffered a difficult year, but were divided on whether the company’s positive beverage sales and moves to stagger pricing for low, medium and premium brand products will help turn things around next year.

In their most recent report, Citi maintained their sell rating, giving Tingyi’s Hong Kong-listed shares a HK$5.19 price target, below Tuesday’s level of HK$9.23.

They noted that the recovery in beverage sales in the third quarter could be the result of “aggressive channel restocking”, meaning that distributors had been asked to take products, but hadn’t necessarily sold them.

“We believe that the market has over-estimated the company’s pricing power and its sustainable top-line recovery amid a likely rebound of soft commodity prices in 2017,” said Xiaopo Wei, analyst at Citi.

But Macquarie said Tingyi is going in the “right direction for a recovery”, and have set a 12-month price target of HK$11.10.

“We believe the worst is over for Tingyi, as noodles continue to stabilise, while beverages have benefited from the hot weather,” said Linda Huang, an analyst at Macquarie.

She said consolidation in the noodle industry was in sight, as the company moved to upgrade its products by introducing premium noodles while China National Cereals, Oils and Foodstuffs Corporation had opted to exit the mainland instant noodle market.

In addition, smaller players could be hurt by rising palm oil prices and weak industry growth, she said.

Huang also said moves like the company’s Starbucks Frappuccino distribution business could be a future driver for premium products.

“We believe the company’s cooperation with Starbucks, if it succeeds, could provide a strong platform for the company to distribute more international brands, which would provide a positive fit into China’s premiumisation trend.”

By contrast, Merrill Lynch maintained their neutral rating, giving the stock a HK$9.60 target price in their most recent report.

“The sharp turnaround in beverage [sales] has boosted utilisation and, as such, profitability, which offset the still-weak noodle segment,” said Tina Long, an analyst for Merrill Lynch.

She said the multi-tier pricing strategy was positive, but cautioned that margins could be impacted in coming quarters by growing inventory.

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