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February 12, 2014
China: Consumer Staples
Equity Research
2014: Price discipline in sight; Tingyi, UPC to Buy; Huishan to CL-Buy
Competition is king in year of weak sales and fading cost tailwind
We believe competitive intensity will be the most important driver of
China Staples’ earnings in 2014 against a backdrop of decelerating top-
line growth and abating raw material cost tailwinds. Directional changes
in promotional spend will thus be crucial for margins this year.
We upgrade Tingyi and UPC to Buy on positive OPM inflection as
Beverage promotions ease. We expect Tingyi to pull promotions following
recent stabilization of market share to restore profitability, and UPC to
follow. This will drive accelerated EPS CAGR for both companies.
Maintain out-of-consensus Sell on Hengan as intense competition is
spilling from tissues and diapers into its key category sanitary napkins
(>50% of OP). In 4Q13, Kimberly Clark staged a major re-launch of its fem
care products targeting the same customer group as Hengan’s Space-7.
Fading raw material cost tailwind: In 2014E/2015E, we forecast that raw
material costs will turn from deflationary to mildly inflationary, with our GS
COGS Index to increase by 6 pp vs 1H13. Adding Huishan to CL-Buy as
we expect the company to benefit most from raw milk price hikes and
downstream premiumization, driving our 40% 2-yr EPS CAGR forecast.
After recent pull back, Huishan is trading at 13.9X average 2014E/2015E P/E.
Upgrade Tingyi and UPC to Buy: Beverages to drive margin rebound
Tingyi’s Beverage margins have contracted from 13% in 2008 to 5% in 2013E
as a result of its aggressive market share defence. We think recent
stabilization of RTD tea market share is likely to prompt Tingyi to pull
Beverage promotions to restore profitability at a faster rate than
appreciated by the market. We forecast Tingyi’s Beverage margins to return
to 11% by 2015E, driving 2-yr recurring EPS CAGR of 29% vs 17% in 2013E.
We expect UPC to follow to restore prices and forecast its Beverage margins
to bounce back from 4.4% in 2013E to 6.6% in 2015E, driving recurring 2-yr
EPS CAGR of 43%, vs 42% decline in 2013E. Noodles competition will remain
tough, but the upswing in Beverage margins will be enough to push both
companies’ EPS CAGRs to 1st quartile vs Staples peers. At current average
2014E/2015E P/E of 22.8X for both Tingyi and UPC, we see re-rating
opportunities to high 20s P/E. Upgrade both companies to Buy.
Revisions to earnings and 12-m target prices for our coverage
We revise our FY13E-FY15E EPS by -10% to +13% and 12-m target prices
by -14% to +35% for stocks under our coverage.
KEY THEMES IN THIS REPORT
2014 Outlook: All about competition; selective on growth
Latest China Staples trends: Growth deceleration continues, COGS tailwind to fade
Tingyi, UPC: Beverages to drive positive OPM inflection in 2014, upgrade both to Buy
RATING AND TARGET PRICE SUMMARY
*The stock is on our Conviction List
HOW WE DIFFER FROM CONSENSUS
Note: UPC, Tsingtao, CRE’s Bloomberg consensus is a mix
of core and non-core EPS. Our estimates are core EPS, excl.
one-offs such as gains from asset sales.
Source: Bloomberg, Datastream, Goldman Sachs Global
Investment Research
Lisa Deng +852-2978-0528 [email protected] Goldman Sachs (Asia) L.L.C. Goldman Sachs does and seeks to do business with
companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
Xiaochun Ni +852-2978-6603 [email protected] Goldman Sachs (Asia) L.L.C.
The Goldman Sachs Group, Inc. Global Investment Research
Implied
Company Ticker New Old New Old Crncy +/‐ %
H‐Share Staples valuation framework
Want Want 0151.HK Buy Buy 13.90 12.50 HKD 37%
UPC 0220.HK Buy Neutral 8.90 7.30 HKD 27%
Tingyi 0322.HK Buy Neutral 24.90 18.45 HKD 26%
Hengan 1044.HK Sell Sell 82.90 78.30 HKD ‐1%
Mengniu 2319.HK Neutral Neutral 36.90 33.20 HKD 1%
Tsingtao (H) 0168.HK Neutral Neutral 65.00 55.10 HKD 17%
CRE 0291.HK Neutral Neutral 26.50 28.40 HKD 18%
China Foods 0506.HK Neutral Neutral 3.00 3.00 HKD 15%Other Staples stocks under coverage
Huishan 6863.HK Buy* Buy 3.60 3.20 HKD 35%
Tsingtao (A) 600600.SS Buy Buy 50.70 44.40 CNY 19%
Greatview 0468.HK Neutral Neutral 4.60 5.35 HKD 12%
Rating 12‐m TP
Company Ticker F13E F14E F15E
Huishan 6863.HK ‐9% ‐6% ‐3%
Want Want 0151.HK ‐4% ‐2% 7%
UPC 0220.HK ‐37% ‐8% 10%
Tingyi 0322.HK 1% 5% 10%
Hengan 1044.HK ‐2% ‐12% ‐10%
Mengniu 2319.HK ‐5% ‐4% ‐9%
Tsingtao 0168.HK ‐10% ‐2% 4%
CRE 0291.HK ‐10% ‐11% ‐5%
China Foods 0506.HK ‐3% ‐105% ‐46%
Greatview 0468.HK ‐3% ‐8% ‐10%
GS vs Consensus
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 2
Table of contents
2014 outlook: All about competition; selective on growth 3
Latest China Staples trends: Growth deceleration continues 6
Upgrade Tingyi and UPC to Buy: Competition not over, but close to the end of a cycle 10
Beverages to lead margin rebound in 2014 for Tingyi and UPC 11
Noodles unit cost analysis suggests marketing flexibility available 15
Huishan (6863.HK): Positive data boosts conviction; to CL-Buy 24
Tingyi (0322.HK): Positive inflection on OP margins; up to Buy 30
UPC (0220.HK, Buy): Price restoration on the horizon; up to Buy 34
Want Want (0151.HK): Restructuring to bear fruit; maintain Buy 38
Hengan (1044.HK): Sanitary napkins feel the pressure; maintain Sell 46
Tsingtao (600600.SS, Buy; 0168.HK, Neutral): Price discounts fading 54
Summary of changes/risks for Neutral-rated stocks 60
Disclosure Appendix 61
The prices in this report are as of the market close of February 10, 2014.
Exhibit 1: China Consumer Staples valuation comparison
*Stock is on our regional Conviction List. All target prices mentioned above are on a 12-m basis. CS = Coverage Suspended, NC = Not Covered. Huishan’s 2013E-2015E EPS CAGR is calculated on calendar year basis here vs. its financial year-end on of March.
Source: Bloomberg, Datastream, Goldman Sachs Global Investment Research
BBG Ticker Name Mkt Cap Last GS Target List Report EPS 13-15E PE PE PEG EV/EBITDA EV/EBITDA P/B Div Yield Div Yield ROA ROE ROEClose Rating Price Crncy Crncy 6M Chg CAGR CY13 CY14 2Yr CY13 CY14 CY14 CY13 CY14 CY13 CY13 CY14
US$m Price L.C. L.C. L.C. % % (X) (X) CAGR (X) (X) (X) % % % % %China Personal Care
1044 HK Hengan 13,287 83.70 Sell 82.90 HKD HKD (5.0) 12.6 26.7 25.4 2.0 18.6 17.4 6.1 2.2 2.3 11.9 25.9 24.8 3331 HK Vinda 1,619 12.58 NC N/A HKD HKD 48.5 16.9 23.2 19.8 1.2 15.2 13.2 2.8 1.2 1.4 6.0 12.4 13.2 Average 14,906 26.3 24.8 1.9 18.2 17.0 5.7 2.1 2.2 11.2 24.4 23.5
China NARTD/Packaged Food322 HK Tingyi 14,213 19.70 Buy 24.90 HKD USD 1.3 28.8 33.8 25.9 0.9 12.4 9.5 4.5 1.5 1.9 5.5 16.2 18.6 151 HK Want Want China 17,251 10.12 Buy 13.90 HKD USD (2.3) 23.9 27.3 23.1 1.0 18.3 15.4 8.2 2.5 3.0 16.8 37.2 38.3 220 HK UPC 3,257 7.02 Buy 8.90 HKD CNY (0.6) 43.3 40.4 27.8 0.6 15.4 12.8 2.2 1.2 0.9 5.4 12.4 8.1 506 HK China Foods 938 2.60 Neutral 3.00 HKD HKD (15.6) nmf nmf nmf nmf 35.9 10.9 1.2 - - (3.7) (11.2) (0.2) Average 35,659 31.2 24.7 0.9 16.1 12.7 6.0 1.9 2.3 10.7 25.3 26.7
China Alcohol168 HK Tsingtao H-Share 9,560 55.35 Neutral 65.00 HKD CNY (9.8) 23.0 31.6 24.8 1.1 17.6 13.9 3.6 1.1 1.2 8.6 16.0 15.5 600600 CH Tsingtao A-Share 9,560 42.55 Buy 50.70 CNY CNY (1.5) 23.0 30.7 24.4 1.1 17.3 13.7 3.6 1.1 1.3 8.6 16.0 15.5 506 HK China Foods 938 2.60 Neutral 3.00 HKD HKD (15.6) nmf nmf nmf nmf 35.9 10.9 1.2 - - (3.7) (11.2) (0.2) 291 HK CRE 6,972 22.50 Neutral 26.50 HKD HKD (12.5) 27.9 35.1 28.4 1.0 8.4 7.4 1.2 0.5 0.7 1.2 3.7 4.4 000729 CH Beijing Yanjing 3,332 7.19 CS N/A CNY CNY 16.7 11.0 25.3 22.3 2.0 nmf nmf 1.9 1.9 2.2 4.8 7.8 7.2 600519 CH Kweichow Moutai 22,760 132.86 Buy 177.42 CNY CNY (23.1) 15.9 9.2 8.0 0.5 5.6 4.8 2.7 5.5 6.3 31.5 39.7 37.6 000858 CH Wuliangye 9,289 14.83 Neutral 17.17 CNY CNY (22.4) 11.3 6.8 6.3 0.6 3.0 2.6 1.3 4.5 4.9 18.8 24.3 22.4 000568 CH Luzhou Laojiao 3,806 16.45 Neutral 21.84 CNY CNY (22.0) 11.5 6.1 5.5 0.5 3.3 3.1 1.8 10.7 10.9 24.1 36.7 35.3 000869 CH Yantai Changyu 2,391 24.44 CS N/A CNY CNY (24.1) 6.2 12.9 12.4 2.0 7.6 8.6 2.5 4.1 3.5 15.2 20.3 19.4 Average 68,607 18.5 15.3 0.9 9.4 7.5 2.5 3.6 4.0 17.6 24.3 23.3
China-Dairy2319 HK China Mengniu 8,683 36.70 Neutral 36.90 HKD CNY 13.4 27.0 36.0 26.2 1.0 18.6 13.2 3.3 0.6 0.8 5.0 10.4 12.5 6863 HK Huishan 4,941 2.66 CL Buy 3.60 HKD CNY nmf 40.6 23.7 16.1 0.4 19.2 12.2 2.1 - - 9.2 14.9 14.2 1117 HK Modern Dairy 2,433 3.91 NC N/A HKD CNY 45.4 60.7 33.2 17.1 0.3 19.6 15.6 2.5 0.1 0.5 4.6 9.0 13.1 600887 CH Yili 12,725 37.75 CS N/A CNY CNY 1.9 20.2 26.1 22.8 1.1 19.6 14.4 4.9 1.1 1.3 10.8 21.0 19.4 600597 CH Bright Dairy 3,861 19.11 CS N/A CNY CNY (2.3) 47.0 48.9 32.0 0.7 nmf nmf 5.4 1.2 1.8 5.4 11.1 15.7 1230 HK Yashili 1,955 4.26 NC N/A HKD CNY 21.7 24.5 22.3 18.9 0.8 13.6 11.2 3.4 4.8 2.8 11.0 14.8 17.6 1112 HK Biostime 5,373 69.20 NC N/A HKD CNY 60.7 31.3 33.6 25.5 0.8 22.2 16.2 12.6 1.7 2.5 23.8 37.2 44.5 SYUT US Synutra 454 7.92 NC N/A USD USD 53.8 30.8 20.3 14.4 0.5 nmf nmf nmf nmf nmf nmf (12.7) nmfAverage 40,425 31.3 23.3 0.8 19.4 14.0 5.1 1.1 1.3 10.2 17.8 19.8
China - Pork1068 HK China Yurun 1,064 4.53 Neutral 4.60 HKD HKD (13.7) nmf nmf 9.2 nmf 22.7 8.0 0.5 0.4 3.6 0.5 0.9 7.5 000895 CH Shuanghui 16,863 46.44 NC N/A CNY CNY 20.1 23.6 26.2 21.2 0.9 17.2 13.4 5.4 0.9 1.1 20.5 31.0 30.6 3999 HK Dachan Food 118 0.90 NC N/A HKD (10.0) nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmfPFH SP People's Food nmf nmf NC N/A SGD nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmfAverage 18,045 26.2 20.5 0.9 17.5 13.0 5.1 0.9 1.3 19.3 29.2 29.2
China Packaging468 Hk GA Pack 711 4.12 Neutral 4.60 HKD CNY (12.5) 21.7 14.7 12.1 0.6 9.2 7.6 1.9 2.0 2.5 11.7 15.2 16.3 906 HK COFCO Pack 772 6.00 NC N/A HKD CNY 17.6 22.2 12.1 9.9 0.4 7.9 6.9 1.2 nmf nmf 5.4 10.3 10.9 829 HK Shenguan 1,418 3.31 NC N/A HKD CNY (0.9) 13.3 11.0 9.8 0.7 8.1 7.0 3.2 5.2 5.6 26.2 31.3 30.6 000659 CH Zhongfu 509 2.40 NC N/A CNY CNY 19.4 nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf600210 CH Zi Jiang 735 3.10 NC N/A CNY CNY 7.6 17.2 20.3 16.9 1.0 nmf nmf nmf nmf nmf nmf 5.4 6.0 9939 TT Hon Chuan 556 64.90 NC N/A TWD TWD (3.7) 12.7 13.9 12.6 1.0 nmf nmf nmf nmf nmf nmf nmf nmfAverage 4,701 13.8 11.8 0.7 8.3 7.1 2.4 4.1 4.6 17.1 18.4 18.6
Price
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 3
2014 outlook: All about competition; selective on growth
After a year of lackluster topline growth and intense competition in 2013, we believe
that the key themes driving Staples performance in 2014 will again be centered on
competitive intensity and access to growth. However, in 2014, we expect that the
category sales growth disparity between “early stage” and “later stage” consumption
categories will become even more pronounced, which will subsequently lead to
increasingly divergent competitive intensity in the two segments.
We reiterate Buy on Huishan and add it to CL; upgrade Tingyi and UPC to Buy from
Neutral; maintain Want Want and Tsingtao (A) on Buy and Hengan on Sell.
Exhibit 2 below conceptualizes our thinking behind the key themes influencing earnings
growth for Staples in 2014 and where each of the stocks under our coverage is positioned.
Exhibit 2: Conceptualizing key themes in Staples for 2014E
Note: Direction of arrows indicate our expected trend for competitive intensity. Arrows pointing to the left indicate a reduction in competitive intensity. Arrows pointing to the right indicate an increase in competitive intensity.
Source: Goldman Sachs Global Investment Research.
We can broadly separate our Staples coverage into “early stage” and “later stage”
companies based on the consumption categories that they are exposed to. We define
a consumption category as either early stage or later stage based on China’s per capita
consumption maturity vs the rest of the developed world (i.e., US, UK, Japan). For
example, we classify Instant Noodles as an early stage consumption category, as its
per capita consumption in China of 3.3kg/pp in 2013 is already close to Japan’s
4.2kg/pp. While Diapers is a later stage category as its per capita consumption is just at
15.4units/pp in 2013 vs US at 61units/pp.
For early stage consumption categories such as instant noodles, beer, carbonated soft-
drinks, we expect topline growth in 2014 to remain soft as per capita consumption matures.
However, industry profitability will likely improve driven by ongoing premiumization and
consolidation, in our view. We could also expect to see higher incidences of M&A for
companies that have a strong balance sheet in order to gain better access to growth.
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 4
In the specific case of our upgrade of Tingyi and UPC to Buy from Neutral, even though
we expect slowing top-line growth for both companies as Beverage and Noodles
growth becomes mature in China, we expect a rebound in operating margins as we
expect reduction in promotional intensity to be the key positive catalyst for the stocks.
For later stage consumption categories, we forecast more attractive topline growth in
2014E helped by consumers trading up and recent policy reforms. However,
competition will likely intensify as large numbers of competitors enter the market,
which could lead to margin erosion. We see personal care categories such as diapers
and tissues and more recently sanitary napkins as particularly susceptible to this and
hence we maintain our out-of-consensus Sell on Hengan due to earnings risk.
We continue to like Huishan and WW as both companies’ have access to high growth
categories and enjoy moderate competition. For these two companies, we believe that
company-specific execution would be the focus. We note that Want Want’s new product
launches (albeit small) are doing well and that it has increased its milk beverage ASP by
5%-8% in October 2013 to combat rising milk powder costs, which reflects its strong pricing
power. For Huishan, we reiterate Buy and add it to our CL. Recent positive news such as
being selected as part of the second batch of national champions for Infant Formula by the
Dairy Association of China, as well as continued escalation of raw milk prices into January
2014 provide added support to our forecast of 40% EPS CAGR in 2013E-2015E.
Our valuation framework
Exhibit 3 below shows the key valuation framework that we apply to our Staples
coverage. We use P/E as our primary valuation methodology as back-testing suggests
that it generates the highest alpha. Our valuation framework has been consistently
applied since we adopted it in 2H12 and has not changed in this report.
We roll forward the valuation period for all 11 of our stocks on Exhibit 3 by 6 months
from CY2014E to average CY2014E/CY2015E.
For our core, branded FMCG (Fast Moving Consumer Goods) stocks, i.e., Tingyi,
Hengan and Want Want, we value the stocks on a relative basis based on each
company’s 2-yr EPS CAGR and CROCI rank vs its Staples peers. We apply a 20% P/E
premium or discount (unchanged) to our sector target average P/E of 24.0X
(unchanged) to companies that rank in the first quartile or fourth quartile of EPS CAGR.
Moreover, we also apply another 15% premium or 5% discount (both unchanged) to
our sector target average P/E of 24.0X to companies which are either in the first or
fourth quartile for CROCI. For example, Want Want, which has 3rd quartile EPS CAGR
but first quartile CROCI relative to its Staples peers, will receive a 15% P/E premium to
our target sector average of 24.0X, resulting in a P/E valuation multiple of 27.6X. Our
target sector average of 24.0X is in-line with the sector’s P/E average from 2007.
For beer companies (Tsingtao and beer business of CRE), we use EV/EBITDA as our
primary valuation methodology as these companies tend to be cash rich and depreciation
policies can vary greatly among them. Since we value CRE’s beer business using EV/
EBITDA and retail business using P/E, with reference to peers, we value CRE on SOTP basis.
Companies that we cover but have a higher commoditized component are not included
in this framework, e.g., Huishan given its upstream dairy farming exposure. For
Huishan, we use PE-SOTP valuation, with reference to its closes peers China Modern
Dairy and Mengniu. For Greatview, we value based on a 20% discount to historical
average P/E given a 20% fall in our forecast CROCI for the stock due to margin squeeze.
For China Foods, we value the company on a SOTP-P/B basis given the company’s
forecast loss in 2013E/2014E.
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 5
Exhibit 3: Our stock calls for 2014: Top pick Huishan (add to CL-Buy), Tingyi and UPC (upgrade to Buy from Neutral),
Want Want (maintain Buy), and Hengan (maintain Sell)
Source: Datastream, Goldman Sachs Global Investment Research.
Exhibit 4: Our 2013E-2015E forecasts are generally below Bloomberg consensus forecasts except for Tingyi GS forecasts vs consensus
Source: Bloomberg, Goldman Sachs Global Investment Research.
Theoretical
Prem/Disc
Company New Old Chg New Old Chg CP
Implied
Up/Dow
nside
Target
multiple Prem/Disc Applied
Old
Multiple
2013‐15E
CAGR Rank
Premium
Applied 2014E Rank
Premium
Applied
Within valuation framework
Mengniu Neutral Neutral 36.90 33.20 11% 36.70 1% 24.0X 0% 24.0X 27% 3 0% 11% 3 0% 0%
Want Want Buy Buy 13.90 12.50 11% 10.12 37% 27.6X 15% 27.6X 24% 3 0% 38% 1 15% 15%
Hengan Sell Sell 82.90 78.30 6% 83.70 ‐1% 22.8X ‐5% 22.8X 13% 4 ‐20% 23% 1 15% ‐5%
Tingyi Buy Neutral 24.90 18.45 35% 19.70 26% * 28.8X 20% 24.0X 29% 1 20% 15% 2 0% 20%
CRE Neutral Neutral 26.50 28.40 ‐7% 22.50 18% ** 28.8X SOTP 33.5X 28% 2 0% 6% 4 ‐5% ‐5%
Tsingtao (H) Neutral Neutral 65.00 55.10 18% 55.35 17% 15.0X EV/EBITDA 15.0X 23% 4 ‐20% 14% 2 0% ‐20%
UPC Buy Neutral 8.90 7.30 22% 7.02 27% 28.8X 20% 28.8X 43% 1 20% 9% 3 0% 20%
China Foods Neutral Neutral 3.00 3.00 0% 2.60 15% ^^ 1.4X SOTP P/B 1.4X nmf nmf 0% 5% 4 ‐5% ‐5%24.0X 24.0X 27% 15%
Outside of valuation framework
Tsingtao (A) Buy Buy 50.70 44.40 14% 42.55 19% 15.0X EV/EBITDA 15.0X 23% N/A N/A 14% N/A N/A N/A
Greatview Neutral Neutral 4.60 5.35 ‐14% 4.12 12% *** 12.0X ‐20% vs hist. avg P/E 15.5X 22% N/A N/A 17% N/A N/A N/A
Huishan CL Buy Buy 3.60 3.20 13% 2.66 35% ^ 18.5X SOTP P/E 19.5X 40% N/A N/A 18% N/A N/A N/A
* We increase Tingyi's P/E multiple from 24x to 28.8x as the company's 2‐yr EPS CAGR moves into 1st quartile
** We value CRE on a SOTP valuation methodology (Beer using EV/EBITDA, Retail using P/E), the Target and Old Muliples shown above are implied P/E multiples based on our SOTP valuation.
*** We reduced the P/E multiple from 15.5x to 12.0x as the company's average 2014/15E CROCI is expected to be 20% below historical average.
^ We value Huishan on P/E based SOTP, with reference to its closest peers China Modern Dairy and Mengniu. The Target and Old multiples shown above are implied P/E multiples based on our SOTP valuation.
^^ We value China Foods on SOTP P/B basis as we expect the company to be in loss in 2013 and 2014 with low earnings visibility.
Ratings Target price Valuation multiples EPS growth CROCI
Currency
Company Ticker New Old Chg % New Old Chg % New Old Chg % F13E F14E F15E
Want Want 0151.HK USD 0.05 0.05 ‐5% 0.06 0.06 ‐3% 0.07 0.07 3% ‐4% ‐2% 7%
Tingyi 0322.HK USD 0.08 0.08 ‐5% 0.10 0.10 ‐1% 0.12 0.12 6% 1% 5% 10%
UPC 0220.HK RMB 0.14 0.12 13% 0.20 0.21 ‐5% 0.28 0.31 ‐10% ^ ‐37% ‐8% 10%
Hengan 1044.HK HKD 3.14 3.01 4% 3.29 3.43 ‐4% 3.98 4.18 ‐5% ‐2% ‐12% ‐10%
Mengniu 2319.HK RMB 0.81 0.81 ‐1% 1.09 1.09 0% 1.30 1.34 ‐3% ‐5% ‐4% ‐9%
China Foods 0506.HK HKD ‐0.26 ‐0.26 0% ‐0.01 ‐0.01 0% 0.08 0.08 0% * ‐3% ‐105% ‐46%
CRE 0291.HK HKD 0.64 0.68 ‐6% 0.79 0.85 ‐7% 1.05 1.14 ‐8% ‐10% ‐11% ‐5%
Tsingtao 0168.HK RMB 1.39 1.51 ‐8% 1.74 1.85 ‐6% 2.10 2.09 0% ^ ‐10% ‐2% 4%
Huishan 6863.HK RMB 0.09 0.09 0% 0.13 0.13 0% 0.17 0.17 0% ‐9% ‐6% ‐3%
Greatview 0468.Hk RMB 0.22 0.22 0% 0.27 0.27 ‐2% 0.33 0.35 ‐7% ‐3% ‐8% ‐10%
Sector Average
^ Consensus forecasts for UPC and Tsingtao in 2013E is a mix of pre‐one‐off and post‐one‐off estimates by brokers. Gse is pre‐one‐off's
* We are less optimistic vs street on ability to turnaround Wine business in a short time.
Note: All EPS above is shown on calendarized basis. All companies within our coverage are December year‐end, except for Huishan, which is a March year‐end.
CY2013E EPS CY2014E EPS CY2015E EPS GS vs Consensus
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 6
Latest China Staples trends: Growth deceleration continues
The latest Nielsen FMCG growth trends indicate that Staples growth continued to
decelerate into 4Q2013. November 2013 FMCG growth was 5.5%, below the rolling 12-m
average growth of 6.7% and FY12 average of 14.9%. Food growth was 5.3% (rolling 12-m
average 6.3%) vs non-food growth of 5.9% (rolling 12-m average 7.5%). For the rolling 12
months to November 2013, beverages grew 9.5%, while other foods, which includes instant
noodles, grew just 2%. Within non-food category, personal care grew 9.0%.
Exhibit 5: China total FMCG sales growth fell to 5.5% in November 2013 from average of
6.7% for the rolling 12 months to November 2013 Nielsen monthly sales growth for total FMCG, food and non-food groups in China
Source: Nielsen.
Exhibit 6: Within food, beverage sales growth in
November 2013 fell to 6.4% vs 9.5% in the rolling 12
months to November 2013 Nielsen monthly food sub-category growth
Exhibit 7: Within non-food, personal care sales growth in
November 2013 fell to 5.8% vs 9.0% in the rolling 12
months to November 2013 Nielsen monthly non-food sub-category growth
Source: Nielsen.
Source: Nielsen.
(20.0)
(10.0)
0.0
10.0
20.0
30.0
40.0
Sep‐11
Oct‐11
Nov‐11
Dec‐11
Jan‐12
Feb‐12
Mar‐12
Apr‐12
May‐12
Jun‐12
Jul‐12
Aug‐12
Sep‐12
Oct‐12
Nov‐12
Dec‐12
Jan‐13
Feb‐13
Mar‐13
Apr‐13
May‐13
Jun‐13
Jul‐13
Aug‐13
Sep‐13
Oct‐13
Nov‐13
Monthly Category Growth (YoY %)
Total FMCG Food Non‐Food
‐40
‐30
‐20
‐10
0
10
20
30
40
50
Sep‐11
Nov‐11
Jan‐12
Mar‐12
May‐12
Jul‐12
Sep‐12
Nov‐12
Jan‐13
Mar‐13
May‐13
Jul‐13
Sep‐13
Nov‐13
Monthly Category Growth (YoY %)
Impulse food Beverage Dairy food Other food
‐30
‐20
‐10
0
10
20
30
40
50
60
70
Sep‐11
Nov‐11
Jan‐12
Mar‐12
May‐12
Jul‐12
Sep‐12
Nov‐12
Jan‐13
Mar‐13
May‐13
Jul‐13
Sep‐13
Nov‐13
Monthly Category Growth (YoY %)
Household Personal Care
Insect Control Hair Products
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 7
Premiumization remained a core growth driver, accounting for the larger portion of
category growth for Liquid Milk, Confectionery, Infant Milk Formula. While heavy
competition drove price erosions for RTD tea, CSD (both due to upsizing in 2013 without
increasing prices) and Facial Tissues.
Exhibit 8: Food sub-category value growth, rolling 12
months to November 2013
Exhibit 9: ASP growth contributed to a significant portion
of category growth for most food categories
Source: Nielsen.
Source: Nielsen.
Exhibit 10: Personal care sub-category value growth,
rolling 12 months to November 2013
Exhibit 11: ASP growth was still high in sanitary napkins,
but price erosion obvious for facial tissues
Source: Nielsen. Source: Nielsen.
Increasing growth divergence between early stage and later stage
consumption categories
Exhibit 12 shows the Nielsen average rolling 12-month average category growth for early
stage and later stage consumption categories. Both the early stage and later stage
consumption categories saw topline growth slow through 2013, although early stage
categories slowed more aggressively relative to later stage categories. That is, average
category sales for early stage categories slowed by 6.3 pp to 3.7% in November 2013, vs
10.0% in January 2013, while later stage categories slowed by just 2 pp, from 13.4% to 11.4%.
Euromonitor expects this diverging trend to continue through 2017 (Exhibit 13). As
category growth shifts gears, ASP is likely to become an increasingly important component
of category growth, in our view (Exhibits 14 and 15), particularly for early stage categories.
