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Cost Trend Matters Summary

Core Content

This report provides an analysis of the current cost trends and their impact on the food and beverage (F&B) industry in China and Hong Kong. It highlights the effects of rising and moderating costs on various segments and provides investment recommendations based on these trends.

Main Points

• Dairy Products:

  • ASPs (Average Selling Prices) of dairy products have increased in July-Aug 2013 to pass on rising costs.
  • However, the moderation in imported milk powder prices from their peak in Apr-13 may help local producers reduce costs and alleviate margin pressures in 2H13-1H14.
  • Companies like Yashili (1230 HK) and Want Want (151 HK) may benefit from this trend.

• Noodle and Beverage Players:

  • Rising costs in flour and PET are expected to negatively impact the margins of noodle and beverage producers.
  • While beer players are expected to benefit from the hot weather, beverage players are still caught in price wars, making them less attractive.

• Beer Industry:

  • The beer industry may experience a loosening cost environment in 2H13-1H14 due to the correction of malty barley prices.
  • Companies like Mengniu (2319 HK) and Tsingtao Brewery (168 HK) are recommended as buys due to their strong pricing power and favorable cost environment.

• UPC:

  • UPC (220 HK) is recommended as a hold due to cost pressures in both the noodle and beverage segments.

Key Information

This Month's Tactics

12-Month Picks

• Top Picks:

  • Mengniu (2319 HK) for its positive outlook on product line reshuffling.
  • CRE (291 HK) and Tsingtao Brewery (168 HK) for steady growth and improving margins in the beer industry.

• Recommendations:

  • Shorting China Foods (506 HK) and Yurun (1068 HK) due to prolonged recovery periods.

Market Overview

• HSI: 21,731

Valuation Table Highlights

Industry Dynamics

• Beer:
  • Production volume and sales revenue growth are positive, with a strong gross margin.
• Baijiu:
  • Enters a low season in summer, leading to a decline in production and sales.
• Soft Drink:
  • Shows positive growth in July, making it one of the few segments with growth.

Sensitivity Analysis

• Tingyi (322 HK):
  • Beverage segments are highly sensitive to sugar and PET costs, with a combined impact of -5.7% on profit.
• Uni-President (220 HK):
  • Beverage and instant noodle segments are sensitive to sugar and PET, with a total impact of -12.1%.
• Want Want (151 HK):
  • Rice cracker and beverage segments are sensitive to various materials, with a total impact of -0.6%.
• Mengniu (2319 HK):
  • Dairy segment is highly sensitive to raw milk costs, with an impact of -4.3% on EBIT.

Conclusion

The report emphasizes the importance of monitoring cost trends in the F&B industry, particularly in dairy, beer, and noodle sectors. It recommends buying dairy and beer stocks due to their pricing power and improving cost environments, while suggesting holding or shorting companies facing rising costs in the noodle and beverage segments.