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February 12, 2014

China: Consumer Staples

Equity Research

2014: Price discipline in sight; Tingyi, UPC to Buy; Huishan to CL-Buy

Competition is king in year of weak sales and fading cost tailwind

We believe competitive intensity will be the most important driver of

China Staples’ earnings in 2014 against a backdrop of decelerating top-

line growth and abating raw material cost tailwinds. Directional changes

in promotional spend will thus be crucial for margins this year.

We upgrade Tingyi and UPC to Buy on positive OPM inflection as

Beverage promotions ease. We expect Tingyi to pull promotions following

recent stabilization of market share to restore profitability, and UPC to

follow. This will drive accelerated EPS CAGR for both companies.

Maintain out-of-consensus Sell on Hengan as intense competition is

spilling from tissues and diapers into its key category sanitary napkins

(>50% of OP). In 4Q13, Kimberly Clark staged a major re-launch of its fem

care products targeting the same customer group as Hengan’s Space-7.

Fading raw material cost tailwind: In 2014E/2015E, we forecast that raw

material costs will turn from deflationary to mildly inflationary, with our GS

COGS Index to increase by 6 pp vs 1H13. Adding Huishan to CL-Buy as

we expect the company to benefit most from raw milk price hikes and

downstream premiumization, driving our 40% 2-yr EPS CAGR forecast.

After recent pull back, Huishan is trading at 13.9X average 2014E/2015E P/E.

Upgrade Tingyi and UPC to Buy: Beverages to drive margin rebound

Tingyi’s Beverage margins have contracted from 13% in 2008 to 5% in 2013E

as a result of its aggressive market share defence. We think recent

stabilization of RTD tea market share is likely to prompt Tingyi to pull

Beverage promotions to restore profitability at a faster rate than

appreciated by the market. We forecast Tingyi’s Beverage margins to return

to 11% by 2015E, driving 2-yr recurring EPS CAGR of 29% vs 17% in 2013E.

We expect UPC to follow to restore prices and forecast its Beverage margins

to bounce back from 4.4% in 2013E to 6.6% in 2015E, driving recurring 2-yr

EPS CAGR of 43%, vs 42% decline in 2013E. Noodles competition will remain

tough, but the upswing in Beverage margins will be enough to push both

companies’ EPS CAGRs to 1st quartile vs Staples peers. At current average

2014E/2015E P/E of 22.8X for both Tingyi and UPC, we see re-rating

opportunities to high 20s P/E. Upgrade both companies to Buy.

Revisions to earnings and 12-m target prices for our coverage

We revise our FY13E-FY15E EPS by -10% to +13% and 12-m target prices

by -14% to +35% for stocks under our coverage.

KEY THEMES IN THIS REPORT

2014 Outlook: All about competition; selective on growth

Latest China Staples trends: Growth deceleration continues, COGS tailwind to fade

Tingyi, UPC: Beverages to drive positive OPM inflection in 2014, upgrade both to Buy

RATING AND TARGET PRICE SUMMARY

*The stock is on our Conviction List

HOW WE DIFFER FROM CONSENSUS

Note: UPC, Tsingtao, CRE’s Bloomberg consensus is a mix

of core and non-core EPS. Our estimates are core EPS, excl.

one-offs such as gains from asset sales.

Source: Bloomberg, Datastream, Goldman Sachs Global

Investment Research

Lisa Deng +852-2978-0528 [email protected] Goldman Sachs (Asia) L.L.C. Goldman Sachs does and seeks to do business with

companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Xiaochun Ni +852-2978-6603 [email protected] Goldman Sachs (Asia) L.L.C.

The Goldman Sachs Group, Inc. Global Investment Research

Implied

Company Ticker New Old New Old Crncy +/‐ %

H‐Share Staples valuation framework

Want Want 0151.HK Buy Buy 13.90 12.50 HKD 37%

UPC 0220.HK Buy Neutral 8.90 7.30 HKD 27%

Tingyi 0322.HK Buy Neutral 24.90 18.45 HKD 26%

Hengan 1044.HK Sell Sell 82.90 78.30 HKD ‐1%

Mengniu 2319.HK Neutral Neutral 36.90 33.20 HKD 1%

Tsingtao (H) 0168.HK Neutral Neutral 65.00 55.10 HKD 17%

CRE 0291.HK Neutral Neutral 26.50 28.40 HKD 18%

China Foods 0506.HK Neutral Neutral 3.00 3.00 HKD 15%Other Staples stocks under coverage