0.2
7.6
0.6 2.4 2.6
11.0
3.4
16.1
5.9 4.7
25.8
36.5
0
5
10
15
20
25
30
35
40
Nov 2013 Food Category Growth (MAT, YoY %)
(3.2) (2.2)
9.0 4.1 2.1 3.3 5.1 7.6 4.7
11.5 7.2
2.1 3.6 2.9 (1.3) (1.6)
0.5 0.1
10.4 3.2 1.2
(6.1)
17.3 33.6
(10.0)
(5.0)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
Nov 13 ASP growth (MAT, YoY %) Nov 13 Volume growth (MAT, YoY %)
11.5
2.8
4.7
7.3
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Facial Tissue
Bathroom Tissue
Diaper
Sanitary Protection
Nov 2013 Non‐Food Category Growth (MAT, YoY %)
(5.7)(0.2)
3.2 8.5
18.2
3.0 1.4
(1.1)
‐10
‐5
0
5
10
15
20
Facial Tissue
Bathroom Tissue
Diaper
Sanitary Protection
Nov 13 ASP growth (MAT, YoY %) Nov 13 Volume growth (MAT, YoY %)
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 8
In 2012-2017E, we project that volume growth for early stage categories will slow from 9.4%
to 5.0%, while ASP growth will be 4.8%, accounting for approximately half of the total
category growth as consumer trading up continues. For later stage categories, although
slower than the past 5 years, volume growth of 12.7% in 2012-2017E is still respectable, and
an increasing ASP growth of 3.1% will push total category growth to close to 15% CAGR.
Exhibit 12: Growth discrepancy of early stage vs late
stage Staples categories have been increasingly
pronounced per Nielsen
Nielsen rolling 12-m average category sales
Exhibit 13: Euromonitor forecasts also support our
expectation that growth disparity between the two
groups will widen over the next several years
Early stage: biscuits, liquid milk, instant noodles, consumer packed oils, carbonates, fruit/vegetable juice, RTD tea, bathroom tissue, sanitary protection.
Later stage: milk formula, sugar confectionery, chocolate confectionery, flavored milk drinks, yoghurt and sour milk products, sweet and savory snacks, bottled water, RTD coffee, sports and energy drinks, Asian specialty drinks, nappies/diapers/pants, facial tissue.
Note: The growth rates between Nielsen and Euromonitor are slightly different as Nielsen’s data is relatively more modern trade skewed, while Euromonitor covers all channels.
Source: Nielsen. Source: Euromonitor.
Exhibit 14: Forecast ASP vs volume growth for early
stage consumption categories in 2012-2017E vs. 2007-
2012
Exhibit 15: Forecast ASP vs volume growth for later
stage consumption categories in 2012-2017E vs. 2007-
2012
Source: Euromonitor.
Source: Euromonitor.
15.014.5
10.0 10.09.1
9.58.8
7.57.0
6.25.5
5.14.3
3.7
20.2 19.9
15.8
13.5 13.4
14.6 14.613.9 13.6
13.112.6 12.4
11.911.4
0.0
5.0
10.0
15.0
20.0
25.0
Oct‐12 Nov‐12 Dec‐12 Jan‐13 Feb‐13 Mar‐13 Apr‐13 May‐13 Jun‐13 Jul‐13 Aug‐13 Sep‐13 Oct‐13 Nov‐13
Early stage consumption categories Late stage consumption categories
12.1%
8.5%
12.1%
14.2%
10.6%10.2%
10.9%
9.3%9.1% 9.2%
15.5%
13.5%
16.5%
17.3%
14.5%
15.0%
16.9%
15.4%15.9%
15.4%
5.0%
8.0%
11.0%
14.0%
17.0%
20.0%
2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E
Early Stage Consumption Categories Later Stage Consumption Categories
5.0%
9.4%
4.8%
5.1%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%
'12‐'17 CAGR
'07‐'12 CAGR
Volume Growth ASP Growth
12.7%
17.1%
3.1%
1.6%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%
'12‐'17 CAGR
'07‐'12 CAGR
Volume Growth ASP Growth
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 9
Raw material outlook returns to mildly inflationary, tailwind comes
to an end
In 2012 through 1H13, most Staples companies enjoyed lower raw materials costs
including large falls in palm oil, sugar, PET prices and NZ milk powder (2012 only). As we
are expecting a mild rebound in raw material prices in 2014E/2015E, we do not expect that
companies can cushion their earnings any longer. As such, competition will become a
more important force in determining earnings growth in 2014E/2015E, in our view.
We forecast the average COGS base for the three large staples companies (Tingyi, Want
Want and Hengan) to rise by 6pp in 2014E/2015E. This will be driven by still elevated NZ
milk powder prices, mild inflation in palm oil, sugar, rice and flour, partially offset by
continued fall of PET prices as our Global Macro Research team forecasts another 9% fall in
Brent Crude Oil prices in 2014E. Contrary to the market, we also forecast pulp prices to
remain stable in 2014E (as opposed to a mild drop) as our Latin American Paper Analyst
Marcelo Aguiar believes that a tighter demand/supply due to delays and more than
anticipated complexity in new capacity ramp up will support prices.
Exhibit 16: We forecast average COGS to be stable in 2014E-2015E, but the raw material
cost tailwind that helped prop up earnings growth in 2012 and 1H13 is likely to end
Source: Bloomberg, WIND, Datastream, Goldman Sachs Global Investment Research.
70
80
90
100
110
120
130
20%
25%
30%
35%
40%
45%
50%
1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13E 1H14E 2H14E 2015E
Staples' gross margin vs. raw material price index
Want Want Hengan Tingyi Average raw material price index (RHS)
Hengan
Want Want
Tingyi
Raw material 1 2 3 4 5
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 10
Upgrade Tingyi and UPC to Buy: Competition not over, but close to
the end of a cycle
The Edgeworth pricing cycle theory1 advocates that in a market with highly
homogenous products, firms undercut each other successively to increase their
market share (price war phase) until the war becomes too costly, at which point
some firm increases its price. The other firms quickly follow, after which price cutting
begins again. The market price thus evolves in cycles.
The rivalry between Tingyi and UPC is far from over, but we believe that the current cycle
is drawing to a close. We upgrade both Tingyi and UPC from Neutral to Buy on
improving EPS growth and CROCI outlook driven by margin recovery. We forecast Tingyi
and UPC’s 2-yr EPS CAGR will accelerate to 29%/43% in 2013-2015E vs 17%/-42% in
2013E. At current P/E of 22.8X average 2014E/2015E EPS for both companies, we see re-
rating opportunities to high 20s P/E given first quartile growth vs Staples peers.
We believe beverages will lead margin recovery for both Tingyi and UPC in 2014. Recent
stabilization of Beverage market share will prompt Tingyi to pull promotions to restore
margins at a rate underappreciated by the market, in our view. As UPC has generally been
a price follower, we expect the company too will restore pricing, driving margin upside for
both companies. As Beverage growth has been driven more by product innovations in the
past 2 years, we expect that both Tingyi and UPC will be more focused on developing new
products in 2014. We are already seeing this in the market, including Tingyi’s recent launch
of its milk and coffee blend beverage selling at RMB3.80/500ml bottle, more than 2X the
price of a RMB2.20/600ml bottle of RTD tea, on a per litre basis. Consequently, we forecast
that Tingyi’s Beverage OP margin will rebound from 4.9% in 2013E to 10.8% in 2015E, while
UPC’s Beverage OP margin will rebound from 4.4% in 2013E to 6.6% in 2015E.
Noodles will remain tough as UPC has recently extended its sausage promotions to
Tingyi’s flagship braised beef noodles. However, we do not expect this to materially
worsen from 2013E as our instant noodles unit cost analysis suggests that both companies
have the flexibility to shift promotional focus between different flavors. Moreover, we are
also seeing a pull-back in above the line advertising spend to fund the more direct, price-
led promotions. We expect the Noodles price-war to end by 2015E as: 1) Tingyi’s dominant
market share in braised beef noodles will be hard to challenge. Former No.2 competitor
Hualong attempted to push for market share in this category via its premium label
Jinmailang in 2009. The product added a free egg to its braised beef flavored bowl noodles
and emphasized its superior quality noodles at competitive prices. Despite some initial
success, it was not sustained and Hualong has been losing share in recent years; 2) second
consecutive year of losses, tight cash flow will necessitate UPC to pull back promotions.
Our instant noodles unit cost analysis calculates that UPC and Tingyi have each spent
an additional RMB0.19/unit and RMB0.26/unit of COGS on promotions in 2013E
compared with 2010. Given ex-factory price of just RMB1.29/unit and RMB1.57/unit
respectively, this implies that aggressive competition has cost both companies 15%-
17% in GP margin. That is, all the raw material cost savings and more, have been
reinvested back into the market for competition. If just 25% of this were to be restored,
we think both Tingyi and UPC will enjoy an incremental 3-4 pp noodles OP margin. We
forecast that Tingyi’s Noodles margins will fall from 9.7% in 2013E to 9.25% in 2015E
due to added competition in Braised Beef Noodles; while UPC’s will improve from -
2.5% to -0.6% in 2015E due to reduced competition in Lao Tan Noodles.
1 A theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles, Maskin and Tirole, 1988
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 11
Beverages to lead margin rebound in 2014 for Tingyi and UPC
Tingyi’s beverage OPM has dropped from 13% in 2008 to 5% in 2013E due to aggressive
market share defence. This is below the usual level of 10%-15% EBIT margin that is
achievable by Beverage companies with dominant market share within a certain country.
As such, we believe that the recent stabilization in RTD tea market share will prompt Tingyi
to pull promotions to restore profitability to a more desirable level.
From Exhibits 17, we see that Tingyi’s volume market share in RTD tea has rebounded
from Mar/April 2013, while UPC and third competitor Wahaha have lost market share. We
think UPC’s loss of market share could be attributed to: 1) significant slowdown of its
flagship Asamu milk tea sales (Exhibit 19) as the usual high growth cycle for an “IT”
product only lasts for c.2-3yrs; and 2) loss of market share in the RTD tea excl. milk tea
category as Tingyi has upsized its RTD tea beverages from 500ml to 600ml without
increasing prices since beginning of 2013.
However, we believe that UPC is unlikely to pursue a price war with Tingyi given its tight
cash flow and the need to fund another RMB4bn capex in 2014E. Since Tingyi has already
successfully defended its RTD tea market share in the face of UPC’s slow-down in milk tea,
we do not see further motivation for Tingyi to extend its pricing discounts in a slowing
category. In fact, we believe that there is good reason for Tingyi to pull back its promotions
in beverages in order to drive margin recovery.
In addition, we forecast PET prices to fall further in 2014E/2015E as our Global Macro
Research team is looking for another 9% drop in Brent Crude Oil prices in 2014. This should
lift Tingyi and UPC’s margins further, in our view.
Exhibit 17: Tingyi sees a rebound in volume market share
of RTD tea beverages Nielsen RTD tea volume market share
Exhibit 18: We are beginning to see a rebound in RTD tea
ASP from July/August 2013 Nielsen RTD tea ASP trend
Source: Nielsen.
Source: Nielsen.
53.5%
28.4%
7.4%0%
10%
20%
30%
40%
50%
60%
Sep‐Oct1
1
Nov‐D
ec11
Jan‐Fe
b12
Mar‐A
pr12
May‐Ju
n12
Jul‐A
ug12
Sep‐Oct1
2
Nov‐D
ec12
Jan‐Fe
b13
Mar‐A
pr13
May‐Ju
n13
Jul‐A
ug13
Sep‐Oct1
3
Volume M
kt Share (%)
TINGYI UPC WAHAHA
0.82 0.820.80 0.82 0.82 0.82 0.83
0.85 0.84
0.79
0.74 0.730.74
0.90
0.950.97 0.96
0.940.91
0.94
0.991.01
0.99
0.95
0.910.93
$0.70
$0.75
$0.80
$0.85
$0.90
$0.95
$1.00
$1.05
Sep‐Oct1
1
Nov‐Dec11
Jan‐Feb12
Mar‐A
pr12
May‐Ju
n12
Jul‐A
ug12
Sep‐Oct1
2
Nov‐Dec12
Jan‐Feb13
Mar‐A
pr13
May‐Ju
n13
Jul‐A
ug13
Sep‐Oct1
3
TINGYI UPC WAHAHA
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 12
Exhibit 19: UPC’s flagship product Asamu milk tea is seeing visible topline slowdown,
relieving market share pressure for Tingyi RTD tea growth
Source: Nielsen.
PepsiCo-Tingyi alliance likely to boost margins further from 2014E
We forecast a small profit contribution (4%/6% to group profits in 2014E/2015E) for the
PepsiCo-Tingyi alliance, which will further add to our margin recovery thesis for Tingyi.
Since formation of the alliance in 2Q12, Tingyi’s management has been targeting to turn
PepsiCo’s losses in China to break-even by 2013. Given management’s confirmation of a
profitable quarter in 2Q13 and a solid performance by Beverages in 3Q13, it appears that
this has come to fruition. From 2014E, we expect the PepsiCo alliance to contribute a small
profit to Tingyi’s beverage business as continued merging of production facilities, end POS
and coolers, gradual merging of sales team etc. will gradually drive the Pepsi business
towards Tingyi’s NPAT margin target of 8%.
With the recent appointment of Mr Ko Yuen-Yat to take over from Mr Chu Wah-Hui to head
Tingyi’s Beverage division, we believe that Tingyi is onto its 2nd stage of integration. In the
first stage, Mr Chu, a former President of PepsiCo China, was appointed to facilitate the
integration of the two businesses and to rebuild PepsiCo. In this second phase of
integration, the focus could be to maximize synergistic benefits and drive the beverage
business forward as a coherent, operational unit for Tingyi.
In 2014E/2015E, we forecast the Pepsi business to contribute US$1.79bn and US$1.89bn to
Tingyi’s top-line and US$23mn (4% of group) and US$45mn (6% of group) to net profit
after minority interest.
78.0%
63.4%
42.5%49.7%
26.3%
16.2%10.7%
‐20%
‐10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Sep‐Oct1
2
Nov‐D
ec12
Jan‐Fe
b13
Mar‐A
pr13
May‐Ju
n13
Jul‐A
ug13
Sept‐O
ct13
MARKET TINGYI UPC ASAMU Milk Tea
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 13
Exhibit 20: We forecast that PepsiCo could contribute US$45mn net profit post minority
interest or 6% uplift to group profits by 2015E
Note: CBL is PepsiCo’s share of Pepsi’s Chinese Bottlers i.e. PepsiCo only owns 78% of total Pepsi bottlers in China.
Source: Company data, Goldman Sachs Global Investment Research.
Exhibits 21 and 22 show our margin recovery projections for both Tingyi’s and UPC’s
beverage businesses.
Exhibit 21: We expect Tingyi’s Beverage OPM to rebound due to: 1) continued fall in raw
material prices; 2) recovering top-line and PepsiCo driving improved operating leverage; 3)
a pull-back in promotional intensity Tingyi’s beverage EBIT margin trend vs market share
Source: Nielsen, Company data, Goldman Sachs Global Investment Research.
2012E 2013E 2014E 2015EConsolidated from 2Q12
USD mnSales 1,607 1,685 1,790 1,892 GP 482 522 573 624 EBIT -37 12 66 127 NPAT -41 7 62 122
CBL's share at 78% -32 6 48 95 Tingyi's @ 47.5% interest -15.2 2.7 22.8 45.1 % of group reported NPAT 4% 6%
USD % GrowthSales 4.9% 6.2% 5.7%GP 8.4% 9.7% 9.0%EBIT nmf nmf 91.5%NPAT nmf nmf 97.9%
USD % MarginGP 31.0% 32.0% 33.0%EBIT 0.7% 3.7% 6.7%NPAT 0.4% 3.4% 6.4%
13.3% 13.4% 13.2%
11.1%
9.2%
5.4%
3.8%
4.9%
8.6%
10.8%
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
15.0%
17.5%
0%
10%
20%
30%
40%
50%
60%
70%
2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E
Tingyi RTD tea market share (LHS) Tingyi Beverage EBIT Margin (RHS)
One More Bottle campaign
drove large increase in
market share, but higher
raw material costs more
than halved OP margins
RTD tea category
slow-down,
PepsiCo merger
and intensified
competition against
UPC's milk tea
drove margins
down fruther.
We expect
resumption of
market share gains,
lower raw material
costs, PepsiCo
profits, pull back in
competition with
UPC will drive
margin rebound.
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 14
Exhibit 22: We expect UPC’s Beverage OPM to rebound due to: 1) continued fall in raw
material prices; 2) increased new plant utilization; 3) a pull-back in promotional intensity UPC’s beverage EBIT margin trend vs market share
Source: Nielsen, Company data, Goldman Sachs Global Investment Research.
Exhibit 23: We forecast Tingyi’s underlying organic beverage margins excl. PepsiCo will
rebound to 10.3%/12.2% in 2014E/2015E Tingyi’s underlying beverage margins, excl. PepsiCo
Source: Company data, Goldman Sachs Global Investment Research.
6.8%
10.7%11.1%
13.4%
7.2%
2.1%
5.5%
4.4%
5.3%
6.6%
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
15.0%
17.5%
0%
5%
10%
15%
20%
25%
30%
35%
2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E
UPC RTD tea market share (LHS) UPC Beverage EBIT Margin (RHS)
Significant
drop in raw
material
costs
Significant
increase in
raw material
costs
Significant
growth of milk
tea, driving
positive
operating
leverage
We expect market share
expansion plateaus. Pull
back in promotions and
further falls in PET prices
drive margin expansion.
33.5%
41.1%
45.9%
40.7%39.6% 40.1%
36.9% 36.8%36.2%
36.9%
28.5%
25.7%
29.5%
31.1%
32.9%
34.5%
-1.1%
7.2%
13.3%
2.6%3.8%
14.7%13.3% 13.4% 13.2%
11.1%
9.2%
5.4%6.0% 6.5%
10.3%
12.2%
34.6%33.9%
32.6%
38.1%
35.8%
25.4%
23.6% 23.4% 23.0%
25.8%
19.3%20.3%
23.5%24.6%
22.6% 22.2%
-10%
0%
10%
20%
30%
40%
50%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E
Organic GPM Organic OPM Organic Opex/Sales %
We forecast margin recovery due
to positive mix; lower raw material
costs; positive operating leverage;
pull-back in promotions vs UPC
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 15
Noodles unit cost analysis suggests marketing flexibility available
Sausage promotions have dominated instant noodles headlines in 2013 on being the
primary promotional tool in Tingyi and UPC’s fight for market share. In the past month,
UPC has further extended its sausage promotion onto Tingyi’s flagship braised beef
noodles. But how much does a sausage cost and what will this mean for margins?
Exhibit 24: UPC’s braised beef noodles – the latest flavor to include sausage promotions Which categories have now become part of the sausage promotion?
Note: Crosses indicate that the free sausage promotional offer applies to this flavor’s bowl noodles
Source: Goldman Sachs Global Investment Research.
This section attempts to conduct an in-depth study in per-unit cost associated with
producing and marketing a unit of instant noodles in China in order to assess the strategic
options available to both companies in the price-war.
Methodology
In Exhibits 25-28 and 31-34 below, we have attempted to estimate the per unit cost of
instant noodles for both Tingyi and UPC. Each of the companies disclose instant
noodles segment sales, GPM and OPM.
Using total market volume sales disclosed by the World Instant Noodles Association
(WINA) and applying Euromonitor’s estimated volume market share for UPC and
Tingyi, we have derived the annual noodles volumes for both companies used to
calculate our per unit cost.
For COGS, we use 2010 as a base for the basic raw materials required for instant
noodles production, before the current cycle of price-war escalated in 2012. Indexing
this base for changes in spot raw material prices, such as the fall in palm oil prices in
2012 and 2013, we calculate the cost base for these same raw materials in 2013. The
difference between this and our forecast 2013 COGS is assumed to be the additional
COGS added in for promotional purposes due to intensified competition e.g. sausage,
sauce sachets etc.
For the different components of SG&A, we have estimated the components of Admin
expense, Transport and Salaries, with reference to group expense ratios. The
remaining SG&A costs are assumed to be advertising and promotions.
Conclusion
Noodles competition will remain tough in 2014E, but we believe that the noodles price-war
will draw to a close by 2015E.
2010: Exhibits 25 and 26 attempt to break down the unit production and marketing cost for
instant noodles for Tingyi and UPC in 2010. We note that:
1) Tingyi has a higher ex-factory price of RMB1.28/unit compared with UPC’s
RMB1.08/unit. This would suggest that Tingyi, with 3X more volumes sales vs UPC,
enjoys better bargaining power in the market.
2) Tingyi incurs higher per unit cost of production than UPC. A plausible explanation of
this is that Tingyi follows a diversified approach vs UPC’s focused approach. It appears
that economies of scale have allowed UPC to drive a lower per unit cost compared
with even the most dominant company in the market.
Lao Tan Lu Rou Braised Beef
Tingyi
UPC
egg flakes
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 16
Exhibit 25: At the height of raw material costs in 2010, we estimate that it took UPC
RMB0.62 worth of raw materials to produce 1 unit of instant noodles… GS estimate of COGS breakdown for UPC in 2010E
Source: Euromonitor, Goldman Sachs Global Investment Research.
Exhibit 26: …while it took Tingyi RMB0.73/unit
GS estimate of Tingyi’s Instant Noodles average per unit cost – 2010
Source: Euromonitor, Goldman Sachs Global Investment Research.
1.08
0.62
- -
0.15
0.12
0.06
0.10
0.03
-0.00
-0.20
-
0.20
0.40
0.60
0.80
1.00
1.20
Ex-factory
Price
Basic raw
materials
Other
COGS
Promotions
Transpor
tationOther Selling
Exp (incl.
salaries)
Admin Operating
Profit
Additional
Raw
materials
Sausage
promotion
Rmb/Unit
1.28
0.73
- -
0.18
0.07
0.05
0.08
0.02
0.16
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Ex-
factory
Basic raw
materials
Other
COGS
PromotionsTranspor
tationOther Selling
Exp (incl.
salaries)
Admin Operating
Profit
Additional
Raw
materials
Sausage
promotion
Rmb/Unit
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 17
2013E: Exhibit 27 to Exhibit 28 shows our estimate for how the unit costs have evolved for
Tingyi and UPC by 2013E. Most notably, the raw material cost per unit should have
declined substantially given the market price corrections for palm oil and flour during this
period. However, since per unit COGS in 2013E has actually not improved vs 2010, we
assume that the difference between our estimate of the raw materials per unit in 2013E
(assuming the same base as 2010) vs the actual raw material costs incurred to be the
additional ingredients added to intensify consumer promotions.
For example, as seen in Exhibit 25, we calculated that UPC’s base instant noodles cost
RMB0.62/unit in basic raw materials to produce. While by 2013E, given the large drops in
flour and palm oil prices, this should be close to RMB0.54/unit. However, we calculate that
UPC’s per unit raw material cost has actually increased to RMB0.73/unit. We believe that
the additional RMB0.19/unit can be attributed to additional promotions such as the
“sausage promotion”, pickled vegetables, and sauce sachets.
Interestingly, this shows that Tingyi has invested higher per unit COGS for promotions
(RMB0.26/unit) vs UPC (RMB0.19/unit), but is able to better leverage its brand promotional
expense spending only RMB0.10/unit vs UPC’s RMB0.18/unit. The total market investments
in 2013E for Tingyi and UPC in instant noodles are similar, at RMB0.36/unit and
RMB0.37/unit, respectively. With already such a high level of market investment, we
believe that things are unlikely to get materially worse. Instead, Tingyi and UPC can
moderate some of its investments in the Lao Tan category growth given its noticeable
slow-down and re-direct to defending/grow in new categories without incurring significant
additional marketing spend. That is, we believe that Tingyi has a higher degree of flexibility
with its marketing budget than perceived by the market.
Exhibit 27: By 2013E, raw materials per unit have fallen to just RMB0.54, while additional
promotional material has cost UPC an incremental RMB0.19/unit to COGS
GS estimate of COGS breakdown for UPC in 2013E
Source: Euromonitor, Goldman Sachs Global Investment Research.
1.29
0.54
0.12
0.07
0.18
0.18
0.06
0.14
0.04 -0.03
-0.20
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Ex-factory Price
Basic raw
materials
Other
COGS
Promotions
Transpor
tation Other Selling
Exp (incl.
salaries)
Admin Operating
Profit
Additional
Raw
materials
Sausage
promotion
Rmb/Unit
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 18
Exhibit 28: By 2013E, raw materials per unit has fallen to just RMB0.63, while additional
promotional material has cost Tingyi an incremental RMB0.26/unit to COGS
Tingyi instant noodles per unit cost – 2013E
Source: Euromonitor, Goldman Sachs Global Investment Research.
2014E-2015E: With UPC’s Lao Tan noodle growth visibly slowing in 2013E and Tingyi
appearing to have successfully defended its market share, we ponder the next steps for these
two companies. Competitive behavior in an oligopoly is often complex because pricing
decisions are made in a highly interdependent environment. Studies on Edgeworth Price
Cycles illustrate that in a market of homogeneous goods where customers are price sensitive
(as is the case for Instant Noodles), one vendor’s actions to undercut another will be quickly
matched. Undercutting will continue until the war becomes too costly when one competitor
will restore prices. Everyone will follow as quickly as possible, and the cycle repeats.
Exhibit 29: Both companies have continued to gain share
in instant noodles at the expense of smaller companies Nielsen Volume Market Share – Instant Noodles
Exhibit 30: UPC’s instant noodles growth has slowed in
1H13 due to slowdown of Lao Tan Noodles Instant Noodles sales growth YoY (%) - Tingyi, Market, UPC
Source: Company data, Nielsen.
Source: Company data.
1.57
0.63
0.04
0.22
0.22
0.10
0.06
0.10
0.05
0.15
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
Ex-
factory
Basic raw
materials
Other
COGS
PromotionsTranspor
tationOther Selling
Exp (incl.
salaries)
Admin Operating
Profit
Additional
Raw
materials
Sausage
promotion
RMB/Unit
45.7
16.8
0
5
10
15
20
25
30
35
40
45
50
Ju
n-0
6
De
c-0
6
Ju
n-0
7
De
c-0
7
Ju
n-0
8
De
c-0
8
Ju
n-0
9
De
c-0
9
Ju
n-1
0
De
c-1
0
Ju
n-1
1
De
c-1
1
Ju
n-1
2
De
c-1
2
Ju
n-1
3
Insta
nt
No
od
les V
olu
me M
ark
et
Sh
are
(%
)
Tingyi Uni-President Huafong
Hualong White Elephant
10.6%
-7.8% -6.0%
67.4% 67.3%
22.5%
10.4%
10.4%15.2% 14.6%
8.0%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2007 2008 2009 2010 2011 2012 1H13
Tingyi UPC Market
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 19
If we look at Tingyi and UPC, we believe that this price-war will hit its peak in 2014 and
pricing will be restored by 2015. This is because we forecast that after its loss in 2013E,
UPC will sustain a second year of loss (albeit smaller) in 2014E by targeting Tingyi’s
flagship product Braised Beef Noodles, with little success in gaining market share. UPC’s
balance sheet will be further stretched in 2014E by a high capex budget of RMB4bn and
rising palm oil costs, driving negative free cash flow will be in the vicinity of RMB2.2bn in
2014E. This implies that the company may be required to take on further debt, continue to
resell fixed assets back to its sister companies, consider issuing equity or a combination of
all three. If we assume that the company will resolve its cash needs via debt, the net
gearing for UPC in 2014E would potentially be 67%.
By 2015E, a combination of slowing topline and raw material inflation is likely to spell an
end to this round of price war, in our view, as companies realize that it is detrimental to the
industry profit pool and will begin to pull back on promotions. In the meantime, we think
the intense competition is likely to marginalize smaller companies further, such as Hualong
and Baixiang, which do not have the financial might to keep up, leading to a further market
share gain for incumbents.
Exhibit 31: In 2014, we expect UPC to direct a higher portion of its promotional budget to
below-the-line direct price promotions, partially funded by a reduction in above the line
brand spend, in our view. Total promotional spend will be slightly lower at RMB0.35/unit
vs RMB0.37/unit in 2013E
GSE UPC Instant Noodles per unit cost – 2014E
Source: Euromonitor, Goldman Sachs Global Investment Research.
1.29
0.56
0.13
0.07
0.18
0.15
0.05
0.14
0.04
-0.03
-0.20
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Ex-
factory
Basic raw
materials
Other
COGS
PromotionsTransport
ation Other Selling
Exp (incl.
salaries)
Admin Operating
Profit
Additional
Raw
materials
Sausage
promotion
Rmb/Unit
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 20
Exhibit 32: We forecast a pull-back in UPC’s sausage promotions in 2015E leading to total
RMB0.32/unit vs RMB0.35/unit in 2014E GSE UPC Instant Noodles per unit cost – 2015E
Source: Euromonitor, Goldman Sachs Global Investment Research.
As for Tingyi, we do not believe that the company will follow UPC’s sausage offer for its
Braised Beef Instant noodles, given the high portfolio exposure to this flavor. We calculate
that if Tingyi did include a free sausage in half of its bowl noodles in response, its noodles
OP margin will drop down from 9.7% in 2013E to about 5.5% in 2014E/2015E. Moreover, a
matching of the sausage offer would be a validation of UPC’s pricing power. As such, we
believe that Tingyi is more likely to come up with a creative solution, one that in aggregate
will see a slightly higher market investment but will mostly involve a re-shifting of a
portion of brand promotions to more direct price discounts. For example, currently, Tingyi
is running a lucky draw promotional activity, where buyers of Braised Beef Noodles have a
chance of winning prizes, as high as 100 giveaways of RMB3,999 in cash. In summary, we
believe that there will be a mild erosion of Tingyi’s noodles OPM in 2014E/2015E, but we
see it to be maintained at c.9%.
