Selling Master Kong noodles in China has never proved a problem for Taiwan-controlled Tingyi.
Keeping an eye on the bottom line has proved more challenging, as price competition and rising input costs have recently prevented top-line growth from filtering down to profits.
The firm has dramatically under-performed the broader Hong Kong market over the past year but investors may have overlooked latent value if the partial sale of its soft-drink business to Asahi Breweries is anything to go by.
The deal will see Japan's largest brewery obtain 40 per cent of the soft-drink venture for US$420 million, while trading house Itochu Corp will take a 10 per cent interest. Into this will go 13 of Tingyi's beverage subsidiaries, selling tea, fruit juice, coffee and health drinks.
At five times the drink venture's book value, the deal looks good since the firm's stock commands a 2.2 times premium to its underlying book value. Tingyi will earn an estimated one-off gain of about US$300 million or 42 cents per share. This enhancement was quickly priced in by investors who bid the firm's stock price 36 per cent higher yesterday. Shareholders, however, will not see the cash as funds are destined to be used for debt repayment, reducing Tingyi's gearing level of 50 per cent to a position of net cash.
The deal appears to be a loud endorsement of Tingyi's hard-built drinks franchise and of the prospects of the beverage market in China. Asahi also brings production and procurement expertise and a range of quality fruit drinks.
On closer inspection, one reason Tingyi is getting a rich price is that it is also selling down a stake in perhaps its best business. Subsequent to its listing on the Hong Kong stock exchange in 1996, Tingyi diversified from its core noodle business into beverages and bakeries. It found quenching mainland thirsts easier than predicting their taste in muffins or crackers.