Profitability Enhanced but Less Impetus for Revenue Growth 盈利能力增强，收入增长动力不足

股

票

研 [Table_Title] Company Report: Uni -President China (00220 HK) Barney Wu 吴宇扬

究 (86755) 2397 6680 EquityResearch 公司报告：统一企业中国 (00220 HK) [email protected]

2 April 2018 [Table_Summary] Profitability Enhanced but Less Impetus for Revenue Growth 盈利能力增强，收入增长动力不足

 UPC’s 2017 results are basically in line with expectations. The Company's Rating:[Table_Rank ] Neutral 2017 revenue expanded by 1.5% YoY to RMB21,297 million, while beverage 公 Downgraded sales rose by 2.3% YoY but noodles sales decreased by 0.7% YoY. Due to the 司 increase in input costs, the Company's instant noodles and beverage’ gross 评级：中性 (下调)

报 margins dropped by 1.1 ppt YoY and 1.4 ppt YoY, respectively. The Company's distribution expenses to sales ratio decreased by 3.7 ppt to 24.2% YoY, resulting 告 6[Table_Price-18m TP 目标价] : HK$7.10 in a huge increase in net profit, up 44.6% YoY to RMB878 million. The Company Revised from 原目标价: HK$7.60

CompanyReport greatly raised its payout ratio to 70% with a dividend of RMB0.1423 per share. Share price 股价: HK$6.790  Mixed performances. UPC’s instant noodles sales underperformed the industry as its classic product continuously retreated, but it has solidified its position in premium instant noodles market with strong performance of Soup Daren. In Stock performance contrast, the Company’s classic beverage products recorded strong recovery in 股价表现 2017, but its star products performed unsatisfactorily. UPC’s earnings growth [Table_QuotePic] outpaced its top-line growth, as it has improved profitability by reducing 50.0 % of return

unnecessary expenses. 40.0

30.0  Although the Company has outstanding R&D ability, its new instant noodles

证 products are under threat of imitation products launched by competitors. On the 20.0

券告 other hand, probability for a new beverage product to succeed has decreased

and the duration of popularity is shortened greatly as customers become pickier. 10.0 研报

Moreover, we are concerned about the uncertainties in the continuous recovery 0.0

究究 of beverage industry in 2018. Therefore, we downgrade the Company’s

(10.0)

报 rating to “Neutral” and lower our TP to HK$7.10, which represents 24.8x Apr-17 Jul-17 Sep-17 Dec-17 Mar-18 研 HSI index UNI-PRESIDENT CHINA 2018 PER, 22.2x 2019 PER and 19.9x 2020 PER.

告券

EquityResearch Report  统一 2017 年业绩大致符合预期。公司 2017 年收入同比上涨 1.5%至人民币 21,297 百万，同 [Table_PriceChange] 证时饮料销售同比上升，但方便面销售同比下降。因为原材料成本提升，公司方便面 Change in Share Price 1 M 3 M 1 Y 2.3% 0.7% [Tab

和饮料的毛利率分别同比下降 1.1 和 1.4 个百分点。公司分销费用占比同比减少 3.7 个百分点股价变动 1 个月 3 个月 1 年

le_I 至 24.2%，导致公司净利润大幅提升，同比上升 44.6%至人民币 878 百万。公司大幅提高分 Abs. % 2.0 4.1 24.1

绝对变动 % 消红派息比率至 70%，期末股息达到人民币 0.1423 元每股。 nfo1 Rel. % to HS Index 4.4 3.6 0.3 费相对恒指变动 %  业绩喜忧参半。由于老品销售持续倒退，统一方便面销售差于行业表现，但因为汤达人的强劲行] Avg. Share price(HK$) 6.6 6.8 6.4 表现其巩固了在高端方便面市场的地位。刚好相反，公司饮料老品在 2017 年录得强劲复苏，平均股价（港元）业 Source: Bloomberg, Guotai Junan International.

Food Beverage & Food 但其明星产品表现不尽如人意。统一的盈利增长快于收入增长，因为其通过削减不必要的费用 - 食改善了盈利能力。品尽管公司有杰出的研发能力，但其方便面新品受到竞争者推出的模仿竞品的威胁。另一方面，饮  因为消费者变得更加挑剔，饮料新品的成功概率已经减小，并且流行的时间也大幅缩短。另外，料

我们担忧饮料行业在 2018 年持续复苏的不确定性。因此，我们下调公司评级至“中性”，并调低目标价至 7.10 港币，相当于 24.8 倍，22.2 倍和 19.9 倍 2018 年，2019 年和 2020 年市盈

