Description
Executive Summary
Tingyi (SEHK: 322) is a Hong Kong listed, Chinese F&B company that is an attractive short at HK$10 for several reasons. First, the company's 3 business lines, noodles, beverages and instant food have witnessed significant competition and this is increasing, not slowing from foreign players. Second, the stock has rallied 40% in the last 3 months for no fundamental reason, Q2 2016 was ugly with net profit declining -87% which makes it highly improbable Tingyi will hit consensus estimates of $175mm in net profit in 2016. Third, the stock is extremely expensive at nearly 40x earnings or nearly 30x EBIT considering below 0% top-line growth, while the company's returns on capital on its capital intensive beverages business are below cost of capital. The company has a net debt position in US$ (while the RMB has depreciated) unlike many of its consumer peers which have a net cash position. Finally, corporate governance is questionable given related party transactions and the company's choice of a relatively unknown auditor, Mazars, not typical for a HK listed company that at one time was over $15bn market cap. Recommend a short on any share price strength, as the company's business faces several years of structurally low or negative growth.
Recent Share Price Rally in Tingyi is Unjustified Given Fundamentals of Business
9 consecutive quarterly revenue declines across business segments: The recent share price strength in Tingyi over the last 3 months with a nearly 40% increase is not justified in its fundamentals. The company has faced 9 consecutive quarterly revenue declines in its noodles and beverages segments and over 14 for instant food/snacks.
| Tingyi's Business Segments - Quarterly YoY Revenue Growth |
| Turnover by Products |
2Q2016 |
1Q2016 |
4Q 2015 |
3Q 2015 |
2Q 2015 |
1Q2015 |
4Q2014 |
3Q2014 |
2Q2014 |
1Q2014 |
4Q2013 |
3Q2013 |
2Q2013 |
1Q2013 |
| Instant noodles |
-11.59% |
-15.8% |
-21.9% |
-6.2% |
-10.4% |
-13.0% |
-18.0% |
-1.8% |
-0.5% |
4.1% |
13.0% |
11.1% |
5.3% |
7.3% |
| Beverages |
-21.06% |
-5.4% |
-13.0% |
-5.3% |
-4.3% |
-18.9% |
-13.8% |
-20.0% |
-0.5% |
6.3% |
42.1% |
18.6% |
5.9% |
78.9% |
| Instant food |
-6.91% |
-5.4% |
-18.9% |
-22.9% |
-20.0% |
-29.2% |
-14.3% |
-14.5% |
-12.7% |
-7.0% |
-12.5% |
-14.1% |
-23.6% |
-3.4% |
| Others |
-20.53% |
29.8% |
22.7% |
-40.9% |
10.7% |
-6.7% |
-25.7% |
109.1% |
-58.9% |
4.2% |
52.2% |
0.0% |
200.0% |
14.3% |
| Total |
-17.95% |
-9.5% |
-17.5% |
-6.4% |
-6.4% |
-16.6% |
-16.4% |
-12.9% |
-1.9% |
5.1% |
22.8% |
15.1% |
6.5% |
37.4% |
Instant Noodles business has lost market share to competitior, UPC: The company's core business (noodles) which accounts for over 90% of net profit has been losing market share to competitor, Uni-President China (UPC), which has continued to gain market share in 1H 2016. Instant noodles for Tingyi across segments - high-end packet, bowl noodle and snack noodles segments declined -34%, -10.9% and -12.9% respectively. This has reflected in the profitability of both companies (Tingyi net profit declined -66% YoY in 1H 2016, UPCH’s net profit upped 12.9% in 1H 2016).
