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Tingyi (Cayman Island) Holdings (SEHK: 322) is China’s largest instant noodle maker and has been a key beneficiary of the positive sentiment surrounding Chinese consumer staples stocks this year as the world’s second-largest economy slows.
The company reported a 3.7% sales increase in its instant noodle business during the first half of 2019 to RMB 11.5 billion (US$1.64 billion). The pickup was mostly driven by high-end instant noodles, selling at more than RMB 20 per pack, a price point that could exceed a similar beef noodle dish served in a restaurant.
The great thing about Tingyi is that it’s focusing its product mix towards the higher-end segment, where customers are increasingly emphasising value, convenience, and health. Food products sold in this market offer premium ingredients, while higher price points also elevate brand reputation and cache.
Redefining convenience, again
For Tingyi, the strategic shift is well timed for the company that controls 43% market share based on sales volume. China’s instant noodle sales peaked at 44 billion servings in 2013, before falling back down to 39 billion in 2017.
Initially, the sales decline was believed to be a result of a general consumption upgrading cycle, as more consumers were choosing to eat out or preferring healthier food choices. But with instant noodle sales jumping back to 40 billion servings in 2018, this initial thesis is now under scrutiny.
One explanation could be due to technology disruptions. Over the past five years, the proliferation of food delivery apps in China have offered both conveniences and affordable food choices. But the lower price points were heavily subsidised from the companies attempting to win early market share in this space. As subsidies have become more rational the convenience of food delivery is backpedaling – with the convenience of instant noodles reemerging.
The shift could also have been economical, as China’s 6% growth in the third quarter, the slowest pickup since the first quarter of 1992, could suggest that consumers are pulling back their spending for cheaper-priced food. But the consumption downtrend has yet to be evident in Tingyi’s numbers, which reported an 11% increase in high-end noodles, compared to a 24% drop in lower priced, ready-to-eat noodles.
Foolish last thought
This landscape should benefit Tingyi, where instant noodles account for 40% of group revenue. But investors should remember that the beverage business, which accounts for the remaining 60% of its top line, is facing a less favourable environment. Although both businesses encounter similar challenges, beverages have been less successful at adapting to changing preferences, where price points and competition are more intense.
Tingyi is trading near the low end of its recent valuation history, suggesting that unless the noodle business materially disappoints, downside support exists for the share price. Year-to-date returns have been erased, providing investors with an opportunity to build a medium-term position.
But even with a strong balance sheet, a 3% dividend yield is lower than peers, suggesting that investors can wait until the company demonstrates a similar turnaround for the beverage business.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Christopher Chu doesn’t own shares in any companies mentioned.