Leveraging the Power of Noodles

09/14/2010 11:47 am EST

Focus: GLOBAL

Yiannis Mostrous

Editor, The Capitalist Times

Leading Chinese food processor Tingyi is leveraging cash from instant soups to build its beverage business, writes Yiannis G. Mostrous in The Silk Road Investor.

Tingyi Holding (Hong Kong: 0322; OTC: TCYMY), China’s biggest maker of packaged food, is poised for big profits over the long term. The company boasts the leading market share in instant noodles (56.4%) and ready-to-drink tea (50.4%), as well as China’s top brand of bottled water.

Tingyi is a direct play on rising domestic demand; at this juncture, consumer staples and lower-priced fare provide the best leverage to this trend, and the company’s product lines are well suited to Chinese tastes.

At the same time, China’s lower per-capita consumption relative to other countries puts a bit of a lid on revenue growth in the near term. Shares of Tingyi won’t take off overnight, but its business will benefit from longer-term structural trends; the stock is an excellent play for investors with a longer time horizon.

Instant noodles provide a good example of the company’s huge potential. Although China is the world’s largest consumer of instant noodles and accounts for 34% of total demand, per-capita consumption is substantially lower than in noodle-centric countries such as South Korea and Taiwan.

The story is the similar for Tingyi’s ready-to-drink teas, juices, and bottled water. China boasts a huge market for these product categories, but per-capita consumption of these items remains far behind the numbers put up in developed nations. Again, the potential is huge.

Given Tingyi’s leading position in its various segments, the company should be able to capitalize as robust economic growth supports domestic demand.

Tingyi recently reported that first-half revenue jumped 30% from a year ago to $3.2 billion, while net profit increased 10.2% to $198 million.

In the second quarter of 2010, the company’s noodle sales were up 24% from the previous year, and beverage sales surged 47%. Tingyi’s market share by volume reached 53.6% in the ready-to-drink tea segment and 25.2% in bottled water, tops in both categories. Its share of the juice drinks market improved to 17.3%, catapulting the company from [number three to number two].

The firm [also] enjoys cost leadership thanks to economies of scale and vertical corporate integration, [and] it has a strong distribution channel that offers deep penetration in China’s various markets.

Meanwhile, strong cash flow generated by its noodles operations supports the beverage business, a high-growth enterprise that requires significant investment. A capable management team is perhaps the company’s most important asset and should ensure that the firm reaches its potential.

The company continues to face cost pressures because of higher input costs, especially for palm oil and sugar. These head winds should affect margins in the short term and could weigh on the stock, which currently trades at 31x expected 2010 earnings.

Long-haul investors should regard any near-term weakness in the stock as a buying opportunity. Buy Tingyi up to HK$20 in the local market or US$55 in the over-the-counter market.

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