| Tingyi Instant Noodles YoY Revenue Growth |
| Turnover by Products |
2Q2016 |
1Q2016 |
4Q 2015 |
3Q 2015 |
2Q 2015 |
1Q2015 |
4Q2014 |
3Q2014 |
2Q2014 |
1Q2014 |
4Q2013 |
3Q2013 |
2Q2013 |
1Q2013 |
| Bowl |
-10.9% |
-15.8% |
-26.3% |
-3.5% |
-11.3% |
-12.1% |
-18.8% |
-3.0% |
-0.2% |
2.7% |
14.5% |
11.4% |
-1.2% |
13.3% |
| High end Packet |
-34.3% |
-36.9% |
-31.3% |
-4.2% |
-6.6% |
-10.8% |
-16.7% |
-2.0% |
-2.1% |
0.5% |
7.8% |
7.0% |
-1.4% |
4.7% |
| Mid end Packet |
73.8% |
62.1% |
22.8% |
-18.5% |
-15.2% |
-18.9% |
-15.6% |
2.4% |
1.0% |
16.5% |
18.4% |
16.5% |
75.0% |
-9.9% |
| Snack Noodle & Others |
-12.9% |
-12.9% |
5.3% |
-30.0% |
-25.0% |
-36.7% |
-36.7% |
3.4% |
12.0% |
50.0% |
57.9% |
70.6% |
108.3% |
17.6% |
| Total |
-11.6% |
-15.8% |
-21.9% |
-6.2% |
-10.4% |
-13.0% |
-18.0% |
-1.8% |
-0.5% |
4.1% |
13.0% |
11.1% |
5.3% |
7.3% |
Beverages business underperformance and ROICs below cost of capital: The company's capital intensive business (beverages) has underperformed relative to the industry - the Pepsi JV has yet to bear fruit. Returns on capital on this business are well below cost of capital. Competitor, Uni-President China has issued a cautious view on Chinese beverage market growth in 2016 and Coca Cola’s sales have also declined this year in China.
| Tingyi Beverages YoY Revenue Growth |
| Turnover by Products |
2Q2016 |
1Q2016 |
4Q 2015 |
3Q 2015 |
2Q 2015 |
1Q2015 |
4Q2014 |
3Q2014 |
2Q2014 |
1Q2014 |
4Q2013 |
3Q2013 |
2Q2013 |
1Q2013 |
| Tea |
-18.8% |
-1.8% |
-16.3% |
6.2% |
4.2% |
-21.3% |
1.6% |
-16.8% |
1.4% |
26.2% |
53.2% |
33.8% |
11.6% |
20.1% |
| Water |
-3.2% |
-3.2% |
-19.4% |
-6.6% |
-13.5% |
-30.0% |
-16.3% |
-26.0% |
25.1% |
34.4% |
40.4% |
37.5% |
14.2% |
16.7% |
| Juice |
-33.2% |
-15.0% |
-3.1% |
-5.2% |
-16.5% |
-38.9% |
-40.9% |
-39.5% |
-28.5% |
-7.6% |
4.5% |
6.8% |
-3.2% |
64.4% |
| Carbonated drinks |
-12.5% |
-7.1% |
-7.9% |
-18.6% |
1.6% |
14.6% |
-13.6% |
-3.8% |
3.6% |
-21.6% |
71.9% |
-1.3% |
0.3% |
NA |
| Total |
-21.1% |
-5.4% |
-13.0% |
-5.3% |
-4.3% |
-18.9% |
-13.8% |
-20.0% |
-0.6% |
6.3% |
42.1% |
18.6% |
5.9% |
78.9% |
Net profit to minority investors faltering: In the last 5 years, Tingyi has had 4 out of 5 years of declining profitability and the first half of 2016 again declining profitability. In Q2 2016, Tingyi's net profit attributable to minorities declined by 87.1% YoY to $11.6mm with declines in both noodles and beverages . Seasonally, Q3 is heavily reliant on beverage sales to drive earnings. Beverage competitors like Coca Cola, UPC in China suggest a subdued environment in terms of sales of tea and juice, and bottled water aggressive promotions in Q3 2016. Noodles matters as accounted for over 90-100% of net profit contribution as snacks and others loss-making.