ConsumerSector 率。

Y[Table_ear End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE

年结Profit ] 收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 [Tab 12/31 (RMB m) (RMB m) (RMB) (△ %) (x) (RMB) (x) (RMB) (%) (%)

le_I 2016A 20,986 607 0.141 (26.9) 43.1 2.787 2.2 0.028 0.5 5.1 nfo2 2017F 21,297 878 0.203 44.0 27.1 2.967 1.9 0.142 2.6 7.1 中] 2018F 21,834 1,003 0.232 14.3 23.7 3.080 1.8 0.163 3.0 7.7 统 2019F 22,438 1,119 0.259 11.5 21.2 3.176 1.7 0.130 2.4 8.3 一外 2020F 23,176 1,248 0.289 11.6 19.0 3.336 1.6 0.144 2.6 8.9 企运 [Table_BaseData]Shares in issue (m) 总股数 (m) 4,319.0 Major shareholder 大股东 Uni-President Enterprises 70.5% 业输 Market cap. (HK$ m) 市值 (HK$ m) 29,326.0 Free float (%) 自由流通比率 (%) 29.5 中 3 month average vol. 3 个月平均成交股数 (‘000) 4,541.0 FY18 Net gearing (%) FY18 净负债/股东资金 (%) Net cash 国 52 Weeks high/low (HK$) 52 周高/低 (HK$) 7.880 / 5.300 FY18 Est. NAV (HK$) FY18 每股估值（港元） 5.0

Source: the Company, Guotai Junan International.

President China (00220 HK) China President (00220 -

Uni See the last page for disclaimer Page 1 of 10

[Table_PageHeader]Uni-President China (00220 HK)

UPC 2017 Annual Results Review

] 1 r a M t h g i R _ e l b a T [

UPC’s 2017 results are basically in line with market consensus and our expectations. Uni-President China ("UPC" or "the

Company")'s revenue in 2017 expanded by 1.5% YoY to RMB21,297 million, in line with expectation. Viewed separately, beverage sales rose by 2.3% YoY to RMB 12,465 million, but instant noodles sales decreased by 0.7% YoY to RMB8,163 million. In 2H2017, the Company's revenue rose 12.3% YoY, due to a low base in 2H16. In 2017, the Company’s beverage

revenue was mainly driven by its classic products including iced black tea, iced green tea, and milk tea, but the Company’s star 2 April2018 product, Classmate Xiaoming, performed unsatisfactorily in 2017, down around RMB300 million YoY to 1.3 billion in 2017. Although instant noodles’ revenue fell back in 2017, its high-end product, Soup Daren, recorded a strong growth, up 70% YoY to RMB1.5 billion.

Profitability improved greatly. Due to the increase in raw material prices, the Company's instant noodles and beverage’ gross margins dropped by 1.1 ppt YoY and 1.4 ppt YoY to 29.8% and 36.2%, respectively. Thanks to the Company's savings in expense on channel promotion and staff costs, the Company's distribution expenses to sales ratio decreased by 3.7 ppt YoY to 24.2% YoY, resulting in an increase in net profit, up 44.6% YoY to RMB878 million. Excluding the one-off gain on the disposal of Jinmailang's business in 2016, the Company’s 2017 adjusted shareholders’ profit rose by 75.2% YoY. Due to a substantial recovery in earnings, dividends of RMB 14.23 cents per share were proposed for 2017, and the payout ratio reached 70%,

which is higher than the level of 20% over the past 5 years. ] 2 r a M t h g i R _ e l b a T [

Table-1: UPC’s 2017 Annual Results Review Income Statement RMB million 2016 2017 YoY 2H16 2H17 YoY

Revenue 20,986 21,297 1.5% 9,272 10,410 12.3%

Cost of sales (13,758) (14,245) 3.5% (6,369) (7,018) 10.2% Gross Profit 7,228 7,052 -2.4% 2,903 3,392 16.8%

Other gains 298 (32) -110.6% 296 (33) -111.0% (00220 HK)

Other income, net 285 308 7.9% 210 169 -19.5% Selling & marketing expenses (5,850) (5,154) -11.9% (2,883) (2,573) -10.8% Administrative expenses (999) (988) -1.1% (486) (521) 7.2% Operating profit 963 1,187 23.3% 18 397 2107.3%

Finance income, net 12 62 401.1% 7 50 585.0% 统一企业中国 Share of JV & associates 93 29 -69.4% 17 27 55.2% Profit before tax 1,068 1,277 19.6% 43 474 1014.8% Income tax expense (461) (399) -13.5% (210) (166) -21.2% Net profit 607 878 44.6% (168) 309 283.8%

Adjust net profit 501 878 75.3% (253) 310 222.5% President China -

Uni Gross Margin 34.4% 33.1% -1.3 ppt 31.3% 32.6% 1.3 ppt Operating Margin 4.6% 5.6% 1.0 ppt 0.2% 3.8% 3.6 ppt Net Margin 2.9% 4.1% 1.2 ppt -1.8% 3.0% 4.8 ppt Adjusted net margin 2.4% 4.1% 1.7 ppt -2.7% 3.0% 5.7 ppt Source: the Company, Guotai Junan International.

