Unexpectedly worse noodle sales were cited.
Tingyi Holdings recently released a profit warning with 35-40% net profit decline in FY15.
According to a research note from Jefferies, noodles had worse than expected performance following a price rise whereas water faced strong competition.
Further, in order to maintain reasonable cash flow they lowered the Capex budget and booked provision in beverage.
Here's more from Jefferies:
What happened? Tingyi expects net profit to decrease 35-40% in FY15 to USD240-260m, at 29-34% below consensus median and our estimates. This implies net loss of USD82-102m in 4Q15, vs. net profit of USD9m in 4Q14. Profit deterioration was caused by: decline in noodle sales following price rise; provisions in beverages and Forex. 3) Tingyi cut Capex to USD500m in FY15 and budgets USD250m Capex in FY16 vs. USD1.4bn (incl. cUSD530m for new headquarters) in FY14.
Management guidance. Noodle sales were impacted following the price rise. Tingyi has increased advertising and promotion (A&P) spending and reinforced lower price products; Noodle business could take 6 months to recover. Water had weak performance and lost market share as the brand was changed from Master Kong to “You Yue”.
They plan to employ multi-tier strategy from March onwards to target different consumers. Management target to highlight new products in water and RTD drinks. Provision in beverages was write-down of idle production equipment. As a result of lower Capex, management expect to maintain reasonable FCF. Management guided flattish to low single digit top line growth and single digit bottom line growth in 16e (incl. the potential provision).
Earnings revision. We revise down 15e group sales by 11% to USD9.1bn (-11.6% yoy); expect sales to reach USD9.1bn (+0.7% yoy) in 16e. We lower GP margin; raise operating expenses and effective tax rate. In a nutshell, we cut 15e net profit by 38.3% to USD259m (-35.2% yoy); expect net profit to reach USD276m (+6.4% yoy) in 16e.
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