3Q24 net profit was up 13% YoY to RMB670m. GPM expansion (+2ppts YoY; mostly from beverage segment) was partially offset by higher S&D expenses ratio. Going forward, UPC will continue to cut promotions but is less likely to adopt price hikes. Recurring channel investments may help UPC consolidate market share in such a competitive environment.
However, coupled with the recent rally of palm oil price, its profitability improvement trend is not so clear in the coming quarters.
Key Factors for Rating
3Q24 profit update. On 12 November 2024, UPC released its 3Q24 unaudited net profit, which came in at RMB670m (+13% YoY), slightly below expectation. 1-9M24 net profit thus reached RMB1,636m (+35% YoY).
Beverage segment maintained strong growth momentum. According to management, UPC's beverage sales delivered low-teen% YoY growth in 3Q24, mainly driven by accelerated POS expansion (incl. higher penetration of display refrigerators) and well-established product mix. UPC saw sequentially recovering demand for beverages from June to October 2024. By product, sugar-free RTD tea (e.g. "Spring Breeze Green Tea") sustained solid growth, despite intensified industry competition during 3Q24.
UPC looks for gaining share in the instant noodle market. In 3Q24, UPC's food segment saw LSD% YoY growth. By product, sales of instant noodles saw MSD%-to-HSD% YoY growth, while sales of other convenience foods (e.g. "Kai Xiao Zao") declined YoY.
We are more cautious about UPC's margin expansion trend. According to management, 3Q24 GPM enhancement was equally attributable to 1) fewer price-based promotions on average, instead of following Tingyi's (322 HK/ TP: HK$12.20, BUY) price hikes, 2) cost tailwind, and 3) efficiency. However, looking ahead, we expect UPC's profit margin expansion logic to be less visible.
On the one hand, raw material cost would be marginally unfavourable from 4Q24. The QTD average price of palm oil surged 18% vs. the 3Q24 average price, weighing on UPC's instant noodle GPM. On the other hand, management now strategically prioritises the importance of top-line growth (along with its market share gains) over that of profitability in the coming years in such a competitive environment, so S&D expenses ratio could stand higher due to recurring investments in brand building, advertising and POS expansion.
Notably, UPC so far has covered nearly 3m POS for beverage segment, and now controls display refrigerators in 1/3 of all the POS (long-term target: 1/2 of all the POS), which we think will be helpful for speeding up sales turnover in on-the-go consumption scenarios.