Report

Company

See the last page for disclaimer Page 2 of 10 [Table_PageHeader]Uni-President China (00220 HK)

Table-2: UPC’s Segment Results Breakdown

] 1 r a M t h g i R _ e l b a T [ Segment Results RMB million 2016 2017 YoY 2H16 2H17 YoY

Segment revenue

Beverage 12,181 12,465 2.3% 4,733 5,868 24.0% Instant Noodle 8,221 8,163 -0.7% 4,211 4,209 0.0% Others 584 668 14.5% 329 334 1.6% Total 20,986 21,297 1.5% 9,272 10,410 12.3% 2 April2018 Gross profit

Beverage 4,580 4,512 -1.5% 1,526 2,091 37.0% Instant Noodle 2,540 2,432 -4.2% 1,297 1,250 -3.6% Others 108 107 -0.9% 80 51 -36.5% Total 7,228 7,052 -2.4% 2,903 3,392 16.8% Segment profit

Beverage 891 1,015 14.0% (51) 348 -774.9% Instant Noodle 316 412 30.4% 167 224 33.7% Others & Unallocated (244) (240) -1.5% (98) (174) 77.9% Total 963 1,187 23.3% 18 397 2107.3% Gross margin

Beverage 37.6% 36.2% -1.4 ppt 32.2%] 2 r a 35.6%M t h g i R _ 3.4e pptl b a T [

Instant Noodle 30.9% 29.8% -1.1 ppt 30.8% 29.7% -1.1 ppt Segment margin

Beverage 7.3% 8.1% 0.8 ppt -1.1% 5.9% 7 ppt Instant Noodle 3.8% 5.0% 1.2 ppt 4.0% 5.3% 1.3 ppt Source: the Company, Guotai Junan International.

Instant Noodles Business Review and Outlook

(00220 HK)

Instant noodles industry rebounded but UPC’s sales slightly retreated. Due to demographic changes, more high-speed trains put into operation resulting in a lower amount of instant noodles and higher popularity of O2O take-away platforms, China's instant noodles market entered a downward trend during 2013-2016. However, according to Nielsen, in 2017, China's instant noodles sales value increased 3.6% YoY and sales volume grew 0.3% YoY; the first instance of positive growth since 统一企业中国 2014, driven by the rise in premium instant noodles sales. UPC maintained its second place in instant noodles market, but its instant noodles sales slightly underperformed the industry as its classic product continuously retreated. Nevertheless, UPC has solidified its position in premium instant noodles market as we saw its Soup Daren reported strong growth in 2017, up 70% YoY

to RMB1.5 billion. President China -

Uni Figure-1: Instant Noodles Market Share – by Volume Figure-2: Instant Noodles Market Share – by Value

60% 70%

60% 50% 44.1% 50.2% 50% 40% Tingyi 康师傅 Tingyi 康师傅 Uni-President 统一 40% Uni-President 统一 30% Hualong 华龙 Hualong 华龙 Baixiang 白象 30% Baixiang 白象 19.3% 20% 21.1% 20% 9.4% 10% 8.2% 5.6% 10% 4.0%

0% 0%

1Q12 2Q12 4Q12 1Q13 3Q13 4Q13 2Q14 3Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 3Q17 4Q17 3Q12 2Q13 1Q14 4Q14 2Q17

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 3Q13 1Q14 3Q14 1Q15 3Q15

Source: Nielsen, the Company, Guotai Junan International. Source: Nielsen, the Company, Guotai Junan International. Report

Company

See the last page for disclaimer Page 3 of 10 [Table_PageHeader]Uni-President China (00220 HK)

UPC has redefined instant noodles segment. Consumption upgrade is a double-edged sword for the instant noodles market.

Low-end instant noodles are a typical a victim of consumption upgrade, but demand ] for 1 premiumr a M t instanth g noodlesi R _ e surgedl b a T [

considerably. To follow the trend, UPC has made more efforts on premium instant noodles and has been the leader in instant

noodles upgrading. It has established a new group to take charge of premium instant noodles priced above RMB4. UPC has differentiated its competition with its main competitor by concentrating on the tier1-tier2 cities and middle-class customers. Inspired by the success of Soup Daren, UPC is launching more new instant noodle products. For example, the local brand

“Teng Jiao” beef noodles” priced at RMB4 per bowl, will be promoted throughout the country. Furthermore, the Company has 2 April2018 stepped into instant foods market by launching self-heating small hotpots, Lazy Time – Chongqing old hot pot priced at RMB45.

Figure-3: Teng Jiao Beef Noodles Figure-4: Lazy Time – Chongqing Old Hot Pot

] 2 r a M t h g i R _ e l b a T [

Source: Tmall. Source: Tmall.

