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Cyrus Tai (SFC CE:BKJ685) (852) 3519 1292 May 29, 2020 Friday Market Wrap HSI▼0.72% HSCEI▼0.17% Turnover HK$132.7 bn ▲24% (30-day average) SSE Composite▲0.33% SZSE Component ▼0.27% Sector tracking Stock tracking 1D ▲% 1Y ▲% 1D ▲% 1Q ▲%

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Market Highlight Nissin Foods (1475 HK) Sees Strong Growth in Mainland China Business The parent company Nissin Japan (JPY:2897) was established in 1948 by Mr. Momofuku Ando. It is currently a leading company in the instant noodle industry in Japan with the market share surpassing 70%. Nissin Foods Company Limited, a renowned food company in Hong Kong and China, best known for popular household brands like Demae Iccho, Cup Noodles and Doll Instant Noodles, got spun-off and listed on HKEx in 2017. With years of accumulated recognition and precipitation and the acquisition of local brands, the Company has become a monopoly in Hong Kong, gaining a leading market share over 60%. However, it has a relatively smaller market share in Mainland China, compared with that of Master Kong and Uni-President, due to the fierce competition there. Company’s Major Business Nissin Foods has two core corporate brands, namely “NISSIN” and “DOLL”. The Group primarily manufactures and sells noodles, steam/boil foods, frozen foods, drinks and snacks, etc. through flagship brands including Cup Noodles, Demae Iccho, Fuku, Doll Instant Noodles and Doll Dim Sum. The Group has been proactively enriching its product portfolios with more instant noodle flavors. Meanwhile, it has also been exploring non-instant-noodle products such as vegetable and fruit juices, granolas, potato chips and others to attract different consumer groups. Frozen noodles Granolas and snacks Instant noodles

Distribution business Beverages

Source: Company data, Orient Securities (Hong Kong) Recently, many shoppers rushed into supermarkets to panic buying vegetables, fruits, food, instant noodles, disinfectants and other household supplies due to concerns over coronavirus with supermarkets shelves emptied in some places. Nissin instant noodle sales spiked due to the pandemic with one-week sales by the end of Jan. climbing 5-6 times higher compared with the same time last year. Share Price Performance 8.5 The share price has been jumping from its offering price 7.5 of HK$3.54 to the current HK$7.15, up 102%, since its flotation by the end of 2017. 6.5 5.5 4.5 Most Hong Kong stocks slumped due to the ongoing coronavirus pandemic. However, Nissin Foods climbed 3.5 up against the market decline. 2.5

Orient Securities (Hong Kong) Limited 1 May 29, 2020

Mainland China Instant Noodle Market Recovery Continues Instant noodle remains as Nissin Foods’ major revenue source, contributing over 80% of the total revenue. The overall Mainland China’s instant noodle market has been showing a sign of continuous recovery and hopefully the sales volume will surpass 40 billion in 2019. Mainland China Instant Noodle Sales Volume  Mainland China’s instant noodle market had been through the “golden 中国方便面市场销量Mainland China instant 增速Growth rate noodle sales volume decade” from 2000 to 2011 with the sales volume jumping from 17.8 (bn) billion to 42.47 billion. 500 4% 450 2%  However, the sales volume slumped from 46.22 billion to 38.52 billion 400 from 2013 to 2016 as the instant noodle slid into recession due to the rise 350 0% of the take-out industry and the decrease in the number of mobile 300 -2% 250 peasant workers. 200 -4%  Mainland China’s instant noodle market is stating to pick up in 2017 with 150 -6% 100 the help of new and high-end products. According to the Nilson Report 50 -8% that Mainland China’s 1H19 instant noodle sales were up 7. 5% YoY with 0 -10% the overall sales volume up 1.4% YoY. Instant Noodle Business Recovered for Leading Manufacturers Uni统一企业中国收入-President China revenue(方便面 in ) 康师傅收入Master Kong revenue(方便面 in ) Uni统一企业中国分部利润-President China segment 康师傅分部利润Master Kong segment profit in Mainland China (instant noodles) Mainland China (instant noodles) profit in Mainland China Mainland China Uni统一企业中国收入增速-President China revenue growth rate 康师傅收入增速Master Kong revenue growth rate Uni统一企业中国分部利润增速-President China segment profit 康师傅分部利润增速Master Kong segment profit growth rate growth rate (RMB mn) (RMB mn)

2015 2016 2017 2018 1H19 2015 2016 2017 2018 1H19

 The instant noodle business of China’s leading instant noodle manufacturers – Master Kong and Uni-President – is bouncing back, benefiting from the recovery of Mainland China’s instant noodle market since 2017.  The high-end instant noodle products have been playing an important role in this market recovery. As a result, the instant noodle segment profit growth outran the revenue growth for both Master Kong and Uni-President.

