Maintain "Accumulate" with a new TP of HK$9.00. We slightly revise down our forecasts for Tingyi's (or the "Company") 2023-2025 sales revenue to RMB83,310 mn (-1.5%) / RMB87,478 mn (-2.2%) / RMB91,599 mn (-2.8%), respectively. Accordingly, we revise down our forecasts for 2023-2025 EPS to RMB0.612 (-1.6%) / RMB0.681 (-6.0%) / RMB0.709 (-10.9%), respectively. On a YTD basis, Tingyi's share price fell 24.9%, reflecting lower-than-expected 2H2023 sales turnover and more cautious investor sentiment towards China's consumer sector in general. We reiterate that the Company is a defensive pick with steady growth trajectory and attractive dividend yield. Our revised TP is based on an updated 12.0x 2024F PER (from 17x previously), implying 26% upside potential.
Investors are concerned about the slower-than-expected top-line growth since 2H2023 despite Tingyi's continuous restoration of market share in a competitive environment. According to our estimation, Tingyi's beverage / instant noodle sales should record yoy growth of 2.5% / 6.4% in 2H2023. Due to shrinking market size, coupled with softened consumer spending, we expect high-end packet noodles to deliver slower yoy growth in 2024-2025. Similarly, given weakening demand from factory and construction workers in mainland China, bowl noodles sales are likely to remain under pressure. We believe that the Company has potential to further consolidate market share by increasing investments in advertising & promotion (A&P) events and product innovation. For its beverage segment, we expect to see a qoq rebound during 4Q2023. Juices and bottled water are likely to regain solid growth momentum, given that the former has been a staple in many diets of an increasing number of health-conscious consumers in restaurants and at-home consumption areas, and the latter is the most obvious beneficiary from thriving outdoor activities.
Solid gross margin would allow some room for Tingyi to enhance A&P investments. ASP could be stable in general - the positive impact from price hikes is offset by higher volume contribution from cost-effective products and large-portion offerings. Together with ongoing raw materials cost stabilization (palm oil and PET resin), we forecast gross margin to be 30.5% in 2024-2025. We leave our forecasts on S&D expenses ratio, capex amount, and annual payout ratio unchanged at ~21.3%, RMB3-3.3 bn/year, and 100%, respectively, for 2024-2025, reflecting its long-term strategic consistency and resilience.
Catalysts: 1) marginal relief on cost inflation pressure, 2) high-dividend-yield strategy would be more popular among investors, likely making the Company an overweight pick in this regard, and 3) price hikes of some beverage SKUs.
Risks: 1) weaker-than-expected demand recovery, 2) food safety issues, 3) intensified market competition, and 4) unexpected price movement in raw and packaging material prices.