The change in instant noodles consumption is expected to remain stable. After users begin to use O2O take-away platforms, within the first half year, purchasing frequency of instant noodles won’t change much but it will start to decline

gradually if users continue to rely on O2O take-away platforms for food. We expect that it is a huge challenge for the sales (00220 HK) volume of instant noodles to pick up continuously in 2018 as the customer base of O2O take-away platforms is still enlarging in lower-tier cities and the comparable base was up in 2017. However, we noticed that as the O2O take-away market has formed a duopolistic competition landscape, the coupons from Ele.com and Meituan offered to customers have decreased significantly.

We believe that instant noodles are still a competitive packaged food product priced between RMB5-RMB15, compared to 统一企业中国 take-out foods. Therefore, we believe that the base for instant noodles is still solid, but has less growth prospect.

Raw materials of the food segment may not be a major concern for UPC in 2018. The YTD price of palm oil declined 20.0%

YoY as at 30 March 2018, and palm oil price continuously declined in March 2018 as production cuts in Indonesia missed President China

expectations. Flour price has remained stable for more than one year, and we have not seen the upside potential. The price - Uni hike of packaging costs, particularly cardboard, was the major factor of pressure of raw material prices for F&B manufacturers in 2017. Cardboard prices almost doubled in 2017, but are also experiencing a kind of hangover after last year’s excess. We expect that the rise in cardboard price has lost momentum as the high price has reached the limitations of tolerance level of downstream companies. Overall, raw material prices may not be a major concern for UPC's food segment in 2018.

Figure-5: Palm Oil price Figure-6: Flour price

3.9 3,600 Flour Price (RMB/kg) Palm Oil Price (MYR/Metric Tonne) 3,400 3.7 3,200 3.5 3,000

2,800 3.3 2,600

3.1 2,400

2,200 2.9

Report

2,000 2.7

1,800

1,600 2.5 Company Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Dec-17

Source: MDEX. Source: Ministry of Agriculture of China. See the last page for disclaimer Page 4 of 10 [Table_PageHeader]Uni-President China (00220 HK)

Figure-7: Corrugated Paper Figure-8: Cardboard Price

Cardboard:] Guangdong:1 r a M Jiulongt h (126g)g i R _ e l b a T [ RMB/ton Corrugated Paper: Guangdong: Jiulong (100g) RMB/ton Corrugated Paper: Guangdong: Sea Dragon (100g) Cardboard: Jiangsu, Zhejiang: Sea Dragon (120g) 7,000 Corrugated Paper: Jiangsu and Zhejiang: Jiulong (100g) 8,000 Cardboard: Jiangsu, Zhejiang: Sequoia (120g)

Corrugated Paper: Tianjin: Jiulong (100g) Cardboard: Tianjin: Sea Dragon (140g) 6,000 7,000 6,000 5,000 5,000

4,000 2 April2018 4,000 3,000 3,000 2,000 2,000

1,000 1,000

0 0 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Feb-18 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Feb-18

Source: Wind. Source: Wind.

] 2 r a M t h g i R _ e l b a T [

Beverage Business Review and Outlook

China's beverage sales recorded strong growth in 2017. According to Nielsen, in 2017, China's beverage sales value increased by 9.9% YoY, up 6.6 ppt from 2016, while according to the National Bureau of Statistics of China, the total output of

beverages in China rose 4.6% YoY, up 2.7 ppt from 2016. The strong growth of beverage sales was primarily contributed to economy recovery, rising consumer confidence, favorable weather and the increase in demand from tier-3 and tier-4 cities. As a major player in China's beverage market, UPC's beverage business also benefited from industry recovery, up 2.3% YoY in

2017, but growth rate was lower than the overall growth rate of the industry. (00220 HK)

Figure-9: Sales Value Growth of Various Beverage Products in China

2015 2016 2017

25% 22.5% 统一企业中国 20% 15.9% 17.1% 15% 9.9% 9.1% 8.4% 8.5% 10% 6.4% 5.6% 5.1% 3.3% 3.3% 3.9% 4.0% 5% 1.2% 1.8% 1.9%

President China - -5% -0.7% -0.6% -0.7% -1.7% -4.5% Uni -10% -9.0% -15% -20% -25% -20.2% Beverage RTD Tea (No Milk) Juice Milk Tea Carbonated Drink Bottled Water Functional Drink Asian Traditional Drink

Source: Nielsen, the Company, Guotai Junan International.

