UPEC: Scale Is a Key Focus for Medium-Term Growth Across Retail, Food and Beverage Businesses

We attended an investor group discussion with the management of no-moat Uni-President Enterprises 1216, or UPEC, in which the company laid out medium-term growth strategies for its major businesses, including narrow-moat President Chain Store, or PCSC, and no-moat Uni-President China, or UPC. The key message delivered was that revenue scale would be the primary target for UPEC across its major markets in food and retail businesses. We left our fair value estimates unchanged for the three companies under our coverage and consider Uni-President China shares to be moderately undervalued, whereas Uni-President Enterprises and President Chain Store shares are slightly overvalued.

Management reiterated its rationale behind the acquisition of Carrefour Taiwan. UPEC thinks revenue size is the key competitive advantage in the retail sector, where scale confers sourcing power, operational efficiency, and a strong brand. We note the operating margins (before depreciation and amortization) for Carrefour Taiwan and 7-Eleven Taiwan were broadly similar, at around 10% in 2021. We see gradually improving operating margins across both businesses down the road as a metric to evaluate management’s execution on this strategic goal. Regarding UPC, management targets a faster pace of revenue growth versus years before 2021, where five-year sales recorded a CAGR of 0.6%. UPEC management sees growing scale as a crucial prerequisite for UPC’s long-term competitiveness in mainland China. Regarding PCSC, the company would accelerate its new store opening for convenience stores in mainland China, as it foresees store growth to slow in Taiwan over the next couple of years.