Uni-President China: Soft Demand for Food Products a Drag; Valuation Lowered

No-moat Uni-President China’s 00220, or UPC’s, first-half 2023 results slightly missed our above-consensus estimates, but net profit was above Refinitive consensus estimate. We lower our fair value estimate slightly to HKD 7.50 per share from HKD 7.60, which implies 19 times 2023 earnings multiples, roughly in line with its five-year historical average. We continue to see the stock as undervalued and think UPC’s profit in 2023 could benefit from resilient beverage demand and alleviating input cost pressure. We like the company’s strategies in the beverage segment and think the headwinds in the food segment are mostly priced in.

Revenue fell short of our expectation due to sluggish demand for instant noodles with people eating out more often postpandemic. However, gross profit increased year on year thanks to resilience in beverage products. The food segment’s operating loss weighed on UPC’s bottom line. Management maintained its full-year guidance on sales growth at high-single digits, but we lowered our estimates and think management’s growth goal is difficult to reach given the sluggish food segment. As a result, we lowered our 2023 net profit estimates by 13% to CNY 1.5 billion.

Revenue increased 4.5% year on year in the first half, versus our estimates of 6%, thanks to 12.2% growth in beverage. The ready-to-drink, or RTD, tea and juice categories recorded mid- to high teens sales growth during the period thanks to point-of-sale expansion, catering channel strength, and increasing foot traffic. But the food segment recorded 8.7% decline in revenue as consumers reduced in-home consumption. Gross profit still rose 8% versus first-half 2022, thanks to the beverage segment. But elevated sugar prices still weigh on gross margins, whereas pressure from other raw materials such as palm oil and PET have alleviated.