UPC’s beverage sales have not fully benefited from the industry recovery. In 2017 the Company’s classic beverage product such iced green tea, iced black tea and milk tea recorded strong recovery, but its star products, Classmate Xiaoming and Haizhiyan, performed unsatisfactorily. The sales of Classmate Xiaoming decreased RMB300 million YoY to RMB1.3 billion. Given that, the Company’s RTD sales only slightly increased 0.8%, much lower than industry growth (22.5% in 2017). Affected by the further decline in Haizhiyan sales as well as the retreat in old products, UPC’s juice sales fell 18.4% YoY. The

Company made improvement in milk tea & coffee segment, which recorded 18.8% YoY growth in 2017. In 2017, except milk

tea, UPC has been losing market share in beverage market. Report

Company

See the last page for disclaimer Page 5 of 10 [Table_PageHeader]Uni-President China (00220 HK)

Figure-10: RTD Tea (without milk tea) Market Share – by Figure-11: RTD Tea (including milk tea) Market Share –

Volume by Value ] 1 r a M t h g i R _ e l b a T [

70% 60%

60% 54.8% 50% 43.6% Tingyi 康师傅 50% Tingyi 康师傅 Uni-President 统一 40% Uni-President 统一 Wahaha 娃哈哈 Wahaha 娃哈哈

40% 2 April2018 Farmer's Spring 农夫山泉 30% Farmer's Spring 农夫山泉 23.5% 30% 21.7% 20% 20% 14.1%

8.7% 10% 10% 3.6% 3.8% 0% 0%

2Q12 3Q12 4Q12 1Q13 4Q13 1Q14 2Q14 3Q14 1Q15 2Q15 3Q15 4Q15 3Q16 4Q16 1Q17 2Q17 4Q17 1Q12 2Q13 3Q13 4Q14 1Q16 2Q16 3Q17

4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q12 2Q12 3Q12 2Q15 3Q15 4Q15 1Q16

Source: Nielsen, the Company, Guotai Junan International. Source: Nielsen, the Company, Guotai Junan International.

Figure-12: Diluted Juice Market Share – by Volume Figure-13: Milk Tea Market Share – by Value

Tingyi 康师傅 ] 2 r a M t h g i R _ e l b a T [ 40% Uni-President 统一 80% 72.3% 72.1% 71.8% Coca Cola 可口可乐 35% 67.8% Huiyuan 汇源 70% 62.9% 62.2% Wahaha 娃哈哈 30% 60% 27.3% Uni-President 统一 Tingyi 康师傅 25% 50% Wahaha 娃哈哈 Kirin 麒麟 20% 19.1% 40%

15% 30% 11.4% 19.0% 10% 17.4% 16.9%

20% 13.9% 14.3% 13.5% (00220 HK)

5% 4.0% 8.9% 10% 5.4% 5.5% 6.0% 6.8% 6.6% 3.4% 0% 5.7% 6.0% 0% 5.1% 4.3% 3.5% 3.3%

2013 2014 2015 2016 1H17 2017

1Q12 2Q12 4Q12 2Q13 3Q13 4Q13 1Q14 3Q14 1Q15 2Q15 3Q15 4Q15 2Q16 4Q16 1Q17 2Q17 3Q17 3Q12 1Q13 2Q14 4Q14 1Q16 3Q16 4Q17

Source: Nielsen, the Company, Guotai Junan International. Source: Nielsen, the Company, Guotai Junan International. 统一企业中国

UPC is improving profitability of beverages by raising ASP and reducing unnecessary expenses. As UPC’s major competitors have raised prices and governments’ control on price has relaxed, UPC may continue to raise its ex-factory prices

of low-gross-margin products in 2018 directly and indirectly, so as to improve profitability. As the Company has well controlled

President China -

its pace of shipments and sorted out a better way to distribute, UPC has reduced an amount of distribution expense. In addition, Uni the Company has optimized its advertisement fees by applying precision marketing. The improvement in product mix missed expectation in 2017, as the sales of low-gross-margin products expanded greatly in 2017 and its star products met headwind. Since young customers lose interest in new products in a faster pace, the Company has been cautious on promotion of new products. The Company will put more resources on Haizhiyan and Classmate Xiaoming’ certain tastes, which have been tested by market.

Upward pressure in the beverage industry from raw material prices has been eased. As at 30 March 2018, the YTD PET price increased slightly by 5.0% YoY, but we expect that the rise in PET price has lost momentum as oil prices have been sluggish. On the other hand, affected by the continuous increase in supply at home and abroad, domestic and international sugar prices have been continuously declining. As at 30 March 2018, YTD domestic sugar price plunged 10.3% YoY. According China Sugar Association, China's sugar production in February 2018 was basically in line with expectations, but sales volume missed. As for the global market, the International Sugar Organization (ISO) has raised their 2017/2018 estimation of annual sugar surplus from 5.03 million tons to 5.15 million tons. We expect that sugar price will under pressure in the whole year of

2018. Report

Company

See the last page for disclaimer Page 6 of 10 [Table_PageHeader]Uni-President China (00220 HK)

Figure-14: PET price Figure-15: Domestic Sugar price

] 1 r a M t h g i R _ e l b a T [ 8,500 7,400 PET Resin Price (RMB/Tonne) Sugar Price (RMB/Tonne)

8,000 6,900

7,500 6,400

7,000 5,900 2 April2018 5,400 6,500

4,900 6,000

4,400 5,500

3,900 5,000 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18

Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18

Source: www.tbs-china.com, WIND. Source: Bloomberg.