1.29
0.57
0.10
0.07
0.18
0.15
0.05
0.14
0.04
-0.01
-0.20
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Ex-
factory
Basic raw
materials
Other
COGS
Promotions
Transpor
tation
Other Selling
Exp (incl.
salaries)
Admin Operating
Profit
Additional
Raw
materials
Sausage
promotion
Rmb/Unit
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 21
Exhibit 33: We expect Tingyi to not follow UPC’s sausage offer for Braised Beef Noodles in
2014E but will extend its promotions to some smaller flavors. This will be funded by a cut
in other COGS/above the line promotions. Total promotions will be RMB0.35/unit vs
RMB0.36/unit in 2013E
Tingyi instant noodles per unit cost – 2014E
Source: Euromonitor, Goldman Sachs Global Investment Research.
Exhibit 34: We expect that Tingyi’s total unit promotions in 2015E will further fall to
RMB0.32/unit vs RMB0.35/unit in 2014E Tingyi instant noodles per unit cost – 2015E
Source: Euromonitor, Goldman Sachs Global Investment Research.
1.57
0.65
0.05
0.21
0.22
0.09
0.06
0.10
0.05
0.14
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
Ex-
factory
Basic raw
materials
Other
COGS
Promotions
Transpor
tation
Other Selling
Exp (incl.
salaries)
Admin Operating
Profit
Additional
Raw
materials
Sausage
promotion
Rmb/Unit
1.57
0.67
0.02
0.21
0.22
0.09
0.06
0.10
0.05
0.14
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
Ex-
factory
Basic raw
materials
Other
COGS
Promotions
Transpor
tation
Other Selling
Exp (incl.
salaries)
Admin Operating
Profit
Additional
Raw
materials
Sausage
promotion
Rmb/Unit
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 22
Case Study: What happened when Tingyi was involved in a price
war last time?
Our conviction on the alleviation of promotional intensity in noodles by 2015E can be
supported by a previous price-war example between Tingyi and the then second-largest
competitor Hualong (also owns the Jinmailang brand). In the early 2000s, domestic private
company Hualong (founded in 1994 in Hebei province) began garnering a lot of market
share in the lower tier cities of China by introducing a low end instant noodle priced at
under RMB1/pack. Moreover, Hualong optimized its advertising expenses by painting on
the walls of rural areas for free. By 2004, Hualong further secured RMB1.5bn investment
from instant noodles pioneer Nissin Foods to further expand its products into the premium
market via the Jinmailang brand. Between 2001-2005, Hualong’s gained 9 pp of value
market share in instant noodles, moving from 7.6% to a peak of 16.6% by 2005.
We calculate the marginal cost of production (including raw materials + transportation) for
each of Tingyi’s instant noodles to be between RMB0.6-0.7/unit and total cost of
production (including fixed COGS, SG&A) of RMB1.1/unit. Hence pricing noodles at
RMB1.00/unit, after giving away 20%-25% of the profits to distributors and retailers, would
be barely break-even for Tingyi.
Despite this, Tingyi attempted to tackle the problem head-on. Not only did it launch a low-
end brand Fumanduo, famous for its RMB1/pack noodles, it also invested RMB300mn in
another Heibei based mass market instant noodles producer Zhong Wang group during
end-2003 in an attempt to strengthen its foothold in the low-end market.
Even though Tingyi’s partnership with Zhong Wang group did not work out, they got an
upper hand when Hualong’s profitability was severely challenged by a 60% jump in palm
oil prices in 2005. Moreover, Hualong attempted to push into the premium market with the
support of Nissin, but it was unable to get past Tingyi’s strong distribution network in the
higher-tier cities and its market share began to decline.
Exhibit 35: Tingyi lost share to Hualong during 2003-2005Nielsen instant noodles volume market share
Exhibit 36: It appears that Tingyi’s noodles OPM is highly
correlated with the company’s market share Tingyi Noodles market share vs OPM
Source: Nielsen. Source: Company data, Nielsen.
The key takeaways from this case study are: 1) Tingyi defended its market share fiercely in
order to maintain its price leadership; 2) with its deeper pockets, scale and distribution
advantage, we believe it is very difficult to undercut Tingyi in prices. The only way to
structurally change the market share would be via fundamental product innovation/
segment extensions; 3) when a competitor is faced with multi-year losses and no progress
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Tingyi Noodles Volume Mkt Share
Hualong Noodles Volume Mkt Share
12
.7%
13.1
%
7.2%
3.6
%
8.2
%
8.1
% 7.4%
9.7
%
13
.7%
12
.2%
10
.5%
10
.5%
0%
3%
6%
9%
12%
15%
20%
25%
30%
35%
40%
45%
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
2010
2011
2012
Tingyi Noodles Market Share % (LHS) Tingyi Noodles EBIT Margin (RHS)
SARS
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 23
in market share, they are likely to retreat from the price-war. We think that the current
price-competition with UPC may go down a similar path.
Exhibit 37: In summary, we forecast that UPC’s Instant Noodles margins will remain
negative in 2014E, before narrowing in 2015E due to a pull-back in Lao Tan promotions
and increased scale UPC’s noodle EBIT margin trend
Source: Company data, Goldman Sachs Global Investment Research.
Exhibit 38: We expect Tingyi’s noodles OPM to remain at c.9% in 2014E/2015E due to
slightly higher marketing spend on braised beef noodles Tingyi Noodles Margin Trend
Source: Company data, Goldman Sachs Global Investment Research.
-2.4%
0.1%
-4.6%
-3.3%
-0.3%
2.8%3.1%
-2.5%
-1.9%
-0.6%
-5%
-3%
-1%
1%
3%
5%
0%
4%
8%
12%
16%
20%
20
06
20
07
20
08
20
09
2010
2011
2012
201
3E
2014
E
201
5E
UPC Noodles Market Share % (LHS) UPC Noodles EBIT Margin (RHS)
Losing market
share to TIngyi
Large gain in market
share from
significant growth of
Lao Tan noodles
Tingyi
initiates
price-
war
We expect tight
balance sheet and
little inroads made on
market share would
necessitate
promotions being
pulled back in 2015E.
12.7%13.1%
7.2%
3.6%
8.2% 8.1%
7.4%
9.7%
13.7%
12.2%
10.5% 10.5%
9.7%9.1% 9.2%
0%
3%
6%
9%
12%
15%
18%
20%
25%
30%
35%
40%
45%
50%
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
2010
2011
2012
2013E
2014
E
2015E
Tingyi Noodles Market Share % (LHS) Tingyi Noodles EBIT Margin (RHS)
Price-war with
Hualong
Market share
challenged by
UPC's Lao Tan
noodles.
Beginning of price
war with UPC from
2H12
We expect
the price war
to draw to an
end by
2015E
Large market share
gain driving positive
opearting leverage
and favourable raw
materials costs
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 24
Huishan (6863.HK): Positive data boosts conviction; to CL-Buy
Source of Opportunity
We upgraded Huishan to Buy from Neutral in December 2013 (refer to
our report “Upgrade to Buy on better margin outlook and recent price
pull-back”, dated December 6, 2013) on the basis that spiking raw milk
prices and continued downstream premiumization will drive a better
GPM than anticipated. Based on our latest monitoring of data to January
2014, our thesis favoring upstream dairy farms vs downstream
processors continues to be relevant. In January 2014, China raw milk
prices for average 10 major producing provinces reached RMB4.24/kg,
up 30% yoy, while key feed prices that Huishan needs to purchase
externally, i.e., corn and soybean meal, have been trending down.
Moreover, given further pull back in stock price in the past month, and a
roll forward of our valuation period from CY2014E to average
CY14E/CY15E to be in-line with our staples peer group, the potential
upside is now 35%. We add the stock to our Conviction Buy List.
Catalysts
Some positive updates from the company post 3Q14 (ended Dec 2013):
1) the raw milk sales price has now reached RMB5,100/ton in January
2014 vs last raise of RMB5,000 in October 2013;
2) the company completed a 10%-15% price hike in all its downstream
liquid milk products, which has been a gradual process in last 3 months;
3) selected as one of the 6 companies in the second batch of national
champions as of January 2014 by the China Dairy Association;
4) our monitoring of Liaoning weather points to no further weather
shocks since CY4Q13.
These data points have been reflected in our current forecasts, but do
provide further affirmation on the company’s ability to execute. As such,
we think that our forecast of 40% EPS CAGR in 2013E-2015E is on track
and expect that the stock will re-rate as investors become more familiar
with the company’s unique vertically integrated business model.
Valuation
We value Huishan on a P/E-based SOTP, with reference to its closest HK
listed peers Modern Dairy (1117.HK, NC) and Mengniu (2319.HK,
Neutral). Our revised TP of HK$3.60 (HK$3.20 previously) is derived
from: 1) a roll forward of our valuation period from 2014E to average of
2014E/2015E; and 2) a reduction in the P/E multiple assigned to
Huishan’s upstream business from 19.0X to 18.0X, given the recent pull
back in Modern Dairy’s stock price. We have not changed our EPS
forecasts.
Key risks
Worse-than-expected raw milk production costs, raw milk and branded
product ASP, raw milk volume output, adverse weather, competition,
food safety.
Growth
Returns *
Multiple
Volatility Volatility
Multiple
Returns *
Growth
Investment Profile
Low High
Percentile 20th 40th 60th 80th 100th
* Returns = Return on Capital For a complete description of the investment
profile measures please refer to the
disclosure section of this document.
Huishan Dairy (6863.HK)
Asia Pacific Consumer Peer Group Average
Key data Current
Price (HK$) 2.66
12 month price target (HK$) 3.60
Market cap (HK$ mn / US$ mn) 38,324.7 / 4,939.9
Foreign ownership (%) --
3/13 3/14E 3/15E 3/16E
EPS (Rmb) New 0.07 0.10 0.14 0.18
EPS revision (%) 0.0 0.0 0.0 0.0
EPS growth (%) 162.7 35.1 47.6 31.8
EPS (dil) (Rmb) New 0.07 0.09 0.14 0.18
P/E (X) NM 21.9 14.8 11.2
P/B (X) NM 2.3 2.0 1.8
EV/EBITDA (X) -- 15.7 11.4 9.1
Dividend yield (%) NM 0.0 0.0 0.0
ROE (%) 30.0 13.1 14.4 16.6
CROCI (%) 18.6 16.8 18.6 18.0
50
52
54
56
58
60
62
64
66
2.4
2.5
2.6
2.7
2.8
2.9
3.0
3.1
3.2
Feb-13 May-13 Aug-13 Nov-13
Price performance chart
Huishan Dairy (L) MSCI China (R)
Share price performance (%) 3 month 6 month 12 month
Absolute (13.6) -- --
Rel. to MSCI China (8.7) -- --
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 2/10/2014 close.
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 25
Huishan Dairy: Summary financials
Profit model (Rmb mn) 3/13 3/14E 3/15E 3/16E Balance sheet (Rmb mn) 3/13 3/14E 3/15E 3/16E
Total revenue 2,552.4 3,917.8 5,902.4 8,194.3 Cash & equivalents 825.7 5,666.9 3,506.8 1,266.5
Cost of goods sold (1,174.3) (1,642.8) (2,540.7) (3,561.6) Accounts receivable 172.6 318.6 560.8 890.8
SG&A (197.2) (665.1) (984.1) (1,422.2) Inventory 446.6 547.3 843.6 1,175.1
R&D 0.0 0.0 0.0 0.0 Other current assets 696.2 1,068.7 1,610.0 2,235.2
Other operating profit/(expense) 41.5 13.3 26.1 37.9 Total current assets 2,141.1 7,601.4 6,521.1 5,567.7
EBITDA 1,291.4 1,744.1 2,573.0 3,485.1 Net PP&E 6,878.6 8,840.7 11,193.4 14,019.4
Depreciation & amortization (68.9) (120.9) (169.3) (236.6) Net intangibles 1,453.3 1,843.0 3,254.6 4,622.4
EBIT 1,222.5 1,623.2 2,403.7 3,248.5 Total investments 0.0 0.0 0.0 0.0
Interest income 4.3 20.0 30.0 20.0 Other long-term assets 37.8 37.8 37.8 37.8
Interest expense (144.2) (180.7) (180.7) (180.7) Total assets 10,510.8 18,322.9 21,007.0 24,247.2
Income/(loss) from uncons. subs. 0.0 0.0 0.0 0.0
Others (1.8) (1.4) (1.5) (1.7) Accounts payable 910.5 1,022.7 1,439.6 1,823.9
Pretax profits 1,080.9 1,461.2 2,251.5 3,086.1 Short-term debt 908.5 1,084.1 1,084.1 1,084.1
Income tax (67.0) (64.0) (133.6) (295.3) Other current liabilities 473.1 646.5 978.8 1,356.6
Minorities 0.0 0.0 0.0 0.0 Total current liabilities 2,292.1 2,753.2 3,502.5 4,264.5
Long-term debt 2,102.8 1,927.2 1,927.2 1,927.2
Net income pre-preferred dividends 1,013.9 1,397.1 2,117.9 2,790.8 Other long-term liabilities 233.0 224.7 206.4 179.3
Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 2,335.8 2,151.9 2,133.6 2,106.6
Net income (pre-exceptionals) 1,013.9 1,397.1 2,117.9 2,790.8 Total liabilities 4,627.9 4,905.2 5,636.1 6,371.1
Post-tax exceptionals 0.0 (128.5) (39.4) (39.4)
Net income 1,013.9 1,268.6 2,078.5 2,751.4 Preferred shares 0.0 0.0 0.0 0.0
Total common equity 5,882.9 13,417.8 15,370.9 17,876.1
EPS (basic, pre-except) (Rmb) 0.07 0.10 0.15 0.19 Minority interest 0.0 0.0 0.0 0.0
EPS (basic, post-except) (Rmb) 0.07 0.09 0.14 0.19
EPS (diluted, post-except) (Rmb) 0.07 0.09 0.14 0.18 Total liabilities & equity 10,510.8 18,322.9 21,007.0 24,247.2
DPS (Rmb) 0.00 0.00 0.00 0.00
Dividend payout ratio (%) 0.0 0.0 0.0 0.0 BVPS (Rmb) 0.41 0.91 1.02 1.18
Free cash flow yield (%) -- (4.0) (7.1) (7.5)
Growth & margins (%) 3/13 3/14E 3/15E 3/16E Ratios 3/13 3/14E 3/15E 3/16E
Sales growth 91.5 53.5 50.7 38.8 CROCI (%) 18.6 16.8 18.6 18.0
EBITDA growth 140.6 35.1 47.5 35.5 ROE (%) 30.0 13.1 14.4 16.6
EBIT growth 144.5 32.8 48.1 35.1 ROA (%) 11.5 8.8 10.6 12.2
Net income growth 162.7 25.1 63.8 32.4 ROACE (%) 21.4 16.4 17.6 17.1
EPS growth 162.7 25.1 63.8 32.4 Inventory days 133.5 110.4 99.9 103.4
Gross margin 54.0 58.1 57.0 56.5 Receivables days 22.9 22.9 27.2 32.3
EBITDA margin 50.6 44.5 43.6 42.5 Payable days 222.9 214.8 176.9 167.2
EBIT margin 47.9 41.4 40.7 39.6 Net debt/equity (%) 37.2 (19.8) (3.2) 9.8
Interest cover - EBIT (X) 8.7 10.1 16.0 20.2
Cash flow statement (Rmb mn) 3/13 3/14E 3/15E 3/16E Valuation 3/13 3/14E 3/15E 3/16E
Net income pre-preferred dividends 1,013.9 1,397.1 2,117.9 2,790.8
D&A add-back 68.9 120.9 169.3 236.6 P/E (analyst) (X) NM 21.9 14.8 11.2
Minorities interests add-back 0.0 0.0 0.0 0.0 P/B (X) NM 2.3 2.0 1.8
Net (inc)/dec working capital 327.6 (134.4) (121.6) (277.3) EV/EBITDA (X) -- 15.7 11.4 9.1
Other operating cash flow 32.0 (175.1) (116.1) (153.2) EV/GCI (X) -- 2.4 1.9 1.5
Cash flow from operations 1,442.4 1,208.4 2,049.5 2,597.0 Dividend yield (%) NM 0.0 0.0 0.0
Capital expenditures (1,567.4) (2,419.7) (4,179.1) (4,847.8)
Acquisitions 0.0 0.0 0.0 0.0
Divestitures 0.0 0.0 0.0 0.0
Others 199.9 107.8 150.2 191.3
Cash flow from investments (1,367.5) (2,311.8) (4,028.9) (4,656.6)
Dividends paid (common & pref) 0.0 0.0 0.0 0.0
Inc/(dec) in debt 385.9 0.0 0.0 0.0
Common stock issuance (repurchase) 0.0 6,125.3 0.0 0.0
Other financing cash flows (148.0) (180.7) (180.7) (180.7)
Cash flow from financing 237.9 5,944.6 (180.7) (180.7)
Total cash flow 312.8 4,841.2 (2,160.1) (2,240.2) Note: Last actual year may include reported and estimated data.
Source: Company data, Goldman Sachs Research estimates.
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 26
Escalating raw milk prices to drive margins
Our monitoring of market spot prices for raw milk and feed cost trends continue to support
our more positive view on dairy farmers vs dairy processors. In January 2014, China raw milk
prices for average 10 major producing provinces reached RMB4.24/kg, up 30% yoy, while key
feed prices that Huishan needs to purchase externally, i.e., corn and soybean meal, have
been trending down. These twin benefits of higher ASP and lower costs pose upside risk to
upstream GP margins for Huishan in 2H14 (March 2014) and 1H15 (Sept 2014).
Exhibit 39: Average raw milk prices in China reached
RMB4.24/kg in January 2014, up 30% yoy…
Exhibit 40: …while feed costs have been trending down Price index of average raw milk, corn and soybean meal
costs in China to January 2014
Source: Dairy Association of China.
Source: Dairy Association of China.
Exhibit 41: The magnitude of raw milk price increases
have far exceeded retail price hikes for liquid milk Price index of average raw milk, and liquid milk retail prices
to January 2014
Exhibit 42: Our Global Macro Research team expects NZ
milk powder prices to remain elevated through 2014E,
but to fall by 25% in 2015E to US$3,600/ton Historical and forecast NZ milk powder prices (US$/ton)
Source: Dairy Association of China.
Source: Global Dairy Trade, Goldman Sachs Global Investment Research.
Nov 2012:
Rmb3.3/Kg
July 2013:
Rmb3.4/Kg
Jan 2014:
Rmb4.24/Kg,
+30% YoY
2.0
2.5
3.0
3.5
4.0
4.5
Ja
n-0
8
Ma
y-0
8
Se
p-0
8
Ja
n-0
9
Ma
y-0
9
Se
p-0
9
Ja
n-1
0
Ma
y-1
0
Se
p-1
0
Ja
n-1
1
Ma
y-1
1
Se
p-1
1
Ja
n-1
2
Ma
y-1
2
Se
p-1
2
Ja
n-1
3
Ma
y-1
3
Se
p-1
3
Ja
n-1
4
Avg. raw milk price - 10 milk producing provinces
80
90
100
110
120
130
140
150
Ja
n-0
8
Ma
y-0
8
Se
p-0
8
Ja
n-0
9
Ma
y-0
9
Se
p-0
9
Ja
n-1
0
Ma
y-1
0
Se
p-1
0
Ja
n-1
1
Ma
y-1
1
Se
p-1
1
Ja
n-1
2
Ma
y-1
2
Se
p-1
2
Ja
n-1
3
Ma
y-1
3
Se
p-1
3
Ja
n-1
4
Raw milk Corn Soybean Meal
80
90
100
110
120
130
140
150
160
170
180
190
Ma
y-0
9
Sep
-09
Ja
n-1
0
Ma
y-1
0
Sep
-10
Ja
n-1
1
Ma
y-1
1
Sep
-11
Ja
n-1
2
Ma
y-1
2
Sep
-12
Ja
n-1
3
Ma
y-1
3
Sep
-13
Ja
n-1
4
Raw Milk Price Index Retail Price Index
-
1,000
2,000
3,000
4,000
5,000
6,000
(USD/ton)
US$4800/Ton,
+3% YoY
US$3600/Ton
-25% YoY
2013 Avg.
US$4663/Ton,
+51% YoY
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 27
Valuation
We value Huishan on a P/E-based SOTP, with reference to its closest HK listed peers
Modern Dairy (1117.HK, NC) and Mengniu (2319.HK, Neutral). Our revised TP of HK$3.60
(HK$3.20 previously) is derived from: 1) a roll forward of our valuation period from 2014E
to average of 2014E/2015E; and 2) a reduction in the P/E multiple assigned to Huishan’s
upstream business from 19.0X to 18.0X, given the recent pull back in Modern Dairy’s stock
price. We have not changed our EPS forecasts.
Huishan is currently trading at 12-m fwd P/E of 15.4X, a 32% discount vs Staples sector
average of 22.5X and slightly lower than closest peer Modern Dairy’s 12-m fwd P/E of 16.3X
as per Bloomberg consensus, despite higher forecast growth and returns.
Exhibit 43: Huishan is currently trading at 32% discount
to Staples sector average Huishan P/E premium/discount to sector
Exhibit 44: Huishan is trading at 15.4X 12-m fwd P/E, 32%
discount vs Staples sector average of 22.5X Huishan historical P/E vs Staples sector average P/E
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
Exhibit 45: Huishan is currently trading at 15.4X 12-m fwd
P/E vs historical average of 17.5x Huishan fwd 12 months P/E
Exhibit 46: We expect Huishan to re-rate as its EV/GCI
has been falling despite stable CROCI outlook Huishan EV/GCI vs 12 months fwd CROCI
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
-32%
-33%
-32%
-31%
-30%
-29%
-28%
-27%
-26%
-25%
De
c-1
3
De
c-1
3
De
c-1
3
Ja
n-1
4
Ja
n-1
4
Ja
n-1
4
Ja
n-1
4
Fe
b-1
4
Fe
b-1
4Huishan historical premium/discount to Staples sector average (%)
5.0
10.0
15.0
20.0
25.0
30.0
De
c-1
3
De
c-1
3
De
c-1
3
Ja
n-1
4
Ja
n-1
4
Ja
n-1
4
Ja
n-1
4
Fe
b-1
4
Fe
b-1
4
Huishan historical P/E Staples sector historical P/E
20.2
15.4
13.0
14.0
15.0
16.0
17.0
18.0
19.0
20.0
21.0
22.0
Oct
-13
Nov
-13
Nov
-13
Dec
-13
Dec
-13
Jan-
14
Jan-
14
Feb
-14
Fwd 12m P/E
+ 1 STDV
- 1 STDV
Average = 17.5x
10%
15%
20%
25%
30%
35%
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Sep‐13
Oct‐13
Nov‐13
Dec‐13
EV/GCI CROCI
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 28
Summary financials
Exhibit 47: Huishan Summary Financials
Source: Company data, Goldman Sachs Global Investment Research.
China Huishan DairyPeriod Ending Date Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16Financial Year 2011 2012 2013 2014E 2015E 2016ETotal SegmentsSegment Revenues - UnconsolidatedDairy Farming Rmb mn 247 953 1,591 2,535 3,654 4,470 Liquid Milk Rmb mn 15 564 1,707 2,448 3,321 4,409 Milk Powder Rmb mn - - 88 447 1,019 1,880 Grains Rmb mn 115 97 77 Total Unconsolidated Revenues Rmb mn 377 1,614 3,463 5,430 7,994 10,758
Elim: Internal Revenues Rmb mnDairy Farming Rmb mn -3 -281 -910 -1,512 -2,092 -2,564 Liquid Milk Rmb mn - - - - - - Milk Powder Rmb mn - - - - - - Grains Rmb mn - - - - - - Elim: Internal Revenues Rmb mn -3 -281 -910 -1,512 -2,092 -2,564
Consolidated Revenues Rmb mnDairy Farming Rmb mn 244 672 681 1,023 1,562 1,906 Liquid Milk Rmb mn 15 564 1,707 2,448 3,321 4,409 Milk Powder Rmb mn - - 88 447 1,019 1,880 Grains Rmb mn 115 97 77 - - - Consolidated Revenues Rmb mn 374 1,333 2,552 3,918 5,902 8,194
Segment COGSDairy Farming Rmb mn -141 -495 -639 -1,035 -1,550 -2,028 Liquid Milk Rmb mn -15 -479 -1,330 -1,807 -2,418 -2,935 Milk Powder Rmb mn - - -42 -314 -665 -1,163 Grains Rmb mn -100 -90 -73 Total COGS Rmb mn -257 -1,064 -2,085 -3,155 -4,632 -6,125 Eliminate: Dairy Farming Revenue Rmb mn -3 -281 -910 -1,512 -2,092 -2,564 Consolidated COGS Rmb mn -254 -783 -1,174 -1,643 -2,541 -3,562
Segment GPDairy Farming Rmb mn 105 458 952 1,500 2,105 2,442 Liquid Milk Rmb mn - 85 377 641 903 1,474 Milk Powder Rmb mn - - 46 133 354 717 Grains Rmb mn 15 7 3 Total GP Rmb mn 120 550 1,378 2,275 3,362 4,633
Segment SG&A & Other Net IncomeDairy Farming Rmb mn -9 5 -21 -129 -175 -215 Liquid Milk Rmb mn -7 -33 -119 -347 -490 -684 Milk Powder Rmb mn -2 -7 -12 -176 -293 -485 Grains Rmb mn -12 -5 -3 - - - Group SG&A & Other Net Income Rmb mn -30 -40 -157 -652 -958 -1,384
EBITDairy Farming Rmb mn 96 462 931 1,372 1,930 2,226 Liquid Milk Rmb mn -7 52 258 294 413 790 Milk Powder Rmb mn -2 -7 33 -42 61 232 Grains Rmb mn 1 1 -0 Total EBIT Rmb mn 88 509 1,221 1,623 2,404 3,248 Unallocated Rmb mn 2 -9 1 -128 -39 -39 Group Underlying EBIT Rmb mn 89 500 1,223 1,495 2,364 3,209
Period Ending Date Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16Financial Year 2011 2012 2013 2014E 2015E 2016EGrowth YoY
Consolidated Revenues %Dairy Farming % 175% 1% 50% 53% 22%Liquid Milk % 3567% 203% 43% 36% 33%Milk Powder % 408% 128% 85%Grains % -16% -21%Consolidated Revenues % 256% 92% 53% 51% 39%
EBIT %Dairy Farming % 381% 101% 47% 41% 15%Liquid Milk % -845% 395% 14% 41% 91%Milk Powder % 223% -605% -227% -245% 280%Grains % 109% -112%Total EBIT % 480% 140% 33% 48% 35%Unallocated % -714% -112% -69% 0%Group Underlying EBIT % 459% 145% 22% 58% 36%
Margin
Segment GP %Dairy Farming % 42.7% 48.0% 59.8% 59.2% 57.6% 54.6%Liquid Milk % 0.0% 15.1% 22.1% 26.2% 27.2% 33.4%Milk Powder % 51.8% 29.9% 34.8% 38.2%Grains % 12.8% 7.2% 4.2%Total GP % 32.0% 41.2% 54.0% 58.1% 57.0% 56.5%
EBIT %Dairy Farming % 39.0% 48.5% 58.5% 54.1% 52.8% 49.8%Liquid Milk % -45.5% 9.2% 15.1% 12.0% 12.4% 17.9%Milk Powder % 37.7% -9.5% 6.0% 12.3%Grains % 0.6% 1.6% -0.2%Total EBIT % 23.9% 37.5% 47.9% 38.2% 40.1% 39.2%
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 29
Exhibit 48: Huishan’s key segment assumptions
Source: Company data, Goldman Sachs Global Investment Research.