Nissin Foods Cracked Mainland China Market by High-end Products and Fast Expansion Nissin Foods adopted the competition strategy of product differentiation in Mainland China, targeting at high-end market to avoid red ocean competition and maintain its high-end brand image. Meanwhile, it has been proactively expanding its sales in other areas, gradually gaining a share in the high-end market. Mainland China Business Performance  It is Mainland China other than Hong Kong that contributed the Mainland中国业务 China business Segment分部获利 profit largest revenue share to Nissin Foods. The Group’s Mainland China Revenue收入增速 growth rate Segment分部获利增速 profit growth rate business recorded a rapid increase in revenue since 2018 with its (HKD mn) 2018 revenue and results accounting for 55.9% and 56.3% of the overall performance.  The Company reported a continued growth momentum for its Mainland China business in 19 results with the revenue and results hitting RMB1,788 million and RMB210.6 million, up 6.7% and 43.0% respectively. The revenue contribution was up to 57.9%, 2.0% higher compared with the same time last year, which is mainly 2014 2015 2016 2017 2018 1H19 3Q19 attributable to the strong sales of Cup Noodles and its increasing brand recognition. Expanding capacity by building new plants: The Company recorded a slow growth in the past few years due the limited production capacity. In order to capture the development opportunity for the high-end instant noodle market in Mainland China and strengthen the cost control and increase the efficiency, the Company has been reallocating its production capacity since 2016 with the plants in Dongguan, Fujian and Pinghu being consecutively put into operation. By the end of 2018, the Company has altogether 9 plants in Hong Kong and Mainland China, which serves as a strong support for the coming product innovation and corporate development. The Company announced to acquire the entire equity interest in UNI-INTEC (Zhuhai) Scientific Technology Co., Ltd. in Jul. 2019. According to the announcement that the target company is primarily engaged in manufacturing and has around 30,000 square meters of developed manufacturing site in Zhuhai. After this acquisition, the Company is planning to invest around RMB180 million in building new plants for package production, which is expected to be complete before 2021. Overall, we believe the Company’s business is trending favorably. However, what’s noteworthy is that the depreciation of RMB would weigh on the Company’s results. Nissin Foods’ 3Q19 results reported a growth of 12.5% for its Mainland Chinese business when denominated in RMB, and yet only a growth of 7.3% when in HKD. Source: Company, Orient Securities (Hong Kong) Orient Securities (Hong Kong) Limited 2 May 29, 2020 资料来源：公司资料、东方证券（香港）

Expand Product Line to Explore More Revenue Sources Besides the high-end instant noodle business, the Company has also been enriching its product line through merger and acquisition. In 2014, it acquired Yongnan Food Products, a company engaged in the manufacturing and sales of frozen food. Nissin Foods jointly launched Nissin Koikeya Foods with Koikeya in 2013 to produce and sell snacks and confectionary products. It bought a 51% stake in MC Marketing & Sales (Hong Kong) Limited in 2017, distributing beverages, processed food and sauces products of a number of brands (such as Danone, Kagome and Kewpie). Nissin Foods formed a joint venture Kagome HK with Kagome Co., Ltd. in 2018, distributing fruit and vegetable juices in Hong Kong and Mainland China and its granola production line in Hong Kong was put into operation at the beginning of 2019.

Nissin Foods acquired Yongnan Food Nissin Foods invested HKD30 Products – a company primarily engaged million in building plants in the in the manufacturing of instant noodles industrial estate in Tai Po and New (including Hong Kong’s household brand Territories in Hong Kong for setting Doll Instant Noodles) and microwave up a whole new granola foods – from Nissin Japan. production line, which was put into operation in 2019.

2013 2014 2017 2018 2019

Nissin Foods bought a 51% stake in The Company formed a The Company formed MC Marketing & Sales, through joint venture Kagome Nissin Koikeya Foods which it started distributing HK, a company (China & HK) Co., Ltd., a beverages, processed food and engaged in fruit and joint venture opened in sauce products of a number of vegetable juices Jan. 2014 for snack brands such as Danone, Kagome and business, holding a 70% business. stake. Kewpie. Parent company successfully produced lab-grown meat, which hopefully would replace Source: Google photos, Orient Securities (Hong Kong) traditional meat products someday: The parent company, together with the University of Tokyo, announced the world’s first success in developing lab-grown steak by using cow’s muscular cells to form tissue masses. The lab-grown meat was mainly produced by first extracting groups of muscular cells from cows and then injecting vitamin C into the cells to form a tissue structure particularly seen in muscles. The final wholly-lab-grown product was a dice-shaped tissue of about 1 cubic centimeter. With the increasing population and the rising living standard, the global demand for meat consumption is expected to grow further, which would result in larger pressure on the livestock industry with upcoming problems such as feed shortage. Though there’s still a long way coming through for commercial lab-grown meat, yet the cutting-edge food technology of the Company (with sales in Mainland China, Hong Kong and Macau) would bode well for its future growth. Source: cnBeta, Orient Securities (Hong Kong) Hong Kong Business Forecast Projects Mild Growth As a household brand, Nissin Foods has gained a market share of c.65% in Hong Kong, far outperforming its peers. However, the market is approaching a saturation point given its over 30 years of development there. As a result, the Company’s Mainland China business remains the main driver while its Hong Kong business could only maintain a mild growth.