Earnings Forecast Assumptions and Revisions

] 2 r a M t h g i R _ e l b a T [

We have raised our earnings forecasts for 2018-2019. We have revised down the Company's instant noodles revenue forecasts in 2018 and 2019 by 3.7% and 4.2%, respectively, as we expect that the sales contribution from new product may not make up the retreat in classic products sales. On the other hand, we slightly revised down beverage sales forecasts in 2018 and 2019 by 0.1% and 0.9% as we believe that the recovery of classic product may not continue and less sales contribution

from new products. Therefore, we have revised down UPC’s revenue forecasts in 2018 and 2019 by 1.1% and 1.7%, respectively. Due to worse prospects on improvement on beverage product mix, we slightly revise down gross margin in 2018 and 2019 by 0.9 ppt and 0.6 ppt. Impressed by the Company’s efforts on saving operating expenses, we have revised up our

forecasts on operating profit in 2018 and 2019. However, due to prospects on higher tax rates, we have revised down our (00220 HK) forecasts on the Company shareholders’ profit in 2018 and 2019 by 1.2% and 1.5%, respectively.

Table-3: Earnings Estimates Revisions

NEW OLD CHANGE 统一企业中国 RMB million 2018F 2019F 2020F 2018F 2019F 2018F 2019F Revenue 21,834 22,438 23,176 22,076 22,829 -1.1% -1.7% Gross profit 7,366 7,696 8,045 7,641 7,977 -3.6% -3.5%

Operating profit 1,337 1,509 1,649 1,318 1,459 1.5% 3.5% President China

Net profit 1,003 1,119 1,248 1,015 1,135 -1.2% -1.4% - Uni EPS (RMB) 0.232 0.259 0.289 0.235 0.263 -1.2% -1.5%

Gross margin 33.7% 34.3% 34.7% 34.6% 34.9% -0.9 ppt -0.6 ppt Operating margin 6.1% 6.7% 7.1% 6.0% 6.4% 0.1 ppt 0.3 ppt Net margin 4.6% 5.0% 5.4% 4.6% 5.0% 0 ppt 0 ppt Source: Guotai Junan International.

Table-4: Instant Noodle Business Assumptions Revisions NEW OLD CHANGE RMB million 2018F 2019F 2020F 2018F 2019F 2018F 2019F Revenue 8,370 8,562 8,756 8,692 8,937 -3.7% -4.2% Gross Profit 2,578 2,671 2,784 2,764 2,887 -6.7% -7.5% EBIT 360 368 377 374 384 -3.7% -4.2%

Gross Margin 30.8% 31.2% 31.8% 31.8% 32.3% -1 ppt -1.1 ppt

EBIT Margin 4.3% 4.3% 4.3% 4.3% 4.3% 0 ppt 0 ppt Report

Source: Guotai Junan International.

Company

See the last page for disclaimer Page 7 of 10 [Table_PageHeader]Uni-President China (00220 HK)

Table-5: Beverage Business Assumptions Revisions

NEW OLD ] 1 r a M t h CHANGEg i R _ e l b a T [ RMB million 2018F 2019F 2020F 2018F 2019F 2018F 2019F Revenue 12,762 13,140 13,646 12,770 13,263 -0.1% -0.9% Gross Profit 4,658 4,888 5,117 4,763 4,974 -2.2% -1.7% EBIT 995 1,025 1,064 996 1,035 -0.1% -0.9%

Gross Margin 36.5% 37.2% 37.5% 37.3% 37.5% -0.8 ppt -0.3 ppt 2 April2018 EBIT Margin 7.8% 7.8% 7.8% 7.8% 7.8% 0 ppt 0 ppt Source: Guotai Junan International.

Downgrade to "Neutral" and lower TP to HK$7.10. Although the Company has outstanding R&D ability, its new instant noodles products are under the threat of imitation products launched by its major competitor which has stronger distribution ability. On the other hand, as customers become pickier and market competition remains fierce, probability for new beverage products to succeed is pretty low. And the time duration of popularity for a star product is shortening. Moreover, we are still concerned about the uncertainties in the continuous recovery of beverage industry in 2018. As the marginal utility of SG&A saving is weakening, we expect UPC's top-line expansion may not drive its earnings growth further. Therefore, we downgrade the Company’s rating to “Neutral” and lower out TP for UPC to HK$7.10, which represents 24.8x 2018 PER, 22.2x 2019 PER

and 19.9x 2020 PER. ] 2 r a M t h g i R _ e l b a T [

Table-6: Peers Comparison

Market PER (x) PBR(x) ROE(%) Gross Margin(%) Operating Margin(%) Share Company Ticker $ Cap

Price (HK$ mn) FY18F FY19F FY20F FY18F FY18F FY18F FY18F

China Resources Beer 291 HK HKD 34.000 110,302 40.7 32.9 26.7 4.4 10.9 35.4 9.3

China Mengniu Dairy 2319 HK HKD 26.900 105,646 25.2 20.2 17.0 3.3 13.6 35.7 6.2 (00220 HK)

