UNI-PRESIDENT CHINA(220.HK)2H24 PREVIEW：A STEADY GROWTH MOMENTUM FUELLED BY DIVERSIFIED CONSUMPTION SCENARIOS & CONTINUOUS PRODUCT INNOVATION-格隆汇

机构：中银国际
研究员：Andy CHEN

　　UPC is expected to announce its final results on 5 March. We expect 4Q core net profit to increase 7% YoY. As a whole, 2H24 results should be consistent with its previous guidance, with sales of beverages/ food up 10%/ 3% YoY and OPM up 0.6ppt YoY to 7.0%. Going forward, UPC may see a net profit CAGR of 11% in 2024-26. From a long-term perspective, we like its proven R&D capability for monetising on F&B consumption trends and continuously building product matrix. We reiterate BUY on UPC with higher TP at HK$8.86. Apart from decent upside potential, its current dividend yield is attractive.
　　Key Factors for Rating
We expect 4Q core net profit to be up 7% YoY. We expect 2H24 revenue to be up 7.5% YoY to RMB15,072m, driven by 10%/3% YoY growth in beverage/ food segment. Despite resilient ASP on promotion cuts in 2H24, YoY expansion in GPM should be slower at 1.7ppts vs. 1H24’s 2.7ppts, mainly due to rising cost of palm oil. Based on our estimation, UPC’s FY24 revenue and net profit should be RMB30,520m (up 6.7% YoY) and RMB1,849m (up 10.9% YoY), respectively, representing a further slowdown in core net profit YoY growth (i.e. 7% in 4Q24, vs. 97%/31%/13% sequentially in 1-3Q24). Overall, we think that 2H24 results should be consistent with the management’s previous guidance.
What to watch for in 2025? Briefly speaking, three key issues that are drawing the attention of investors include: 1) to what degree will UPC’s beverage portfolio outperform the market? 2) Shall we expect instant noodles as a basic necessity to deliver steady growth in today’s environment? What marketing strategy will be adopted by the Company to solidify its share? 3) How much room is there for profit margin expansion ahead?
First of all, we expect the soft beverage market size in China to grow at MSD% in 2025-26, as non-alcoholic drinking demand is quite resilient and non-cyclical. Total soft beverage output was 92m tonnes, up 5.3% YoY, in 2H24, according to the National Bureau of Statistics. Competition for shelf space in retail points is still intense, but we expect UPC to continue outperforming the industry average (and its direct rivalry Tingyi) in 2025-26, with HSD% total beverage sales CAGR. Three pillars include: 1) well-positioned product family, esp. RTD tea & milk tea; 2) increasing efforts for market penetration, e.g. coverage of diversified drinking scenarios (such as traditional RTD, dining, family, gifting and group-buying, etc.) and heavier investment in commercial refrigerators; and 3) robust brand image, plus interaction with target consumers in depth. By category, we forecast UPC’s sales value of RTD tea, milk tea, and juices to reach RMB9.3bn, RMB7.2bn, and RMB4.0bn, up 10%, 7%, and 8% YoY, respectively, in 2025.
　　Food segment growth should speed up in 2H24. Looking ahead, we expect UPC to stick to stable pricing system, with rational price-based promotions (instead of price hikes adopted by its direct rivalry) during 2025. We like its “Laotan” and “the King of Tomato”, for example, with good sales momentum; and there is still some room for UPC to grab market share in the coming quarters. Looking at the bigger picture, we think instant noodles TAM growth potential in China (likely at LSD% CAGR in the medium- to long-term) is overlooked by many investors.
We expect UPC to sequentially increase OPM by 0.5ppt YoY from 2024 to 2026. To be specific, ASP is likely to stay roughly flat. Raw material cost tailwinds may last in 2025 in general, while pressure from near-term unfavourable price trend of palm oil & milk powder so far looks controllable. S&D expenses ratio could be c.22.0%-22.5%, subject to competition dynamics.
　　Key Risks for Rating
Risks: 1) intensified competition; 2) challenges in strategy execution; 3) change in consumer preferences; 4) cost inflation pressures; and 5) food safety issue.
　　Valuation
We fine-tuned our revenue forecasts, but at the same time, slightly cut our profit margin forecasts for 2H24-25E, principally to factor in heightened palm oil price assumptions.
Maintain BUY. On a YTD basis, UPC’s share price was down 3%, lagging behind its HK-listed peers; for instance, share price of Tingyi (our sector top pick)(322 HK/TP: HK$12.20, BUY), Nongfu Spring (9633 HK/TP: HK$39.10, BUY) and CR Beverage (2460 HK/TP: HK$18.22, BUY) changed by +13%, +6% and -0.3%, respectively, as at 14 February 2025. For UPC, we believe that concerns about deceleration in quarterly profit YoY growth has been mostly priced in. Together with the recovering sentiment towards China assets and the consumer sector as a whole, which could last in 2025, now there is room for higher valuation. We roll- over UPC’s valuation multiplier from 15.0x 24E EPS to 17.5x 25E EPS. New TP is HK$8.86, with an upside of 17%.