China Huishan DairyPeriod Ending Date Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16Financial Year 2011 2012 2013 2014E 2015E 2016EDairy Farming
Calves and Heifer<12mths Heads 10,170 16,240 24,078 34,383 46,821 59,920 Heifers >12mths Heads 26,798 42,793 38,884 55,900 69,908 85,369 Milkable cow Heads 18,584 31,221 49,889 68,632 89,791 113,037 Total Heads 55,552 90,254 112,851 158,915 206,520 258,326
Yield/Cow Tons/Cow 3.27 8.96 9.00 9.00 9.10 9.10
Total Raw Milk Produced Tons 60,741 223,097 365,066 533,345 720,738 922,756 Used to feed calves Tons 3,360 9,177 12,655 13,334 18,018 23,069 Used for commercial production Tons 57,381 213,920 352,411 520,011 702,719 899,687
Internal demand Tons 605 62,837 200,980 310,197 402,262 516,069 External sales Tons 56,776 151,083 151,431 209,813 300,458 383,618 Raw milk used for commercial production Tons 57,381 213,920 352,411 520,011 702,719 899,687
Raw milk sales price Rmb/ton 4,298 4,453 4,515 4,875 5,200 4,968 Feed cost Rmb/ton -887 -1,743 -1,318 -1,542 -1,735 -1,774 D&A Rmb/ton -337 -119 -121 -126 -136 -130 Total Labor & Other Farm Opex Rmb/ton -1,239 -451 -374 -368 -370 -378
Total Revenues Rmb mn 247 953 1,591 2,535 3,654 4,470 Net Feed Cost Rmb mn -51 -373 -465 -802 -1,219 -1,596 D&A Rmb mn -19 -26 -43 -66 -95 -117 Total Labor & Other Farm Opex Rmb mn -71 -96 -132 -192 -260 -340 Total COGS Rmb mn -141 -495 -639 -1,059 -1,574 -2,053
Gross Profit Rmb mn 105 458 952 1,476 2,080 2,417 Other Income/(Expense) Rmb mn 3 5 6 Selling Expesne Rmb mn -9 5 -21 -55 -70 -87 Admin Rmb mn -76 -110 -134 OP Rmb mn 96 462 931 1,347 1,905 2,201
MarginsGPM % 42.7% 48.0% 59.8% 58.2% 56.9% 54.1%Other Income/(Expense) % 0.0% 0.0% 0.0% 0.1% 0.1% 0.1%Selling Expense/Sales % -3.7% 0.5% -1.3% -2.2% -1.9% -2.0%Admin/Sales % 0.0% 0.0% 0.0% -3.0% -3.0% -3.0%D&A/Sales % -7.8% -2.7% -2.7% -2.6% -2.6% -2.6%OP Margin % 39.0% 48.5% 58.5% 53.1% 52.1% 49.3%
China Huishan DairyPeriod Ending Date Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16Financial Year 2011 2012 2013 2014E 2015E 2016ELiquid MilkNE Region Tons 1,563 85,107 246,162 318,577 387,256 469,375 Rest of China Tons 5,300 10,600 20,140 Total Volume Tons 1,563 85,107 246,162 323,877 397,856 489,515 NE Region Rmb/ton 9,845 6,631 6,935 7,249 7,861 8,271 Rest of China Rmb/ton 26,131 26,131 26,131 ASP Rmb/ton 9,845 6,631 6,935 7,558 8,348 9,006 NE Region Rmb mn 15 564 1,707 2,309 3,044 3,882 Rest of China Rmb mn 138 277 526 Total Revenue Rmb mn 15 564 1,707 2,448 3,321 4,409
Total raw milk cost Rmb mn -6 -279 -881 -1,468 -1,975 -2,371 Other Variable Costs Rmb mn -8 -193 -439 -324 -410 -519 Total D&A Rmb mn -1 -8 -11 -15 -33 -44 Total COGS Rmb mn -15 -479 -1,330 -1,807 -2,418 -2,935
Gross Profit Rmb mn - 85 377 641 903 1,474 Other Income/(Expense) Rmb mn 7 13 19 Total Selling Expense Rmb mn -7 -33 -119 -280 -401 -565 Total Admin Rmb mn -75 -102 -138 Total OP Rmb mn -7 52 258 294 413 790
MarginsGPM % 0.0% 15.1% 22.1% 26.2% 27.2% 33.4%Other Income/(Expenses) % 0.0% 0.0% 0.0% 0.3% 0.4% 0.4%Selling Expense/Sales % -45.5% -5.8% -7.0% -11.4% -12.1% -12.8%Admin/Sales % 0.0% 0.0% 0.0% -3.1% -3.1% -3.1%D&A/Sales % 9.2% 1.3% 0.6% 0.6% 1.0% 1.0%OP Margin % -45.5% 9.2% 15.1% 12.0% 12.4% 17.9%
Milk PowderB2B Tons 357 6,750 15,808 28,059 B2C Tons 991 3,000 6,000 10,800 Total Volume Tons 1,348 9,750 21,808 38,859 B2B 25,908 23,296 27,166 27,137 B2C 79,519 110,000 115,500 121,275 ASP 65,320 45,846 46,721 48,380 B2B Rmb mn 9 157 429 761 B2C Rmb mn 79 330 693 1,310 Less: D90 internal sales Rmb mn - -40 -104 -191 Total Revenue Rmb mn 88 447 1,019 1,880
Total Raw Milk Cost Rmb mn -11 -44 -117 -192 Total Other Variable Costs Rmb mn -47 -229 -507 -895 Total D&A Rmb mn 15 -40 -41 -75 Total COGS Rmb mn -42 -314 -665 -1,163
Gross Profit Rmb mn 46 133 354 717 Other Income/(Expense) Rmb mn 4 8 13 Total Selling Expense Rmb mn -12 -161 -260 -423 Total Admin Rmb mn -18 -41 -75 Total OP Rmb mn 33 -42 61 232
MarginsGPM % 52% 30% 35% 38%D&A/Sales % 17.6% -8.9% -4.0% -4.0%Other Income/(Expense) % 0.0% 0.8% 0.8% 0.7%Selling Expense/Sales % -14.2% -36.1% -25.5% -22.5%Admin/Sales % 0.0% -4.0% -4.0% -4.0%Total OP Margin % 37.7% -9.5% 6.0% 12.3%
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 30
Tingyi (0322.HK): Positive inflection on OP margins; up to Buy
Source of opportunity
We upgrade Tingyi from Neutral to Buy, TP: HK$24.90 (from HK$18.45),
implying 26% potential upside. We believe after two years of intense
competition between Tingyi and UPC, they are nearing the end of the
current price-war. We believe Beverage recovery will come first, driven by:
1) We think stabilization of RTD tea market share will prompt Tingyi to pull
promotions to restore profitability to a more desirable level. Its Beverage
margins dropped from 13% in 2008 to 5% in 2013E, below global industry
leaders’ 10%-15% OPM level. We expect this to return to 11% by 2015E;
2) We expect UPC to follow to restore prices, driving margin upside for
both companies;
3) Beverage growth in recent years has been more reliant on product
innovation. We see that both companies are launching more new,
premium products in the market as opposed to deepening discounts.
Noodles will remain tough, as UPC has recently extended its sausage
promotions to Tingyi’s flagship product Braised Beef noodles. However,
we do not expect Tingyi to follow nor this to translate into large market
share gains for UPC as Tingyi’s dominant brand strength in this flavor
has proven difficult for previous competitors to challenge. For example,
former No. 2 Jinmailang attempted to target this flavor by adding a free
egg to its bowl noodles in 2009 but was unsuccessful in denting Tingyi’s
market share. Instead, we believe that the price-war will end by 2015E as
UPC’s continued loss in Noodles and tight cash flow will necessitate a
pull-back in promotions.
Catalyst
Our increase in 12-m TP from HK$18.45 to HK$24.90 is based on: 1) roll
forward of our valuation period from 2014E to average 2014E/2015E;
and 2) forecast EPS revisions of -5%/-1%/+6 due to lower topline growth
in 2013, but improving OP margins in 2014E/2015E. We are forecasting
10% sales CAGR for Tingyi in 2013E-2015E, but 29% EPS CAGR
driven by 2 pp improvement in group OPM.
On beverages, we expect the company’s OPM to increase from 5%
in 2013E to 11% in 2015E, driven primarily by our expectations for:
1) reduced promotional intensity; 2) lower PET prices in
2014E/2015E; and 3) a turn from loss to small profit for the PepsiCo
alliance. For Noodles, we forecast OPM to fall moderately from 9.7%
to 9.2% in 2014E/2015E due to slightly higher promotional spend to
defend braised beef noodles market share.
Valuation
We value Tingyi on 28.8X P/E (previously 24.0x) on average 2014E/2015E
recurring EPS (previous 2014E). This is a 20% premium to our target Staples
sector average of 24X, justified based on Tingyi’s first quartile EPS CAGR vs
the Staples group. At current P/E of 22.8X we see a re-rating opportunity.
Key risks
Worsening competition resulting in worse than expected margins and
sales, worse than expected inflation in raw material prices.
Growth
Returns *
Multiple
Volatility Volatility
Multiple
Returns *
Growth
Investment Profile
Low High
Percentile 20th 40th 60th 80th 100th
* Returns = Return on Capital For a complete description of the investment
profile measures please refer to the
disclosure section of this document.
Tingyi (Cayman Islands) Holdings (0322.HK)
Asia Pacific Consumer Peer Group Average
Key data Current
Price (HK$) 19.70
12 month price target (HK$) 24.90
Market cap (HK$ mn / US$ mn) 110,125.2 / 14,194.7
Foreign ownership (%) --
12/12 12/13E 12/14E 12/15E
EPS ($) New 0.06 0.08 0.10 0.12
EPS revision (%) 0.0 (5.5) (1.5) 5.9
EPS growth (%) (14.2) 17.3 30.4 27.1
EPS (dil) ($) New 0.08 0.08 0.10 0.12
P/E (X) 43.6 33.8 25.9 20.4
P/B (X) 6.1 5.1 4.5 4.0
EV/EBITDA (X) 17.1 12.4 9.5 7.7
Dividend yield (%) 1.2 1.5 1.9 2.5
ROE (%) 19.6 16.2 18.6 21.0
CROCI (%) 13.4 12.6 15.1 16.9
19,500
20,500
21,500
22,500
23,500
24,500
25,500
18
19
20
21
22
23
24
Feb-13 May-13 Aug-13 Nov-13
Price performance chart
Tingyi (Cayman Islands) Holdings (L) Hang Seng Index (R)
Share price performance (%) 3 month 6 month 12 month
Absolute (9.4) 1.3 (10.7)
Rel. to Hang Seng Index (4.5) 2.4 (3.9)
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 2/10/2014 close.
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 31
Tingyi (Cayman Islands) Holdings: Summary financials
Profit model ($ mn) 12/12 12/13E 12/14E 12/15E Balance sheet ($ mn) 12/12 12/13E 12/14E 12/15E
Total revenue 9,211.9 10,763.2 11,890.9 13,050.4 Cash & equivalents 837.9 1,217.7 1,302.5 1,542.0
Cost of goods sold (6,457.4) (7,493.5) (8,241.1) (8,971.1) Accounts receivable 233.1 301.8 366.1 401.7
SG&A (2,168.1) (2,474.9) (2,668.7) (2,856.5) Inventory 478.1 472.7 519.9 565.9
R&D 0.0 0.0 0.0 0.0 Other current assets 419.3 489.8 541.1 593.8
Other operating profit/(expense) 31.2 (84.3) 35.0 82.8 Total current assets 1,968.4 2,482.1 2,729.5 3,103.5
EBITDA 1,005.4 1,234.6 1,585.2 1,922.5 Net PP&E 5,001.7 5,108.3 5,217.7 5,327.8
Depreciation & amortization (387.8) (524.0) (569.1) (616.9) Net intangibles 312.9 429.0 533.7 628.1
EBIT 617.6 710.6 1,016.1 1,305.6 Total investments 139.5 139.5 139.5 139.5
Interest income 48.4 60.0 75.0 85.0 Other long-term assets 50.8 50.8 50.8 50.8
Interest expense (32.7) (34.6) (27.3) (16.8) Total assets 7,473.3 8,209.7 8,671.2 9,249.7
Income/(loss) from uncons. subs. 4.0 5.9 7.1 8.6
Others 0.0 0.0 0.0 0.0 Accounts payable 1,043.3 1,457.1 1,602.4 1,744.4
Pretax profits 637.3 741.9 1,071.0 1,382.3 Short-term debt 499.7 787.8 397.6 349.6
Income tax (227.8) (225.7) (289.2) (359.4) Other current liabilities 1,251.5 1,443.0 1,598.0 1,752.1
Minorities (49.7) (93.9) (230.8) (322.7) Total current liabilities 2,794.5 3,687.9 3,598.0 3,846.0
Long-term debt 984.8 497.0 499.4 99.8
Net income pre-preferred dividends 359.9 422.3 551.0 700.3 Other long-term liabilities 196.7 186.9 177.6 168.7
Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 1,181.5 683.9 677.0 268.5
Net income (pre-exceptionals) 359.9 422.3 551.0 700.3 Total liabilities 3,976.0 4,371.7 4,274.9 4,114.5
Post-tax exceptionals 95.3 10.5 0.0 0.0
Net income 455.2 432.8 551.0 700.3 Preferred shares 0.0 0.0 0.0 0.0
Total common equity 2,550.9 2,797.7 3,125.2 3,541.4
EPS (basic, pre-except) ($) 0.06 0.08 0.10 0.13 Minority interest 946.3 1,040.3 1,271.1 1,593.7
EPS (basic, post-except) ($) 0.08 0.08 0.10 0.13
EPS (diluted, post-except) ($) 0.08 0.08 0.10 0.12 Total liabilities & equity 7,473.3 8,209.7 8,671.2 9,249.7
DPS ($) 0.03 0.04 0.05 0.06
Dividend payout ratio (%) 39.6 50.0 50.0 50.0 BVPS ($) 0.46 0.50 0.56 0.63
Free cash flow yield (%) 1.7 5.0 4.5 6.1
Growth & margins (%) 12/12 12/13E 12/14E 12/15E Ratios 12/12 12/13E 12/14E 12/15E
Sales growth 17.1 16.8 10.5 9.8 CROCI (%) 13.4 12.6 15.1 16.9
EBITDA growth 5.3 22.8 28.4 21.3 ROE (%) 19.6 16.2 18.6 21.0
EBIT growth (2.6) 15.1 43.0 28.5 ROA (%) 6.9 5.5 6.5 7.8
Net income growth 8.5 (4.9) 27.3 27.1 ROACE (%) 10.6 12.4 18.9 24.2
EPS growth 8.4 (4.9) 27.3 27.1 Inventory days 22.3 23.2 22.0 22.1
Gross margin 29.9 30.4 30.7 31.3 Receivables days 7.7 9.1 10.3 10.7
EBITDA margin 10.9 11.5 13.3 14.7 Payable days 57.0 60.9 67.8 68.1
EBIT margin 6.7 6.6 8.5 10.0 Net debt/equity (%) 18.5 1.7 (9.2) (21.3)
Interest cover - EBIT (X) NM NM NM NM
Cash flow statement ($ mn) 12/12 12/13E 12/14E 12/15E Valuation 12/12 12/13E 12/14E 12/15E
Net income pre-preferred dividends 359.9 422.3 551.0 700.3
D&A add-back 387.8 524.0 569.1 616.9 P/E (analyst) (X) 43.6 33.8 25.9 20.4
Minorities interests add-back 49.7 93.9 230.8 322.7 P/B (X) 6.1 5.1 4.5 4.0
Net (inc)/dec working capital 273.0 471.4 137.8 161.6 EV/EBITDA (X) 17.1 12.4 9.5 7.7
Other operating cash flow 85.7 4.6 (7.1) (8.6) EV/GCI (X) 2.1 1.7 1.6 1.4
Cash flow from operations 1,156.0 1,516.2 1,481.5 1,792.8 Dividend yield (%) 1.2 1.5 1.9 2.5
Capital expenditures (881.5) (752.6) (789.0) (827.2)
Acquisitions (9.0) 0.0 0.0 0.0
Divestitures 0.0 0.0 0.0 0.0
Others 231.6 5.8 5.8 5.8
Cash flow from investments (658.9) (746.8) (783.2) (821.4)
Dividends paid (common & pref) (247.7) (203.3) (262.1) (387.7)
Inc/(dec) in debt (21.6) (199.7) (387.8) (447.6)
Common stock issuance (repurchase) 3.9 0.0 0.0 0.0
Other financing cash flows 6.2 13.4 36.3 103.3
Cash flow from financing (259.2) (389.6) (613.6) (731.9)
Total cash flow 237.8 379.8 84.8 239.5 Note: Last actual year may include reported and estimated data.
Source: Company data, Goldman Sachs Research estimates.
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 32
We value Tingyi on 28.8X P/E (previously 24.0x) on average 2014E/2015E recurring EPS.
This is a 20% premium to our target Staples sector average of 24X, which is justified based
on Tingyi’s first quartile 2013E-2015E 2-yr EPS growth vs the Staples group. Our increase in
12-m target price from HK$18.45 to HK$24.90 is based on: 1) roll forward of our valuation
period from 2014E to average 2014E/2015E; and 2) forecast EPS revisions of -5%/-1%/+6
due to lower topline growth in 2013 but improving OP margins in 2014E/2015E.
At present, Tingyi is trading at 25.0X 12-m fwd P/E, which is lower than its historical average
of 26.8X and represents 11% premium to the Staples sector average of 22.5X. We believe that
the re-rating can be justified on a rebound in the company’s CROCI as margins recover.
Exhibit 49: Tingyi is trading at 11% premium to Staples
sector average vs its historical average of 14% premiumTingyi P/E premium/discount to sector
Exhibit 50: Tingyi is currently trading at 25.0X 12-m fwd
P/E vs sector average of 22.5X Tingyi historical P/E vs. sector P/E
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
Exhibit 51: Tingyi is trading at 25.0X 12-m fwd P/E vs
historical average of 26.8X Tingyi fwd 12-m P/E
Exhibit 52: We expect Tingyi to re-rate given improving
CROCI outlook Tingyi EV/GCI vs. CROCI
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
-11%
48%
11%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Ja
n-0
7
May
-07
Sep
-07
Ja
n-0
8
May
-08
Sep
-08
Ja
n-0
9
May
-09
Sep
-09
Ja
n-1
0
May
-10
Sep
-10
Ja
n-1
1
May
-11
Sep
-11
Ja
n-1
2
May
-12
Sep
-12
Ja
n-1
3
May
-13
Sep
-13
Ja
n-1
4
Tingyi historical premium/discount to Staples sector average (%)
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
Ja
n-0
7
Ju
n-0
7
No
v-0
7
Ap
r-0
8
Sep
-08
Fe
b-0
9
Ju
l-0
9
De
c-0
9
Ma
y-1
0
Oct-
10
Ma
r-1
1
Au
g-1
1
Ja
n-1
2
Ju
n-1
2
No
v-1
2
Ap
r-1
3
Sep
-13
Fe
b-1
4
Tingyi historical P/E Staples sector historical P/E
39.0
17.4
25.0
15.0
20.0
25.0
30.0
35.0
40.0
Jan-
06
Apr
-06
Jul-0
6
Oct
-06
Jan-
07
Apr
-07
Jul-0
7
Oct
-07
Jan-
08
Apr
-08
Jul-0
8
Oct
-08
Jan-
09
Apr
-09
Jul-0
9
Oct
-09
Jan-
10
Apr
-10
Jul-1
0
Oct
-10
Jan-
11
Apr
-11
Jul-1
1
Oct
-11
Jan-
12
Apr
-12
Jul-1
2
Oct
-12
Jan-
13
Apr
-13
Jul-1
3
Oct
-13
Jan-
14
Tingyi fwd 12m P/E
+ 1 STDV
+ 2 STDV
- 1 STDV
- 2 STDV
Historical avg. 26.8x
10%
15%
20%
25%
30%
35%
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Ja
n-0
7
May
-07
Sep
-07
Ja
n-0
8
May
-08
Sep
-08
Ja
n-0
9
May
-09
Sep
-09
Ja
n-1
0
May
-10
Sep
-10
Ja
n-1
1
May
-11
Sep
-11
Ja
n-1
2
May
-12
Sep
-12
Ja
n-1
3
May
-13
Sep
-13
Ja
n-1
4
EV/GCI CROCI
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 33
Exhibit 53: Tingyi Summary Financials
Source: Company data, Goldman Sachs Global Investment Research.
Tingyi (0322.HK)USD mnDivisional P/L 2013 Q1 2013 Q2 2013 Q3 2013 Q4E 1H11 2H11 1H12 2H12 1H13 2H13E 2011 2012 2013E 2014E 2015E 13-'15 2Yr CAGR
Pepsi since 31/03/12
Pepsi since 31/03/12
External RevenuesInstant Noodles 1,105 888 1,153 1,194 1,618 1,974 1,873 2,087 1,993 2,347 3,592 3,960 4,340 4,689 5,049 8%Beverages 1,462 1,787 2,160 685 2,392 1,607 2,504 2,427 3,250 2,845 3,999 4,931 6,094 6,824 7,555 11%Bakery 57 42 55 49 94 107 114 120 99 103 201 234 202 233 279 17%Others 24 58 22 23 36 38 42 45 81 45 74 87 126 145 167 15%Segment Total 2,648 2,775 3,390 1,951 4,140 3,726 4,533 4,678 5,423 5,340 7,867 9,212 10,763 11,891 13,050 10%Unallocated 0 0 0 0 -1 1 0 0 0 0 0 0 0 0 0Group Revenues 2,648 2,775 3,390 1,951 4,140 3,727 4,533 4,678 5,423 5,340 7,867 9,212 10,763 11,891 13,050 10%
Operating ProfitInstant Noodles 127 67 139 90 132 247 198 218 194 229 379 416 422 427 466 5%Beverages 58 91 210 -61 205 10 144 45 149 150 215 189 298 586 820 66%Bakery 1 -8 -4 -5 2 2 0 5 -7 -9 4 6 -15 -6 7 nmfOthers 2 23 0 0 41 -5 8 3 25 0 36 11 25 29 33 15%Segment Total 188 173 345 25 380 254 350 272 361 370 634 622 731 1,036 1,326 35%Unallocated -7 -6 0 4 0 0 183 4 -14 4 0 187 -9 -20 -20Group EBIT 180 167 345 29 379 255 533 275 347 374 634 808 721 1,016 1,306 35%
YoY Growth (%)
Revenues Instant Noodles 7% 5% 11% 14% 22% 23% 16% 6% 6% 12% 23% 10% 10% 8% 8%Beverages 79% 6% 19% 13% 32% -6% 5% 51% 30% 17% 13% 23% 24% 12% 11%Bakery -3% -24% -14% -13% 22% 28% 21% 12% -13% -14% 25% 16% -14% 15% 20%Others 13% 175% 2% -2% 39% 24% 17% 18% 94% 0% 31% 17% 45% 15% 15%Total 37% 6% 15% 13% 28% 8% 10% 26% 20% 14% 18% 17% 17% 10% 10%
Operating ProfitInstant Noodles 2% -9% 3% 7% -5% 13% 50% -12% -2% 5% 6% 10% 1% 1% 9%Beverages 41% -12% 46% nmf 0% -91% -30% 336% 3% 233% -33% -12% 58% 97% 40%Bakery 290% -5549% -244% -278% 10% 582% -79% 173% -1718% -261% 90% 47% -366% -61% -216%Others -44% 258% -102% nmf 343% -114% -81% -161% 225% -90% -27% -69% 131% 15% 15%Recurring OP 11% -5% 20% -246% 7% -33% -8% 7% 3% 36% -13% -2% 18% 42% 28%
Margins
Gross ProfitInstant Noodles 30.2% 28.0% 29.8% 29.2% 25.1% 29.0% 29.4% 30.5% 29.2% 29.5% 27.2% 30.0% 29.3% 27.7% 26.9%Beverages 28.4% 31.7% 34.1% 25.6% 26.7% 24.1% 30.0% 29.3% 30.2% 32.0% 25.7% 29.6% 31.1% 32.7% 34.1%Bakery 38.2% 35.1% 38.4% 35.7% 34.8% 37.5% 37.7% 40.2% 36.9% 37.1% 36.2% 39.0% 37.0% 37.5% 38.0%Others 18.6% 27.9% 19.2% 18.9% 12.0% 15.0% 15.8% 17.0% 25.2% 19.0% 13.5% 16.4% 23.0% 23.0% 23.0%Total 29.3% 30.4% 32.6% 28.0% 26.1% 27.0% 29.8% 30.0% 29.9% 30.9% 26.5% 29.9% 30.4% 30.7% 31.3%
Operating ProfitInstant Noodles 11.5% 7.5% 12.0% 7.5% 8.1% 12.5% 10.6% 10.5% 9.7% 9.7% 10.5% 10.5% 9.7% 9.1% 9.2%Beverages 3.9% 5.1% 9.7% -8.9% 8.6% 0.6% 5.7% 1.8% 4.6% 5.3% 5.4% 3.8% 4.9% 8.6% 10.8%Bakery 1.8% -18.5% -6.8% -10.0% 2.1% 1.8% 0.4% 4.4% -6.7% -8.3% 1.9% 2.5% -7.5% -2.5% 2.5%Others 8.5% 39.8% -0.4% 1.8% 114.5% -14.1% 18.3% 7.2% 30.7% 0.7% 48.3% 12.6% 20.0% 20.0% 20.0%Total 7.1% 6.2% 10.2% 1.3% 9.2% 6.8% 7.7% 5.8% 6.7% 6.9% 8.1% 6.7% 6.8% 8.7% 10.2%
Consolidated P/L 2013 Q1 2013 Q2 2013 Q3 2013 Q4E 1H11 2H11 1H12 2H12 1H13 2H13E 2011 2012 2013E 2014E 2015E 13-'15 2Yr CAGRExternal Sales 2,648 2,775 3,390 1,951 4,140 3,727 4,533 4,678 5,423 5,340 7,867 9,212 10,763 11,891 13,050 10%COGS -1,873 -1,930 -2,285 -1,405 -3,057 -2,721 -3,182 -3,276 -3,803 -3,691 -5,779 -6,457 -7,493 -8,241 -8,971Gross profit 775 845 1,104 545 1,082 1,006 1,352 1,403 1,620 1,650 2,088 2,754 3,270 3,650 4,079 12%Other Op. Rev/Exp -5 36 27 -132 58 0 185 36 31 -105 58 222 -74 35 83SG&A -590 -714 -786 -384 -761 -751 -1,004 -1,164 -1,304 -1,171 -1,512 -2,168 -2,475 -2,669 -2,857Reported EBIT 180 167 345 29 379 255 533 275 347 374 634 808 721 1,016 1,306 35%D&A -107 -115 -119 -184 -145 -176 -192 -196 -222 -302 -321 -388 -524 -569 -617EBITDA 288 281 464 213 524 431 725 471 569 676 955 1,196 1,245 1,585 1,923 24%Net Interest 5 6 6 9 14 15 11 5 11 15 29 16 25 48 68Associate Income/(Loss) 2 4 9 -9 0 0 5 -1 6 0 0 4 6 7 9Profit before tax 187 177 360 29 393 270 548 279 364 389 663 828 752 1,071 1,382 36%Income taxes -70 -49 -82 -25 -86 -77 -125 -102 -119 -107 -163 -228 -226 -289 -359Profit after tax 117 128 278 4 307 192 423 177 245 282 500 600 527 782 1,023 39%Minority interest -12 -36 -93 47 -78 -2 -136 -9 -48 -46 -80 -145 -94 -231 -323Reported Net income 105 92 186 50 229 191 287 168 197 236 420 455 433 551 700 27%
Less: net one-off's 11 39 0 95 0 11 0 39 95 11 0 0Recurring net income 105 81 186 50 190 191 191 168 186 236 380 360 422 551 700 29%
EPS (Adj., diluted, US$/Sh 0.019 0.014 0.033 0.009 0.034 0.034 0.034 0.030 0.035 0.040 0.068 0.064 0.075 0.098 0.125 29%
YoY Growth %Sales 37.4% 6.5% 15.1% 12.6% 27.6% 8.4% 9.5% 25.5% 19.6% 14.1% 17.7% 17.1% 16.8% 10.5% 9.8%GP 38.2% 6.9% 19.7% 13.5% 7.5% 12.6% 24.9% 39.5% 19.9% 17.6% 9.9% 31.9% 18.7% 11.6% 11.8%SG&A 53.6% 15.4% 27.7% 32.0% 54.9% 29.9% 0.6% 21.2% 43.4% 14.2% 7.8% 7.0%OP (GP less SG&A) 4.6% -7.4% -16.6% 8.0% -6.0% -9.1% 100.4% -11.7% 1.9% 35.5% 23.4% 24.6%Reported EBIT -49.4% -5.2% 22.6% -592.8% 5.8% -30.0% 40.5% 8.2% -34.8% 35.8% -12.2% 27.5% -10.8% 40.9% 28.5%Reported NPAT -47.4% 5.2% 18.4% 338.7% 9.9% -29.0% 25.2% -11.6% -31.4% 40.2% -12.0% 8.5% -4.9% 27.3% 27.1%Recurring NPAT 0.7% -6.9% 18.4% 338.7% -8.9% -29.0% 0.8% -11.6% -2.8% 40.2% -6.8% -5.4% 17.3% 30.5% 27.1%
MarginsGP 29.3% 30.4% 32.6% 28.0% 26.1% 27.0% 29.8% 30.0% 29.9% 30.9% 26.5% 29.9% 30.4% 30.7% 31.3%OP (GP less SG&A) 7.0% 4.7% 9.4% 8.3% 7.8% 6.8% 7.7% 5.1% 5.8% 9.0% 7.3% 6.4% 7.4% 8.3% 9.4%Reported EBIT 6.8% 6.0% 10.2% 1.5% 9.2% 6.8% 11.8% 5.9% 6.4% 7.0% 8.1% 8.8% 6.7% 8.5% 10.0%Reported NPAT 4.0% 3.3% 5.5% 2.6% 5.5% 5.1% 6.3% 3.6% 3.6% 4.4% 5.3% 4.9% 4.0% 4.6% 5.4%Recurring NPAT 4.0% 2.9% 5.5% 2.6% 4.6% 5.1% 4.2% 3.6% 3.4% 4.4% 4.8% 3.9% 3.9% 4.6% 5.4%
SG&A/Sales -22.3% -25.7% -23.2% -19.7% -18.4% -20.2% -22.2% -24.9% -24.1% -21.9% -19.2% -23.5% -23.0% -22.4% -21.9%Effective Tax Rate % 37.3% 27.9% 22.7% 87.6% 21.8% 28.7% 22.9% 36.7% 32.7% 27.5% 24.6% 27.5% 30.0% 27.0% 26.0%
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 34
UPC (0220.HK, Buy): Price restoration on the horizon; up to Buy
Source of opportunity
We upgrade UPC to Buy from Neutral with a revised 12-m TP of HK$8.90
(previously HK$7.30), implying 27% potential upside. After two years of
intense competition, we believe that Tingyi has reclaimed the driver’s seat
in RTD tea, prompting it to pull promotions to restore profitability in 2014.