Holdin Tingyi 322 HK HKD 16.280 91,439 31.4 27.3 23.3 3.6 12.2 30.3 6.5 Co Dali Foods 3799 HK HKD 6.460 88,464 18.2 15.8 14.3 4.5 26.5 39.3 21.4 Want Want China 151 HK HKD 6.290 78,386 19.8 18.8 18.1 4.6 23.8 44.7 21.0 Tsingtao Brewery 168 HK HKD 41.000 61,994 26.9 24.2 26.3 2.4 9.3 41.2 6.3

Holdings Ltd 统一企业中国 Uni-President China 220 HK HKD 6.790 29,328 23.7 21.2 19.0 1.8 7.7 33.7 6.1 Ltd-H Vitasoy 345 HK HKD 20.200 21,387 38.3 32.8 28.3 8.0 21.9 52.0 12.1 Holdings China Foods 506 HK HKD 3.610 10,098 25.1 19.7 17.6 2.1 8.7 35.5 5.1 Simple Average 27.2 23.3 21.3 3.8 14.9 38.8 10.4

President China

Weighted Average 27.7 23.6 20.9 3.9 15.6 37.6 11.2 -

Source: Bloomberg. Uni

Figure-16: PER Band of UPC Figure-17: PEB Band of UPC

Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 40 4.0

35 (x) (x) 30 3.0

20 2.0

10 1.0

0 0.0

UPC UPC

PER (historical) PER (current) PER (high) PBR (historical) PBR (current) PBR (high) PER (low) PER band PBR (low) PBR band

Report

Source: Bloomberg, Guotai Junan International Source: Bloomberg, Guotai Junan International

Company

See the last page for disclaimer Page 8 of 10 [Table_PageHeader]Uni-President China (00220 HK)

Financial Statements and Ratios

[Table_IncomeStatement] [Table_BalanceSheet] ] 1 r a M t h g i R _ e l b a T [ Income Statement Balance Sheet

Year end 31 Dec (RMB mn) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (RMB mn) 2016A 2017A 2018F 2019F 2020F

Revenue 20,986 21,297 21,834 22,438 23,176 Property, plant and equipment 11,097 10,504 10,599 10,483 10,370

Cost of sales (13,758) (14,245) (14,468) (14,743) (15,131) Leasehold land 2,222 2,104 2,116 2,134 2,156

Gross Profit 7,228 7,052 7,366 7,696 8,045 Others 1,712 1,608 1,621 1,641 1,661

Total Non-current Assets 15,031 14,216 14,336 14,258 14,186 2 April2018

Other gains - net 298 (32) 18 18 18

Other income 409 384 352 343 341 Cash & Cash Equivalents 2,077 2,783 2,729 3,813 3,998

Other expenses (124) (76) (79) (83) (88) Inventories 1,215 1,159 1,298 1,206 1,364 Selling & marketing expenses (5,850) (5,154) (5,314) (5,522) (5,693) Bills receivable 543 563 454 591 488 Administrative expenses (999) (988) (1,004) (942) (973) Others 1,840 1,315 1,441 1,579 1,731

Operating Profit 963 1,187 1,337 1,509 1,649 Total Current Assets 5,675 5,820 5,922 7,189 7,582

Total Assets 20,705 20,037 20,258 21,447 21,768

Finance income 108 113 83 82 114

Finance costs (96) (52) (23) (29) (29) Short-term debts 2,100 835 1,000 1,000 1,000

Share of JCEs & associates 93 29 25 25 25 Bills payable 1,138 1,396 824 1,438 883

Profit Before Tax 1,068 1,277 1,423 1,588 1,760 Accrued expenses and other payables 4,044 4,026 4,127 4,242 4,381

Others 260 39 45 52 59

] 2 r a M t h g i R _ e l b a T [ Income Tax (461) (399) (419) (469) (512) Total Current Liabilities 7,543 6,296 5,996 6,731 6,324

Profit after Tax 607 878 1,003 1,119 1,248

Long-term debts 500 500 500 500 500

Non-controlling Interest 0 0 0 0 0 Others 623 425 459 496 536

Shareholders' Profit / Loss 607 878 1,003 1,119 1,248 Total Non-current Liabilities 1,123 925 959 996 1,036

Adjusted Net Profit 501 878 1,003 1,119 1,248 Total Liabilities 8,665 7,221 6,955 7,727 7,360

Basic EPS 0.141 0.203 0.232 0.259 0.289 Total Shareholders' Equity 12,040 12,815 13,303 13,719 14,408

Adjusted EPS (RMB) 0.116 0.203 0.232 0.259 0.289 Minority Interest 0 0 0 0 0

Total Equity 12,040 12,815 13,303 13,719 14,408 (00220 HK)

[Table_CashFlowStatement] Cash Flow Statement

[Table_FinancialRatio] Year end 31 Dec (RMB mn) 2016A 2017F 2018F 2019F 2020F Financial Ratios

