The Largest Cup Noodle Company In Hong Kong: Nissin Foods Co. Limited
August 3, 2020
Nissin Foods Company Limited (Nissin Foods) (HKG:1475) is a food and beverage manufacturer based in Hong Kong and Mainland China. The group positions itself as a premium instant noodle manufacturer and is the largest instant noodle company in Hong Kong (with an estimated 65% market share) with a notable presence in Mainland China.
Since its initial public offering in late 2017, the company’s share price has surged more than 85%, which piqued our interest in the company. In this article, we will take a closer look at Nissin Foods’s business profile, management, and financials, to assess whether the company is suitable for an investment.
Nissin Foods primarily manufactures and sells instant noodles, frozen food and other food products under a diversified portfolio of well-known and highly popular product brands. These include its five flagship product brands, namely Cup Noodles (合味道)” , “Demae Iccho (出前一丁)”, “Doll Instant Noodle (公仔麵)”, “Doll Dim Sum (公仔點心)” and “Fuku (福)”.
To further expand its product portfolio, Nissin Foods acquired 51.0% equity interest in MC Marketing & Sales (Hong Kong) Limited (MCMS) in March 2017, and began distributing beverage, processed food and sauce products of brands such as Danone, Kagome, and Kewpie in Hong Kong and Macau.
The diagram below shows Nissin Foods’ current group structure.
(Source: company website)
Nissin Foods earns the bulk of its revenue and profits from two regions, namely Hong Kong (including exports to overseas) and Mainland China. Mainland China is the larger contributor, making up 54.9% of revenue and 67.8% of profits of the group in 2019.
(Source: 2019 annual report)
Nissin Foods’ Mainland China segment has been growing at respected rates over the last six years – revenue is up 28.6% from HK$1.4 billion in 2014 to HK$1.8 billion in 2019. By comparison, its Hong Kong segment has grown at a much slower rate during the same period – revenue is only up 8.3% from HK$1.2 billion in 2014 to HK$1.3 billion in 2019.
Going forward, investors can expect Mainland China to sustain the group’s growth as consumers become comfortable paying for premium instant noodles and frozen food. Since Nissin Foods’ current market share in Mainland China is estimated at 2.0-3.0%, there is plenty of room for expansion. Conversely, growth is expected to be subdued in Hong Kong due to its saturated market where Nissin Foods is already the dominant player.
Nissin Food plans to strengthen and expand its position in the Hong Kong and Mainland China premium instant noodle markets using its “3DNV” strategic ethos:
“Discover New Value” through further production innovation and development. The group aims to introduce new products and flavours as well as enhance its product scope particularly in the target snack and organic food markets where it believes has potential;
“Distinguish New Value” through renewed efforts to distinguish, market and promote brands and products, from innovative product packaging all the way to in-store presentation; and
“Distributed New Value” through further expanding its sales network and distribution channels, especially in Mainland China.
While reading the annual reports, we note the following actions taken by management in line with its 3DNV strategy:
Nissin Foods introduced a premium brand RAOH（拉王）, featuring “Tonkotsu” or pork bone soup flavor to target different clientele.
To cater to health-conscious customers, the group has developed a collection of non-fried instant noodles brands in various formats such as the Spicy Tomato Seafood Flavour and Soya Milk Soup with Vegetable Flavour under Cup Noodles Light to offer a low fat and calorie option for customers. Bar Noodle featuring non-fried straight noodles under Demae Iccho and FUKU brands have also been launched.
The group has entered into a 70:30 joint-venture agreement with Kagome Co., Ltd to commence the distribution of vegetable and fruit beverages products in Hong Kong.
Nissin Foods has invested approximately HK$30.0 million in a new granola production line in its Tai Po production plant to manufacture and sell its made-in-Hong Kong granola products.
Nissin Foods has transitioned its Demae Iccho distribution from third party distributor to its own distributor MCMS to better control its channel mix and understand the dynamics in the distribution business.
In July 2019, the group acquired the entire equity interest in UNI-INTEC (Zhuhai) Scientific Technology Co., Ltd and plant to invest approximately RMB180 million to construct a new production plant on site for the purpose of manufacturing packaging materials.
The group and Ms. Liu Feng have entered into a shareholders’ and cooperation agreement to form a joint-venture company, which in turn, will establish a wholly-owned foreign enterprise in Shanghai, to engage in the import and sale of Japanese brand food and beverage products in China.
Investors should keep abreast of such corporate developments to ensure that management is indeed executive on its business development plan.
Nissin Foods Holdings Co., Ltd (Nissin Japan) (TYO:2897) is the parent company of Nissin Foods and owns an equity stake of 70.0% in the group.
Nissin Japan has the largest market share in terms of retail sales value in the Japanese instant noodle market, and its portfolio of food brands and products have become iconic household premium foods brands that enjoy high popularity among consumers. The backing of a strong parent ensures that Nissin Foods will continue to produce innovative products with high food safety and quality standards.
(Source: 2019 annual report)
Mr. Kiyota Ando, aged 40, is Executive Director, Chairman of the Board and Chief Executive Officer of Nissin Foods. He is responsible for the strategic planning and managing the overall business and operations of the group. Mr. Ando is the grandson of Mr. Momofuku Ando, the founder of Nissin Japan, the controlling shareholder of the group. He owns a direct interest of 1.70% in Nissin Foods.
Measure 1: Growth in revenue and profits
Nissin Foods has achieved growth in revenue and profits at compounded annual growth rates (CAGR) of 5.50% and 40.34% from 2016 to 2019.
Measure 2: Profitability
Overall Nissin Foods’ gross profit margins and net profit margins have remained stable over 2016 – 2019, at 30.5% – 39.6% and 3.5% – 8.1% respectively. While return on equity ratios are at the low end, they have doubled from 3.4% in 2016 to 6.8% in 2019.
Measure 3: Liquidity
Nissin Foods’ current and cash ratios are at a healthy level and hence, the group should not face liquidity issues. Further, the group has cash and cash equivalents and short term time deposits of HK$1.6 billion and zero borrowings as at 31 December 2019.
Round 4: Dividends payout
Since its listing in 2017, Nissin Foods has paid at least 50% of its profits out as dividends. Since the group does not have any cash flow concerns, the group should be able to maintain such dividend payouts at this level going forward. The dividend payouts made in 2016 and 2017 are unlikely to be sustainable over the longer term.
With a closing share price of HK$7.10 as at 21 July 2020, Nissin Foods is trading at a price to earnings (PE) ratio of 29.5, with a market capitalisation of HK$7.6 billion. Investors searching for a stable quality consumer name may consider putting this group on their watch list.
An accountant by training, F.I.R.E 2030 is a student of value investing since 2012. She believes that successful investing requires discipline and patience. But with the right knowledge and temperament, ordinary investors can achieve extraordinary results. These articles are her journals on stocks and the investing journey toward financial freedom in 2030.