1Q Profit Declined as Cost Pressure Remained as an Overhang for UPC

Uni-President China reported first-quarter 2022 net profit of CNY 329 million, falling 13% versus the same period last year due to continued pressure from rising commodity costs, especially palm oil and PET. Although revenue increased by high single digits year on year, gross margin fell at a single digit rate. Management continued to note there is no plan for direct price hikes but would manage its channel expenses, which we view as an initiative to gain share from peers. A first-quarter profit decline of 13% was slightly worse than our full year estimates of 10% drop. We think the recent omicron outbreak and continued lockdowns in various parts of China will pose headwinds to the company’s revenue in 2022, while logistics disruptions could also erode efforts to reduce channel expenses as a way to protect margins. We have lowered our gross and net margins estimates for the year to account for deteriorating operating environment but retain our fair value estimates at HKD7.2 per share. However, we do not see catalysts for the company’s stock in the near term.