PBT 1,068 1,277 1,423 1,588 1,760 2016A 2017A 2018F 2019F 2020F 统一企业中国

DD&A 1,433 1,402 1,291 1,291 1,285 Revenue growth (%) -5.1 1.5 2.5 2.8 3.3

Net interest 108 52 23 29 27 Gross profit growth (%) -11.2 -2.4 4.5 4.5 4.5

Change in working capital 331 298 (601) 573 (592) Operating profit growth (%) -34.5 83.4 8.3 13.0 9.4

Others (527) (0) (48) (54) (52) Net profit growth (%) -27.2 44.6 14.2 11.5 11.6

Income tax paid (270) (574) (412) (460) (502)

President China -

Cash from Operating Activities 2,143 2,453 1,676 2,966 1,925 Gross Margin (%) 34.4 33.1 33.7 34.3 34.7 Uni - Beverages 37.6 36.2 36.5 37.2 37.5 Investing activities - Instant Noodles 30.9 29.8 30.8 31.2 31.8

Capital expenditure (944) (751) (1,200) (1,100) (1,100) Operating Margin (%) 4.6 5.6 6.1 6.7 7.1

Time Deposits 55 1 0 0 0 - Beverages 7.3 8.1 7.8 7.8 7.8

Others 1,161 (33) (80) (80) (81) - Instant Noodles 3.8 5.0 4.3 4.3 4.3

Cash from Investing Activities 272 (782) (1,280) (1,180) (1,181) Net Margin (%) 2.9 4.1 4.6 5.0 5.4

ROA (%) 2.9 4.3 5.0 5.4 5.8

Financing activities ROE (%) 5.1 7.1 7.7 8.3 8.9

Loans changes (1,655) (1,265) 165 0 0

Dividend paid (168) (120) (615) (702) (559) Inventory turnover days 34.3 30.4 31.0 31.0 31.0

Others 0 1 0 0 0 Receivable turnover days 9.3 9.5 8.5 8.5 8.5

Cash from Financing Activities (1,823) (1,384) (450) (702) (559) Payable turnover days 31.4 32.5 28.0 28.0 28.0

Net gearing (%) 1.1 Net cash Net cash Net cash Net cash

Net Changes in Cash 592 286 (54) 1,084 185 Net interest cover (x) Net Net Net Net Net

income income income income income Foreign exchange effect 11 0 0 0 0

Cash at Beg of Year 1,473 2,077 2,783 2,729 3,813 Payout ratio (%) 20.0 70.0 70.0 50.0 50.0

Cash at End of Year 2,077 2,783 2,729 3,813 3,998 Report

Source: the Company, Guotai Junan International.

Company

See the last page for disclaimer Page 9 of 10 [Table_PageHeader]Uni-President China (00220 HK)

Company[Table_CompanyRatingDefinition] Rating Definition

The Benchmark: Hong Kong Hang Seng Index ] 1 r a M t h g i R _ e l b a T [

Time Horizon: 6 to 18 months

Rating Definition

Buy 买入 Relative Performance >15%; or the fundamental outlook of the company or sector is favorable. Accumulate 收集 Relative Performance is 5% to 15%;

or the fundamental outlook of the company or sector is favorable. 2 April2018 Neutral 中性 Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral. Reduce 减持 Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable.

Sell 卖出 Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable.

Sector[Table_ RatingIndustry DefinitionRatingDefinition] The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Outperform 跑赢大市 Relative Performance >5%;

] 2 r a M t h g i R _ e l b a T [ or the fundamental outlook of the sector is favorable. Neutral 中性 Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral. Underperform 跑输大市 Relative Performance <-5%; Or the fundamental outlook of the sector is unfavorable.

[DISCLOSURETable_DISCLOSUREOFINTERESTS OF INTERESTS ] (1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report.

(2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (00220 HK)

(3) Except for GREENLAND BROAD (01253 HK),GUOTAI JUNAN I (01788 HK),BINHAI INVESTMENT (02886 HK),GFI MSCI A I (03156 HK),CAM SCSMALLCAP (03157 HK),ZHENRO PPT (06158 HK),LINK HOLDINGS (08237 HK),MR CSI300 ETF-R (CNY) (83127 HK),GFI MSCI A I-R (CNY) (83156 HK),Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer mentioned in this Research Report. (4) Guotai Junan and its group companies have not had investment banking relationships with the issuer mentioned in this Research

Report within the preceding 12 months. 统一企业中国 (5) Guotai Junan and its group companies are not making a market in the securities in respect of the issuer mentioned in this Research Report. (6) Guotai Junan and its group companies have not employed an individual serving as an officer of the issuer mentioned in this Research Report. There is no officer of the issuer mentioned in this Research Report associated with Guotai Junan and its group companies.

President China

Uni DISCLAIMER

This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services, etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily).

Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan.

Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision.

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Company

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