We expect that UPC will also follow to restore pricing discipline as it has
been the company’s strategy to not engage in price-war, but focus on
product differentiation. Currently, we are seeing UPC launching more new
products into the market including a premium milk tea and green tea
blended beverage, which is selling for RMB4.00/450ml PET bottle, more
than 2x the price of its standard RMB2.30/500ml RTD teas. The premium
mix shift will help boost margins. As such, we forecast Beverage OP
margin to rebound from 4.4% in 2013E to 6.6% by 2015E.
We expect Noodles to remain in loss in 2014E as competition remains
intense. However, we expect an end to this by 2015E as a second year of
losses and tight cash flow will necessitate UPC to pull back in noodles
promotions. We believe that UPC’s current attempt to gain share in instant
noodles by extending its sausage offer to Tingyi’s flagship product Braised
Beef Noodles will prove to be tough. Past attempts including that from
former number 2 instant noodles player Jinmailang has not proven
successful in the face of Tingyi’s dominant brand strength. Our per unit
cost analysis for Instant Noodles suggests that in 2013E, UPC invested an
additional RMB0.19/unit of COGS in promotions and RMB0.06/unit in
promotional expenses for one unit of instant noodles vs 2010. This implies
an incremental 19% margin investment for a unit of noodle averaging
RMB1.29/unit ex-factory price. If UPC pulled its noodles total promotions
back by c.25%, it would potentially achieve an incremental 3-4% OPM, in
our view.
Catalyst
We forecast accelerating EPS CAGR of 43% in 2013E-2015E vs 42%
decline in 2013E. This will be driven by: 1) rebound in Beverage margins
from 4.4% in 2013E to 6.6% by 2015E; and 2) a pull-back in noodles
promotions by 2015E, which will narrow its noodles losses from -2.5%
OPM in 2013E to -0.6% OPM by 2015E. Topline growth is expected to be
muted at 10% 2-year CAGR as RTD tea and Noodles growth in China
approaches maturity. We adjust our 2013E-2015E recurring NPAT by
13%/-5%/-10% due to higher foreign exchange gains in 2H13 but lower
sales growth forecasts in 2014E/2015E.
Valuation
We value UPC on average 2014E/2015E (previously 2014E) P/E multiple
of 28.8X (unchanged). This is based on a 20% premium to our staples
sector target average of 24.0X given UPC’s first quartile 2-yr EPS CAGR
relative to staples peers. Given current P/E of 22.8X, we see a re-rating
opportunity.
Key risks
Worsening competition resulting in worse than expected margins and
sales, worse than expected inflation in raw material prices.
Growth
Returns *
Multiple
Volatility Volatility
Multiple
Returns *
Growth
Investment Profile
Low High
Percentile 20th 40th 60th 80th 100th
* Returns = Return on Capital For a complete description of the investment
profile measures please refer to the
disclosure section of this document.
Uni-President China Holdings Ltd. (0220.HK)
Asia Pacific Consumer Peer Group Average
Key data Current
Price (HK$) 7.02
12 month price target (HK$) 8.90
Market cap (HK$ mn / US$ mn) 25,268.1 / 3,257.0
Foreign ownership (%) 0.0
12/12 12/13E 12/14E 12/15E
EPS (Rmb) New 0.24 0.14 0.20 0.28
EPS revision (%) 0.0 13.4 (4.9) (9.8)
EPS growth (%) 173.3 (42.1) 42.9 43.7
EPS (dil) (Rmb) New 0.24 0.28 0.20 0.28
P/E (X) 24.6 39.8 27.9 19.4
P/B (X) 2.7 2.3 2.2 2.0
EV/EBITDA (X) 13.5 15.4 12.8 9.6
Dividend yield (%) 0.8 1.3 0.9 1.3
ROE (%) 11.8 12.4 8.1 10.9
CROCI (%) 11.8 8.5 9.3 10.3
50
52
54
56
58
60
62
64
66
68
70
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
Feb-13 May-13 Aug-13 Nov-13
Price performance chart
Uni-President China Holdings Ltd. (L) MSCI China (R)
Share price performance (%) 3 month 6 month 12 month
Absolute (9.4) (0.6) (21.0)
Rel. to MSCI China (4.2) (3.6) (12.9)
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 2/10/2014 close.
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 35
Uni-President China Holdings Ltd.: Summary financials
Profit model (Rmb mn) 12/12 12/13E 12/14E 12/15E Balance sheet (Rmb mn) 12/12 12/13E 12/14E 12/15E
Total revenue 21,405.7 24,491.7 27,093.1 29,591.2 Cash & equivalents 2,290.8 3,403.9 2,935.2 2,940.9
Cost of goods sold (14,003.9) (16,263.7) (18,053.0) (19,613.7) Accounts receivable 512.6 586.5 648.8 708.6
SG&A (6,765.9) (8,008.5) (8,577.6) (8,980.3) Inventory 1,284.9 1,536.8 1,755.4 1,960.9
R&D 0.0 0.0 0.0 0.0 Other current assets 828.9 828.9 828.9 828.9
Other operating profit/(expense) 245.6 327.0 348.0 270.1 Total current assets 4,917.3 6,356.2 6,168.3 6,439.3
EBITDA 1,684.5 1,512.6 2,017.9 2,678.3 Net PP&E 7,912.1 10,354.7 12,901.6 13,439.9
Depreciation & amortization (803.0) (966.1) (1,207.4) (1,411.0) Net intangibles 1,433.7 1,609.8 1,777.2 1,841.7
EBIT 881.5 546.5 810.5 1,267.3 Total investments 1,329.6 1,434.8 1,550.6 1,678.0
Interest income 116.7 200.0 155.0 135.0 Other long-term assets 947.2 837.9 837.9 837.9
Interest expense (52.9) (82.1) (161.6) (181.8) Total assets 16,539.8 20,593.4 23,235.7 24,236.9
Income/(loss) from uncons. subs. 131.6 105.3 115.8 127.4
Others 0.0 0.0 0.0 0.0 Accounts payable 1,441.9 1,674.6 1,858.9 2,019.6
Pretax profits 1,076.9 769.7 919.8 1,347.8 Short-term debt 408.6 717.2 923.0 923.0
Income tax (221.0) (274.1) (211.5) (330.2) Other current liabilities 3,097.7 3,097.7 3,097.7 3,097.7
Minorities 0.0 0.0 0.0 0.0 Total current liabilities 4,948.2 5,489.5 5,879.6 6,040.3
Long-term debt 3,562.3 6,253.7 8,047.9 8,047.9
Net income pre-preferred dividends 855.9 495.6 708.2 1,017.6 Other long-term liabilities 358.2 358.2 358.2 358.2
Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 3,920.6 6,611.9 8,406.1 8,406.1
Net income (pre-exceptionals) 855.9 495.6 708.2 1,017.6 Total liabilities 8,868.7 12,101.4 14,285.7 14,446.4
Post-tax exceptionals 0.0 505.3 0.0 0.0
Net income 855.9 1,000.9 708.2 1,017.6 Preferred shares 0.0 0.0 0.0 0.0
Total common equity 7,671.1 8,492.0 8,950.0 9,790.6
EPS (basic, pre-except) (Rmb) 0.24 0.14 0.20 0.28 Minority interest 0.0 0.0 0.0 0.0
EPS (basic, post-except) (Rmb) 0.24 0.28 0.20 0.28
EPS (diluted, post-except) (Rmb) 0.24 0.28 0.20 0.28 Total liabilities & equity 16,539.8 20,593.4 23,235.7 24,236.9
DPS (Rmb) 0.05 0.07 0.05 0.07
Dividend payout ratio (%) 20.0 25.0 25.0 25.0 BVPS (Rmb) 2.13 2.36 2.49 2.72
Free cash flow yield (%) (5.4) (13.9) (11.2) 0.9
Growth & margins (%) 12/12 12/13E 12/14E 12/15E Ratios 12/12 12/13E 12/14E 12/15E
Sales growth 26.4 14.4 10.6 9.2 CROCI (%) 11.8 8.5 9.3 10.3
EBITDA growth 112.8 (10.2) 33.4 32.7 ROE (%) 11.8 12.4 8.1 10.9
EBIT growth 237.5 (38.0) 48.3 56.4 ROA (%) 5.7 5.4 3.2 4.3
Net income growth 174.4 16.9 (29.2) 43.7 ROACE (%) 9.6 3.8 5.3 6.8
EPS growth 164.2 16.9 (29.2) 43.7 Inventory days 33.4 31.7 33.3 34.6
Gross margin 34.6 33.6 33.4 33.7 Receivables days 8.7 8.2 8.3 8.4
EBITDA margin 7.9 6.2 7.4 9.1 Payable days 34.4 35.0 35.7 36.1
EBIT margin 4.1 2.2 3.0 4.3 Net debt/equity (%) 21.9 42.0 67.4 61.6
Interest cover - EBIT (X) NM NM 123.5 27.1
Cash flow statement (Rmb mn) 12/12 12/13E 12/14E 12/15E Valuation 12/12 12/13E 12/14E 12/15E
Net income pre-preferred dividends 855.9 495.6 708.2 1,017.6
D&A add-back 803.0 966.1 1,207.4 1,411.0 P/E (analyst) (X) 24.6 39.8 27.9 19.4
Minorities interests add-back 0.0 0.0 0.0 0.0 P/B (X) 2.7 2.3 2.2 2.0
Net (inc)/dec working capital 1,035.0 (93.1) (96.6) (104.6) EV/EBITDA (X) 13.5 15.4 12.8 9.6
Other operating cash flow (152.9) (105.3) (115.8) (127.4) EV/GCI (X) 1.5 1.3 1.1 1.0
Cash flow from operations 2,541.0 1,263.3 1,703.2 2,196.6 Dividend yield (%) 0.8 1.3 0.9 1.3
Capital expenditures (3,672.5) (4,000.0) (3,921.7) (2,013.8)
Acquisitions 0.0 0.0 0.0 0.0
Divestitures 275.5 620.0 0.0 0.0
Others (8.3) 401.0 0.0 0.0
Cash flow from investments (3,405.2) (2,979.0) (3,921.7) (2,013.8)
Dividends paid (common & pref) (93.6) (171.2) (250.2) (177.1)
Inc/(dec) in debt 879.8 3,000.0 2,000.0 0.0
Common stock issuance (repurchase) 0.0 0.0 0.0 0.0
Other financing cash flows (0.1) 0.0 0.0 0.0
Cash flow from financing 786.0 2,828.8 1,749.8 (177.1)
Total cash flow (78.2) 1,113.1 (468.7) 5.7 Note: Last actual year may include reported and estimated data.
Source: Company data, Goldman Sachs Research estimates.
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 36
We value UPC on 28.8X P/E (unchanged), which is a 20% premium to our target Staples
sector average of 24.0X as justified by the company’s first quartile 2-yr EPS CAGR vs
Staples peers. Our increase in 12-m TP from HK$7.30 to HK$8.90 is due to: 1) roll forward of
the valuation period from 2014E to average 2014E/2015E; and 2) EPS forecast revisions of
+13%/-5%/-10% in 2013E-2015E due to higher foreign exchange gains in 2H13E and lower
sales growth in 2014E/2015E.
At present, UPC is trading at 26.3X 12-m fwd P/E, vs historical average of 19.9X. This is at a
17% premium to Staples sector average of 22.5X. The company has continued to re-rate
following successful product focus strategy in recent years, and is now trading at mid-
range valuations since 2012 when Milk Tea and Lao Tan noodles saw significant growth.
We expect the company to re-rate given improving EPS growth outlook and CROCI.
Exhibit 54: UPC is trading at 17% premium to the Staples
sector average P/E vs historical average of 14% discount
UPC P/E premium/discount to sector
Exhibit 55: UPC is currently trading at 26.3X 12-m fwd
P/E vs Staples sector average of 22.5X
UPC historical P/E vs. sector P/E
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
Exhibit 56: UPC is trading at 26.3X 12-m fwd P/E vs
historical average of 19.9X UPC fwd 12-m P/E
Exhibit 57: We expect UPC to re-rate given its improving
CROCI UPC EV/GCI vs. CROCI
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
-54%
17%
-21%
17%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Ja
n-0
8
Ju
l-08
Ja
n-0
9
Ju
l-09
Ja
n-1
0
Ju
l-10
Ja
n-1
1
Ju
l-11
Ja
n-1
2
Ju
l-12
Ja
n-1
3
Ju
l-13
Ja
n-1
4UPC historical premium/discount to Staples sector average (%)
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Ja
n-0
8
Ju
n-0
8
No
v-0
8
Ap
r-0
9
Se
p-0
9
Fe
b-1
0
Ju
l-1
0
De
c-1
0
May
-11
Oct-
11
Ma
r-1
2
Au
g-1
2
Ja
n-1
3
Ju
n-1
3
No
v-1
3
UPC historical P/E Staples sector historical P/E
7.6
28.5
26.3
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Jan
-08
Ap
r-0
8
Jul-
08
Oct
-08
Jan
-09
Ap
r-0
9
Jul-
09
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Ap
r-1
3
Jul-
13
Oct
-13
Jan
-14
UPC fwd 12m P/E
+ 1 STDV
+ 2 STDV
- 1 STDV
- 2 STDV
Historical avg. 19.9x
0%
5%
10%
15%
20%
25%
0.0
0.5
1.0
1.5
2.0
2.5
De
c-0
8
Ma
r-0
9
Ju
n-0
9
Sep
-09
De
c-0
9
Ma
r-1
0
Ju
n-1
0
Sep
-10
De
c-1
0
Ma
r-1
1
Ju
n-1
1
Sep
-11
De
c-1
1
Ma
r-1
2
Ju
n-1
2
Sep
-12
De
c-1
2
Ma
r-1
3
Ju
n-1
3
Sep
-13
De
c-1
3
EV/GCI CROCI
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 37
Exhibit 58: UPC Summary Financials
Source: Company data, Goldman Sachs Global Investment Research.
Uni-President China (220.HK)RMB mnDivisional P/L 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 2010 2011 2012 2013E 2014E 2015E 13-'15 2Yr CAGR
RevenuesBeverages 4,594 4,203 5,834 4,855 7,114 6,800 8,262 7,838 8,797 10,689 13,914 16,100 17,750 19,273 9.4%Instant Noodles 1,471 2,078 2,794 3,143 3,420 3,849 3,777 4,293 3,549 5,936 7,270 8,069 8,891 9,709 9.7%Others 99 146 172 135 114 109 166 157 245 307 223 323 452 610 37.5%
Total 6,164 6,427 8,799 8,133 10,648 10,758 12,204 12,287 12,591 16,932 21,406 24,492 27,093 29,591 9.9%
EBITBeverages 408 229 145 84 429 336 449 263 637 229 764 713 937 1,268 33.4%Instant Noodles -13 3 52 113 178 48 -60 -138 -10 165 225 -199 -169 -58 -45.9%Others -13 14 -3 -18 8 -11 13 14 2 -21 -3 27 43 58 45.4%Segment Total 383 246 194 178 614 372 402 139 629 372 986 541 811 1,267 53.0%Unallocated -40 -31 -38 -73 -73 -31 219 292 -71 -111 -105 511 0 0Group Total 343 215 156 105 540 341 620 431 558 261 882 1,052 811 1,267 9.8%
YoY Growth %
RevenuesBeverages 30% 24% 27% 16% 22% 40% 16% 15% 27% 22% 30% 16% 10% 9%Instant Noodles 54% 79% 90% 51% 22% 22% 10% 12% 67% 67% 22% 11% 10% 9%Others 340% 278% 73% -7% -34% -20% 46% 44% 301% 25% -28% 45% 40% 35%Total 37% 40% 43% 27% 21% 32% 15% 14% 38% 34% 26% 14% 11% 9%
EBITBeverages -25% -41% -64% -64% 195% 302% 5% -22% -31% -64% 234% -7% 31% 35%Instant Noodles 52% 106% 512% 4237% 243% -58% -134% -390% 86% 1760% 36% -188% -15% -66%Others -132% 416% 76% -229% 354% -40% -69% -230% 117% -1376% -84% -896% 57% 35%Total -24% -32% -55% -51% 247% 224% 15% 27% -26% -41% 165% -45% 50% 56%
Margins
GP margin Beverages 36.6% 31.4% 29.1% 29.5% 35.0% 36.2% 35.9% 36.0% 34.1% 29.3% 35.6% 35.9% 36.8% 38.1%Instant Noodles 29.6% 27.0% 27.4% 32.0% 34.3% 32.2% 30.4% 28.8% 28.1% 29.8% 33.2% 29.5% 27.3% 26.0%Others 6.4% 26.8% 10.3% 17.8% 14.7% 16.9% 18.5% 19.0% 18.5% 13.6% 15.8% 18.8% 18.8% 18.8%Total 34.4% 29.9% 28.2% 30.3% 34.6% 34.6% 34.0% 33.2% 32.1% 29.2% 34.6% 33.6% 33.4% 33.7%
EBIT marginBeverages 8.9% 5.4% 2.5% 1.7% 6.0% 4.9% 5.4% 3.4% 7.2% 2.1% 5.5% 4.4% 5.3% 6.6%Instant Noodles -0.9% 0.1% 1.9% 3.6% 5.2% 1.2% -1.6% -3.2% -0.3% 2.8% 3.1% -2.5% -1.9% -0.6%Others -12.7% 9.7% -1.8% -13.6% 6.7% -10.2% 7.8% 9.1% 0.7% -7.0% -1.5% 8.5% 9.5% 9.5%Total 6.2% 3.8% 2.2% 2.2% 5.8% 3.5% 3.3% 1.1% 5.0% 2.2% 4.6% 2.2% 3.0% 4.3%
Consolidated P/L 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 2010 2011 2012 2013E 2014E 2015E 13-'15 2Yr CAGR
Sales 6,164 6,427 8,799 8,133 10,648 10,758 12,204 12,287 12,591 16,932 21,406 24,492 27,093 29,591 9.9%COGS -4,041 -4,507 -6,318 -5,671 -6,968 -7,036 -8,059 -8,204 -8,548 -11,989 -14,004 -16,264 -18,053 -19,614Gross Profit 2,123 1,920 2,481 2,462 3,680 3,722 4,145 4,083 4,043 4,943 7,402 8,228 9,040 9,978 10.1%SG&A -1,830 -1,786 -2,409 -2,432 -3,235 -3,530 -3,888 -4,120 -3,616 -4,841 -6,766 -8,008 -8,578 -8,980 5.9%Other Op. Rev/Exp 50 81 84 75 96 150 364 468 131 159 246 832 348 270Reported EBIT 343 215 156 105 540 341 620 431 558 261 882 1,052 811 1,267 9.8%D&A -174 -198 -233 -297 -363 -440 -517 -449 -372 -530 -803 -966 -1,207 -1,411EBITDA 517 413 389 403 903 781 1,137 881 930 792 1,685 2,018 2,018 2,678 15.2%Net Interest Expense 26 29 30 65 12 52 61 57 55 95 64 118 -7 -47Associate Income/(Loss) 0 0 42 -2 64 68 48 57 0 40 132 105 116 127JCE Income/(Loss) 28 41 0 0 0 0 0 0 69 0 0 0 0 0Profit Before Tax 398 285 227 169 616 461 729 546 683 396 1,077 1,275 920 1,348 2.8%Tax Expense -99 -64 -51 -38 -111 -110 -154 -120 -163 -84 -221 -274 -212 -330Minority Interest 0 0 0 0 0 0 0 0 0 0 0 0 0 0Reported NPAT 298 221 177 135 505 351 575 426 519 312 856 1,001 708 1,018 0.8%Net One-off's 12 37 7 16 12 -3 200 306 48 23 9 505 0 0Recurring NPAT 287 184 170 119 493 354 375 120 471 289 847 496 708 1,018 43.3%
EPS (Adj., diluted, RMB/Sh) 0.080 0.051 0.047 0.033 0.137 0.098 0.104 0.033 0.131 0.080 0.235 0.138 0.197 0.283 43.3%
YoY Growth %Sales 37% 40% 43% 27% 21% 32% 15% 14% 38% 34% 26% 14% 11% 9%Operating Profit -30% -51% -76% -77% 519% 533% -42% -119% -38% -76% 523% -65% 111% 116%EBIT -24% -32% -55% -51% 247% 224% 15% 27% -27% -53% 237% 19% -23% 56%Reported NPAT -30% -21% -41% -39% 186% 159% 14% 21% -26% -40% 174% 17% -29% 44%Recurring NPAT -33% -34% -41% -35% 190% 197% -24% -66% -32% -39% 193% -42% 43% 44%
MarginsGross Profit 34.4% 29.9% 28.2% 30.3% 34.6% 34.6% 34.0% 33.2% 32.1% 29.2% 34.6% 33.6% 33.4% 33.7%Operating Profit 4.8% 2.1% 0.8% 0.4% 4.2% 1.8% 2.1% -0.3% 3.4% 0.6% 3.0% 0.9% 1.7% 3.4%EBIT 5.6% 3.3% 1.8% 1.3% 5.1% 3.2% 5.1% 3.5% 4.4% 1.5% 4.1% 4.3% 3.0% 4.3%EBITDA 8.4% 6.4% 4.4% 5.0% 8.5% 7.3% 9.3% 7.2% 7.4% 4.7% 7.9% 8.2% 7.4% 9.1%Reported NPAT 4.8% 3.4% 2.0% 1.7% 4.7% 3.3% 4.7% 3.5% 4.1% 1.8% 4.0% 4.1% 2.6% 3.4%Recurring NPAT 4.7% 2.9% 1.9% 1.5% 4.6% 3.3% 3.1% 1.0% 3.7% 1.7% 4.0% 2.0% 2.6% 3.4%
SG&A/Sales -29.7% -27.8% -27.4% -29.9% -30.4% -32.8% -31.9% -33.5% -28.7% -28.6% -31.6% -32.7% -31.7% -30.3%Effective Tax Rate -25.0% -22.5% -22.4% -22.4% -18.0% -23.9% -21.2% -21.9% -23.9% -21.3% -20.5% -21.5% -23.0% -24.5%D&A/Sales -2.8% -3.1% -2.6% -3.7% -3.4% -4.1% -4.2% -3.7% -3.0% -3.1% -3.8% -3.9% -4.5% -4.8%
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 38
Want Want (0151.HK): Restructuring to bear fruit; maintain Buy
Source of opportunity
We maintain Buy on the stock as we continue to believe that Want Want
(WW) is one of the best positioned Staples stocks in terms of its access
to high growth categories and moderate pricing competition. We believe
that recent share price weakness due to concerns on escalating NZ milk
powder prices and weak topline demand is overdone. The company’s
hike in Hot Kid Milk prices by 5%-8% in October 2013 and yoghurt drink
market share gains strengthens our positive view.
In 2013E-2015E, we forecast 2yr sales CAGR of 18% and EPS CAGR of
24% driven by higher contribution of new products and price hikes. We
anticipate group OPM expansion from 19.2% to 21.7% due to: 1) NZ milk
price correction; 2) improving mix shift towards snack foods; and 3)
enhanced operating efficiency as Project Want Want Unite bears fruit.
Our revised TP of HK$13.90 (prior HK$12.50)–based on rolled forward
valuation and small changes to EPS–implies 37% upside potential.
Catalysts
We see 3 key catalysts for WW in 2014E/2015E: 1) Continued market share
gain for new products: WW’s yoghurt drink value market share increased
from 0.9% in Nov/Dec 2011 to 1.6% in Sept/Oct 2013, as per Nielsen.
Moreover, management notes that its banana milk products are doing well,
with total sales over RMB200mn in its first 9mths of launch in 2013. Our
market analysis suggests that the banana milk market could bring an
additional US$2.5bn sale to China’s flavored milk market, which is a
significant market opportunity for WW given its early mover advantage.
2) Price hike insulates 2014E margins: WW has increased its Hot Kid milk
prices by 5%-8% in October 2013 to combat the recent run in NZ milk
powder prices, reflective of its strong pricing power. Moreover, our Global
Macro Research team is expecting a correction of 25% in average NZ milk
powder spot prices in 2015E as global supply resurges on higher prices. We
expect this to benefit WW’s GPM as product prices tend to be downward
sticky. 3) Meaningful efficiency gains We compared 4 key sales productivity
metrics (sales per 1st tier distributor, sales per staff, sales per POS and sales
per household) with Tingyi and Hengan and found that WW ranked in either
2nd or 3rd position in all four measures. The Want Want Unite project
announced in 1H13 was launched to specifically address these inefficiencies
and could further margin upside for WW. Our -5%/-3%/+3% change in
2013E-2015E EPS reflects: 1) lower macro demand; 2) negative mix in rice
crackers for 2013E, offset by improving group margins in 2014E/2015E due
to better sales growth; 3) NZ milk powder correction, improving efficiency.
Valuation
We raise our 12-m TP for WW to HK$13.90 from HS$12.50 primarily
based on a roll forward of our valuation period from 2014E to average of
2014E/2015E. We value WW on 27.6X (unchanged), implying a 15% P/E
premium to the sector’s target average P/E multiple of 24X (unchanged)
due to its first quartile CROCI of 38% in 2014E relative to peers.
Key risks
Worse than expected execution of restructuring plan, significant slow-
down in sales, worse than expected hike in raw material prices.
Growth
Returns *
Multiple
Volatility Volatility
Multiple
Returns *
Growth
Investment Profile
Low High
Percentile 20th 40th 60th 80th 100th
* Returns = Return on Capital For a complete description of the investment
profile measures please refer to the
disclosure section of this document.
Want Want China Holdings (0151.HK)
Asia Pacific Consumer Peer Group Average
Key data Current
Price (HK$) 10.12
12 month price target (HK$) 13.90
Market cap (HK$ mn / US$ mn) 133,784.6 / 17,244.3
Foreign ownership (%) --
12/12 12/13E 12/14E 12/15E
EPS ($) New 0.04 0.05 0.06 0.07
EPS revision (%) 0.0 (4.6) (2.9) 3.3
EPS growth (%) 32.0 14.2 18.3 29.8
EPS (dil) ($) New 0.04 0.05 0.06 0.07
P/E (X) 28.7 27.3 23.1 17.8
P/B (X) 9.9 9.5 8.2 6.9
EV/EBITDA (X) 19.3 18.3 15.4 11.8
Dividend yield (%) 2.4 2.5 3.0 3.8
ROE (%) 37.9 37.2 38.3 42.3
CROCI (%) 38.2 36.8 37.7 41.7
19,500
20,500
21,500
22,500
23,500
24,500
25,500
10.0
10.5
11.0
11.5
12.0
12.5
13.0
Feb-13 May-13 Aug-13 Nov-13
Price performance chart
Want Want China Holdings (L) Hang Seng Index (R)
Share price performance (%) 3 month 6 month 12 month
Absolute (9.3) (2.3) (8.2)
Rel. to Hang Seng Index (4.4) (1.3) (1.2)
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 2/10/2014 close.
