Givaudan: Sticky Player In A Niche Industry (OTCMKTS:GVDBF)

Investment Thesis

It is quite exciting to find a niche market with several secular tailwinds and top players’ rational behavior. In my opinion, Flavors & Fragrances (F&F) is such a type of niche industry. Top 4 players consist of more than half of the market share with trends of continuing consolidation. In addition to that, the sector has substantial barriers to entry that keep protecting incumbents.

Leading player in the industry is Givaudan (OTCPK:GVDBF) (OTCPK:GVDNY), along with International Flavors & Fragrances (NYSE:IFF), Symrise (OTCPK:SYIEF), and Firmenich (private company). In my view, Givaudan is the best-managed company for long-term exposure based on its fundamentals and business model.

Heritage Over 250 Years

Givaudan is the world’s leading flavors and fragrances manufacturer with a legacy that stretches back over 250 years. Today, the Company has a leading market share and 73 production sites worldwide. It has two business divisions: Fragrances and Flavors. The Company also engages in research and development activities into perfumery raw materials, both synthetic and natural.

Industry Overview

F&F companies occupy a strong position in the value chain because their products make up only a small portion of the final product cost, but play a decisive role in the consumer’s purchasing decision. According to the Givaudan presentation, the share of F&F ingredients in customers’ COGS represents 4-6% in fine fragrances and 0.5-2% in flavors and consumer fragrances. On the other side, scent and taste largely determine the customer purchase decisions. Therefore, the F&F companies are in a sweet spot in the value chain, because they represent only a small portion of production costs, but a critical buying criteria.

Several megatrends support the organic growth of the industry. For instance, health & wellness, middle-class boom & urbanization, naturalness & sustainability, vegetarian/vegan/halal/kosher food, traceability, etc. In addition to that, the industry has a strong connection to population growth and disposable income, with little dependence on cyclical economic trends.

The total F&F market size is around USD26bn and is growing by an average of 4% per year in the long run. More than 500 companies are active worldwide, but the four largest producers have a market share of more than 50%. The F&F market is characterized worldwide by high barriers to entry (regulation, intellectual property, innovation, scale, global presence, preferred supplier lists, the complexity of supply chains, local taste preferences).

Recent Results & Outlook

Givaudan had a strong start to the year. In the first half of 2020, Givaudan recorded sales of CHF3.2bn, an increase of 4.0% on a like-for-like basis. The Fragrance division grew 4.5%, and the Flavors division grew 3.6% on a like-for-like basis. When we look deep into the top-line performance, we can see the relatively good performance of those parts of the portfolio which are not impacted by COVID-19. On the other side, Fine Fragrance, Fragrance Ingredients, and Active Beauty were down by 16.4% and 0.1% on a like-for-like basis respectively.

The Company had the right balance between mature and growth markets, with 58% of sales coming from mature and 42% of sales from growth markets. All regions were contributing to the growth on a like-for-like basis. The only market which was almost flat was India, given that the country has been heavily affected by the COVID-19 crisis.

EBITDA increased by 11.3% to CHF734m, while the underlying margin was remaining stable at 23.7%. At the bottom line, net income amounted to CHF413m or an 8.8% increase compared to the same period last year. Free cash flow was at the level of CHF178m or 5.5% of sales compared to 4.8% in 2019.

Balance sheet wise, the Company has a net debt (incl. pension obligations) of CHF5.2bn at the end of the first half of 2020. The weighted average effective interest rate for is 1.43%. The leverage range of 3.0-3.5x seems sustainable for a consumer goods company like Givaudan, given the free cash flow generation (CHF787m in 2019). But for future shareholders, the Company has already trod some of its flexibility.

Despite the higher debt than what it would be desirable, the maturity profile is quite favorable. Within the next 2-3 years, there is a need for refinancing of around CHF1.3bn.

The Company aims to outpace the market with 4-5% sales growth and free cash flow of 12-17% of sales, and both measured as an average over the five years. In 2016-2019, it grew sales by 5.1% and had a free cash flow margin of 12.5%.

