The premium noodle maker returned to profit growth in the third quarter, following a decline in the first half of the year, as it raised prices and brought rising ingredient costs under control
- Nissin Foods’ profit grew 20% in the third quarter, returning to a growth track after the figure fell 3.5% in the first half of the year
- The company’s stock has become a safe haven for investors during current market turbulence, with its shares up 30% since May
By Doug Young
In noodles we trust. Or put differently, who needs gold when you have noodles?
That’s the sentiment coming through in the business and stock performance this year for Nissin Foods Co. Ltd. (1475.HK), one of China’s top instant noodle makers focused on the premium end of the market. The company has just released its latest results that show it returned to profit growth in the third quarter as its gross margin showed slow but steady improvement.
This is noodles, after all, so many may not get easily excited about this kind of low-tech product. But such instant noodles have been in high demand these days on both the Chinese mainland and in Hong Kong, the company’s two main markets, due to frequent restaurant closures and lockdowns that have led to more dining at home.
The other big story this year for Nissin Foods and rivals like Tingyi (0322.HK) and Uni-President China (0220.HK) has been inflation, which has hit this group especially hard due to the fact that flour and other noodle-making ingredients constitute a big portion of their costs. By comparison, inflation has been a much smaller issue for newer economy companies whose main costs tend to come from product development that is far less inflation-prone.
Responding to the inflation challenge, Nissin Foods raised its prices in the mainland Chinese market in March, representing its first increase there in 11 years.
That increase is helping to boost Nissin’s profitability, which is showing up in its latest gross margin. That figure reached 31.6% in the first three quarters of this year, representing a slight improvement from the 31.5% margin a year earlier. It was also an improvement on the 31.4% margin in the first half of the year, implying the figure was relatively strong in the third quarter.
Nissin Foods’ shares were roughly unchanged after the third-quarter update came out midway through the trading day on Thursday, though they rose 1.3% in early Friday trade. Year-to-date the stock is roughly unchanged, which is a vastly better than the nearly 30% decline for the broader Hang Seng Index over that period. The stock is also up about 30% from its low this year in May.
Hence our assessment that in these kinds of troubled economic times, noodles may provide an interesting alternative to the more traditional haven in gold.
The recent rally for Nissin Foods’ shares has driven its stock to a relatively mouth-watering price-to-earnings (P/E) ratio of 23, the kind of figure one more often associates with moderate- to high-growth young companies. The figure represents a slight premium over Uni-President China’s P/E of 21 and Tingyi’s 20, probably because Nissin Foods’ well-known Cup Noodles brand is quite well regarded in both Hong Kong and on the Chinese mainland. But U.S. food giant Kraft Heinz (HKC.US) commands an even higher ratio of 39.
Such ratios could hold as long as global markets remain volatile. But they could be difficult to maintain if and when more traditional investor favorites from the high-tech and other faster-growth realms come back into favor.
Return to profit growth
All that said, we’ll spend the second half of this space looking more closely at Nissin Foods’ latest results, as well as a separate announcement from earlier this week that seems to signal the company may be preparing to buy out some or all of its local joint venture partners going forward.
We’ll begin with top-line revenue, which rose 4.4% to HK$1.05 billion ($134 million) in the third quarter, based on our own calculations using the company’s nine-month figures. That represented a slowdown from the 9.7% growth in the first half of the year, though the strong first-half growth was boosted by the March price increase combined with some of China’s strictest Covid restrictions that forced many to remain house-bound in the second quarter.
Nissin Foods noted that despite the price increase, it was still able to post an increase in sales volume for its main products in the first nine months of the year. That seems to indicate that consumers were relatively accepting of the price hikes, which is notable since such increases often lead to reduced sales volume initially.
Notably, the company’s cost of sales rose just 2.4% year-on-year in the third quarter, representing a big improvement from the 10.4% increase in the first half of the year. That shows the company was able to bring its material costs under control despite big inflationary pressures.
Such costs controls, combined with the price hikes, allowed Nissin Foods’ profit to grow by 20% to HK$72 million for the quarter, returning to growth after a 3.5% decline in the first half of the year.
We’ll close with the other company announcement from earlier this week saying it had won the bidding to buy out its joint venture partner in Zhuhai Golden Coast Winner Food Products Ltd., an instant noodle maker and distributor on the Chinese mainland. Specifically, Nissin Foods said its bid to pay 352 million yuan ($49 million) for the 29.55% of the venture it didn’t already own, which was held by Zhuhai Western Development, was selected as the winner in an auction conducted on the Guangdong United Assets and Equity Exchange.
This particular announcement follows a similar, but much smaller, deal announced last December, which saw Nissin Foods say it would pay HK$13.7 million to boost its stake in its Hong Kong and Macau distributor MCMS to 81% from a previous 51%.
Such buyouts and stake increases are becoming increasingly common among foreign companies in China these days, as they become more confident about operating in China alone without the help of a domestic partner. At the same time, a slowing Chinese economy may also be pressuring some of these ventures’ local Chinese partners, prompting them to lower or completely sell their stakes.
Nissin Foods’ buyout of the China venture was also well received by investors, with the company’s shares rising 4.2% the day after that move was announced.
To subscribe to Bamboo Works free weekly newsletter, click here