Starting the shareholder return of TINGYI

Since the beginning of the year, the returns of most food and beverage stocks have not been good. For example, the stock king Maotai has fallen below 1400 yuan, shaking the logic of medium and long-term investments. The valuations of Yili and Mengniu in the dairy industry are also at historical lows, with many consumer stocks falling out of the 3-5% dividend yield range, which is a benefit that past consumer goods investments did not have.

However, in the weak consumption environment, whether companies can earn the expected profits from the market and distribute profits to investors as expected by the market is not guaranteed. Referring to the experience of Japanese food and beverage stocks in the 1990s, stable market competition, low capital expenditure, and the ability to raise prices are necessary for consumer stocks to provide stable medium to long-term shareholder returns.

For example, Hong Kong stocks Kangshifu and U-PRESID CHINA meet the two conditions of stable market competition and low capital expenditure, but there are doubts about their sustainable pricing power. The stock prices of these two companies have halved in the past 2 years, but since February this year, their stock prices have risen by over 50%, mainly because their beverage and instant noodle products have started to raise prices.

More importantly, since 2018, U-PRESID CHINA and Kangshifu have maintained a dividend payout ratio of 100% for 5 consecutive years, and even reached 200% in individual years. Market expectations are that under the pricing strategy, the increase in profits will lead to increased dividend payouts. Although it is not easy to raise prices for consumer goods in a downturn cycle, which may lead to a decline in sales volume, these two companies are worth paying attention to again.

I. Changes in global food and beverage stocks

In the recent article "Consumption Downturn Behind Tech Stocks", we introduced a rare phenomenon in the US stock market.

Leading food and beverage stocks that usually accompany the S&P 500 to new highs are diverging from the overall market. This is because the performance of food and beverage stocks is not impressive, and some even qualify as landmines. Another reason is that in the context of high concentration of funds in the US stock market, the valuation of food and beverage stocks is being squeezed by the technology sector. When the growth rate of the food and beverage industry slows down, companies that can provide shareholder returns will be more attractive.

Therefore, the poor performance of food and beverage stocks is global. Just like the poor sales of alcoholic beverages this year, it is not just Maotai that has weak sales, but all global liquor companies are struggling. According to Snowball users, alcohol sales in the US have not grown since 2022, and liquor companies can only maintain sales growth by raising prices.

The timing of the change in foreign alcohol sales volume is 2022, which is the same domestically. Within a year after the end of the epidemic, alcohol sales weakened, and alcohol prices declined.

The biggest common point is that people are paying more attention to their health, and there have been some changes in consumer groups. The demand for strong liquor among the new generation of young people is not as high, possibly due to the replacement effects of entertainment and short videos. From a supply and demand perspective, another reason is that alcohol sales were very high in 2020-2022, during the high growth period of the epidemic.

Another point, has Maotai's stock price dropped significantly? Not really, Maotai is actually the least affected among the liquor industry leaders.

For example, the stock prices of international liquor giants Diageo, Pernod Ricard, and Bacardi have all dropped by over 30% in 2022, while Maotai has only dropped by 25%.

On July 30th, Diageo disclosed its financial report, with a revenue of $20.27 billion for the 2024 fiscal year, a 1.4% year-on-year decrease compared to last year, and net profit declining from $4.45 billion to $3.87 billion, mainly due to a significant drop in sales in Latin America and the Caribbean.

Diageo's management stated that with the improvement of the global consumption environment, the medium to long-term guidance is for revenue to recover to a growth rate of 5-7%, but profit margins will face certain pressures. (Possibly because the management feels resistance to the pricing strategy in the future)

Therefore, when liquor sales decline, these international liquor companies can only rely on price increases to maintain sales growth, making Maotai appear more passive.

Although Feitian Maotai raised prices once last year, the proportion of its series products is not small. Not only is there no room for further price increases, but the market wholesale prices are also plummeting, affecting the profit margin of the series products. Feitian Maotai cannot raise prices every year, which means it cannot adopt a pricing strategy like the international liquor giants.

In other words, it is not easy for domestic consumer goods to raise prices, and very few can raise prices without affecting sales volume.

II. National consumer stocks with strong shareholder returns

Returning to the mention of Master Kong and U-PRESID, if they can continue to raise prices and maintain a 100% dividend payout ratio annually, they can be considered sustainable investments in the consumer industry.