Since 2014, the Company made 14 acquisitions, which contributed CHF1.5bn of annualized revenues. On the other side, the Company paid for M&A growth of CHF3.6bn. The strategy is to continue to grow through acquisitions by being opportunistic, disciplined, and diligent. Also, it is very assuring the Company is not going for size at all costs, rather opportunistic acquisitions. We can see from the list below that the Company strategically picks what best fits into its business model.


Since the Company has delivered its outlook in H1 2020, I will keep it as a proxy for the next five years in my valuation model. It isn’t straightforward to model potential acquisitions, so I will not include them in my model.

For 2020, I used lower bound estimates for revenues and FCF, while for the rest of the projection period, I used mid-bound forecasts of 4.5% for top-line growth and 14.5% for FCF. For the terminal growth rate, I used 3%, which is consistent with world economic growth. I set a discount rate at 6%, but if someone uses 5% or 7%, the intrinsic value is CHF4,797 and CHF2,109, respectively.


Putting all the pieces together, we can conclude that Givaudan is in an attractive industry with a strong tailwind. But at the same time, we can see that these companies are trading at a higher price than my model indicate.

Therefore, it would be wise to wait for a better entry point because I don’t see a margin of safety at this valuation level. Putting all pieces into perspective, the Company would be on my list, but I would wait for a better entry point.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tingyi Holding: Leading Noodles And RTD Tea Player In China (OTCMKTS:TCYMY)

Elevator Pitch

I assign a Neutral rating to Hong Kong-listed Chinese food & beverage company Tingyi (Cayman Islands) Holding Corp. (OTCPK:TCYMY) (OTCPK:TCYMF) (OTC:TCYQY) [322:HK].

Tingyi Holding is the market leader in instant noodles, RTD (ready-to-drink) tea and cola carbonates in China. But Tingyi Holding faces competitive threats from online food delivery companies in the instant noodles business and street stalls/kiosks in the beverages segment, and the success of its product premiumization strategy is the key to mitigating the negative impact of such competitive threats.

Tingyi Holding’s forward FY2020 dividend yield of 4.8% is attractive, and there are tailwinds for the noodles business in the short term due to Covid-19. But long-term structural competitive threats can’t be ignored, so I think that a Neutral rating is fair for Tingyi Holding.

Readers have the option of trading in Tingyi Holding shares listed either on the Over-The-Counter Bulletin Board (OTCBB) as ADRs with the tickers TCYMY, TCYMF or TCYQY on the Hong Kong Stock Exchange with the ticker 322:HK. For those shares listed as ADRs on the OTCBB, note that liquidity is low and bid/ask spreads are wide.

For those shares listed in Hong Kong, there are limited risks associated with buying or selling the shares in terms of trade execution, given that the Hong Kong Stock Exchange is one of the major stock exchanges that is internationally recognized and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $12 million, and market capitalization is above $8.7 billion, which is comparable to the majority of stocks traded on the US stock exchanges. Institutional investors which own Tingyi Holding shares listed in Hong Kong include The Vanguard Group, MFS Investment Management, Hermes Investment Management, and BlackRock, among others. Investors can invest in key Asian stock markets either using US brokers with international coverage, such as Interactive Brokers, Fidelity, or Charles Schwab, or local brokers operating in their respective domestic markets.

Company Description

Started in 1992 and listed on the Hong Kong Stock Exchange in 1996, Tingyi Holding is one of the leading food & beverage companies in China, and it generates more than 99% of its sales from the country. The company derived approximately 40.8% and 57.5% of its FY2019 revenue from its instant noodles and beverages business segments, respectively. Other food products contributed the remaining 1.7% of Tingyi Holding’ FY2019 top line. In terms of earnings contribution, the instant noodles business accounted for 66.0% of Tingyi Holding’ FY2019 net profit attributable to shareholders, while the beverage business contributed 28.4% of the company’s net income last year.

Tingyi Holding has significant distribution and production capabilities, which help to cement its status as a leading Chinese food & beverage company. As of end-FY2019, Tingyi Holding’s distribution network in China comprises of 371 sales offices, 182 warehouses, 36,186 wholesalers and 185,789 direct retailers. The company also has 165 and 425 production lines for its instant noodles and beverages businesses, respectively as of December 31, 2019.

