Equity Market Hong Kong Equity Morning Notes 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 ▲% Textiles 2.7 Equip 204.7 NOBLE ENGINEERIN(8445) 88.0 SUNSHINE OILSAND(2012) 158.4 Retail 2.6 Household Prod 62.1 LAI GROUP HOLDIN(8455) 61.4 BOSSINI INTL(592) 137.7 Printing 2.0 Semicon 43.5 MAJOR HOLDINGS(1389) 52.5 CROSSTEC GROUP H(3893) 104.2 Gold 1.6 Softw & Serv 29.8 ISDN HOLDINGS LT(1656) 41.5 MICROPORT SCIENT(853) 99.2 Coal 1.5 Apparel 29.7 BCI GROUP HOLDIN(8412) 26.3 MY HEART BODIBRA(8297) 88.0 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 industrial estate in Tai Po and New in the manufacturing of instant noodles (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 engaged in fruit and beverages, processed food 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.