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 39
Want Want China Holdings: Summary financials
Profit model ($ mn) 12/12 12/13E 12/14E 12/15E Balance sheet ($ mn) 12/12 12/13E 12/14E 12/15E
Total revenue 3,358.7 3,902.2 4,589.3 5,394.6 Cash & equivalents 1,499.2 1,835.3 1,890.5 1,992.0
Cost of goods sold (2,030.6) (2,367.4) (2,797.7) (3,177.2) Accounts receivable 165.9 203.4 251.8 310.8
SG&A (664.0) (786.2) (905.2) (1,047.1) Inventory 460.8 543.8 650.2 747.2
R&D 0.0 0.0 0.0 0.0 Other current assets 141.9 141.9 141.9 141.9
Other operating profit/(expense) 46.4 64.2 77.1 93.1 Total current assets 2,267.9 2,724.4 2,934.5 3,191.9
EBITDA 798.4 914.4 1,081.5 1,401.2 Net PP&E 1,045.7 1,212.0 1,420.8 1,683.2
Depreciation & amortization (87.8) (101.7) (117.9) (137.7) Net intangibles 131.4 133.8 136.2 138.4
EBIT 710.5 812.8 963.5 1,263.5 Total investments 11.5 11.5 11.5 11.5
Interest income 51.6 60.0 68.0 70.0 Other long-term assets 4.6 4.6 4.7 4.8
Interest expense (13.8) (17.3) (19.5) (19.5) Total assets 3,461.1 4,086.4 4,507.7 5,029.9
Income/(loss) from uncons. subs. 0.0 0.0 0.0 0.0
Others 0.6 0.0 0.0 0.0 Accounts payable 231.4 263.3 303.5 336.0
Pretax profits 749.0 855.5 1,012.0 1,313.9 Short-term debt 350.0 50.0 50.0 50.0
Income tax (195.0) (222.7) (263.4) (342.0) Other current liabilities 599.3 680.2 774.6 860.4
Minorities (0.2) (0.2) (0.2) (0.3) Total current liabilities 1,180.7 993.5 1,128.1 1,246.4
Long-term debt 653.0 1,253.0 1,253.0 1,253.0
Net income pre-preferred dividends 553.8 632.6 748.3 971.6 Other long-term liabilities 23.9 22.7 21.5 20.5
Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 676.9 1,275.7 1,274.5 1,273.5
Net income (pre-exceptionals) 553.8 632.6 748.3 971.6 Total liabilities 1,857.5 2,269.2 2,402.7 2,519.9
Post-tax exceptionals 0.0 0.0 0.0 0.0
Net income 553.8 632.6 748.3 971.6 Preferred shares 0.0 0.0 0.0 0.0
Total common equity 1,595.5 1,808.9 2,096.5 2,501.2
EPS (basic, pre-except) ($) 0.04 0.05 0.06 0.07 Minority interest 8.1 8.3 8.5 8.9
EPS (basic, post-except) ($) 0.04 0.05 0.06 0.07
EPS (diluted, post-except) ($) 0.04 0.05 0.06 0.07 Total liabilities & equity 3,461.1 4,086.4 4,507.7 5,029.9
DPS ($) 0.03 0.03 0.04 0.05
Dividend payout ratio (%) 68.3 68.3 68.3 68.3 BVPS ($) 0.12 0.14 0.16 0.19
Free cash flow yield (%) 2.3 2.6 3.0 3.9
Growth & margins (%) 12/12 12/13E 12/14E 12/15E Ratios 12/12 12/13E 12/14E 12/15E
Sales growth 14.0 16.2 17.6 17.5 CROCI (%) 38.2 36.8 37.7 41.7
EBITDA growth 34.2 14.5 18.3 29.6 ROE (%) 37.9 37.2 38.3 42.3
EBIT growth 36.0 14.4 18.6 31.1 ROA (%) 16.8 16.8 17.4 20.4
Net income growth 32.0 14.2 18.3 29.8 ROACE (%) 51.9 50.3 50.9 56.0
EPS growth 32.0 14.2 18.3 29.8 Inventory days 78.3 77.4 77.9 80.3
Gross margin 39.5 39.3 39.0 41.1 Receivables days 17.7 17.3 18.1 19.0
EBITDA margin 23.8 23.4 23.6 26.0 Payable days 39.8 38.1 37.0 36.7
EBIT margin 21.2 20.8 21.0 23.4 Net debt/equity (%) (30.9) (29.3) (27.9) (27.5)
Interest cover - EBIT (X) NM NM NM NM
Cash flow statement ($ mn) 12/12 12/13E 12/14E 12/15E Valuation 12/12 12/13E 12/14E 12/15E
Net income pre-preferred dividends 553.8 632.6 748.3 971.6
D&A add-back 87.8 101.7 117.9 137.7 P/E (analyst) (X) 28.7 27.3 23.1 17.8
Minorities interests add-back 0.2 0.2 0.2 0.3 P/B (X) 9.9 9.5 8.2 6.9
Net (inc)/dec working capital (40.2) (7.6) (20.3) (37.6) EV/EBITDA (X) 19.3 18.3 15.4 11.8
Other operating cash flow 14.1 (0.1) (0.1) (0.1) EV/GCI (X) 8.4 8.0 6.9 5.8
Cash flow from operations 615.8 726.8 846.1 1,072.0 Dividend yield (%) 2.4 2.5 3.0 3.8
Capital expenditures (243.4) (270.4) (329.0) (402.4)
Acquisitions (0.4) 0.0 0.0 0.0
Divestitures 0.0 0.0 0.0 0.0
Others (0.2) 0.0 0.0 0.0
Cash flow from investments (244.0) (270.4) (329.0) (402.4)
Dividends paid (common & pref) (298.8) (419.1) (460.8) (566.9)
Inc/(dec) in debt (21.2) 300.0 0.0 0.0
Common stock issuance (repurchase) 8.2 0.0 0.0 0.0
Other financing cash flows 2.2 (1.2) (1.1) (1.1)
Cash flow from financing (309.6) (120.3) (461.9) (568.0)
Total cash flow 62.2 336.0 55.2 101.6 Note: Last actual year may include reported and estimated data.
Source: Company data, Goldman Sachs Research estimates.
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 40
NZ milk powder prices stabilizing
The 51% hike in NZ milk powder prices is likely to hurt WW’s 2H13 GP margin, which we
forecast to drop from 43% in 1H13 to 34% in 2H13. However, WW has raised prices for its
Hot Kid Milk products by 5%-8% in October 2013 and we expect this will help insulate
margins somewhat in 2014E. Moreover, our Global Macro Research team projects that
prices will fall back to US$3,600/ton (-25% YoY) as high demand is partially relieved from a
pick-up in domestic raw milk production in China.
Exhibit 59: Our Global Macro Research team expects NZ milk powder prices to remain
elevated through 2014E, but will fall by 25% in 2015E to US$3,600/ton
Historical and forecast NZ milk powder prices (US$/Ton)
Source: Global Dairy Trade, Goldman Sachs Global Investment Research.
Exhibit 60: We forecast that WW’s Dairy Beverage GPM in 2H13E will dip to 34% before
recovering to 36%/38% in 1H/2H 2014E as the company’s 5%-8% Hot Kid Milk price hike in
October 2013 takes effect Historical and forecast NZ Milk Price (LHS, US$/Ton) vs WW GPM (RHS, %)
Source: Company Data, Global Dairy Trade, Goldman Sachs Global Investment Research.
-
1,000
2,000
3,000
4,000
5,000
6,000
(USD/ton)
US$4800/Ton,
+3% YoY
US$3600/Ton
-25% YoY
2013 Avg.
US$4663/Ton,
+51% YoY
38%39%
33%33% 34%
38%
34% 35%34%
33%
36%
42% 43%
34%
36%
38%
30%
35%
40%
45%
50%
55%
60%
1500
2100
2700
3300
3900
4500
5100
NZ Milk Price, 6mths delay WW GPM %
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 41
Focus on initial products bearing fruit
Under the Want Want Unite project announced during 1H13 results, management put forth
as its primary focus to enhance the success rate of new product launches in the market. As
per our monitoring of the market, we believe that two products (Yoghurt drinks and
Banana milk) that WW launched in the past 1-2yrs have been delivering stand-out results.
Firstly, in Yoghurt Drinks, while still a small category for WW, its market share as
monitored by Nielsen has nearly doubled since the launch of been noticeably improving
since launch of its Oligo enhanced prebiotic yoghurt drinks in 1H12 (see Exhibit 61).
Moreover, we have noticed that the ASP for the product has risen by 8.9% in Sept/Oct 2013
YoY, outperforming the market 3.9%.
Exhibit 61: Want Want yoghurt drink market share has
close to doubled in the past 22 months
Exhibit 62: WW has also been able to realize price hikes
above market
Source: Nielsen.
Source: Nielsen.
Banana milk
Another stand-out product that the company launched in 1H13 is the WW Banana Milk. We
note that there is already a high per capita consumption of fruit flavored milk in China.
However, we believe that if this flavor could help lift per capita consumption from
2.5litres/pp to Korea’s 3.0 litres/pp, then the incremental sales could be a sizeable US$2.5bn,
thereby providing a significant opportunity for WW given its early mover advantage.
0.91.0
1.11.1 1.2 1.2
1.31.3 1.3
1.3
1.51.6
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
ND 11 JF 12 MA 12 MJ 12 JA 12 SO 12 ND 12 JF 13 MA 13 MJ 13 JA 13 SO 13
Want Want Yoghurt Drink Value Mkt Share (%)
8.26
8.83
12.26
13.80
6.00
7.00
8.00
9.00
10.00
11.00
12.00
13.00
14.00
15.00
ND 11 JF 12 MA 12 MJ 12 JA 12 SO 12 ND 12 JF 13 MA 13 MJ 13 JA 13 SO 13
Market Average ASP (RMB/Kg) Want Want ASP (Rmb/Kg)
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 42
Exhibit 63: China already has a relatively high per capita
consumption of fruit juice flavored milk beverage, but
South Korea has the highest
Exhibit 64: We estimate that the popularization of
banana milk can bring an additional US$2.5bn sales to
China’s flavored milk market Current flavored milk market of US$13.4bn sales as per
Euromonitor, additional US$2.5bn sales incremental from
banana milk as per GS estimates
Source: Euromonitor.
Source: Euromonitor, Goldman Sachs Global Investment Research.
Significant room for sales productivity improvement ahead
We focus on the WW Unite project to lift overall sales efficiency. Below, we have compared
several key indicators of efficiency vs WW’s peers Tingyi and Hengan. Tingyi leads in all
the four KPIs: 1) sales per first tier distributor; 2) sales per staff; 3) sales per point of sale
(POS); 4) sales per household. For example, Tingyi has the highest staff productivity where
each staff generated RMB731K in revenues for the company in 2012, while for Want Want,
each staff only generated RMB378K of revenues, 48% lower. This could be partially
explained by Tingyi’s more automated operations where the entire instant noodles line
requires only to be operated by a small number of ground staff. In comparison, WW’s rice
crackers lines are still manual labor intensive and the company is looking to improve this
by enhanced automation.
Exhibit 65: Comparison of sales per first tier distributors –
Tingyi, Hengan, WW (2012)
Exhibit 66: Comparison of sales per staff – Tingyi,
Hengan, WW (2012)
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
2.5
0.5
3.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
China Japan South Korea
Per capita consumption of flavored milk drinks with fruit juice (Ltrs/pp)
1.7ltrs/pp is banana milk US$13.4bn
US$15.9bn
9,360
4,859
2,645
‐
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Tingyi Hengan WW
Sales per first tier distributor (Rmb'000)
731
441 378
‐
100
200
300
400
500
600
700
800
Tingyi Hengan WW
Sales per staff (Rmb'000)
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 43
Exhibit 67: Comparison of sales per Point Of Sale (POS) –
Tingyi, Hengan, WW (2012)
Exhibit 68: Comparison of sales per household – Tingyi,
Hengan, WW (2012)
Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.
Interestingly, if we drill down into the RMB171 per year household spend on total Want
Want products (see Exhibit 69) at ex-factory level, it would equate to RMB228 per year at
retail sales level assuming a 25% profit for distributors/retailers. This equates to RMB4.4
retail spend per week, or just above 2X 125ml Hot Kid Milk. In comparison, it appears that
most households consume up to 3.7 units of Tingyi’s RTD tea or instant noodles every
week vs just 1.7 units of UPC.
Exhibit 69: Units consumed by each household per week
Source: Company data, Kantar WorldPanel, Goldman Sachs Global Investment Research.
48,362
14,529
35,266
‐
10,000
20,000
30,000
40,000
50,000
60,000
Tingyi Hengan WW
Sales per POS controlled by company (Rmb'000)
392
125
171
‐
50
100
150
200
250
300
350
400
450
Tingyi Hengan WW
Sales per household (Rmb/household)
Tingyi UPC Hengan Want Want
Household spend p.a. : ex‐factory (Rmb) 392 181 125 171
Household spend p.a. : retail (Rmb) 522.83 241.87 166.04 227.52
Household spend per week: retail (Rmb) 10.05 4.65 3.19 4.38
Per unit price* 2.75 2.75 11.5 2.00
Estimated units consumed per week 3.7 1.7 0.3 2.2
Per unit price:
2) We assume RMB11.5/unit for Hengan, which is the retail price of an 18 piece Space‐7 sanitary napkin pack.
3) We assume RMB2.00/unit for Want Want, which is the retail price of Hot Kid Milk.
1) We assume RMB2.75/unit for Tingyi and UPC, which is the average of an RMB2.5/unit RTD tea drink and an
RMB3.0/unit instant noodles.
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 44
Valuation and earnings revisions
We value WW at 27.6X average of 2014E/2015E P/E. This implies a 15% premium on our target
Staples sector average of 24.0X due to the company’s first quartile CROCI relative to its Staples
peers. We lift WW’s TP from HK$12.50 to HK$13.90 on: 1) roll forward of the valuation period
from 2014E to average 2014/15E; and 2) -5%/-3%/+3% change to EPS due to softer macro
demand and higher raw materials cost pressure than previously anticipated in 2013E/2014E
while slightly higher GPM due to forecast correction in NZ milk powder prices in 2015E.
The company is currently trading at 22.2X 12-m fwd P/E. This is 1% discount to Staples
sector average of 22.5X, vs historical premium of 4%. We believe that WW should trade at
a premium to its Staples peers given first quartile CROCI of 37% in 2013E. Moreover, we
expect this premium to extend further as WW’s EPS CAGR accelerates to 24% in 2013E-
2015E from 14% in 2013E.
Exhibit 70: WW is trading at 22.2X 12-m fwd P/E, 1%
discount to Staples average vs historical 4% premium WW P/E premium/discount to sector
Exhibit 71: WW is trading at 22.2X 12-m fwd P/E vs
sector average of 22.5X WW historical P/E vs. sector P/E
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
Exhibit 72: WW is trading at 22.2X 12-m fwd P/E vs
historical average of 23.4X WW fwd 12-m P/E
Exhibit 73: We expect WW to re-rate as its CROCI outlook
improves WW EV/GCI vs. CROCI
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
-9%
21%
-1%
-20%
-10%
0%
10%
20%
30%
Ma
y-0
8
Sep
-08
Ja
n-0
9
Ma
y-0
9
Sep
-09
Ja
n-1
0
Ma
y-1
0
Sep
-10
Ja
n-1
1
Ma
y-1
1
Sep
-11
Ja
n-1
2
Ma
y-1
2
Sep
-12
Ja
n-1
3
Ma
y-1
3
Sep
-13
Ja
n-1
4
Want Want historical premium/discount to Staples sector
average (%)
10.0
15.0
20.0
25.0
30.0
35.0
May-0
8
Sep
-08
Ja
n-0
9
May-0
9
Sep
-09
Ja
n-1
0
May-1
0
Sep
-10
Ja
n-1
1
May-1
1
Sep
-11
Ja
n-1
2
May-1
2
Sep
-12
Ja
n-1
3
May-1
3
Sep
-13
Ja
n-1
4
Want Want historical P/E
Staples sector historical P/E
29.1
22.2
10
15
20
25
30
35
Jul-0
8
Oct
-08
Jan-
09
Apr
-09
Jul-0
9
Oct
-09
Jan-
10
Apr
-10
Jul-1
0
Oct
-10
Jan-
11
Apr
-11
Jul-1
1
Oct
-11
Jan-
12
Apr
-12
Jul-1
2
Oct
-12
Jan-
13
Apr
-13
Jul-1
3
Oct
-13
Jan-
14
Fwd 12m P/E
+ 1 STDV
+ 2 STDV
- 1 STDV
- 2 STDV
Average = 23.4x
30%
31%
32%
33%
34%
35%
36%
37%
38%
39%
2
3
4
5
6
7
8
9
10
11
12
Ma
r-0
8
Ju
l-0
8
No
v-0
8
Ma
r-0
9
Ju
l-0
9
No
v-0
9
Ma
r-1
0
Ju
l-1
0
No
v-1
0
Ma
r-1
1
Ju
l-1
1
No
v-1
1
Ma
r-1
2
Ju
l-1
2
No
v-1
2
Ma
r-1
3
Ju
l-1
3
No
v-1
3
EV/GCI CROCI
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 45
Summary financials
Exhibit 74: WW Summary Financials
Source: Company data, Goldman Sachs Global Investment Research.
Want Want (151.HK)USD mnDivisional P/L 1H11 2H11 1H12 2H12 1H13 2H13E 2011 2012 2013E 2014E 2015E 2013-2015E 2Yr CAGR
RevenuesRice crackers 278.6 538.2 277.2 534.9 320.1 618.4 816.8 812.1 938.5 1,051.8 1,193.6 13%Dairy Products and Beverages 623.4 770.3 796.2 912.4 942.2 1,109.1 1,393.6 1,708.6 2,051.2 2,507.4 3,026.8 21%Snack foods 369.3 353.7 450.3 379.5 488.2 415.2 723.0 829.8 903.4 1,019.5 1,161.7 13%Others 8.2 4.9 3.8 4.4 4.0 5.1 13.1 8.2 9.1 10.6 12.4 17%Total 1,279.5 1,667.0 1,527.5 1,831.1 1,754.5 2,147.8 2,946.5 3,358.7 3,902.2 4,589.3 5,394.6 18%
Operating IncomeRice crackers 35.9 124.6 34.4 111.8 37.8 117.0 160.5 146.3 154.9 187.2 216.1 18%Dairy Products and Beverages 126.7 147.9 187.7 246.3 272.8 227.8 274.6 434.0 500.6 581.8 817.3 28%Snack foods 62.9 69.8 101.9 82.4 116.9 99.9 132.7 184.3 216.8 260.0 302.1 18%Others -0.5 0.5 -0.4 -0.1 0.6 -1.2 0.0 -0.5 -0.6 -0.7 -0.7 10%Segment Total 225.1 342.7 323.7 440.4 428.1 443.6 567.8 764.1 871.6 1,028.3 1,334.7 24%Unallocated -21.5 -23.9 -25.9 -27.7 -30.8 -28.1 -45.3 -53.5 -58.9 -64.8 -71.3Group EBIT 203.6 318.9 297.8 412.7 397.3 415.5 522.5 710.5 812.8 963.5 1,263.5 25%
YoY Growth %
RevenuesRice crackers 18% 37% 0% -1% 15% 16% 30% -1% 16% 12% 13%Dairy Products and Beverages 29% 32% 28% 18% 18% 22% 31% 23% 20% 22% 21%Snack foods 35% 37% 22% 7% 8% 9% 36% 15% 9% 13% 14%Others -24% -20% -54% -10% 6% 15% -23% -37% 11% 17% 17%Total 28% 34% 19% 10% 15% 17% 31% 14% 16% 18% 18%
Operating IncomeRice crackers -29% 44% -4% -10% 10% 5% 17% -9% 6% 21% 15%Dairy Products and Beverages 42% 26% 48% 67% 45% -8% 33% 58% 15% 16% 40%Snack foods -12% 27% 62% 18% 15% 21% 5% 39% 18% 20% 16%Others -157% -178% -8% -125% -236% 915% n.a. n.a. n.a. n.a. n.a.Total 6% 32% 44% 28% 32% 1% 21% 35% 14% 18% 30%
Margins
GP MarginRice crackers 32.1% 40.4% 35.2% 41.0% 35.6% 40.0% 37.6% 39.0% 38.5% 39.5% 39.5%Dairy Products and Beverages 33.8% 33.1% 36.4% 42.2% 42.5% 34.2% 33.4% 39.5% 38.0% 37.0% 41.0%Snack foods 32.8% 36.3% 39.6% 41.3% 42.7% 43.4% 34.5% 40.4% 43.0% 44.0% 44.0%Others 8.0% 44.6% 15.8% 14.8% 21.4% 92.5% 21.7% 15.3% 61.2% -1.7% -50.1%Total 33.0% 36.2% 37.1% 41.6% 41.2% 37.8% 34.8% 39.5% 39.3% 39.0% 41.1%
EBIT MarginRice crackers 12.9% 23.1% 12.4% 20.9% 11.8% 18.9% 19.6% 18.0% 16.5% 17.8% 18.1%Dairy Products and Beverages 20.3% 19.2% 23.6% 27.0% 28.9% 20.5% 19.7% 25.4% 24.4% 23.2% 27.0%Snack foods 17.0% 19.7% 22.6% 21.7% 23.9% 24.1% 18.4% 22.2% 24.0% 25.5% 26.0%Others -5.8% 9.7% -11.5% -2.7% 14.7% -23.4% 0.0% -6.7% -6.6% -6.2% -5.9%Total 17.6% 20.6% 21.2% 24.0% 24.4% 20.7% 19.3% 22.7% 22.3% 22.4% 24.7%
Consolidated P&L 1H11 2H11 1H12 2H12 1H13 2H13E 2011 2012 2013E 2014E 2015E 2013-2015E 2Yr CAGRSales 1,279.5 1,667.0 1,527.5 1,831.1 1,754.5 2,147.8 2,946.5 3,358.7 3,902.2 4,589.3 5,394.6 18%COGS -857.5 -1,064.1 -961.2 -1,069.4 -1,030.8 -1,336.7 -1,921.6 -2,030.6 -2,367.4 -2,797.7 -3,177.2Gross Profit 421.9 602.9 566.3 761.8 723.7 811.1 1,024.9 1,328.1 1,534.8 1,791.6 2,217.4 20%SG&A -248.9 -314.8 -292.2 -371.8 -367.9 -418.3 -563.7 -664.0 -786.2 -905.2 -1,047.1Operating Profit 173.0 288.1 274.1 389.9 355.7 392.8 461.1 664.1 748.6 886.4 1,170.4 25%Other income/expenses 30.6 30.7 23.7 22.8 41.5 22.6 61.3 46.4 64.2 77.1 93.1Reported EBIT 203.6 318.9 297.8 412.7 397.3 415.5 522.5 710.5 812.8 963.5 1,263.5 25%D&A -35.5 -34.8 -42.3 -45.5 -48.3 -53.4 -72.3 -87.8 -101.7 -117.9 -137.7EBITDA 239.1 353.7 340.1 458.2 445.6 468.8 594.7 798.4 914.4 1,081.5 1,401.2 24%Net finance costs 5.5 10.2 19.8 18.0 21.9 20.8 15.7 37.8 42.7 48.5 50.5Other non-operating income (expense 0.0 0.1 0.0 0.7 0.6 -0.6 0.1 0.6 0.0 0.0 0.0Pretax income 209.1 329.1 317.6 431.4 419.9 435.6 538.2 749.0 855.5 1,012.0 1,313.9 24%Provisions for taxes -42.0 -76.6 -86.6 -108.4 -112.4 -110.3 -118.7 -195.0 -222.7 -263.4 -342.0Minority interest (I/S item) 0.0 -0.1 -0.1 0.0 0.2 -0.4 -0.1 -0.2 -0.2 -0.2 -0.3Reported NPAT 167.0 252.4 230.9 322.9 307.6 325.0 419.5 553.8 632.6 748.3 971.6 24%
EPS - Diluted (US$/Sh) 0.013 0.019 0.017 0.024 0.023 0.025 0.032 0.042 0.048 0.057 0.073
YoY Growth %Sales 27.6% 34.3% 19.4% 9.8% 14.9% 17.3% 31.3% 14.0% 16.2% 17.6% 17.5%GP 10.5% 30.2% 34.2% 26.3% 27.8% 6.5% 21.3% 29.6% 15.6% 16.7% 23.8%SG&A 21.8% 30.0% 17.4% 18.1% 25.9% 12.5% 26.2% 17.8% 18.4% 15.1% 15.7%OP -2.4% 30.5% 58.5% 35.3% 29.8% 0.7% 15.9% 44.0% 12.7% 18.4% 32.0%EBIT 4.2% 30.8% 46.3% 29.4% 33.4% 0.7% 19.0% 36.0% 14.4% 18.6% 31.1%NPAT 3.6% 28.1% 38.2% 27.9% 33.2% 0.6% 17.0% 32.0% 14.2% 18.3% 29.8%
MarginsGP 33.0% 36.2% 37.07% 41.6% 41.2% 37.8% 34.8% 39.5% 39.3% 39.0% 41.1%EBIT 15.9% 19.1% 19.5% 22.5% 22.6% 19.3% 17.7% 21.2% 20.8% 21.0% 23.4%OP 13.5% 17.3% 17.9% 21.3% 20.3% 18.3% 15.6% 19.8% 19.2% 19.3% 21.7%NPAT 13.1% 15.1% 15.1% 17.6% 17.5% 15.1% 14.2% 16.5% 16.2% 16.3% 18.0%
-11.1% -12.0% -12.5% -11.5%SG&A/Sales -19.5% -18.9% -19.1% -20.3% -21.0% -19.5% -19.1% -19.8% -20.1% -19.7% -19.4%Effective tax rate (%) -20% -23% -27% -25% -27% -25% 22% 26% 26% 26% 26%
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 46
Hengan (1044.HK): Sanitary napkins feel the pressure; maintain Sell
Source of opportunity
Despite the stock’s recent pull-back, we believe that the market is still too
optimistic on the competitive risks confronting Hengan in 2014E/2015E. In
addition to tissues and diapers, the sanitary napkins market—which
accounts for over 50% of Hengan’s group OP over 2013E-2015E— is
witnessing increasing competitive pressure. Following Unicharm’s
upgrade of its product quality in 1H13 which Hengan quickly matched
without hiking prices, Kimberly Clark, which grew diaper sales by 35% yoy
in 2013, staged a major re-launch of its feminine care products in 4Q13.
Kimberly Clark recently re-launched its premium U by Kotex portfolio,
which targets the same audience as Hengan’s Space-7. We are currently
forecasting Sanitary Napkins for Hengan to still see some margin
improvement from 43.1% in 2013E to 44.5% by 2015E. However, if
competition does mount, there could be downside risk to our forecasts.
We forecast 14% 2yr sales CAGR and 13% EPS CAGR for Hengan, as we
expect the group OPM to be relatively flat. Our revised TP of HK$82.90
implies 1% potential downside. Maintain Sell. We revise our 2013E-2015E
earnings by +4%/-4%/-5% on lower sales growth but better margins in
2013E before deteriorating in 2014E/2015E. Our estimates are now -12%/-
10% vs Bloomberg consensus EPS in 2014/2015.
Catalyst
Our recently updated China Tissue Industry supply-demand model
suggests that excess capacity will escalate in 2014E/2015E. For the top 4
competitors (Hengan, APP, Vinda, Zhongshun) that have deeper pockets
to compete, total announced capacity additions, as per CNHPIA, will
more than double from 650K tons in 2013 to 1.35mn tons in 2014. As
such, excess capacity is likely to reach 2.9mn tons in 2014 vs just 1.6mn
in 2011. For Hengan, management noted during its recent pre-results
black-out call that it may increase its production of OEM tissues (which
is at lower margins) and/or begin discounting its primary brand Heartex
to combat competition. While some investors has previously expected
falling pulp prices to provide some relief, GS LatAm Paper analyst
Marcelo Aguiar has a constructive view on pulp prices in 2014E/2015E vs
the street, which is negative for Hengan. As for Diapers, we believe that
a slowdown in the company’s push into mother/baby stores (now 10K
stores vs market 55K) may be conservative, in our view, and will hamper
Hengan’s long-term growth as mother/baby stores continue to take
share from modern trade.
Valuation
We value the stock at 22.8X (unchanged) average 2014E/2015E P/E
(previously 2014E) as we apply a net 5% discount to our target staples
sector P/E average of 24.0X. The net 5% discount is calculated by a 15%
premium for Hengan’s 1st quartile CROCI, offset by a 20% discount
given its 4th quartile 2-yr EPS growth relative to peers.
Key risks
Upside risks: Better than expected top-line growth and margins. Higher
than expected fall in pulp prices benefiting Hengan’s margins.
Growth
Returns *
Multiple
Volatility Volatility
Multiple
Returns *
Growth
Investment Profile
Low High
Percentile 20th 40th 60th 80th 100th
* Returns = Return on Capital For a complete description of the investment
profile measures please refer to the
disclosure section of this document.
Hengan International (1044.HK)
Asia Pacific Consumer Peer Group Average
Key data Current
Price (HK$) 83.70
12 month price target (HK$) 82.90
Market cap (HK$ mn / US$ mn) 102,867.3 / 13,259.2
Foreign ownership (%) --
12/12 12/13E 12/14E 12/15E
EPS (HK$) New 2.86 3.14 3.29 3.98
EPS revision (%) 0.0 4.2 (4.2) (4.9)
EPS growth (%) 32.7 9.6 5.0 20.9
EPS (dil) (HK$) New 2.86 3.14 3.29 3.98
P/E (X) 25.8 26.7 25.4 21.0
P/B (X) 6.5 6.5 6.1 5.4
EV/EBITDA (X) 18.3 18.6 17.4 14.2
Dividend yield (%) 2.3 2.2 2.3 2.8
ROE (%) 26.6 25.9 24.8 27.1
CROCI (%) 25.9 24.4 23.1 25.0
50
55
60
65
70
75
80
70
75
80
85
90
95
100
Feb-13 May-13 Aug-13 Nov-13
Price performance chart
Hengan International (L) MSCI China (R)
Share price performance (%) 3 month 6 month 12 month
Absolute (6.7) (5.0) 3.5
Rel. to MSCI China (1.3) (7.9) 14.1
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 2/10/2014 close.
