Tingyi (Cayman Islands)Holdings:Above expectations on beverage margin;Sustainability key focus

What surprised us

Tingyi reported 3Q16net profit of US$143mn, down 1% yoy but aboveGSe of US$118mn. The surprise was mainly on the beverage business:Tingyi recorded 3.5% yoy positive sales growth driven by tea and waterproducts. It also recorded an 11% beverage OPM, highest in past 5years.Noodles sales were down 9% yoy, in line with expectations.

Key highlights from the briefing: 1) Core beverage products matter themost: volume growth of core products such as Ice Lemon tea, Green teaor RMB1/unit water products benefit from the positive operating leverage.We see Tingyi will largely focus on reviving growth for these lower endproducts in the near term and improving utilization (3Q at 50%); 2) Betterpricing setup for Noodles: Tingyi has raised ASP of its new products(incl. Black pepper and Gold Soup launched around Oct-Nov) to RMB5.00from RMB4.50/bowl. We see this as a valid strategy to differentiate theseproducts from its backbone Braised beef noodle pricing at RMB4.0; 3) Freecash flow strength: this remains a top priority for management in 2017.Tingyi says it will continue to limit capex and pay down USD debt with itsexcessive cash flow. We also expect further upside from potential assetdisposals over the next 2years. We expect a better yoy result in 4Q giventhe low base last year, however we see that key focus post stock rally nowis whether Tingyi can continue gaining market share next year, given thecompany is still largely focusing on growth of core(old) products.

What to do with the stock

Retain Neutral. We raise Tingyi’s 2016-18E recurring EPS by 25%/4%/4%,reflecting stronger beverages sales/margins. Our 12m TP increases toHK$7.35(from HK$6.70), based on 17X avg. 2017-18E PE (higher than 16Xearlier on a stronger growth outlook). Key risks: Stronger/weaker thanexpected noodles sales growth, beverage margin, rising commodity cost.