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.
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
||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]
|Want Want China (OTCPK:WWNTF) (OTCPK:WWNTY) [151:HK]
|China Foods Limited (OTC:CHFHF) (OTCPK:CHFHY) [506:HK]
|Nissin Foods Company Limited [1475:HK]
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.