Tingyi’s 1H Top Line Beat but Profit Missed, Outlook To Improve From Here; Retain HKD 14.90 FVE

Narrow-moat Tingyi reported first-half earnings with resilient sales growth but a more sluggish bottom line suppressed by inflationary pressure. Our below-consensus net profit estimates have assumed a lower-than-normalized net margin level for the period but beverage growth outpaced our expectations. The EBIT margin contraction in the first half was a result of rising cost pressure, inventory write-off and increased channel expenses. We think the company’s margin level could normalize next year as these headwinds dissipate. We raised our 2022 sales estimates to mid-single-digit growth but keep our net income assumption broadly unchanged. Our fair value estimate remains at HKD 14.90 per share, which imply 25 and 18 times 2022 and 2023 P/E multiples, respectively. The current valuation has likely priced in sluggish net income trends in 2022. Management updated full-year net income guidance that trailed Refinitiv consensus but our pre-earnings forecast was within the guided range. We think the updated guide is achievable. In our view, the stock could have potential upside as the market looks through the headwinds this year and focuses on a more normalized profit level in 2023.