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 47
Hengan International: Summary financials
Profit model (HK$ mn) 12/12 12/13E 12/14E 12/15E Balance sheet (HK$ mn) 12/12 12/13E 12/14E 12/15E
Total revenue 18,524.2 21,100.4 24,085.1 27,615.1 Cash & equivalents 9,544.4 14,539.2 13,630.8 15,325.5
Cost of goods sold (10,209.0) (11,609.3) (13,347.2) (14,786.1) Accounts receivable 1,870.5 2,531.6 2,625.1 3,438.7
SG&A (4,139.2) (4,963.2) (5,766.4) (6,787.6) Inventory 3,830.5 3,925.8 5,064.8 4,976.0
R&D 0.0 0.0 0.0 0.0 Other current assets 946.0 946.0 946.0 946.0
Other operating profit/(expense) 326.9 350.1 227.0 291.5 Total current assets 16,191.3 21,942.5 22,266.7 24,686.2
EBITDA 5,063.7 5,592.5 6,034.8 7,267.8 Net PP&E 10,149.7 10,985.0 12,163.4 12,576.7
Depreciation & amortization (560.8) (714.6) (836.3) (934.8) Net intangibles 590.8 580.4 570.1 559.7
EBIT 4,502.9 4,878.0 5,198.5 6,332.9 Total investments 0.0 0.0 0.0 0.0
Interest income 275.6 497.5 546.0 546.0 Other long-term assets 2,273.0 2,280.6 2,288.6 2,296.9
Interest expense (239.6) (268.4) (312.2) (312.2) Total assets 29,204.8 35,788.6 37,288.6 40,119.5
Income/(loss) from uncons. subs. 0.0 0.0 0.0 0.0
Others 0.0 0.0 0.0 0.0 Accounts payable 1,803.1 2,323.1 2,347.6 2,745.5
Pretax profits 4,539.0 5,107.1 5,432.4 6,566.8 Short-term debt 7,440.6 8,589.7 8,589.7 8,589.7
Income tax (1,001.2) (1,225.7) (1,358.1) (1,641.7) Other current liabilities 1,577.9 1,602.3 1,821.7 2,070.3
Minorities (19.0) (20.9) (21.9) (26.5) Total current liabilities 10,821.5 12,515.1 12,759.0 13,405.6
Long-term debt 3,787.2 7,019.1 7,019.1 7,019.1
Net income pre-preferred dividends 3,518.7 3,860.5 4,052.4 4,898.6 Other long-term liabilities 187.9 178.5 169.6 161.1
Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 3,975.1 7,197.6 7,188.6 7,180.2
Net income (pre-exceptionals) 3,518.7 3,860.5 4,052.4 4,898.6 Total liabilities 14,796.6 19,712.7 19,947.6 20,585.7
Post-tax exceptionals 0.0 0.0 0.0 0.0
Net income 3,518.7 3,860.5 4,052.4 4,898.6 Preferred shares 0.0 0.0 0.0 0.0
Total common equity 14,078.2 15,725.0 16,968.2 19,134.5
EPS (basic, pre-except) (HK$) 2.86 3.14 3.29 3.98 Minority interest 330.0 350.9 372.8 399.3
EPS (basic, post-except) (HK$) 2.86 3.14 3.29 3.98
EPS (diluted, post-except) (HK$) 2.86 3.14 3.29 3.98 Total liabilities & equity 29,204.8 35,788.6 37,288.6 40,119.5
DPS (HK$) 1.70 1.86 1.95 2.36
Dividend payout ratio (%) 59.4 59.4 59.4 59.4 BVPS (HK$) 11.45 12.78 13.78 15.54
Free cash flow yield (%) 0.5 2.8 1.9 4.3
Growth & margins (%) 12/12 12/13E 12/14E 12/15E Ratios 12/12 12/13E 12/14E 12/15E
Sales growth 8.6 13.9 14.1 14.7 CROCI (%) 25.9 24.4 23.1 25.0
EBITDA growth 40.9 10.4 7.9 20.4 ROE (%) 26.6 25.9 24.8 27.1
EBIT growth 42.9 8.3 6.6 21.8 ROA (%) 13.4 11.9 11.1 12.7
Net income growth 32.8 9.7 5.0 20.9 ROACE (%) 25.3 22.3 21.4 24.3
EPS growth 32.6 9.6 4.9 20.9 Inventory days 120.9 121.9 122.9 123.9
Gross margin 44.9 45.0 44.6 46.5 Receivables days 37.1 38.1 39.1 40.1
EBITDA margin 27.3 26.5 25.1 26.3 Payable days 65.9 64.9 63.9 62.9
EBIT margin 24.3 23.1 21.6 22.9 Net debt/equity (%) 11.7 6.7 11.4 1.5
Interest cover - EBIT (X) NM NM NM NM
Cash flow statement (HK$ mn) 12/12 12/13E 12/14E 12/15E Valuation 12/12 12/13E 12/14E 12/15E
Net income pre-preferred dividends 3,518.7 3,860.5 4,052.4 4,898.6
D&A add-back 560.8 714.6 836.3 934.8 P/E (analyst) (X) 25.8 26.7 25.4 21.0
Minorities interests add-back 19.0 20.9 21.9 26.5 P/B (X) 6.5 6.5 6.1 5.4
Net (inc)/dec working capital (1,156.7) (211.9) (988.6) (78.2) EV/EBITDA (X) 18.3 18.6 17.4 14.2
Other operating cash flow 14.5 35.9 35.6 35.2 EV/GCI (X) 5.3 5.4 4.7 4.4
Cash flow from operations 2,956.2 4,419.9 3,957.4 5,816.8 Dividend yield (%) 2.3 2.2 2.3 2.8
Capital expenditures (2,468.9) (1,582.5) (2,047.2) (1,380.8)
Acquisitions 0.0 0.0 0.0 0.0
Divestitures 0.0 0.0 0.0 0.0
Others (524.4) (3,000.0) 0.0 0.0
Cash flow from investments (2,993.3) (4,582.5) (2,047.2) (1,380.8)
Dividends paid (common & pref) (1,843.5) (2,214.3) (2,809.7) (2,732.8)
Inc/(dec) in debt 4,000.8 4,381.0 0.0 0.0
Common stock issuance (repurchase) 0.5 0.0 0.0 0.0
Other financing cash flows (834.5) 2,990.6 (8.9) (8.5)
Cash flow from financing 1,323.3 5,157.4 (2,818.6) (2,741.3)
Total cash flow 1,286.2 4,994.8 (908.4) 1,694.7 Note: Last actual year may include reported and estimated data.
Source: Company data, Goldman Sachs Research estimates.
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 48
Tissue oversupply to deteriorate further in FY14E/FY15E
We expect margin pressure for Hengan’s tissue segment to increase significantly in 2014.
The key reason is that industry supply will accelerate in 2014, driving further deterioration
of the oversupply situation in China. More specifically, the announced capacity for the top 4
competitors (Hengan, APP, Vinda and Zhongshun) as per CNHPIA is expected to double
from 650K tons in 2013 to 1.35mn tons of new capacity in 2014. For the whole market, we
are expecting c.net 1mn tons of new capacity in 2014E after accounting for elimination of
400K tons of substandard capacity from the market. This will take the market to a total of
2.9mn tons of excess capacity vs just 1.6mn tons in 2011. We expect that the oversupply
will be carried through to 2015E as the pipeline of capacity additions continues.
Exhibit 75: Latest China S/D model suggests widening excess capacity
Source: CNHPIA, Company data, Goldman Sachs Global Investment Research.
6.26.9
7.78.7
9.610.4
5.2 5.8
6.3 6.6 7.3
8.0
4.75.3 5.6
6.16.8
7.4
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
2010 2011 2012 2013E 2014E 2015E
Estimated Industry Capacity Estimated Industry Production
Estimated Industry Demand
1.6mn tons
excess capacity
1.2mn tons/18%
over supply
1.6mn tons/20%
over supply
(mn tons)
2.9mn tons
excess capacity
3.0mn tons
excess capacity
(mn tons)
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 49
Exhibit 76: We forecast another 960K tons of new tissue capacity to come on board in
2014E GS Detailed China Tissue S/D model
Source: CNHPIA, Company data, Goldman Sachs Global Investment Research.
On the ground evidence of increasing price pressure, and in-particular for facial tissues
(c.60-65% of Hengan’s tissue segment sales) are mounting. The latest Nielsen data shows
that while the facial tissue segment continues to experience high volume growth, the
industry average ASP has declined 5.7% (the lowest among our monitored staples
categories) in the past 12 months (Exhibit 78).
Exhibit 77: Facial tissue segment growth remains high as
consumer trade-up occurs. But intensifying erosion is
leading to worsening price discounts Nielsen’s facial tissue category rolling 12mths value, ASP,
volume growth yoy
Exhibit 78: Facial tissue ASP erosion is one of the worst
among Staples in 2013
Source: Nielsen.
Source: Nielsen.
Consequently, we forecast Tissue 2-yr sales CAGR of 13% in 2013E-2015E and OP margin in
2014E to erode from 12.1% in 2013E to just 8.4% in 2014E. This reflects the company’s
strategies to potentially: 1) increase higher volumes of OEM, which we believe will be at
lower margins to its current branded portfolio; and 2) begin discounting on its main
Heartex/Mind Upon Mind brand. We expect the OP margin to rebound back to 9.9% in
2015E as the company enjoys the benefits of lower pulp prices out of South America.
Supply (mn tons) 2010 2011 2012 2013E 2014E 2015EOpening capacity 6.08 6.17 6.86 7.73 8.68 9.64 Add: New capacity 0.41 0.88 1.27 1.35 1.36 1.20 Less: Retirement -0.32 -0.19 -0.40 -0.40 -0.40 -0.40 Net capacity 6.17 6.86 7.73 8.68 9.64 10.43 Utilization 85.0% 85.0% 80.0% 80.0% 80.0% 80.0%Total Production 5.25 5.82 6.27 6.56 7.33 8.03 ...New Capacity 0.68 0.87 0.95 0.96 0.80
DemandPer capita consumption (kg) 3.48 3.90 4.20 4.49 4.94 5.39 ...yoy growth 12% 8% 7% 10% 9%China population (mn) 1,340 1,347 1,354 1,361 1,367 1,374 Total demand (mn tons) 4.66 5.25 5.69 6.11 6.76 7.40 ...New demand 0.59 0.43 0.43 0.65 0.65
Over/(Under) Capacity 1.51 1.60 2.04 2.56 2.88 3.03 As a % of Net Capacity 24% 23% 26% 30% 30% 29%
(10.0)
(5.0)
0.0
5.0
10.0
15.0
20.0
25.0
Facial Tissue Value Growth (%) ASP Growth (%)
Volume Growth (%)
(5.7)
(0.2)
3.2
8.5
(8.0)
(6.0)
(4.0)
(2.0)
0.0
2.0
4.0
6.0
8.0
10.0
Jan‐13 Mar‐13 May‐13 Jul‐13 Sep‐13 Nov‐13
Rolling 12mths ASP growth YoY (%)
Facial Tissue Bathroom Tissue Diaper Sanitary Protection
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 50
Diapers – structural disadvantage in channel will continue to hurt
Hengan’s competitive position in diapers is structurally challenged in our view. Admittedly,
the industry growth will be aided by increasing per capita penetration and the recent
loosening of the one-child policy. However, we think Hengan’s ability to capitalize on this
growth opportunity will be hampered by the fact that it: 1) does not have a quality
advantage over peers that are priced similarly; 2) is a late entrant into new-found sales
channels (e-commerce and mother/baby stores) that are taking share from traditional
supermarkets/hypermarkets. As seen in the latest Nielsen market share, Hengan’s market
share has fallen from close to 20% in March/April 2009 to 11.9% in September/October
2013. While Hengan has been working hard to premiumize its products via quality
upgrades, it remains in more mass market price points, and does not have a successful
premium product offering to capture the customer trading up. In comparison, US
competitor Kimberly Clark has recently launched a super-premium product to complement
its more mainstream price-point products and has been taking market share.
Exhibit 79: Hengan continues to lose market share in
Diapers, while Kimberly Clark has been gaining share Nielsen Diaper category value market share (%)
Exhibit 80: Hengan’s diapers’ ASP has been improving as
upgraded Super-Absorbent series improves in
contribution Nielsen Diaper category ASP trend (RMB/unit)
Source: Nielsen.
Source: Nielsen.
On the increasing importance of e-commerce and mother/baby store channels, i.e. where
Hengan is typically not strong, the two channels made up for 50.2% of the market in May
2013, according to Kantar WorldPanel vs 43.9% a year ago. We understand that these two
channels combined are still low single digits of Hengan’s diaper sales. Hengan entered into
10K mother/baby stores in 2H13 vs a total market of c.55K stores. However, these stores
will generate an initial loss as the entry expenses are now high given the proven retail
format. Moreover, in order to fight for shelf space, Hengan will need to squeeze a
competitor off the shelves and the mother/baby stores are generally unwilling to do that
unless they secure very favorable terms from Hengan, which will hurt Hengan’s diaper
margins. In what may be reflective of the company’s unwillingness to spend, it has pulled
back on its expansion plans in the mother/baby store channel, to a more gradual progress.
We believe that this could affect the company’s longer term top-line growth.
11.9%
36.6%
15.5%
11.5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
MA 10
MJ 1
0
JA 10
SO 10
ND 10
JF 11
MA 11
MJ 1
1
JA 11
SO 11
ND 11
JF12
MA12
MJ12
JA12
SO12
ND12
JF13
MA13
MJ13
JA13
SO13
Value M
kt Share (%)
KIMBERLY CLARK PROCTER & GAMBLE
UNI‐CHARM HENG AN
1.13
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
MA 10
MJ 1
0
JA 10
SO 10
ND 10
JF 11
MA 11
MJ 1
1
JA 11
SO 11
ND 11
JF12
MA12
MJ12
JA12
SO12
ND12
JF13
MA13
MJ13
JA13
SO13
KIMBERLY CLARK PROCTER & GAMBLE UNI‐CHARM
HENG AN MARKET
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 51
Exhibit 81: E-Commerce and Mother/Baby stores now account for up to half of baby-
product sales, according to Kantar WorldPanel Baby Product Value contribution
Source: Kantar WorldPanel.
Pulp price correction delayed
Our Latin American Paper analyst Marcelo Aguiar is more positive than consensus on
global pulp prices in 2014E/2015E because of a tighter market balance at least through
3Q14. For hardwood pulp prices, he is looking for an average price decline of 2% in 2014E
and 9% in 2015E. The key difference here is that Marcelo Aguiar believes that the market is
under-appreciating the complexity required in capacity ramp ups of plants that are
expected to bring on new capacity. Moreover, one of the major mills in Uruguay - Montes
del Plata has been delayed from 2Q13 to 1Q14. Including ramp up required, we see pulp
prices holding stable in 1H14. From 2H14, the ramp-up of the Maranhao/Montes Del Plata
mills, totally 2.8mn tons, should lead the market to weaken more noticeably.
Exhibit 82: Our Latin American Paper Analyst Marcelo Aguiar has a bullish outlook on pulp
prices in 2014E/2015E Hardwood/Softwood pulp prices Europe list price (US$/ton)
Source: Goldman Sachs Global Investment Research.
12.9% 10.7%
28.5%23.2%
29.5%
28.8%
14.4%21.4%
3.7% 5.5%3.7% 3.5%7.2% 6.8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
May 2012 May 2013
Supermarket/CVS Hypermarket Baby Store
Internet Oversea Purchase Gift
Others
Hardwood pulp 2013 2014E 2015E
End-of-period 770 729 739
Change, seq -1% -5% 1%
Average 792 777 709
Change, seq 4% -2% -9%
Softwood pulp 2013 2014 2015
End-of-period 905 849 849
Change, seq 12% -6% 0%
Average 857 905 819
Change, seq 5% 6% -10%
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 52
Hengan valuation
We value Hengan using 22.8X average of 2014E/2015E P/E. This implies a 5% discount to our
Staples target sector average of 24.0X. This is calculated as the net of: 1) 20% discount for the
stock’s 4th quartile 2013E-2015E EPS CAGR among peers; and 2) 15% premium for its first
quartile CROCI. Our TP for Hengan has increased from HK$78.30 to HK$82.90 because: 1) we
have rolled forward the valuation period from 2014E to average 2014E-2015E; and 2) we have
revised our 2013E-2015E EPS by +4%/-4%/-5%. The key reasons for this include better than
expected protection of margins in 2H13E while we expect competitive intensity to worsen in
2014E/2015E as strong competitors are stepping up their market investments not only in
Tissues but also Diapers and most recently Sanitary Napkins.
The company is trading at 12-m fwd P/E of 24.7x, a 10% premium to Staples sector average of
22.5X vs historical average of 1% premium. We believe that the de-rating is warranted as we
expect Hengan’s CROCI to fall due to higher capex being spent on lower margin products i.e.
Tissues and competitive tension in Diapers and Sanitary Napkins may pose margin risk.
Exhibit 83: Hengan is trading at 10% premium to sector
vs historical 1% premium Hengan P/E premium/discount to sector
Exhibit 84: Hengan is trading at 24.7x vs staples sector
average of 22.5X 12-m fwd P/E Hengan historical P/E vs. sector P/E
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
Exhibit 85: Hengan is trading at 24.7x 12-m fwd P/E vs
historical average of 24.1x Hengan fwd 12-m P/E
Exhibit 86: We expect Hengan to de-rate as its CROCI
outlook is hampered by margin erosion due to
intensifying competition Hengan EV/GCI vs. CROCI
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
-27%
22%
15%
10%
-30%
-20%
-10%
0%
10%
20%
30%
Ja
n-0
7
Ju
l-0
7
Ja
n-0
8
Ju
l-0
8
Ja
n-0
9
Ju
l-0
9
Ja
n-1
0
Ju
l-1
0
Ja
n-1
1
Ju
l-1
1
Ja
n-1
2
Ju
l-1
2
Ja
n-1
3
Ju
l-1
3
Ja
n-1
4
Hengan historical premium/discount to Staples sector average
(%)
10.0
15.0
20.0
25.0
30.0
35.0
40.0Ja
n-0
7
Ju
l-0
7
Ja
n-0
8
Ju
l-0
8
Ja
n-0
9
Ju
l-0
9
Ja
n-1
0
Ju
l-1
0
Ja
n-1
1
Ju
l-1
1
Ja
n-1
2
Ju
l-1
2
Ja
n-1
3
Ju
l-1
3
Ja
n-1
4
Hengan historical P/E Staples sector historical P/E
32.1
24.7
10.0
15.0
20.0
25.0
30.0
35.0
40.0
Jan-
06
May
-06
Sep
-06
Jan-
07
May
-07
Sep
-07
Jan-
08
May
-08
Sep
-08
Jan-
09
May
-09
Sep
-09
Jan-
10
May
-10
Sep
-10
Jan-
11
May
-11
Sep
-11
Jan-
12
May
-12
Sep
-12
Jan-
13
May
-13
Sep
-13
Jan-
14
Fwd 12m P/E
Hist. avg 24.1x
+ 1 STDV
+ 2 STDV
- 1 STDV
- 2 STDV
0%
5%
10%
15%
20%
25%
30%
35%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Ja
n-0
7
Ju
l-0
7
Ja
n-0
8
Ju
l-0
8
Ja
n-0
9
Ju
l-0
9
Ja
n-1
0
Ju
l-1
0
Ja
n-1
1
Ju
l-1
1
Ja
n-1
2
Ju
l-1
2
Ja
n-1
3
Ju
l-1
3
Ja
n-1
4
EV/GCI CROCI
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 53
Exhibit 87: Hengan Summary Financials
Source: Company data, Goldman Sachs Global Investment Research.
Hengan International (1044.HK)HK$ mnDivisional P/L 1H11 2H11 1H12 2H12 1H13 2H13E FY11 FY12 FY13E FY14E FY15E 13-'15 2yr CAGRRevenues (external only)Sanitary Napkins 1,848 2,266 2,265 2,651 2,860 3,172 4,114 4,915 6,032 7,288 8,557 19.1%Diapers 1,232 1,491 1,321 1,364 1,432 1,510 2,723 2,685 2,942 3,263 3,635 11.2%Tissue Papers 3,920 4,098 4,411 4,736 5,065 5,179 8,018 9,147 10,244 11,445 13,011 12.7%Food & Snacks 859 683 809 578 932 678 1,543 1,387 1,609 1,899 2,279 19.0%Skincare 330 323 236 153 126 146 653 389 272 191 133 -30.0%
8,189 8,862 9,042 9,483 10,415 10,686 17,051 18,524 21,100 24,085 27,615 14.4%
Operating ProfitSanitary Napkins 626 831 931 1,198 1,199 1,401 1,456.7 2,129 2,599 3,206 3,804 21.0%Diapers 158 202 271 334 304 327 360.0 604 631 727 850 16.0%Tissue Papers 402 382 700 711 675 562 783.4 1,411 1,237 962 1,284 1.9%Food & Snacks 63 26 41 11 57 51 88.5 52 108 137 175 27.6%Skincare 35 156 33 14 10 14 191.3 46 25 19 15 -22.6%
1,284 1,596 1,975 2,267 2,245 2,355 2,880 4,241 4,600 5,051 6,129 15.4%Other gains 82 231 54 273 137 213 313 327 350 227 292 Unallocated -16 -26 -22 -43 -44 -28 -42 -65 -72 -79 -87 Group OP 1,349 1,801 2,006 2,497 2,337 2,541 3,151 4,503 4,878 5,199 6,333 13.9%
YoY Growth (%)
Revenues (external only)Sanitary Napkins 28% 31% 23% 17% 26% 20% 30% 19% 23% 21% 17%Diapers 8% 14% 7% -9% 8% 11% 11% -1% 10% 11% 11%Tissue Papers 34% 29% 13% 16% 15% 9% 31% 14% 12% 12% 14%Food & Snacks 28% 28% -6% -15% 15% 17% 28% -10% 16% 18% 20%Skincare 32% 30% -28% -53% -46% -5% 31% -40% -30% -30% -30%
27% 27% 10% 7% 15% 13% 27% 9% 14% 14% 15%Operating ProfitSanitary Napkins 26% 30% 49% 44% 29% 17% 28% 46% 22% 23% 19%Diapers -43% -10% 71% 65% 12% -2% -28% 68% 5% 15% 17%Tissue Papers -30% -2% 74% 86% -4% -21% -19% 80% -12% -22% 34%Food & Snacks -5% -20% -34% -59% 39% 382% -10% -42% 109% 27% 28%Skincare 87% 111% -7% -91% -68% 4% 106% -76% -47% -22% -23%
-10% 17% 54% 42% 14% 4% 3% 47% 8% 10% 21%
Margins
Gross ProfitSanitary Napkins 59.6% 61.1% 64.1% 67.3% 65.1% 67.0% 60.4% 65.8% 66.1% 67.0% 68.0%Diapers 35.3% 35.1% 41.6% 44.2% 43.5% 44.0% 35.2% 42.9% 43.8% 44.8% 46.4%Tissue Papers 31.4% 31.4% 36.1% 34.7% 34.9% 31.3% 31.4% 35.4% 33.1% 30.4% 32.9%Food & Snacks 32.0% 32.9% 37.9% 38.6% 42.6% 44.0% 32.4% 38.2% 43.2% 43.2% 43.2%Skincare 35.7% 68.6% 41.7% 40.7% 48.9% 49.1% 52.0% 41.3% 49.0% 49.5% 50.0%
38.6% 41.1% 44.2% 45.5% 45.2% 44.7% 39.9% 44.9% 45.0% 44.6% 46.5%
Operating ProfitSanitary Napkins 33.9% 36.7% 41.1% 45.2% 41.9% 44.2% 35.4% 43.3% 43.1% 44.0% 44.5%Diapers 12.9% 13.5% 20.5% 24.4% 21.2% 21.7% 13.2% 22.5% 21.5% 22.3% 23.4%Tissue Papers 10.2% 9.3% 15.9% 15.0% 13.3% 10.9% 9.8% 15.4% 12.1% 8.4% 9.9%Food & Snacks 7.3% 3.8% 5.1% 1.8% 6.1% 7.5% 5.7% 3.7% 6.7% 7.2% 7.7%Skincare 10.7% 48.3% 13.8% 8.8% 8.2% 9.7% 29.3% 11.9% 9.0% 10.0% 11.0%
15.7% 18.0% 21.8% 23.9% 21.6% 22.0% 16.9% 22.9% 21.8% 21.0% 22.2%
Consolidated P/L (HK mn 1H11 2H11 1H12 2H12 1H13 2H13E FY11 FY12 FY13E FY14E FY15E 13-'15 2yr CAGR
Revenue 8,189 8,862 9,042 9,483 10,415 10,686 17,051 18,524 21,100 24,085 27,615 14.4%COGS -5,029 -5,221 -5,043 -5,166 -5,704 -5,906 -10,250 -10,209 -11,609 -13,347 -14,786 GP 3,160 3,640 3,999 4,316 4,711 4,780 6,800 8,315 9,491 10,738 12,829 Other income 82 231 54 273 137 213 313 327 350 227 292 SG&A (excl. other rev/exp -1,892 -2,070 -2,046 -2,093 -2,510 -2,453 -3,963 -4,139 -4,963 -5,766 -6,788 EBIT 1,349 1,801 2,006 2,497 2,337 2,541 3,151 4,503 4,878 5,199 6,333 13.9%D&A -212 -232 -261 -300 -348 -366 -443 -561 -715 -836 -935 EBITDA 1,561 2,033 2,267 2,797 2,685 2,907 3,594 5,064 5,593 6,035 7,268 14.0%Net Finance Exp. 65 40 46 -10 130 99 105 36 229 234 234 Profit Before Tax 1,414 1,841 2,052 2,487 2,467 2,640 3,255 4,539 5,107 5,432 6,567 13.4%Tax -206 -363 -411 -591 -584 -625 -570 -1,001 -1,226 -1,358 -1,642 Minority Interest -26 -11 -15 -4 -24 -11 -37 -19 -21 -22 -26 NPAT Attributable to S/h 1,182 1,467 1,626 1,892 1,859 2,004 2,649 3,519 3,860 4,052 4,899 12.6%One-off's after tax - - - - - - - - - - - Recurring NPAT 1,182 1,467 1,626 1,892 1,859 2,004 2,649 3,519 3,860 4,052 4,899 12.6%
EPS - Diluted (HKD/Sh) 0.96 1.19 1.32 1.54 1.51 1.63 2.16 2.86 3.14 3.29 3.98 12.6%
Growth Sales 27% 27% 10% 7% 15% 13% 27% 9% 14% 14% 15%GP 8% 21% 27% 19% 18% 11% 14% 22% 14% 13% 19%SG&A 24% 24% 8% 1% 23% 17% 24% 4% 20% 16% 18%OP (GP less SG&A) -9% 16% 54% 42% 13% 5% 3% 47% 8% 10% 22%EBIT -9% 19% 49% 39% 17% 2% 5% 43% 8% 7% 22%Recurring NPAT -2% 19% 38% 29% 14% 6% 9% 33% 10% 5% 21%
MarginsGP 38.6% 41.1% 44.2% 45.5% 45.2% 44.7% 39.9% 44.9% 45.0% 44.6% 46.5%OP (GP less SG&A) 15.5% 17.7% 21.6% 23.4% 21.1% 21.8% 16.6% 22.5% 21.5% 20.6% 21.9%EBIT 16.5% 20.3% 22.2% 26.3% 22.4% 23.8% 18.5% 24.3% 23.1% 21.6% 22.9%Recurring NPAT 14.4% 16.6% 18.0% 20.0% 17.8% 18.8% 15.5% 19.0% 18.3% 16.8% 17.7%
SG&A/Sales -23.1% -23.4% -22.6% -22.1% -24.1% -23.0% -23.2% -22.3% -23.5% -23.9% -24.6%Effective Tax Rate -15% -20% -20% -24% -24% -24% -18% -22% -24% -25% -25%
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 54
Tsingtao (600600.SS, Buy; 0168.HK, Neutral): Price discounts fading
Source of opportunity
We are increasingly constructive on China’s beer industry as we believe
that current industry consolidation (4-firm concentration ratio of c.60%)
is at a point where industry profitability may take a turn for the better. In
the US during 1965-1974, when the 4-firm concentration ratio increased
from c.30% to c. 50%, the beer industry enjoyed a period of fast margin
expansion as national competitors were able to leverage their scaled
advertising advantage to force out the smaller companies, reducing
competition. In China, we believe that the recent phasing out and/or
consolidation of small local companies as well as a clear trend of
premiumization will turn market competition in 2014E/2015E to become
more brand driven as opposed to price-led. Tsingtao’s recent bid for the
top ad-spot during CCTV’s news hour; ABI’s Harbin Beer appointment of
British advertising agency Bartle Bogle Hegarty (BBH) as its new creative
partner and Yanjing’s move to increase prices by 15%-20%, the first time
since January 2011, supports our view. As brand-led competition should
benefit national companies most, due to scalability, we forecast
Tsingtao’s group EBITDA margins to improve from 10.3% in 2013E to
11.7% by 2015E. We do expect the margin expansion to be more gradual
vs the US due to: 1) still higher degree of brand proliferation; and 2)
global brewers pushing into the market.
As such, we forecast 2013E-2015E 2-yr sales CAGR of 14%, but EBITDA
growth of 21.5%, as we expect group EBITDA margins to improve from
10.3% in 2013E to 11.7% in 2015E. Between Tsingtao (H) and Tsingtao
(A), we maintain our Buy on Tsingtao (A) and Neutral on Tsingtao (H) as
after a significant run in Tsingtao (H), the upside potential is limited. For
Tsingtao (A), the A/H price disparity would add another 2% implied
upside, driving total upside potential of 19%.
Catalysts
We revise Tsingtao’s 2013-2015E EPS by -8%/-6%/0% to factor in slightly
lower sales and higher SG&A in 2013E as the company steps up brand
investment. We expect that in 2014E/2015E, selling expenses will reduce
by 1pp of sales, from 20.7% in 2013E to 19.7% by 2015E driving
accelerated EBITDA growth. A fall in barley prices in 2014E will further
reverse margin pressure seen over the past two years.
Valuation
We have increased our 12-m TP for Tsingtao (H) from HK$55.10 to
HK$65.00 and for Tsingtao (A) from RMB44.40 to RMB50.70. This is
premised on: 1) a roll forward of both stock’s valuation period from
2014E to average 2014E/2015E; and 2) a 15X (unchanged) EV/EBITDA
valuation multiple, which is in-line with the stock’s average since 2009.
This implies 23.0X/22.6X average 2014E/2015E P/E for Tsingtao (H)/(A).
Key risks
Upside/Downside: better/worse than expected competition driving prices
and margin up/down. Better/worse than expected raw material inflation.
Growth
Returns *
Multiple
Volatility Volatility
Multiple
Returns *
Growth
Investment Profile
Low High
Percentile 20th 40th 60th 80th 100th
* Returns = Return on Capital For a complete description of the investment
profile measures please refer to the
disclosure section of this document.
