WITH ITS US$2.4 billion offer to acquire China Huiyuan Juice Group Ltd., Coca-Cola Co. has put the mainland beverage market under a spotlight. Some analysts believe there is room on stage for Huiyuan's rivals.
Tingyi (Cayman Islands) Holding Corp. and Uni-President China Holdings Ltd. have seen their share prices tumble in recent months along with Huiyuan's. All three beverage producers, which are listed in Hong Kong, have suffered from a combination of high inflation in China and a broad downward bias in Hong Kong and the mainland. Major snowstorms in south China in February and the Sichuan earthquake in May also put a dent in sales and marketing by the mass-market firms.
But Coke's offer of 12.20 Hong Kong dollars (US$1.56) a share for Huiyuan, China's largest juice maker by market share, shows that the industry's shares have been oversold, some analysts say. Huiyuan's shares were down 49% this year to HK$4.14 on Aug. 29, the last day its shares were traded before the Coca-Cola announcement. Huiyuan's shares soared Wednesday to close at HK$10.94, up 164%.
One analyst says foreign suitors might also be watching Tingyi and Uni-President, which are strong in bottled water, iced tea and juice. The rich price for the Coke deal shows that a successful beverage company 'represents something valuable to foreign companies which plan to penetrate into China's market,' Ken Lee, a research analyst with UOB Kay Hian (HK) Ltd., writes in a research note.
A spokeswoman for Tingyi, which sells products under the 'Master Kong' label in China, says the company doesn't need a merger partner. A spokesman for Uni-President, the mainland China subsidiary of Taiwanese food and beverage giant Uni-President Enterprises Corp., declines to comment.
Though the nonalcoholic beverage market in China isn't expected to match previous growth rates, it is still expected to expand by leaps and bounds. Consumption of nonalcoholic beverages, excluding hot drinks, in China rose 82.5% between 2002 and 2007, and is forecast to increase another 55% through 2012, according to market research firm Euromonitor International.
Meanwhile, inflation pressures are showing signs of slowing. World-wide commodity prices have softened in recent weeks, and the industry is shifting toward higher-end products that appeal to less-price-sensitive consumers in China.
As Chinese consumers accumulate more disposable income and become increasingly health-conscious, Uni-President and Tingyi are preparing to meet a growing demand for high-quality and healthy beverages, which produce higher margins, with new product lines, such as sugar-free organic iced tea, bottled water and pure fruit juice.
It can be a difficult shift. Tingyi says its sugar-free offerings aren't popular yet. 'It takes time for customers to accept it,' its spokeswoman says.
But Euromonitor International forecasts that carbonated drinks will 'struggle to strongly increase sales, due to its unhealthy image,' according to the firm's latest industry report. Meanwhile, 'fruit/vegetable juice, [ready-to-drink] tea, Asian specialty drinks and bottled water are expected to benefit from their healthy positioning.'
Uni-President has fallen 22% from its December initial public offering price of HK$4.22 a share. It finished Wednesday up nine Hong Kong cents, or 2.8%, at HK$3.28. Tingyi is down 24% from HK$12.40 on Jan. 2, finishing Wednesday at HK$9.39, up eight Hong Kong cents. China's largest domestic beverage producer, Wahaha, isn't publicly traded.
Uni-President derives 74% of its revenue from beverage sales, which rose 13% in the first half from a year earlier, to 3.7 billion yuan ($541.5 million). The unit attributed the growth in part to its increased focus on higher-margin beverage businesses. Tea-drink sales rose 34%, while juice sales fell 14%.
However, the unit posted an 18% drop in first-half profit, which it attributed to a loss of 128 million yuan from the yuan's strength against the U.S. and Hong Kong currencies. Excluding the foreign-exchange loss, Uni-President had recurring earnings growth of 31%, according to a research note by BNP Paribas. The bank has a 'buy' rating on Uni-President with a target price of HK $4.88 over the next year.
Morgan Stanley has an 'overweight' rating on Uni-President, its equivalent of a buy, and a target price of HK$4.35 over the next 12 to 18 months. In a report dated Aug. 22, analysts Angela Moh, Penny Tu and Jessica Wang wrote that the company's 'restructuring efforts will continue to pay off, as the company focuses on rationalizing its product mix toward higher-margin products while keeping operating costs under control.'
Tingyi has seen continued growth this year, although its drinks sales are showing signs of maturity. Overall sales increased 36% in the first half to US$2 billion, and profit was up 31%, but its beverage division lagged behind slightly, with sales growth of 25%. Tingyi's iced tea and mineralized water rank first in mainland China by market share, according to a June survey by ACNielsen.
The company seeks to boost its overall share in the nonalcoholic beverage market to 20% this year, up from 16.8% last year, with a US$300 million investment in its beverage business. The company's chief executive has mentioned plans to spin off its major operations -- instant noodles, beverages and bakery products -- into separate listings within the next five years, though its board hasn't considered such a move, the spokeswoman says.
In an Aug. 15 research note, BNP Paribas retained its buy call on the stock with a 12-month target price of HK$11.60, noting that it was likely to benefit from declining prices for 'soft' commodities such as food.
Tingyi is rated overweight by Morgan Stanley, with a target of HK$10.35 over the next 12 to 18 months. 'With its solid distribution network and strong brand, Tingyi remains a good proxy for the secular growth story in China's food and beverage industry,' the authors wrote Aug. 26.
Despite the heavy competitive pressures from foreign firms such as Coca-Cola, Uni-President and Tingyi remain well-positioned since they make more than just juice. Each derives a significant portion of revenue from its instant-noodle business -- 26% for Uni-President and 48% for Tingyi.
Regulatory changes may also give the companies a boost. New national beverage standards in China will force producers to focus on quality. The introduction of such measures is likely to give bigger companies such as Uni-President and Tingyi an advantage since they have also had a role in setting the new standards, Euromonitor noted.
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Ting-I Tsai in Taipei contributed to this article. |
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