Master Kong noodle king and Pepsi, PEP partner Tingyi Cayman Islands Holdings, 322 HKG, warned today that net profit would be down 35-40% for the year ended 12/15. 3 reasons were given as an explanation:
- Noodle sales volume was down due to price increases for quality upgrades. Sales channel adopting a “wait and see” attitude in short-term. (Read consumers rejected price increase.)
- Beverage business making pro-active provisions for “diminution in value.” (Read asset impairment due to declining future sales). Despite two ground-breaking deals with Pepsi: 2011 shares for bottling ops; 2014 exclusive pact with Shanghai Disney. (Shanghai Disney faced numerous delays, now projected to open in June, 2016. )
- Fluctuating exchange rates
This announcement was especially shocking given the last earnings report, which showed declines far less than now currently projected. (In millions of $US, except eps. Despite Hong Kong listing, shows numbers in $US millions.)
Although revenue and profits had been dropping, both for the quarter and for the year, there is nothing comparable to a 35-40% drop. While there is obvious concern that the noodle price increase hit a major speed bump, even more concerning is the apparent markdown of the beverage business. Although Disney, DIS US, hasn’t opened as scheduled, it’s a delay not a cancellation. Why take a markdown four months before the opening? Rationally there could be something going on from either Pepsi or Disney that’s not being stated. (Shanghai Disney Resort is a jv with 57% held by the PRC group, Shanghai Shendi Group.)
The need to markdown the beverage unit reinforces a trend seen in the 3rd quarter where revenues and profits showing a significant decline in this segment. ($US Millions)
The much larger decline in the beverage profit versus the noodles profit had a significant hit on the beverage sector’s impact on total profit compared to 2014.
In the last quarterly report, dried noodles in the overall Chinese market were noted to be in a downward recessionary spiral, reflecting a market yoy decline of 2.8% volume, with a slight .4% increase in sales dollars. Beverage sales volume and dollars had increased by 0.3% and 2.5% yoy respectively in the third quarter of 2015.
Despite the myriad of reports over the transition to a consumer economy in China, this report throws a spanner into that thesis.
Stock facts: HK 322, Tingyi Caymen Islands Holding