Against a Stereotype: Tingyi Noodles

Tingyi Instant Noodle Shelves

Who said the Chinese loved noodles? As often happens, when stereotypes are closely scrutinised they are found to be only half-truths. The Chinese consume 3 kilograms, or 30 standard packets, of instant noodles per person. Meanwhile its neighbours are consuming far more on a per capita basis: Indonesians and Vietnamese eat around 5.6 kilograms or 56 packets of instant noodles per person, Hong Kongers consume 5 kilograms or 50 packets of instant noodles per person, and Japanese consume around 3.9 kilograms or 39 packets of instand noodles per person. It may be down to the working week. For example Hong Kongers work an average of 49 hours a week compared to 43 hours in China and so instant noodles are an excellent quick hot meal. Whatever the reasons, data suggests the Chinese are currently less keen on noodles than its neighbours.

Nevertheless, China is the largest instant noodle market in the world with 44 trillion packets of instant noodles produced in 2013, far higher than second place Indonesia with 14 trillion packets and Japan and Vietnam with around 5 trillion packets. As China develops a larger service economy, expect instant noodle sales to increase as the Chinese work longer hours with a clear trend being that its neighbouring countries have followed the same path.

Within the Chinese instant noodles market, we would look to Tingyi Holding Corporation as the incumbent monopolist to capitalize the most on these growing trends.  Founded in 1991 and listed on the Hong Kong stock exchange in 1996, Tingyi currently controls an over 50% share of China’s instant noodles market. Their flagship instant noodle brand is Master Kong or Kang Shi Fu, which was voted the second most valued brand in China for the past two years (behind only Sony). In the era of big brand augmentation, expect their brand to propel Tingyi’s sales growth. The Master Kong noodles are famed for their salty and oily flavour.

Tingyi Logo

Tingyi reported sales of US$9.21 billion, making 7% growth year-on-year in 2013, down from their five year average growth of 20%. They were forced to lower their profit margins due to the onset of a price war in the mainland Chinese instant noodles market. Far from being a warning, this intimates Tingyi’s adaptability – after all it is the companies most adaptable to change that succeed. This should bode well for Tingyi’s decision to start selling its instant noodles in Taiwan for the first time in 2013. Its major competitors in mainland China are Want Want China and Uni-President. Uni-President is the market leader in Taiwan with 50% share of the US$300 million market.

Tingyi’s various strengths ensure that we remain optimistic about their future outlook in both their major markets, both mainland China and Taiwan. Tingyi have an excellent brand, production base and retail channels in China. Moreover on the macroeconomic level, China’s rising average income and massive urbanisation trend will continue to deliver healthy sales growth to Tingyi’s operations.

The company also produces soft drinks, bottled water, and baked goods. Tingyi gets over half its revenues from beverages, 43% from instant noodles and 2.5% from baked food. Tingyi is PepsiCo Inc’s Chinese partner. Tingyi is the second largest soft drinks company in China’s 67.5 billion litre market, with a 13% share after Coca Cola’s 16%. Meanwhile, Tingyi’s bottled tea products are market-leading in China, with 44% share, whilst its juice products come in second with a 20.5% market share. Moreover, China now consumes the largest amount of bottled water in the world, however they are still below the global per capita bottled water consumption average of 30 litres per person. The top three water brands in China are Tingyi’s Master Kong, Zhejiang Nongfushanquan Water Co, Ice Dew from Coca-Cola and Yibao from China Resources Enterprises. With increased consumer health consciousness in China, bottled water is the lion’s share of the non-alcoholic beverages market constituting 42% of sales. Thus we can expect continued hegemony for Tingyi in terms of its beverages products.

Despite the ongoing tensions between the Chinese and Japanese governments, Tingyi have found bedfellows that are able to assist them R&D-wise in their hegemonic endeavours.  Tingyi formed a joint venture in April 2012 with Japanese trading house Itochu Corporation and Japanese snack maker Calbee to produce snack foods in China. More recently, Tingyi agreed to a joint venture with Japanese beverage producer Asahi and Itochu to further expand their share of China’s US$15 billion soft drink market. This market has grown at a consistent rate of 15% since 1995. The new venture will make tea, fruit juice, health drinks and coffee. Tingyi is banking on Asahi’s strong R&D capabilities and Itochu’s outstanding information collection ability and supply of inexpensive materials to surmount the rapidly changing Chinese beverage market.

Divestiture arbitrage opportunity?

Tingyi is currently trading at HK$22.4 within a 52 week range of HK$18.2 to HK$24. At the current price, it is a good long-term buy. However there may be a divestiture arbitrage opportunity with rumours afloat that Tingyi may consider divesting its food or beverage business with the intention of listing the divested business in order to improve operational efficiency and maximize shareholder wealth.

Bright investments often come down to a combination of luck and discerning patterns. The pattern for consumer staple foods is that a market goes through a boom phase, a slowdown phase, and then there is a fight for consumers centered on marketing spend. We live in a world where control often dictates success. I’m betting Tingyi, with their current market capitalization of US$15 billion and 79,300 employees, will win that marketing war.