Hong Kong Business Revenue and Segment Results

香港业务Hong Kong business Segment分部获利 profit  Innovate to cope with growing health-oriented consumers: Nissin Foods has developed non-fried bar noodle products under Demae 收入增速Revenue growth rate Segment分部获利增速 profit growth rate (HKD mn) Iccho and Fuku as well as non-fried instant noodle brand Diet Cup Noodles to provide low-fat and low-calorie alternatives for consumers.  Growing preference for Japanese food among consumers in Hong Kong and Mainland China: Nissin Foods introduced a series of products imported from Japan; it also launched the Crossover series together with ramen noodle franchises popular among Chinese community (such as Hakata Ippudo and Butao Ramen).  Hong Kong’s business revenue has maintained a low single-digit growth in 2014-2017. It recorded a YoY growth of 11.5% in 2018 due to the purchase of the 51% stake in MC Market & Sales (Hong Kong) Limited.  Hong Kong’s 19 business recorded a YoY decrease of 1.8% in revenue, which is mainly attributable to the product mix changes in the distribution business of MC Marketing & Sales (Hong Kong) Limited.  Meanwhile, Hong Kong business recorded a fluctuating growth rate in its segment profit. Its 19 results were down 12.4% to HKD100 million, factoring in the increasing of administrative expenses. If excluded, Hong Kong business recorded positive growth.

The Company made price adjustments in Jul. 2019 to lower the cost pressure in face of the shortage and the rising costs of raw materials, the increasing labor costs and the growing logistics expenses, etc. The brands related include Cup Noodles, Demae Iccho (both cup and bowl type), Nissin Rice Vermicelli (including cup type) and Nissin Nupasta, etc. What’s noteworthy of is that it is the first time that the Company raised prices since 2008, which was believed to offset the rising costs and meanwhile improve the profit forecast of its Hong Kong business.

Orient Securities (Hong Kong) Limited 3 May 29, 2020

Financial Performance Analysis Operating profit Revenue收入 Net净利润 profit Revenue收入增速 净利润增速Net profit 毛利Gross profit 营业费用 (HKD mn) growth rate growth rate 毛利率GPM Operating营业费用占收入比 profit (HKD mn) as % of revenue

Revenue & Results

 Nissin Foods has maintained a stable growth. It recorded a sharp YoY growth in net profits in 2017, which is mainly attributable to the non-recurring gains from the disposal of Shanghai plants. Its 3Q19 revenue recorded a higher YoY growth of 7.2%, compared with 1H19. The growth of net profit attributable to shareholders slowed down, up 8.8% YoY, mainly due to the increase of the marketing investment during this period. The Company also raised its marketing input as it is currently in the stage of rapid channel exploration. It is expected that its Mainland China business would maintain the growth momentum.  The Company recorded a continuous improvement in GPM, up 2.2 ppts to 32.8% with the gross profits up 10.6% to HKD770 million, which is mainly attributable to the stabilizing raw material costs and the effective control over fixed costs. The price raise of some products in Hong Kong would continue to drive the GPM growth.

净现金Net cash 自由现金流Free cash flow Dividend派息 派息比率Dividend payout ratio (HKD mn) (HKD ) 2,200 60%

1,700 50% Financial Got listed on the 40% position & 1,200 HKEx by the end of 2017; its 30% Dividend 700 dividend payout ratio is expected 20% payouts to grow 200 10% (300) 0% 2014 2015 2016 2017 2018 1H19 2014 2015 2016 2017 2018  Nissin Foods is in a good financial position with cash holdings of RMB1.61 billion up to 3Q19. It has been generating positive free cash flow with no foreign borrowings.  The Company adopted a progressive dividend payout policy with the dividend payout ratio rising from c.40% in 2017 to c.50% in 2018. With the sufficient cash holdings and the business growth, its dividends are expected to grow.