Tailwinds For Instant Noodles Business In The Near Term

Tingyi Holding is a market leader in the China’s noodles market. According to AC Nielsen data as of end-2019, Tingyi Holding has a 43.3% market share of the Chinese instant noodles market; while Euromonitor ranks Tingyi Holding’ Master Kong as the top brand in China’s rice, pasta & noodles market with a 14.8% share in 2019.

Instant Noodles Business’ Product Mix

Source: Tingyi Holding’s FY2019 Results Presentation Slides

The instant noodles business’s segment revenue increased by +5.79% YoY in FY2019, and the strong sales momentum for Tingyi Holding’s instant noodles business is expected to continue in 1H2020. The instant noodles business’ robust sales growth in FY2019 was mainly attributable to consumers tightening their purse strings as a result of economic weakness in China, and turning to affordable food options like instant noodles. In the early part of this year, the coronavirus pandemic has been a boost to the sales of instant noodles in China.

While Tingyi Holding has not disclosed its quarterly results (semi-annual financial reporting), the 1Q2020 performance of its instant noodles peer, Nissin Foods [1475:HK], provides an indication of the performance of the Chinese instant noodles market in early 2020. Nissin Foods’ revenue in Mainland China grew +10.3% YoY to HK$526.2 million in 1Q2020. In Nissin Foods’ 1Q2020 results announcement published on May 11, 2020, Nissin Foods noted that “the stay-at-home economy (due to Covid-19) during the period of fourth quarter has increased higher demand for premium instant noodles.” Using Nissin Foods’ 1Q2020 results as a reference, I expect Tingyi Holding to register a double digit YoY revenue growth for the company’s instant noodles business in 1H2020.

While the outlook for Tingyi Holding’s instant noodles business is positive in the near term, the instant noodles business faces structural disruption threats from online food delivery companies in the medium to long term. A November 2019 Rice, Pasta and Noodles in China Euromonitor report notes that the Chinese market noodles market has seen a “decline in the early part of the review period (2019) partly resulting from competition from online delivery services.” A May 11, 2020 South China Morning Post news article also stated that “the instant food segment (in China) had been losing market share in recent years as consumers increasingly turned to food delivery companies.”

Looking ahead, the future growth of Tingyi Holding’s instant noodles business will be dependent on both the sustainability of discounts offered by online food delivery companies, and the company’s efforts in launching new products to capitalize on the product premiumization trend (discussed in a subsequent section of the article).

Headwinds For Beverages Business In Both The Short Term And Long Term

Similar to its instant noodles business, Tingyi Holding’s beverages business also dominates the Chinese market. The company has a 45.7% share of the ready-to-drink or RTD tea (including milk tea) market in China based on AC Nielsen’s December 2019 data; while its flagship Master Kong Ice Tea brand alone has 16.4% brand share of the Chinese RTD tea market in 2019.

Tingyi Holding acquired PepsiCo’s (PEP) China bottling operations in 2012, and the company is the exclusive manufacturer, bottler, and distributor of PepsiCo non-alcoholic drinks in China. Pepsi is the second largest brand in the Chinese carbonated drinks market with a 32.9% market after Coca-Cola (KO) based on GlobalData December 2019 data. However, it is noteworthy that Pepsi has a larger market share than Coca-Cola in the cola carbonated drinks sub-segment (versus the larger overall carbonated drinks market) in China, according to Euromonitor’s December 2019 Carbonates in China report.

Beverages Business’ Product Mix

Source: Tingyi Holding’s FY2019 Results Presentation Slides

Tingyi Holding’s beverages business delivered a lackluster +0.81% YoY increase in segment revenue in FY2019, as strong sales growth for carbonated drinks and juice products were offset by flat RTD tea sales and a significant decline in bottled water sales.

Going forward, the outlook for beverages business is bleak, as Covid-19 is expected to have reduced on-premise and on-the-go consumption of beverages in China in the first half of the year. Beverage sales in 2020 will be reliant on consumers’ willingness to step out of their homes and dine out more often.

In the medium to long term, Tingyi Holding’s beverages business also faces significant challenges. The beverage business’ key products are RTD tea and carbonated drinks, which accounted for 78% of the segment’s FY2019 sales.

