Listed on the Stock Exchange of Hong Kong Limited in February 1996,Tingyi Caymen Islands Holding Corp(0322.HK) specialises in the production and distribution of instant noodles, beverages and instant food products in the People’s Republic of China (PRC). Not only is Tingyi part of Hong Kong’s Hang Seng Index, Tingyi is also a constituent stock of the British All-World Asia Pacific Ex-Japan Index and the Morgan Stanley Capital International (MSCI) Hong Kong Index. This shows us how big Tingyi is and with over US$10billion in Rev for FY2014, Tingyi definitely belongs in the major leagues.
Many might see a target of becoming “The biggest Group for Chinese Instant Food and Beverage in the World” a very lofty aspiration. However, Tingyi sure walks the talk and we will leave it to the numbers to show you why. According to AC Nielson SCAN TRACK EXPRESS (a global marketing research group), Tingyi was either the market leader (in terms of 2014 market share) or among the leaders for their core operations in PRC:
This is not some small third world country that we are talking about. This is China – a country with ~1.4 billion people (2014), close to 5x the population of the United States. More importantly, Tingyi is either the leader or amongst the leaders in both their two core operating segments that contributed to over 97% of FY2014 Rev:
1. Instant Noodles (US$4.1 billion | 40% of FY2014 Rev)
This segment is symbolised by Master Kong’s line of products. I was told by friends that have lived in PRC that Master Kong’s instant noodles are everywhere. And with a market share of 46.8%, I could see why. Included in this segment are various types of instant noodles from packet noodles (there’s a difference between high and low end) and bowl noodles. The bulk of Tingyi’s instant noodle rev comes from Bowl (US$2billion) and High End Packet (US$1.6billion), close to 86% of the Group’s total instant noodle sales.
2. Beverage (US$5.8 billion | 57% of FY2014 Rev)
This consisted of stuff like Tea, Water, Juice and Carbonated Drinks. For FY2014, the largest portion of beverage was contributed by Tea. An instance of the tea they produce are Ready-to-Drink or simply RTD Tea. This refers to those bottled tea that you can grab off the shelf and are literally ready to drink. Not rocket science on the history of how this genre of beverages came about. Tingyi was not named as one of the 50 best listed companies in Asia by Forbes for six straight years (since 2008) for nothing!
1. Master Kong (康師傅)– King of the PRC Instant Noodles Industry
Tingyi’s dominance in the PRC’s instant noodles market can be reflected in the graph above. And this was established by none other than Tingyi’s Master Kong (康師傅) line of instant noodles.
No matter which graph you are looking at, Tingyi (The green line) was the clear market leader in both (By volume and by value). With close to 3x the market share of the 2nd player, you could say that Tingyi dominates the PRC instant noodles market. If we are not mistaken, the 2nd player was none other than Uni-President China Holdings Ltd. If you were wondering, the other 2 remaining players are Baixiang and Hualong. However they are slightly different from Tingyi and UPC in a sense that they appear to be more concentrated in the low-end segment of the instant noodles market. Based on the historical performance (2010-2014) bar an epic meltdown, I think that we can assume that Tingyi would not be losing their positon as market leader anytime soon. And with instant noodles making up ~40% of Tingyi’s Rev, that’s ~US$4 billion coming in every single year.
In financial parlance, efficiency can be measured against various yardsticks. One of them are efficiency ratios like DOH, DSO and DPO – especially for F&B players. Before we explore Tingyi in detail, it would be good to have a brief refresher on what these three terms mean:
Days on Hand (DOH): In layman’s term, this represents how long a company to sell their products in one cycle. And most of the time, the shorter it is, the better. Inventory is not like wine, it doesn’t get better with age, especially for the one selling them.
Days Sales Outstanding (DSO): In today’s environment, your customers might not pay you in cash all the time when you sell them stuff. Hence you might offer them credit terms. DSO measures how fast you are able to collect your cash from your customers and of course the shorter, the better. This shows how stringent the cash policy of a company is.
Days Payable Outstanding (DPO): Opposite to DSO, DPO refers to the number of days you take to pay your suppliers (People who you buy stuff from). For DPO, it’s the converse, the longer you take the better because the longer you delay paying, means the more cash the company can put to use in the meantime.
Tingyi exceled in all 3 counts with DOH of 22 days, DSO of only 9 days and a DPO of 55 days with a Cash Conversion Cycle (CCC) of -24 days! CCC essentially measures how fast cash on hand gets converted to more cash. And a negative CCC means for Tingyi is that are very efficient in their cash operations whereby in essence they do not pay their suppliers for the goods bought until they have received payment for selling those goods, and then some. Another inference that we can make from this ratio would be that Tingyi has significant influence over both their suppliers and customers, two references to Porter’s 5 forces right here.
