Tingyi (Cayman Islands) Holding Corp expects competition in China's beverage industry to intensify as rivals including Coca-Cola Co step up investment in the world's third-largest economy.
Tingyi, China's biggest maker of packaged food, will continue to upgrade factories with better technology to lower costs and increase output, Chief Financial Officer Frank Lin told reporters in Hong Kong yesterday. Capital investment this year will be about $500 million, of which $300 million will be spent on the beverage segment, he said.
Coca-Cola, the world's biggest maker of soft drinks, said in 2009 it planned to invest $2 billion over three years in China, whose population exceeds the total of the US and European Union. China's demand for drinks such as soda and bottled water may grow 9.8 percent to 60.4 billion liters in this year, according to market research company Euromonitor. Tingyi yesterday said its 2009 profit rose 47 percent.
"To fight against rising competition, and also to better prepare for the future competition from Coca-Cola, Tingyi's 2010 strategy, in our view, is still to maintain and even further improve its market share," Bank of America Merrill Lynch analysts Chen Luo and Denise Chai said in a note to clients today. In the first half of last year, "most industry players adopted a conservative marketing approach due to the financial crisis and Tingyi was the only aggressive one," they said.
Stock downgrade
The analysts downgraded Tingyi's stock to "neutral" from "buy" because its price has approached their forecast and the company's "near-term margins could be under some pressure."
Tingyi, which has more than doubled in market value over the past year, declined 0.6 percent to HK$19.50 at 10:34 am in Hong Kong trading today.
"We're preparing for future competition in the next five, 10 years when international beverage companies will be investing in the Chinese market," Lin said. "There will be intense competition and we're preparing to invest to keep our top position."
Tingyi's 2009 profit rose to $383.2 million from $260.4 million a year earlier as rising consumer spending and leisure travel boosted demand for cold drinks and instant noodles. The company sells food and beverages mostly under the Master Kong brand.
Coke's China sales
The company's reported net income compares with a mean estimate of $389.7 million by 16 analysts in a Bloomberg survey. Sales increased 19 percent to $5.08 billion.
Atlanta-based Coca-Cola last month reported sales grew 29 percent by volume in China in the fourth quarter, helping boost global net income by 55 percent.
"Tingyi faces intense competition in the beverage sector and it will need to introduce new products to continue to grow." Renee Tai, an analyst at CIMB-GK Securities HK Ltd, who has a "neutral" rating on Tingyi's stock, said before the earnings announcement. "Tingyi has a good distribution network and it is expanding production capacity which will help increase market share."
Tingyi sells high-end packet noodles under its "Master Kong" label and targets low-income consumers with products under its "Fumanduo" brand.
Profitability improved in 2009 as the company cut costs to counter rising raw material prices. "With the economic recovery in 2010, it is expected that the demand for instant noodles will grow noticeably," the company said yesterday. "Leading international food giants will set off fevers in investment into China. The competition in the trade will become keener."
Master Kong noodles have a market share by sales volume of 41.7 percent, retaining the top position, Tingyi said, citing a survey by ACNielsen in December. Tingyi has a market share in China of 50.4 percent for ready-to-drink tea, it said yesterday.
Tingyi proposed a final dividend of 3.43 cents a share, compared with 2.33 cents a year earlier.