Euromonitor highlighted in its RTD Tea in China report published in December 2019 that “milk tea from street stalls/kiosks has gradually become the first choice instead of RTD milk tea among consumers (in China).” The perceived “freshness” of milk tea from street stalls/kiosks, greater collaboration between street stalls/kiosks and online food delivery platforms, and the wide variety of milk tea choices for street stalls/kiosks are singled out by Euromonitor as the key factors for the growing market share of street stalls/kiosks in China’s milk tea market.

Separately, consumers in China and around the world have been switching away from cola carbonates to other beverage options, due to increased health consciousness. The structural decline in Tingyi Holding’s carbonated drinks segment has been partly stemmed by the introduction of low-calorie cola variants, and the increased popularity of sparkling water products.

Product Premiumization Strategy Is Key To Fending Off Competitive Threats

In its report on China’s rice, pasta & noodles market published in November 2019, Euromonitor notes that Tingyi Holding’ Master Kong brand “is at the forefront of the premiumization trend” with its premium products “seen as more nutritious and healthier” and having a strong “emphasis on the quality of its soup and ingredients.” Similarly, a December 2019 Euromonitor report on the Chinese RTD tea market highlighted that “an important driving force for the growth of RTD tea is consumption upgrading.” Euromonitor also mentioned in its report that the average unit price of a RTD tea product sold in China has increased from RMB3 previously to RMB5 now, due to the increased launch of premium RTD tea products.

For the noodles business, high-end products contributed 40% of the segment’s FY2019 sales. For its high-end noodles products, Tingyi Holding introduced new variants using different seasonings such as shallots rib and millet pepper & pickled pepper mix last year. In 2019, Tingyi Holding also launched a new super-premium line of noodles aptly named as “Express Chef’s Noodle” which features “juicy chunks of meat, thick pure broth and the taste of fresh noodles.” Similarly, Tingyi Holding’s beverages business came out with a new premium line of RTD tea products branded as “Master Kong Chacanting”. The term Chacanting refers to Hong Kong-style cafes which serve quality milk tea and ice lemon tea products to be enjoyed with food, so the new product line’s name serves as an indication of its quality.

In the face of competitive threats from online food delivery companies and street stalls/kiosks, the success of Tingyi Holding’ product premiumization strategy is key to its future growth prospects.

Valuation And Dividends

Tingyi Holding trades at 18.5 times trailing twelve months’ P/E and 20.8 times consensus forward next twelve months’ P/E based on its share price of HK$12.16 as of July 2, 2020. As a comparison, the stock’s historical five-year and 10-year consensus forward next twelve months’ P/E multiples were 24.3 times and 26.4 times, respectively.

Tingyi Holding offers consensus forward FY2020 and FY2021 dividend yields of 4.8% and 5.1%, respectively.

As per the peer valuation comparison table below, Tingyi Holding’s P/E valuation and dividend yield are roughly in line with what its Hong Kong-listed Chinese food & beverage peers are trading at.

Peer Valuation Comparison For Tingyi Holding

Stock Trailing Twelve Months’ P/E Consensus Forward Next Twelve Months’ P/E Consensus Forward One-Year Dividend Yield
Uni-President China (OTCPK:UPCHY) (OTCPK:UNPSF) [220:HK] 22.2 21.3 4.6%
Want Want China (OTCPK:WWNTF) (OTCPK:WWNTY) [151:HK] 18.6 17.3 4.7%
China Foods Limited (OTC:CHFHF) (OTCPK:CHFHY) [506:HK] 17.6 17.2 2.1%
Nissin Foods Company Limited [1475:HK] 26.0 21.7 2.2%

Source: Author

Risk Factors

The key risk factors for Tingyi Holding include online food delivery companies gaining market share from instant noodles players, stiffer than expected competition from street stalls/kiosks selling tea products, consumers switching away from cola carbonates due to health concerns, and a cut in the company’s dividend payout ratio.

Note that readers who choose to trade in Tingyi Holding shares listed as ADRs on the OTCBB (rather than shares listed in Hong Kong) could potentially suffer from lower liquidity and wider bid/ask spreads.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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