Valuation-Comparison with 2 Leading Instant Noodle Manufacturers 2016 2017 2018 2019 2020E  We are going to make a comparison based on Bloomberg forecasts. The EPS of Nissin EPS (HKD) 0.18 0.23 0.20 0.23 0.29 Foods/Master Kong/Uni-President China has been growing at a CAGR of 20.4%/6.1%/16.6% in

Nissin P/E ratio 39.1 30.6 35.2 26.8 24.3 18-20E. Nissin Foods has a relatively faster Foods growth rate. EV/EBITDA 17.3 14.7 14.1 8.8 7.9  Nissin Foods’s 20E P/E ratio is close to that of Master Kong while Uni-President China has a EPS (RMB) 0.25 0.32 0.48 0.59 0.54 comparatively lower 20E P/E ratio.  As a heavy-asset industry, beverage and instant Master P/E ratio 54.7 42.8 28.5 21.5 25.3 noodle sector has high depreciation and Kong amortization expenses, which would impact net EV/EBITDA 10.5 10.1 9.4 9.3 8.9 profit but not cash flow, and thus there exists a large gap between net profit and operating cash EPS (RMB) 0.14 0.21 0.25 0.32 0.34 flow. Therefore, it is more proper to valuate Uni- those companies based on EV/EBITDA. We President P/E ratio 56.1 37.4 31.4 21.7 19.3 believe Nissin Foods still has an upside potential China as it has a relatively lower valuation compared EV/EBITDA 15.0 13.9 13.2 11.5 11.1 with that of the other two. Nissin Foods is currently in the stage of rapid channel exploration and has a high return certainty. With a sound financial position, it is possible to see a dividend payout ratio increase in the future. As for Our View valuation, Nissin Foods has a relatively lower EV/EBITDA compared with that of Master Kong and Uni-President China. Source: Bloomberg, Orient Securities (Hong Kong)

Orient Securities (Hong Kong) Limited 4 资料来源：公司资料、东方证券（香港） May 29, 2020

Revenue Breakdown Gross Profit & GPM Financial Summary

(HKD mn) GP GPM (HKD mn) 2017 2018 2019 Revenue 2,630 2,689 3,088 Gross profit 821 933 1,013 Net profit 221 231 279 HK NPM (%) 8.2 7.7 9.0 business Mainland Profit attributable to 42% China 195 205 251 business shareholders 58% EPS 0.23 0.20 0.24 DPS 0.07 0.1 0.117 Net gearing (%) NC NC NC Free cash flow 25 85 289 Mainland China business contributed 58% of The prices rises of some products in Hong The exploration of the Mainland China market would the total revenue in 19. It is estimated that Kong would continue to drive the GPM increase revenue sources for the Company and push the contribution will continue to rise. growth. the profits up further.

Strength Weakness  Nissin Foods has built up a  The Company’s business is deeply-rooted brand image among vulnerable to the changes in raw consumers with high brand recognition. material prices.  The Company is highly innovative and  The Mainland China instant has developed popular products (such as noodle market is highly low-calorie series) among consumers. concentrated with Master Kong and Uni-President China taking up 65% market share.

Opportunity Threat  The Company is going to gain  The competition against both recognition from consumers for its domestic and international innovative capacity. brands is getting increasingly  Nissin Foods has been exploring its fierce. Mainland China market to increase  Consumption pattern has been distribution channels. changing constantly.  The Company has a diverse product portfolio including potato chips and frozen foods. Key Risk Valuation Our Opinion

 The Company targets at high-end market, and  The depreciation of RMB would weigh on P/E 26.8x meanwhile it has been proactively expanding the Company’s results. sales in other areas and gaining an increasing  Consumers’ choice and flavor preference share in the high-end market. might change as time goes by.  The Company has been exploring product  The increasingly fierce competition and diversity to meet consumers’ needs. the rising operating costs would impact P/B 1.9x  Nissin Foods raised prices for the first time the Company’s results. since 2008, which would improve the profit  The food safety issue might have a direct forecast of its Hong Kong business.  impact on the company image. The consumption pattern of Chinese Dividend yield 1.9% consumers has been changing constantly. Relative Performance P/B Band Historical P/B

The Group’s share price has consistently The Group’s P/E ratio is of 26.8x, higher than its The Group’s current P/B ratio is higher than its outperformed the HIS. historical average of 21.1x. historical average of 1.5x.

Orient Securities (Hong Kong) Limited 5 May 29, 2020

Analyst Certification I, Cyrus Tai (Tai Wai Ho), being the person primarily responsible for the content of this research report, in whole or in part, hereby certify that: (1) all of the views expressed in this report accurately reflect my personal view about the subject company(ies) and its (or their) securities; (2) no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report, or our Investment Banking Department; (3) I am not, directly or indirectly, supervised by or reporting to our Investment Banking Department; (4) the subject company(ies) do(es) not fall into the restriction of the quiet period as defined in paragraph 16.5(g) of SFC Code of Conduct; (5) I and my associates do not deal in or trade in the stock(s) covered in this report within 30 calendar days prior to the date of issue of the report; (6) I and my associates do not serve as an officer(s) of the listed company(ies) covered in this report; and (7) I and my associates have no financial interests in relation to the listed company (ies) covered in this report.

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Orient Securities (Hong Kong) Limited 6 May 29, 2020