3. Unrivaled Distribution Network
In today’s PRC F&B environment, these three names stand out:
Tingyi (Caymen Islands) Holding Corp
Uni-President China Holdings Ltd
Want Want China Holdings Ltd
Having a great product just a pre-requisite for F&B companies. In order to effectively sell their products, the other part of the equation is to have a large distribution network . And in order to serve their 36,837 Wholesalers and 118,359 Direct Retailers, Tingyi (2014) had:
582 Sales Offices
Although there might not be an exact science to measure distribution, looking at the number of Sales offices should provide us with a decent gauge of the situation. And Tingyi’s count at 582 was almost 60% more than Want Want’s 359! Although we could not get much information on Uni-President China’s sales office count, it might not be too far off to say that with UPC’s FY2014 Revenue of RMB22 billion (~US$3.5 billion), they would likely have a smaller distribution network compared to Tingyi’s FY2014 Revenue of over US$10 billion. Another interesting highlight was Pepsi’s strategic alliance with Tingyi through Tingyi’s beverage arm Tingyi-Asahi Beverage. It’s not everyday that you see a beverage powerhouse like PepsiCo basically exchanging their entire interest in their PRC non-alcoholic business for an indirect stake in Tingyi’s beverage arm with an option to increase that stake (By 31 Oct 2015). This move implied the confidence PepsiCo might have had in Tingyi and just within 2 years (In 2013), Tingyi achieved their target of breakeven for the operations of the Pepsi beverages. And this next bit of information nugget might be just the thing to show the extent of Tingyi’s distribution. In 2014, PepsiCo and Tingyi will exclusively provide beverages to the Shanghai Disney Resort – the first time in 25 years since PepsiCo last sold its beverage through the theme park chain. This was even though Pepsi’s share of the carbonated soft drink segment in PRC was in 2nd place to Coca-Cola in 2014.
1. PRC Instant Noodles Market not exactly a ‘Growth’ Industry
Wasn’t it just mentioned that Tingyi’s instant noodles segment was a consistent performer at ~US$4 billion in Revenue per year and it was a good thing? Yes, that still a good thing. Maybe I should rephrase this segment by saying that this is one of those cases where the sector is rather mature and we should not expect too much growth. What this means that it takes a lot more to move the needle when you are big. And a market share of ~50% of the PRC instant noodle market is definitely big. A simple example is the “law of diminishing returns”. Let’s take an investment fund for example – When you are a $100 million fund, a $10 million return nets you a 10% return. However if you are a $1 billion fund, $10 million just adds up to a 1% return! And since FY2012, Revenue from instant noodles have been rather flat. Although part of this could have been attributed towards Tingyi’s size, the other part of this equation was also due to the intense competition in both the instant noodles and beverage industry from its direct competitor – Uni-President China, which leads us to our next point.
2. Intense competition between direct competitor
With the exception of Tingyi’s Carbonated Soft Drink segment, Tingyi and UPC are in almost the exact same industries of instant noodles and RTD beverages. Even their parents have strong links in Taiwan through Ting Hsin International Group (33.10% of Tingyi) and Uni-President Enterprises Corporation (70.52% of Uni-President China). Competition within the industry are part and parcel of business. But when we say that competition between these two are intense, we really mean it. Both have been dealing each other blow after blow. Some examples include:
Launch of a similar product after one party brings a new idea to market
Intensive marketing campaigns at the tradeoff of lower margins to protect market share
Lower sale prices at the tradeoff of lower margins to protect market share
Here’s an interesting piece from Reuters in 2013. The key risk of this is that margins might be continue to be depressed if the price wars continue. However a flip side would be the bull argument that in the event that prices do rationalise, both parties Tingyi and UPC would stand to benefit!
This point is addressed to consumer staples as a whole. Business-wise, Tingyi appears to be in a commanding position. However, one of the main concerns for an investor in consumer staples is that they do not come ‘cheap’ in the traditional sense. In normal conditions, a simple rule of thumb might be that most of these established brands do not trade at less than 20x PE (At this point in time, Tingyi is priced at 28x TTM P/E). Thus, whenever a big time F&B player trades at sub 20x PE, it might be worth your time to find out why! Given our earlier take (Just our opinion!) on the instant instant noodles industry, one might potentially have to consider if Tingyi’s potential growth in their beverage arm is comfortable from their perspective. At the end of the day, ‘cheap’ is relative. Valuation is none other than one’s perception of the future and if you are comfortable with your estimates, then that’s what matters most!
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