1475.HK
Nissin Foods unlikely to report exciting news for the new year

The instant noodle maker was hit by slowing consumption in Hong Kong and Mainland China, with downside factors likely to dampen its performance for the rest of the year 

Key Takeaways:

  • Nissin Foods reported its revenue fell 7.1% in the first quarter, even as its profit rose by a similar 7.31% due to falling raw material costs
  • The company acquired sister firm Nissin Vietnam last year, hoping to boost its slow growth by expanding from its home China base to Vietnam

By Ken Lo

Instant noodles are serious business in China, where the country’s top three Hong Kong-listed players are differentiated not only by their flavors but also their business approaches.

Among the trio, Nissin Foods Co. Ltd. (1475.HK) is less aggressive than competitors Tingyi (1475.HK) and Uni-President China(0220.HK), both in terms of product and business expansion strategies. Nissin has drawn on its Japanese roots to cultivate a more upscale image for its Cup Noodle brand, recently introducing high-end bag-sized instant noodles as it tries to recover market share lost to its two more mainstream rivals that harken from Taiwan. 

Nissin is also exploring new growth opportunities outside its core markets of Mainland China and Hong Kong, including an ongoing foray in Vietnam.

Despite its efforts, Nissin’s broader near-term trends were somewhat lukewarm, based on its latest financial results released last week that showed last year’s declining revenue and rising profit trends continuing into this year’s first quarter. Its revenue for the period fell 7.1% year-on-year to HK$963 million ($123 million). But its profit grew 7.31% to HK$118 million and its net profit margin also rose to 12.3%, as it benefited from lower flour costs.

If the first-quarter revenue trends continue, the company could register annual revenue this year on par with last year’s HK$3.83 billion. But its profit and related profit margin could both improve significantly from last year’s HK$330 million and 8.61%, as it benefits from lower flour costs following initial volatility at the opening of the Russia-Ukraine war. Its net profit margin last year was the best in the past five years, outpacing figures typically in the 7% to 8% range. 

The three Hong Kong-listed noodle makers have used a traditional playbook of trying to boost their performance by improving the taste and packaging of existing products, and through introduction of higher-margin new products. But as the upgrade strategy delivers diminishing returns, Nissin turned to a price hike in 2022 after flour prices spiked at the start of the Russia-Ukraine war. While such hikes bring in more revenue per unit, manufacturers try to avoid them because they also scare off some customers.

Revenue hit

Nissin’s price hike for its two star products, Cup Noodles and Nissin Demae Itcho, in early 2022 was its first such adjustment on the Mainland since 2011. At the time, Tingyi and Uni-President, both with higher market share than Nissin, didn’t follow with similar moves. Nissin was sarcastically praised at the time by consumers for its “courage” to jack up prices. But it had to take the action as its profit margin got squeezed by rising flour prices.

That strategy ultimately worked, at least from a profitability standpoint. Last year Tingyi and Uni-President reported net profit margins of just 3.9% and 5.8%, respectively, while Nissin was comfortably ahead. Nissin gets most of its money from noodles, whereas its two main rivals derive more revenue from beverages than their food offerings, mostly noodles. That distinction has helped to prop up Tingyi’s and Uni-President’s profitability in the past, since beverages normally carry margins that are around 10 percentage points higher than foods. 

Thus, Uni-President’s overall profit margin actually masks a much thinner 0.6% net margin for its food sales last year, while its 10.9% margin for beverage sales helped to bring up the overall figure. That shows just how cutthroat the instant noodle market has become, making it extremely difficult for anyone to make significant profits.

To maintain its higher profit margin, Nissin had to endure lower revenue growth last year. Tingyi’s revenue for 2023 totaled 80.4 billion yuan ($11.2 billion), including instant noodle-related revenue of 28.8 billion yuan. Uni-President China’s revenue of 28.6 billion yuan last year included 9.59 billion yuan from instant noodle sales, both significantly higher than Nissin’s HK$3.83 billion.

Despite raising its prices in 2022, Nissin still managed to report revenue growth of 5.2% that year to HK $4.07 billion. But sputtering consumer sentiment on the Mainland due to economic uncertainty has caused the instant noodle market to slow significantly, with Nissin’s revenue down 5.8% last year. Despite that, its profit continued to grow on lingering benefits from the 2022 price hikes.

Dash to Vietnam

With Nissin’s two main markets on the Chinese Mainland and in Hong Kong going nowhere fast, the company acquired 66% of sister company Nissin Vietnam last June, beginning an expansion beyond its traditional home in Greater China. In the first quarter of this year, the company’s revenue from Hong Kong and other Asian markets dropped by 3.4% year-on-year. 

The company’s Vietnam sales actually rose as it reaped rewards from expansion of its local sales channels over the past year. But that growth was offset by lost business in Hong Kong as local consumers crossed the Mainland border in search of cheaper goods in the boomtown of Shenzhen, reflecting shifting consumption patterns. Nissin’s Mainland revenue fell by a relatively large 9.1% in the first quarter as consumers reined in their spending.

The factors dragging down Nissin’s growth are here to stay, at least in the short term, meaning prospects for its stock this year don’t look particularly strong. The shares now trade at a trailing price-to-earnings (P/E) ratio of 16.4 times, roughly the same as 16.6 times and 17 times for Tingyi and Uni-President China. Those relatively high multiples for such low-growth companies make all three stocks look relatively expensive at current levels. In terms of dividends, Nissin’s current yield of 3.04% is similar Tingyi’s and lower than Uni-President’s 5.95%. That means there’s no strong catalyst to lift Nissin’s shares at the moment. 

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