Tsingtao Brewery (A) (600600.SS)
Asia Pacific Consumer Peer Group Average
Key data Current
Price (Rmb) 42.55
12 month price target (Rmb) 50.70
Market cap (Rmb mn / US$ mn) 57,484.3 / 9,480.5
Foreign ownership (%) --
12/12 12/13E 12/14E 12/15E
EPS (Rmb) New 1.30 1.39 1.74 2.10
EPS revision (%) 0.0 (7.9) (5.7) 0.4
EPS growth (%) (1.2) 6.5 25.7 20.3
EPS (dil) (Rmb) New 1.30 1.59 1.74 2.10
P/E (X) 26.0 30.7 24.4 20.3
P/B (X) 3.7 4.0 3.6 3.2
EV/EBITDA (X) 14.7 17.3 13.7 11.2
Dividend yield (%) 1.2 1.1 1.3 1.5
ROE (%) 14.9 16.0 15.5 16.5
CROCI (%) 11.7 13.9 13.6 14.7
5,400
5,600
5,800
6,000
6,200
6,400
6,600
6,800
7,000
34
36
38
40
42
44
46
48
50
Feb-13 May-13 Aug-13 Nov-13
Price performance chart
Tsingtao Brewery (A) (L) FTSE Xinhua 600 Index (R)
Share price performance (%) 3 month 6 month 12 month
Absolute (0.8) (1.5) 21.5
Rel. to FTSE Xinhua 600 Index 2.0 (1.1) 42.7
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 2/10/2014 close.
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 55
Tsingtao Brewery (A): Summary financials
Profit model (Rmb mn) 12/12 12/13E 12/14E 12/15E Balance sheet (Rmb mn) 12/12 12/13E 12/14E 12/15E
Total revenue 25,781.5 28,993.5 33,708.3 37,908.6 Cash & equivalents 7,118.2 8,092.7 9,198.9 10,700.3
Cost of goods sold (17,635.0) (19,628.0) (22,701.0) (25,494.2) Accounts receivable 144.5 193.8 260.6 336.4
SG&A (6,200.3) (7,288.6) (8,291.8) (9,083.0) Inventory 2,360.1 2,336.3 2,753.2 3,150.9
R&D 0.0 0.0 0.0 0.0 Other current assets 519.3 519.3 519.3 519.3
Other operating profit/(expense) 0.0 0.0 0.0 0.0 Total current assets 10,142.1 11,142.2 12,732.0 14,706.9
EBITDA 2,785.3 2,992.5 3,716.4 4,417.7 Net PP&E 8,343.7 9,104.3 9,796.7 10,421.0
Depreciation & amortization (839.0) (915.5) (1,000.9) (1,086.3) Net intangibles 2,546.6 2,697.2 2,830.5 2,946.7
EBIT 1,946.3 2,076.9 2,715.5 3,331.4 Total investments 171.1 441.1 471.1 501.1
Interest income 282.2 320.0 365.0 425.0 Other long-term assets 2,457.6 2,638.6 2,819.7 3,000.7
Interest expense (104.1) (105.4) (105.4) (105.4) Total assets 23,661.1 26,023.4 28,650.1 31,576.5
Income/(loss) from uncons. subs. 15.0 270.0 30.0 30.0
Others 344.7 (48.4) 220.9 200.8 Accounts payable 2,075.3 2,479.3 2,799.4 3,073.5
Pretax profits 2,484.2 2,513.1 3,226.0 3,881.8 Short-term debt 150.4 147.6 147.6 147.6
Income tax (639.4) (584.1) (806.5) (970.4) Other current liabilities 5,110.3 5,364.4 5,909.5 6,374.1
Minorities (85.9) (55.6) (64.5) (77.6) Total current liabilities 7,336.0 7,991.3 8,856.5 9,595.1
Long-term debt 1,861.8 1,861.8 1,861.8 1,861.8
Net income pre-preferred dividends 1,758.9 1,873.3 2,355.0 2,833.7 Other long-term liabilities 1,412.3 1,412.3 1,412.3 1,412.3
Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 3,541.7 3,274.1 3,274.1 3,274.1
Net income (pre-exceptionals) 1,758.9 1,873.3 2,355.0 2,833.7 Total liabilities 10,877.7 11,265.4 12,130.6 12,869.3
Post-tax exceptionals 0.0 268.5 0.0 0.0
Net income 1,758.9 2,141.8 2,355.0 2,833.7 Preferred shares 0.0 0.0 0.0 0.0
Total common equity 12,468.0 14,386.9 16,083.8 18,194.0
EPS (basic, pre-except) (Rmb) 1.30 1.39 1.74 2.10 Minority interest 315.5 371.1 435.6 513.3
EPS (basic, post-except) (Rmb) 1.30 1.59 1.74 2.10
EPS (diluted, post-except) (Rmb) 1.30 1.59 1.74 2.10 Total liabilities & equity 23,661.1 26,023.4 28,650.1 31,576.5
DPS (Rmb) 0.40 0.49 0.54 0.64
Dividend payout ratio (%) 30.7 30.7 30.7 30.7 BVPS (Rmb) 9.23 10.65 11.91 13.47
Free cash flow yield (%) 1.6 3.1 3.1 3.9
Growth & margins (%) 12/12 12/13E 12/14E 12/15E Ratios 12/12 12/13E 12/14E 12/15E
Sales growth 11.3 12.5 16.3 12.5 CROCI (%) 11.7 13.9 13.6 14.7
EBITDA growth (1.1) 7.4 24.2 18.9 ROE (%) 14.9 16.0 15.5 16.5
EBIT growth (8.1) 6.7 30.7 22.7 ROA (%) 7.8 8.6 8.6 9.4
Net income growth 1.2 21.8 10.0 20.3 ROACE (%) 23.1 21.5 24.7 27.6
EPS growth 1.2 21.8 10.0 20.3 Inventory days 52.5 43.7 40.9 42.3
Gross margin 31.6 32.3 32.7 32.7 Receivables days 2.3 2.1 2.5 2.9
EBITDA margin 10.8 10.3 11.0 11.7 Payable days 39.5 42.3 42.4 42.0
EBIT margin 7.5 7.2 8.1 8.8 Net debt/equity (%) (39.9) (41.2) (43.5) (46.5)
Interest cover - EBIT (X) NM NM NM NM
Cash flow statement (Rmb mn) 12/12 12/13E 12/14E 12/15E Valuation 12/12 12/13E 12/14E 12/15E
Net income pre-preferred dividends 1,758.9 1,873.3 2,355.0 2,833.7
D&A add-back 839.0 915.5 1,000.9 1,086.3 P/E (analyst) (X) 26.0 30.7 24.4 20.3
Minorities interests add-back 85.9 55.6 64.5 77.6 P/B (X) 3.7 4.0 3.6 3.2
Net (inc)/dec working capital 696.0 632.5 381.5 265.1 EV/EBITDA (X) 14.7 17.3 13.7 11.2
Other operating cash flow (276.1) 318.5 0.0 0.0 EV/GCI (X) 1.9 2.2 2.0 1.8
Cash flow from operations 3,103.6 3,795.4 3,802.0 4,262.7 Dividend yield (%) 1.2 1.1 1.3 1.5
Capital expenditures (2,378.2) (2,007.8) (2,007.8) (2,007.8)
Acquisitions 0.0 0.0 0.0 0.0
Divestitures 0.0 0.0 0.0 0.0
Others 383.4 (270.0) (30.0) (30.0)
Cash flow from investments (1,994.8) (2,277.8) (2,037.8) (2,037.8)
Dividends paid (common & pref) (439.6) (540.4) (658.0) (723.5)
Inc/(dec) in debt 58.4 (2.8) 0.0 0.0
Common stock issuance (repurchase) 66.9 0.0 0.0 0.0
Other financing cash flows 216.2 0.0 0.0 0.0
Cash flow from financing (98.1) (543.2) (658.0) (723.5)
Total cash flow 1,010.6 974.5 1,106.2 1,501.4 Note: Last actual year may include reported and estimated data.
Source: Company data, Goldman Sachs Research estimates.
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 56
Competition shifting from price-led to brand-building
China’s beer industry performed well during 2013, with both volume and revenue growth
accelerating in 2012. Volumes were up c.4.59% (vs 3.06% in 2012) and industry revenues
were up 9.44% (year-to-November 2013 vs 7.67% a year ago).
As current industry concentration is already at a point with the 4-firm concentration ratio at
60%, we believe that the form of competition going forward will be driven more by product
and brand as opposed to price. This will benefit national competitors most, due to
scalability of advertising costs. In fact, we are seeing that market leaders are increasingly
investing in brand building exercises, including Tsingtao’s recent RMB83mn bid for the top
ad-spot during CCTV’s new hour and ABI’s Harbin Beer appointment of British advertising
agency Bartle Bogle Hegarty (BBH) as its new creative partner.
Moreover, Yanjing has announced that it has risen its prices by 15%-20% from January 1st
2014 in Beijing. This would be the first time that the company has hiked prices since
January 2011, when industry-wide price hikes took place to recoup raw material cost
inflation. Tsingtao or CR Snow (beer arm of CRE) has not confirmed on whether they will
follow, but it does indicate to us that market competition is increasingly less price-based.
Exhibit 88: Prices have been largely steady in 2013, Tsingtao’s draft beer has realized
significant price hike during the year Unit retail price per Yihaodian.com (Rmb/330ml tin)
Source: Wind (sourced from Yihaodian.com), Goldman Sachs Global Investment Research.
US experience suggests that China is ready for margin uplift
In the US during 1965-1974 when the 4-firm concentration increased from c.30% to c.50%,
national brewers were able to leverage costly, national advertisement programs to build a
self-reinforcing entry barrier that drove out smaller competitors over time and resulted in
continued market share gains.
Further, according to the U.S. Brewing Industry Data and Economic Analysis, Tremblay and
Tremblay, published in 2005, we note that during 1965-1974, the US brewing industry
average real advertising spend fell, thus leading to industry net profit margins jumping
from just over 2% to c.4%.
6.90
7.80
3.80
8.80
5.20
4.50
2.20
6.50
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14
Tsingtao (Draft) Tiger Beer Carlsberg Harbin Beer Heineken
Kirin (Ichiban) Asahi (Crisp) Budweiser Suntory (Crisp) Tsingtao (Draft)
Suntory
Harbin
Beer
Asahi
Kirin
Tsingtao
Draft/Bu
dweiser
Heineken
Carlsberg
Tiger
Brand
Rmb/330ml tin
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 57
With the Chinese 4-firm concentration ratio at c.60% and the competitive dynamics now
turning from price-led to brand driven, in our view, the ability for national competitors to
drive margin improvement through scalability in advertisements will become increasingly
obvious. As such, we are forecasting higher gross profit margin and OP margin for
Tsingtao and CR Snow premised on higher gross profit per KL, as driven by
premiumization while SG&A costs per KL will plateau.
Exhibit 89: We forecast gross profit per KL for Tsingtao
and CR Snow to improve due to operating leverage and
product premiumization Gross Profit forecasts – RMB/KL
Exhibit 90: While SG&A costs per KL are likely to plateau
given the less intense competitive environment SG&A forecasts – RMB/KL
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
Lower Barley prices an added bonus
Average China import barley prices for 2H2013 were 5.5% yoy vs 9.2% for 1H2013 due to a
rebound in supply and a good quality crop this year. Malt barley makes up for c.13.5% of
Tsingtao’s total COGS and every 1pp inflation above/below our current forecast of -6%/+4%
in 2014E/2015E will impact NPAT by 1.5%/2.1% respectively.
Exhibit 91: China’s import barley prices were up an average of 5.5% in 2H13 vs 9.2% yoy in
1H13 due to improving global supply Barley spot prices
Source: Bloomberg, Datastream, Goldman Sachs Global Investment Research.
-
200
400
600
800
1,000
1,200CRE Tsingtao Yanjing
-
100
200
300
400
500
600
700
800
900
Tsingtao Yanjing CRE
0
50
100
150
200
250
300
350
0
500
1,000
1,500
2,000
2,500
3,000
3,500
De
c-9
9
De
c-0
0
De
c-0
1
De
c-0
2
De
c-0
3
De
c-0
4
De
c-0
5
De
c-0
6
De
c-0
7
De
c-0
8
De
c-0
9
De
c-1
0
De
c-1
1
De
c-1
2
De
c-1
3
Estimated China Import Barley Price (LHS)
Barley spot price (Winni peg, RHS)(RMB/ton) (CAD/ton)
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 58
Valuation
We value Tsingtao (A) and (H) on 15X EV/EBITDA, which is in-line with its historical
average. We have chosen to value the company on EV/EBITDA as opposed to P/E as we
believe that the company’s rich cash balance and large differences in each beer companies
depreciation policies will disadvantage Tsingtao if we valued the company on a P/E basis.
Our 12-m TP for Tsingtao (A) has changed from RMB44.40 to RMB50.70 and for Tsingtao (H)
from HK$55.10 to HK$65. This is because: 1) we have rolled forward our valuation period from
2014E to average 2014E/2015E, and 2) we have revised our 2013E-2015E EPS by -8%/-6%/0% to
factor in higher SG&A expenses and lower sales in 2013E. However, we do expect a gradual
improvement in selling expenses as a ratio of sales as our study of the beer market has
concluded with an expectation that competitive intensity is reducing and the market structure is
turning more towards oligopolistic pricing behaviour – i.e. less price based competition.
Tsingtao (A) is trading at 13.0X EV/EBITDA vs its historical average of 14.5X. While
Tsingtao (H) is trading at 13.4X EV/EBITDA vs its historical average of 15.2X EV/EBITDA.
While we like the story for Tsingtao, we see better upside in Tsingtao (A) vs Tsingtao (H) as
we calculate a 2% pricing difference between the (A) and (H) stock, pushing the upside
from 17% for (H) to 19% for (A). Buy (A) and Neutral (H)
Exhibit 92: Tsingtao (A) is trading at 13.0x EV/EBITDA Tsingtao (A) EV/EBITDA
Exhibit 93: …vs. Tsingtao (H) trading 13.4x EV/EBITDA Tsingtao (H) EV/EBITDA
Source: Company data, Datastream, Goldman Sachs Global Investment Research.
Source: Company data, Datastream, Goldman Sachs Global Investment Research.
Exhibit 94: Tsingtao (H) is currently trading at 24.1X 12-m
fwd P/E vs historical average of 28.2X Tsingtao (H) fwd 12mth P/E
Exhibit 95: We expect Tsingtao’s CROCI outlook to be
stable; re-rating driven by accelerating EBITDA CAGR Tsingtao (H) EV/GCI vs. CROCI
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.
13.0
25
30
35
40
45
50
55
10
11
12
13
14
15
16
17
18
19
20
Sep
-09
Nov
-09
Jan-
10
Mar
-10
May
-10
Jul-1
0
Sep
-10
Nov
-10
Jan-
11
Mar
-11
May
-11
Jul-1
1
Sep
-11
Nov
-11
Jan-
12
Mar
-12
May
-12
Jul-1
2
Sep
-12
Nov
-12
Jan-
13
Mar
-13
May
-13
Jul-1
3
Sep
-13
Nov
-13
Jan-
14
(x) Tsingtao (A) EV to EBITDA (LHS) +1 SD Mean -1 SD Tsingtao (A) PX (RHS)
Average EV/EBITDA since Sept 2009 = 14.5X
13.4
10
20
30
40
50
60
70
10
11
12
13
14
15
16
17
18
19
20
Sep
-09
Nov
-09
Jan-
10
Mar
-10
May
-10
Jul-1
0
Sep
-10
Nov
-10
Jan-
11
Mar
-11
May
-11
Jul-1
1
Sep
-11
Nov
-11
Jan-
12
Mar
-12
May
-12
Jul-1
2
Sep
-12
Nov
-12
Jan-
13
Mar
-13
May
-13
Jul-1
3
Sep
-13
Nov
-13
Jan-
14
(x) Tsingtao (H) EV to EBITDA (LHS) +1 SD Mean -1 SD Tsingtao (H) PX (RHS)
Average EV/EBITDA since Sept 2009 = 15.2X
56.4
52.2
24.1
5.0
15.0
25.0
35.0
45.0
55.0
65.0
Jan-
06
May
-06
Sep
-06
Jan-
07
May
-07
Sep
-07
Jan-
08
May
-08
Sep
-08
Jan-
09
May
-09
Sep
-09
Jan-
10
May
-10
Sep
-10
Jan-
11
May
-11
Sep
-11
Jan-
12
May
-12
Sep
-12
Jan-
13
May
-13
Sep
-13
Jan-
14
Fwd 12m P/E
Hist. avg 28.2x
+ 1 STDV
+ 2 STDV
- 1 STDV
- 2 STDV
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Jan‐07
May‐07
Sep‐07
Jan‐08
May‐08
Sep‐08
Jan‐09
May‐09
Sep‐09
Jan‐10
May‐10
Sep‐10
Jan‐11
May‐11
Sep‐11
Jan‐12
May‐12
Sep‐12
Jan‐13
May‐13
Sep‐13
Jan‐14
EV/GCI CROCI
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 59
Exhibit 96: Tsingtao Summary Financials
Source: Company data, Goldman Sachs Global Investment Research.
Tsingtao (168.HK)RMB mnKey drivers 2013 Q1 2013 Q2 2013 Q3E 2013 Q4E 1H11 2H11 1H12 2H12 1H13 2H13E 2011 2012 2013E 2014E 2015E 13-'15 2Yr CAGRChina Beer Industry ('000 KL)Production volumes 10,443 14,533 15,970 9,670 23,502 25,486 23,988 25,032 24,975 25,640 48,990 49,020 50,615 52,640 54,746 4.0%Market share 17.5% 18.9% 18.5% 13.1% 16.0% 13.3% 17.4% 14.9% 18.3% 16.4% 14.6% 16.1% 17.4% 19.0% 20.0%
Volumes ('000 KL)Tsingtao brand 1,046 1,354 1,430 825 2,030 1,960 2,200 2,090 2,400 2,255 3,990 4,290 4,655 5,074 5,505 8.7%Secondary & Other brands 783 1,397 1,520 442 1,720 1,440 1,980 1,630 2,180 1,962 3,160 3,610 4,142 4,953 5,442 14.6%Total 1,829 2,751 2,950 1,266 3,750 3,400 4,180 3,720 4,580 4,216 7,150 7,900 8,796 10,026 10,947 11.6%
ASP (RMB/ltr) 3.45 3.15 3.13 3.79 3.21 3.27 3.21 3.33 3.27 3.33 3.24 3.26 3.30 3.36 3.46 2.5%
Total Sales 6,312 8,659 9,221 4,801 12,050 11,108 13,406 12,376 14,971 14,022 23,158 25,782 28,994 33,708 37,909 14.3%
YoY Growth (%)China Beer IndustryProduction volumes 16.1% -3.1% 0.5% 5.8% 11.0% 7.8% 2.1% -1.8% 4.1% 2.4% 9.3% 0.1% 3.3% 4.0% 4.0%Market share (ppt) -0.7% 2.0% 1.9% -0.5% 1.3% -0.4% 1.5% 1.5% 0.9% 1.6% 0.4% 1.5% 1.3% 1.7% 0.9%
Volumes ('000 Kl)Tsingtao brand 10.1% 8.3% 2.1% 1.8% 23.0% 7.1% 8.4% 6.6% 9.1% 7.9% 14.7% 7.5% 8.5% 9.0% 8.5%Secondary & Other brands 13.5% 8.3% 22.6% 2.8% 17.8% 1.4% 15.1% 13.2% 10.1% 20.3% 10.1% 14.2% 14.7% 19.6% 9.9%Total 11.5% 8.3% 11.7% 2.1% 20.6% 4.6% 11.5% 9.4% 9.6% 13.3% 12.6% 10.5% 11.3% 14.0% 9.2%
ASP (RMB/ltr) 1.1% 2.4% -1.6% 17.9% 0.7% 6.5% -0.2% 1.8% 1.9% 0.0% 4.9% 0.8% 1.0% 2.0% 3.0%
Total Sales 12.7% 10.9% 9.9% 20.4% 21.4% 11.4% 11.2% 11.4% 11.7% 13.3% 18.1% 11.3% 12.5% 16.3% 12.5%
Consolidated P&L 2013 Q1 2013 Q2 2013 Q3E 2013 Q4E 1H11 2H11 1H12 2H12 1H13 2H13E 2011 2012 2013E 2014E 2015E 13-'15 2Yr CAGRBeer Sales 11,873 10,917 13,206 12,112 14,757 13,716 22,790 25,318 28,472 33,103 37,227 Other Sales 177 191 199 264 215 306 368 463 521 606 681 Total Sales 6,312 8,659 9,221 4,801 12,050 11,108 13,406 12,376 14,971 14,022 23,158 25,782 28,994 33,708 37,909 14.3%COGS -3,705 -5,048 -5,491 -2,908 -6,840 -6,576 -7,979 -7,455 -8,753 -8,399 -13,417 -15,434 -17,153 -19,823 -22,258 Taxes -513 -697 -706 -560 -1,056 -968 -1,166 -1,035 -1,210 -1,265 -2,024 -2,201 -2,475 -2,878 -3,236 Gross Profit 2,093 2,915 3,024 1,333 4,154 3,563 4,260 3,886 5,008 4,358 7,717 8,147 9,366 11,007 12,414 15.1%SG&A -1,489 -2,208 -2,174 -1,418 -2,870 -2,728 -3,026 -3,174 -3,697 -3,591 -5,599 -6,200 -7,289 -8,292 -9,083 11.6%EBIT 605 706 850 -84 1,283 835 1,234 712 1,311 766 2,118 1,946 2,077 2,716 3,331 26.6%Depreciation -267 -303 -331 -354 -369 -371 -571 -685 -739 -808 -876 Amortization -47 -80 -76 -78 -82 -95 -127 -154 -176 -193 -211 EBITDA 605 706 850 -84 1,598 1,218 1,642 1,144 1,761 1,231 2,816 2,785 2,992 3,716 4,418 21.5%Net finance costs 41 55 83 35 -2 39 84 94 96 119 36 178 215 260 320 Other non-op. rev/ (exp) 53 303 90 44 1,394 190 101 259 356 134 301 360 490 251 231 Pretax income 698 1,064 1,024 -5 1,391 1,064 1,419 1,065 1,762 1,019 2,455 2,484 2,782 3,226 3,882 Provisions for taxes -189 -136 -252 -7 -345 -313 -369 -271 -325 -259 -657 -639 -584 -807 -970 Minority interest (I/S item) -22 -21 -2 -11 -57 -3 -43 -43 -43 -13 -60 -86 -56 -65 -78 Reported NPAT 488 907 770 -23 990 748 1,007 751 1,395 747 1,738 1,759 2,142 2,355 2,834 15.0%Less: net one-off's - 268 - 0 - -41 - 0 268 0 -41 - 268 - - Recurring NPAT 488 638 770 -23 990 790 1,007 751 1,126 747 1,779 1,759 1,873 2,355 2,834
EPS (Adj., diluted, RMB/Sh) 0.361 0.473 0.570 -0.017 0.733 0.584 0.746 0.556 0.834 0.553 1.317 1.302 1.387 1.743 2.098
YoY Growth %Sales 12.7% 10.9% 9.9% 20.4% 21.4% 11.4% 11.2% 11.4% 11.7% 13.3% 16.4% 11.3% 12.5% 16.3% 12.5%GP 20.1% 15.8% 7.6% 23.9% 16.4% 3.8% 2.6% 9.1% 17.5% 12.1% 10.2% 5.6% 15.0% 17.5% 12.8%SG&A 22.2% 22.1% 9.4% 19.5% 12.9% 11.1% 5.4% 16.3% 22.2% 13.2% 12.0% 10.7% 17.6% 13.8% 9.5%EBIT -15.1% 0.3% -3.4% 23.5% 25.1% -14.6% -3.8% -14.7% 6.2% 7.6% 5.7% -8.1% 6.7% 30.7% 22.7%NPAT 8.3% 62.9% 14.0% -130.3% 21.6% 5.9% 1.8% 0.5% 38.5% -0.6% 14.3% 1.2% 21.8% 10.0% 20.3%
Margins (on total sales)GP 33.2% 33.7% 32.8% 27.8% 34.5% 32.1% 31.8% 31.4% 33.5% 31.1% 33.3% 31.6% 32.3% 32.7% 32.7%EBIT 9.6% 8.2% 9.2% -1.8% 10.7% 7.5% 9.2% 5.8% 8.8% 5.5% 9.1% 7.5% 7.2% 8.1% 8.8%EBITDA 9.6% 8.2% 9.2% -1.8% 13.3% 11.0% 12.2% 9.2% 11.8% 8.8% 12.2% 10.8% 10.3% 11.0% 11.7%NPAT 7.7% 10.5% 8.4% -0.5% 8.2% 6.7% 7.5% 6.1% 9.3% 5.3% 7.5% 6.8% 7.4% 7.0% 7.5%
SG&A/Sales -23.6% -25.5% -23.6% -29.5% -23.8% -24.6% -22.6% -25.6% -24.7% -25.6% -24.2% -24.0% -25.1% -24.6% -24.0%Effective tax rate (%) -27% -13% -25% 148% -25% -29% -26% -25% -18% -25% -27% -26% -21% -25% -25%
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 60
Summary of changes/risks for Neutral-rated stocks
Exhibit 97: Summary of revisions for Neutral-rated stocks and key risks
Source: Goldman Sachs Global Investment Research.
Company Ticker Rating New TP Old TP Chg Reporting
HK$ HK$ % Currency CY13 CY14 CY15 CY13 CY14 CY15 CY13 CY14 CY15
Mengniu 2319.HK Neutral 36.90 33.20 11% RMB 0.81 1.09 1.34 0.81 1.09 1.30 ‐0.6% 0.3% ‐2.9%
CRE 0291.HK Neutral 26.50 28.40 ‐7% HKD 0.68 0.85 1.14 0.64 0.79 1.05 ‐5.8% ‐6.7% ‐7.8%
China Foods 0506.HK Neutral 3.00 3.00 0% HKD ‐0.26 ‐0.01 0.08 ‐0.26 ‐0.01 0.08 0.0% 0.0% 0.0%
Greatview 0468.HK Neutral 4.60 5.35 ‐14% RMB 0.22 0.27 0.35 0.22 0.27 0.33 0.0% ‐2.1% ‐7.0%
Old EPS New EPS EPS Chg
Company Comments Risks
Mengniu We revise our 12‐m P/E‐based TP to HK$36.90 (1% upside potential) based on: 1) roll forward of
valuation period from 2014E to average of 2014E/2015E; and 2) EPS revisions for 2013E‐2015E due
to slight downward revision for Yashili forecasts as we understand topline sales in 2H13E are
impacted by Fonterra's botulism scare in August 2013 and a build up of inventory in the channels.
Better/worse than expected raw milk price inflation, ASP driven by
premiumization, execution risk on consolidation of new businesses and
internal restructuring, competition.
CRE We revise our 12‐m SOTP‐based TP to HK$26.50 (18% upside potential) based on: 1) roll forward of
valuation period from 2014E to average 2014E/2015E; and 2) EPS revisions due to lower topline
growth outlook given weaker macro demand, and lower Beverage margin outlook as the company
continues to prioritize market share expansion over margin improvement.
Retail: Turnaround of losses from Northern Region, ability to extract synergies
and reduce losses from Tesco JV likely at end 2014; Beer: raw material cost
fluctuation, better/worse than expected level of competition and ability to
premiumize brand.
China Foods Our 12‐m P/B‐based TP of HK$3.0 (15% upside potential) is unchanged even though we roll forward
our valuation period from 2014E to average 2014E/2015E as the book value of the company for
these two periods has changed little. The implied P/B for the group in 2014E/2015E remains at 1.4x
(unchanged).
Ability to turnaround losses in Wine, Confectionery and Consumer Packed Oils
by new management, better/worse than expected level of competition with
imported wine, Wilmar in Oil, Tingyi/Pepsi for Beverage business, raw material
cost fluctuations.
Greatview We revise our 12‐m P/E‐based TP to HK$4.60 (12% upside potential) based on: 1) roll forward of
valuation period from 2014E to average 2014E/2015E; and 2) EPS cut in 2013E‐2015E as we trim
sales growth due to our expectations that supply constraints of raw milk in China will last at least
through 2014, while its attempt to fill capacity with non‐carbonated soft drink orders may drive
lower margins.
Better/worse than expected volume growth of UHT milk in China given supply
constraints, ability to turn to profit for Germany business, expansion in Europe
and raw material cost fluctuations.
February 12, 2014 China: Consumer Staples
Goldman Sachs Global Investment Research 61
Disclosure Appendix
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We, Lisa Deng and Xiaochun Ni, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject
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the specific recommendations or views expressed in this report.
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Disclosures
Coverage group(s) of stocks by primary analyst(s)
Lisa Deng: Asia Pacific Consumer and Retail.
Asia Pacific Consumer and Retail: Ace Hardware Indonesia, Amorepacific, CJ CheilJedang, China Foods, China Resources Enterprise, China Yurun
Food Group, E-Mart, GS Retail Co., Greatview Aseptic Packaging Company, Hengan International, Huishan Dairy, Hyundai Department Store, KT&G,
LG Household & Healthcare, Lotte Shopping, Matahari Department Store, Mengniu Dairy, Mitra Adiperkasa, Orion, PT Gudang Garam Tbk, PT
Indofood CBP Sukses Makmur, PT Indofood Sukses Makmur Tbk, PT Kalbe Farma Tbk, PT Unilever Indonesia Tbk, Ramayana Lestari Sentosa,
Shinsegae, Stella International Holdings, Sun Art Retail Group, Tingyi (Cayman Islands) Holdings, Tsingtao Brewery (A), Tsingtao Brewery (H), Uni-
President China Holdings Ltd., Want Want China Holdings, Yue Yuen Industrial.
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Goldman Sachs Global Investment Research 62
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