Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Thematic (Sector/Industry)

Vietnam Food products / Thematic (Sector/Industry)

<p><a href="https://www.smartkarma.com/entities/14016" target="_blank" data-smartkarma-citation="entities:14016:1">Tingyi (Cayman Islands) Holding Corp. (322 HK)</a> and <a href="https://www.smartkarma.com/entities/14927" target="_blank" data-smartkarma-citation="entities:14927:1">Uni President China Holdings Ltd. (220 HK)</a> are now trading at price/earnings ratios of 39 times and 31 times our respective fiscal 2017 earnings estimates. This is in line with historical multiples, but given our thesis of a structural decline in consumption, we think the stocks are overvalued. In our view, this is most likely due to optimistic expectations of growth and profitability driven by premiumization. Although we think both Tingyi and Uni-President will benefit from premiumization, without sustainable competitive advantages, we project only low-single-digit EBITDA growth rates for these two no-moat companies. This is still far below the rapid growth of the past, attributable to persistent industry headwinds and severe market competition amid China's decelerating economic growth. Based on our DCF model, we view Tingyi and Uni-President as overvalued and suggest investors avoid these stocks at their current prices, as they are currently trading at 72% and 47% respective premiums to our fair value estimates.</p><h2>Key Takeaways</h2><ul><li>Chinese consumers seem to be losing their appetite for instant noodles, as the world's biggest instant noodle market peaked in 2013 and has since been in decline, with sales volume decreasing at a CAGR of 4% over 2012-16.</li><li>We estimate the income elasticity of instant noodle demand to be negative 0.17 over the past five years, implying that instant noodles are inferior goods in China, and conclude that as disposable income continues to rise, the quantity demanded for instant noodles is likely to fall.</li><li>We expect headwinds from several negative factors—rising health awareness, decreasing numbers of low-income workers due to demographic changes and urbanization, and increasing threats from other substitutes—will decrease industry sales volume growth in the next five years.</li><li>We believe premiumization will become the primary sales driver on the back of consumption upgrades and increasing purchasing power. We anticipate that instant noodles' sales volume and value will grow at CAGRs of negative 1.5% and 3%, respectively, over 2017-21.</li><li>With greater exposure to the premium segment, we expect Uni-President to gain share over time, to the tune of around 2%-3%, while industry leader Tingyi will lose 2%-3% market share during the same time frame.</li></ul><div class="content-remarks"><p>Other companies mentioned: <a href="https://www.smartkarma.com/entities/12548" target="_blank" data-smartkarma-citation="entities:12548:1">Nissin Foods Holdings Co Ltd (2897 JP)</a>.</p></div><p><em>Analyst: Allen Cheng</em></p>

Tingyi (Cayman Islands) Holding Corp. (322 HK) and Uni President China Holdings Ltd. (220 HK) are now trading at price/earnings ratios of 39 times and 31 times our respective fiscal 2017 earnings estimates. This is in line with historical multiples, but given our thesis of a structural decline in consumption, we think the stocks are overvalued. In our view, this is most likely due to optimistic expectations of growth and profitability driven by premiumization. Although we think both Tingyi and Uni-President will benefit from premiumization, without sustainable competitive advantages, we project only low-single-digit EBITDA growth rates for these two no-moat companies. This is still far below the rapid growth of the past, attributable to persistent industry headwinds and severe market competition amid China's decelerating economic growth. Based on our DCF model, we view Tingyi and Uni-President as overvalued and suggest investors avoid these stocks at their current prices, as they are currently trading at 72% and 47% respective premiums to our fair value estimates.Key TakeawaysChinese consumers seem to be losing their appetite for instant noodles, as the world's biggest instant noodle market peaked in 2013 and has since been in decline, with sales volume decreasing at a CAGR of 4% over 2012-16.We estimate the income elasticity of instant noodle demand to be negative 0.17 over the past five years, implying that instant noodles are inferior goods in China, and conclude that as disposable income continues to rise, the quantity demanded for instant noodles is likely to fall.We expect headwinds from several negative factors—rising health awareness, decreasing numbers of low-income workers due to demographic changes and urbanization, and increasing threats from other substitutes—will decrease industry sales volume growth in the next five years.We believe premiumization will become the primary sales driver on the back of consumption upgrades and increasing purchasing power. We anticipate that instant noodles' sales volume and value will grow at CAGRs of negative 1.5% and 3%, respectively, over 2017-21.With greater exposure to the premium segment, we expect Uni-President to gain share over time, to the tune of around 2%-3%, while industry leader Tingyi will lose 2%-3% market share during the same time frame.Other companies mentioned: Nissin Foods Holdings Co Ltd (2897 JP).Analyst: Allen Cheng

The Changing Landscape for Chinese Instant Noodles: Instant Noodle Manufacturers Are Overvalued