Uni-President China Earnings: Missed Due to Food Segment; Beverages To Drive Growth in 2023

No-moat Uni-President China 00220 posted first-quarter results that slightly missed our expectations on sales and margins. Net profit increased 48% year on year, but fell 30%, excluding one-off land sales gain. We have moderately lowered our top-line and net profit estimates for 2023, as a downward revision in the food segment more than offset a better outlook for beverages. Our fair value estimate remains unchanged at HKD 7.60 per share, which implies 16 times 2023 P/E and is broadly in line with its three-year average. We think the market could be concerned with the food business performance following first-quarter results. We consider the stock fairly valued at its current price, and may lack a near-term catalyst.

We moderately reduced our 2023 revenue growth projection by 60 basis points to 7%, mainly dragged by the food segment, which more than offset our upward revision in beverage sales growth. We also lowered our gross margin estimate for the food segment by 1 percentage point, with softer first-quarter numbers. We keep our sales and marketing expenses ratio for this year, as we had already projected a 90-basis-point increase. Our net profit estimate for 2023 is now 4% lower than our prior estimate. We continue to think normalizing foot traffic will drive sales and profit rebound for UPC. And we believe the beverage segment would be the key driver.

Revenue for the first quarter fell single-digits year on year, as food segment sales declined in the low teens. Meanwhile, beverage sales grew a single-digit percentage. Management attributed weaker sales to earlier Lunar New Year timing. Comparable period sales (three months since December 2022 according to UPC) grew in the midteens versus first-quarter 2022. We had lower expectations for food revenue growth, but results still fell below our estimates. Increased catering demand likely cannibalized instant noodle sales for the company, which we now estimate to trend flat year on year.