Despite the stagnant performance of the Hang Seng Index over the last decade, not to forget the ongoing protests that escalated over Christmas holiday, we still believe some companies will outperform on the back of unstoppable long-term trends. In this article, we are going to analyse and discuss another sector with a huge runway for growth in China; the food and beverage (F&B) market.

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Chinese economy shifting to consumption

China has been gradually transitioning from an export-driven economy to a domestically-focused consumption one. The ratio of exports-to-GDP peaked at 36% in 2006 and then shrank to 19% in 2018. During that time, the corresponding ratio for domestic consumption increased from 36% to 39.4%. In 2018, consumption contributed to 80% of the actual GDP growth of China! The strong domestic consumption market is solely supported by the phenomenal growth of household income.

According to the Financial Times, median individual disposable income grew more than 9% annually between 2011 and 2017, in which the share of labour compensation as a percentage of GDP rose from 46% in 2007 to more than 60% in 2016.

Thriving F&B market in China

Another industry expected to thrive in tandem with the growing Chinese middle class is food and beverage. The Chinese F&B market grew 30% year-on-year from 2009 to 2014, surpassing the American market back in 2011. In fact, the revenue is still growing robustly at 19.3% and is forecast to reach US$22.1 billion in 2019.

The lack of trust that Chinese people have in local food production processes – following several high-profile food safety scandals – has spurred higher quantities of foreign-branded F&B products. The healthy-eating trend is also catching on among the Chinese middle-class leading to an increasing demand for imported healthy foods and organic products.

International F&B giants are opening up to cash in on this new demand. With 1.4 billion mouths to feed, there has never been a better time to invest in China’s fast-growing F&B market. Thinking longer term in the market, here are three Hong Kong companies that are riding this wave of growth and which investors should look out for in future.

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Nissin (SEHK: 1745): Sparking an instant food culture

Nissin Foods Co Ltd (SEHK: 1475), covering the Hong Kong and China markets, is a spin-off of Tokyo-listed Nissin Foods Holdings (TSE: 2897). With the former having listed in December 2017, its main aim was to expand into the premium instant noodles market in the Greater China region.

Nissin created the famous Cup Noodles in 1971, leading to an explosion in consumption of instant noodles in many parts of the world. Nissin’s Demae Iccho brand quickly conquered Hong Kong in the 1980s, and these instant noodles are now at home on the kitchen shelves of most people.

Many tourists, in particular Mainland Chinese, find a gourmet trip to Hong Kong cannot be complete without visiting a cha chaan teng. The popularity of cha chaan teng culture among Mainlanders is the successful export of “soft power” that has influenced their eating habits – i.e. consume more Nissin instant noodles per capita.

Don’t underestimate the tremendous influence of culture on selling F&B products. Coca-Cola and Starbucks are some of the best examples in building the intangible, yet valuable, asset from culture.

With higher safety awareness and demand for better quality, the premium instant noodles (equivalent to RMB 5 (US$0.71) or more per bag) market has witnessed rapid double-digit growth, at the expense of low-cost brand instant noodles makers like Tingyi Holdings(SEHK: 322).

According to Nissin, people in Japan and Hong Kong can easily consume more than 40-50 servings per person per year of supreme instant noodles. On the contrary, China is yet to catch up, only at 30 servings per year. There is ample room for Nissin to grow. into every corner in China when Chinese consumers gradually increase their average intake, recognise the tastiness of the product and appreciate what Nissin’s unique brand proposition is.

At the IPO offering price of HK$3.54 per share, Nissin Foods has already delivered a 100% return to investors in less than two years. It is a phenomenon when you compare the negative returns of the Hang Seng Index within the same period of time!

Comparing it to its biggest competitor, Tingyi, which has a HK$60 billion (US$7.6 billion) market capitalisation, Nissin is an upstart competitor with only a HK$7.7 billion market cap. Riding on the consumption upgrade trend, I strongly believe Nissin Foods could dominate the China market one day – should it repeat the story of successfully penetrating the Hong Kong market like it has done since the1980s.