| Net profit (US$ '000) |
Dec-03 |
Dec-04 |
Dec-05 |
Dec-06 |
Dec-07 |
Dec-08 |
Dec-09 |
Dec-10 |
Dec-11 |
Dec-12 |
Dec-13 |
Dec-14 |
Dec-15 |
Q1 2016 |
Q2 2016 |
| Instant noodles |
45,093 |
17,478 |
66,194 |
74,399 |
94,167 |
151,876 |
253,114 |
304,555 |
303,633 |
323,404 |
336,781 |
360,388 |
273,922 |
48,661 |
12,166 |
| Beverages |
6,892 |
9,474 |
46,909 |
67,269 |
89,152 |
99,316 |
114,009 |
128,581 |
77,172 |
141,977 |
70,995 |
71,956 |
17,639 |
12,822 |
5,726 |
| Bakery/Instant food |
-7,454 |
-15,904 |
1,184 |
4,079 |
4,221 |
5,901 |
7,034 |
1,966 |
6,457 |
3,729 |
-14,029 |
-17,449 |
-21,368 |
-3,189 |
-3,195 |
| Others |
-8,715 |
275,381 |
9,242 |
3,178 |
7,297 |
3,311 |
9,050 |
41,685 |
32,283 |
-10,488 |
14,797 |
-14,413 |
-13,853 |
-116,304 |
-26,362 |
| Net profit |
35,816 |
286,429 |
123,529 |
148,925 |
194,837 |
260,404 |
383,207 |
476,787 |
419,545 |
458,622 |
408,544 |
400,482 |
256,340 |
58,010 |
11,665 |
| YoY % Growth |
|
NM |
-56.9% |
20.6% |
30.8% |
33.7% |
47.2% |
24.4% |
-12.0% |
9.3% |
-10.9% |
-2.0% |
-36.0% |
-45.8% |
-87.1% |
Net debt balance sheet and rising inventory: As of Q2 2016, Tingyi had net debt of $954mm. 74% are denominated in foreign currency, from 79% as of Dec 2015. Inventory has reduced to $313mm in Q2 2016 from $361mm in Q1 2016 and 325mm in Dec 2015. Tingyi does not disclose full quarterly cash flow figures
| Net Debt US$ '000 |
Dec-06 |
Dec-07 |
Dec-08 |
Dec-09 |
Dec-10 |
Dec-11 |
Dec-12 |
Dec-13 |
Dec-14 |
3Q 2015 |
Dec-15 |
1Q 2016 |
2Q 2016 |
| Cash |
163,920 |
242,892 |
384,964 |
520,189 |
893,340 |
600,052 |
837,898 |
1,249,890 |
1,183,103 |
1,666,044 |
1,023,700 |
1,676,795 |
1,482,833 |
| Total Debt |
268,081 |
398,427 |
567,081 |
335,070 |
634,135 |
1,250,077 |
1,484,472 |
1,676,279 |
2,628,754 |
2,542,982 |
2,449,565 |
2,363,222 |
2,437,097 |
| Net Debt |
104,161 |
155,535 |
182,117 |
-185,119 |
-259,205 |
650,025 |
646,574 |
426,389 |
1,445,651 |
876,938 |
1,425,865 |
686,427 |
954,264 |
Consensus estimates have come down but still remain optimistic: Valuations are I believe the probability of Tingyi hitting 2016 consensus net profit figures of $175mm (down from $200mm a few weeks back) is low. Therefore, without clear catalysts , Tingyi is extremely expensive whether earnings over 40x or free cash flow (FCF) which has turned negative. To reach consensus prior to today’s results (as per Bloomberg) of ~$175mln for full year, Tingyi must earn approximately $100mm in Q3 2016 assuming Q4 is roughly breakeven (vs Q4 2015 loss of US-$85mm and Q4 2014 $8.9m just breakeven). Furthermore, consensus is predicting a strong recovery in 2017 profitability -- which we believe is highly improbable given faltering sales growth and intense competition.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Declining sales, profitability and intense competition.