These two companies started raising prices in 2022. For example, Master Kong's bottled iced tea increased from 4 yuan to 5 yuan, instant noodles from 4.5 yuan to 5 yuan, and a box of 12 barrels of bulk noodles increased from 43 yuan to 48 yuan. According to a report by Fuli, the profit forecasts for Master Kong for 2024-2026 were raised by 3%/1%/1%.

There are two reasons for the price increases. One is that the cost of raw materials has risen significantly in recent years. The management mentioned that the cost of oil has nearly doubled, but the selling price has only increased by 1 yuan. Especially in 2022-2023 when the company did not raise prices, the gross profit margin was severely suppressed by costs, leading to a sharp drop in stock prices last year. However, this year, raw material costs have stabilized, and profit expectations have rebounded. Another reason is that after the second generation took over at Master Kong, capital expenditures were reduced, strengthening the profit orientation

Although the price increase is not significant, it has received considerable negative feedback from consumers, which may affect future sales. This uncertainty raises the question of how far Tingyi and Uni-President can go with their price hikes.

Firstly, looking at the competitive landscape, the instant noodle market in China is mainly dominated by Tingyi with a market share of 45% and Uni-President with a market share of 20%. Bai Xiang holds around 7% of the market share, with its growth coming from e-commerce channels. However, offline channels are still dominated by Tingyi and Uni-President, making them the strongest players in offline distribution.

In 2017, when e-commerce channels were not as developed, Tingyi and Uni-President held market shares of 50% and 21% respectively, accounting for 70% of the domestic instant noodle market.

In recent years, with the expansion of e-commerce channels, more instant noodle brands have emerged in China, leading to an increase in the variety of instant food products. Tingyi and Uni-President have lost market share due to their weaker presence in e-commerce channels, as their main advantage lies in offline distribution. Nevertheless, the instant noodle market has maintained an annual compound growth rate of 3-5%, with Tingyi and Uni-President still leading in market share.

The reason for the weakness in e-commerce channels is simple. For products that consumers can easily purchase offline, they may not necessarily choose to buy them online. Consumers are more inclined to purchase other instant food products with weaker offline distribution through e-commerce platforms, such as Nissin from overseas.

In terms of the competitive landscape, Tingyi and Uni-President have a significant advantage in offline channels. However, their weakness in online competitiveness may lead to the need for continuous marketing expenses to boost revenue from e-commerce channels. Tingyi's management has indicated that they will implement a strategy of raising prices and reducing costs this year to improve profit levels, but the execution and outcome of this strategy remain unknown.

However, with Tingyi and U-PRESID dominating the market, based on this competitive landscape, it is possible to increase prices by single digits annually. Although consumers may not be happy with the price increase, instant noodles largely rely on offline channels. In the past decade, both Tingyi and U-PRESID have raised prices 5-6 times, and sales have still increased.

Of course, it is important to consider that the current macro environment is different from the past. Raising prices now is indeed counter-cyclical. The key is whether the stable competitive landscape and the advantage of channel distributors can be leveraged.

Looking at the financial data, according to Wind's forecast, Tingyi's revenue in 2025 is expected to be 88.4 billion RMB, a year-on-year growth of 4.5%, with a net profit of 3.76 billion RMB, a year-on-year growth of 8.6%, corresponding to a P/E ratio of around 13 times. With a 100% dividend payout ratio, this corresponds to an approximately 8% dividend yield. As of the end of 2023, Tingyi had cash on hand of 6.7 billion RMB.

III. Conclusion

It is worth mentioning that Tingyi mainly operates on debt. Since the second-generation successor took over the company, the company has basically distributed the money earned. The management holds about 33% of the shares, not a high percentage but still pays high dividends. This at least proves that the management has no bad intentions, and their interests are aligned.

On the other hand, U-PRESID's management holds about 73% of the shares. Starting from 2018, they have been paying high dividends to shareholders every year. Currently, Tingyi's dividend yield is 6.3%, while U-PRESID's is 7.3%.

If both companies can maintain their positions in the current competitive landscape, and implement a price increase strategy, although their stock performance has been poor in recent years, they are still generous in dividend payouts, making them worth keeping an eye on.

But as mentioned, it is not easy to raise prices in the current environment, which poses a significant challenge