When you further think of the HK$100 billion total addressable market of the instant noodles market in China, Nissin could become a solid ten-bagger candidate given the sky is the limit in terms of potential growth.

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Vitasoy International (SEHK: 345) : Hong Kong Dominant Player

Since it was introduced in 1940, Vitasoy International Holdings Ltd (SEHK: 345) has become one of those quintessential Hong Kong brands whose products are caught up in the city’s pop culture and collective memory.

Over in the local stock market, Vitasoy is a famous ten-bagger over the past decade – during the “lost decade” of the Hang Seng Index since 2008. First of all, it isn’t easy for an old brand to take off again in terms of its stock price appreciation. It requires a refresh in terms of the brand and a willingness on the part of the company to take risks to reignite growth. In that respect, the credibility and execution power of the management team has earned our trust to hold the stock over the long term.

Accounting for 62% revenue, the Mainland China market remains the growth engine of the group, but the depreciation of the Chinese Renminbi will be unfavourable when profit is reported in Hong Kong Dollars. For example, operating profit from China rose by 23% in local currency but was up only 8% in HKD terms.

Like Nissin Foods, consumers’ perception of the brand requires a concerted marketing effort to build up that brand image in their mind. This intangible asset is where the “moat” comes into play for most consumer discretionary stocks.

Although Vitasoy has been promoting its signature milk products in the mainland over the last 20 years, it’s the VLT Lemon Tea drinks that captured the heart of Chinese consumers. VLT Lemon Tea beat out the world-famous Coca-Cola and household brand Wong Lo Kat to become the best-selling beverage brand on both Alibaba’s Tmall and in 2018.

It’s been particularly popular among the younger generation since 2016. VLT Lemon Tea’s brand possesses a cachet among youngsters and many of them are said to be so addicted that they consume several packs a day!

Vitasoy hopes to further consolidate its popular brand image among the younger generation by being proactive, including having recently sponsored e-sports competitions. Mainland consumers are willing to pay double the price of Tingyi’s Lemon Black Tea for VLT Lemon Tea – indicating the strong price power of Vitasoy. In fact, Vitasoy’s gross margin stands at a stunningly high level of 54%.

Meanwhile, capital expenditure increased by 130% in FY19; mainly for the construction of new factories in Dongguan, China. I believe the penetration rate of Vitasoy in China is still extremely low and the development potential is enormous. The exchange rate and raw material prices are cyclical, and companies with strong pricing power can easily pass on the cost to consumers. Therefore, the value of Vitasoy International ultimately depends on the long-term acceptance of the brand by its consumers.

Budweiser APAC (SEHK:1876): One Of The Mega IPO Stocks To Watch

Budweiser Brewing Company APAC (SEHK: 1876) is no stranger to investors having recently listed in Hong Kong. For a giant stock with HK$372 billion market cap, it is unrealistic to expect Budweiser APAC to be next ten-bagger but it could be an ideal choice for stable investors expecting high single-digit returns annually over the long run.

China is the world’s largest beer market accounting for 25% of market share by volume. As a foreign brand, Budweiser ranks number one by both total beer value sales and premium categories beer value sales in China. The overall Chinese beer market is becoming mature, the premiumisation momentum can be seen a structural trend as consumers seek out products that offer more in terms of flavour and style.

That said, the growth engine of the sector was highly concentrated in the premium segment during 2013 to 2018. With super premium brands such as Hoegaarden and Stella in the portfolio, Budweiser leaves major competitors i.e. CR Snow and Tsingtao in the dust. According to consultancy firm Global Data, the market share of Budweiser in the premium and super premium category was 46.6% in 2018. Both CR Snow and Tsingtao had declining market shares during 2013 to 2018.

Furthermore, Budweiser APAC is also vigorously developing its product offerings in emerging high-growth markets, such as India and Vietnam. Both countries have had double-digit industry growth over the past few years. Budweiser is currently ranked second in India with a 23% market share. Urbanisation is a long term tailwind for consumption growth in Asia, and the per capita consumption of beer in Asia is still far lower than the global benchmark. Thus, we are optimistic about the promising future of Budweiser in the region.

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