Huishan 6863.HK Buy* Buy 3.60 3.20 HKD 35%

Tsingtao (A) 600600.SS Buy Buy 50.70 44.40 CNY 19%

Greatview 0468.HK Neutral Neutral 4.60 5.35 HKD 12%

Rating 12‐m TP

Company Ticker F13E F14E F15E

Huishan 6863.HK ‐9% ‐6% ‐3%

Want Want 0151.HK ‐4% ‐2% 7%

UPC 0220.HK ‐37% ‐8% 10%

Tingyi 0322.HK 1% 5% 10%

Hengan 1044.HK ‐2% ‐12% ‐10%

Mengniu 2319.HK ‐5% ‐4% ‐9%

Tsingtao 0168.HK ‐10% ‐2% 4%

CRE 0291.HK ‐10% ‐11% ‐5%

China Foods 0506.HK ‐3% ‐105% ‐46%

Greatview 0468.HK ‐3% ‐8% ‐10%

GS vs Consensus

February 12, 2014 China: Consumer Staples

Goldman Sachs Global Investment Research 2

Table of contents

2014 outlook: All about competition; selective on growth 3

Latest China Staples trends: Growth deceleration continues 6

Upgrade Tingyi and UPC to Buy: Competition not over, but close to the end of a cycle 10

Beverages to lead margin rebound in 2014 for Tingyi and UPC 11

Noodles unit cost analysis suggests marketing flexibility available 15

Huishan (6863.HK): Positive data boosts conviction; to CL-Buy 24

Tingyi (0322.HK): Positive inflection on OP margins; up to Buy 30

UPC (0220.HK, Buy): Price restoration on the horizon; up to Buy 34

Want Want (0151.HK): Restructuring to bear fruit; maintain Buy 38

Hengan (1044.HK): Sanitary napkins feel the pressure; maintain Sell 46

Tsingtao (600600.SS, Buy; 0168.HK, Neutral): Price discounts fading 54

Summary of changes/risks for Neutral-rated stocks 60

Disclosure Appendix 61

The prices in this report are as of the market close of February 10, 2014.

Exhibit 1: China Consumer Staples valuation comparison

*Stock is on our regional Conviction List. All target prices mentioned above are on a 12-m basis. CS = Coverage Suspended, NC = Not Covered. Huishan’s 2013E-2015E EPS CAGR is calculated on calendar year basis here vs. its financial year-end on of March.

Source: Bloomberg, Datastream, Goldman Sachs Global Investment Research

BBG Ticker Name Mkt Cap Last GS Target List Report EPS 13-15E PE PE PEG EV/EBITDA EV/EBITDA P/B Div Yield Div Yield ROA ROE ROEClose Rating Price Crncy Crncy 6M Chg CAGR CY13 CY14 2Yr CY13 CY14 CY14 CY13 CY14 CY13 CY13 CY14

US$m Price L.C. L.C. L.C. % % (X) (X) CAGR (X) (X) (X) % % % % %China Personal Care

1044 HK Hengan 13,287 83.70 Sell 82.90 HKD HKD (5.0) 12.6 26.7 25.4 2.0 18.6 17.4 6.1 2.2 2.3 11.9 25.9 24.8 3331 HK Vinda 1,619 12.58 NC N/A HKD HKD 48.5 16.9 23.2 19.8 1.2 15.2 13.2 2.8 1.2 1.4 6.0 12.4 13.2 Average 14,906 26.3 24.8 1.9 18.2 17.0 5.7 2.1 2.2 11.2 24.4 23.5

China NARTD/Packaged Food322 HK Tingyi 14,213 19.70 Buy 24.90 HKD USD 1.3 28.8 33.8 25.9 0.9 12.4 9.5 4.5 1.5 1.9 5.5 16.2 18.6 151 HK Want Want China 17,251 10.12 Buy 13.90 HKD USD (2.3) 23.9 27.3 23.1 1.0 18.3 15.4 8.2 2.5 3.0 16.8 37.2 38.3 220 HK UPC 3,257 7.02 Buy 8.90 HKD CNY (0.6) 43.3 40.4 27.8 0.6 15.4 12.8 2.2 1.2 0.9 5.4 12.4 8.1 506 HK China Foods 938 2.60 Neutral 3.00 HKD HKD (15.6) nmf nmf nmf nmf 35.9 10.9 1.2 - - (3.7) (11.2) (0.2) Average 35,659 31.2 24.7 0.9 16.1 12.7 6.0 1.9 2.3 10.7 25.3 26.7

China Alcohol168 HK Tsingtao H-Share 9,560 55.35 Neutral 65.00 HKD CNY (9.8) 23.0 31.6 24.8 1.1 17.6 13.9 3.6 1.1 1.2 8.6 16.0 15.5 600600 CH Tsingtao A-Share 9,560 42.55 Buy 50.70 CNY CNY (1.5) 23.0 30.7 24.4 1.1 17.3 13.7 3.6 1.1 1.3 8.6 16.0 15.5 506 HK China Foods 938 2.60 Neutral 3.00 HKD HKD (15.6) nmf nmf nmf nmf 35.9 10.9 1.2 - - (3.7) (11.2) (0.2) 291 HK CRE 6,972 22.50 Neutral 26.50 HKD HKD (12.5) 27.9 35.1 28.4 1.0 8.4 7.4 1.2 0.5 0.7 1.2 3.7 4.4 000729 CH Beijing Yanjing 3,332 7.19 CS N/A CNY CNY 16.7 11.0 25.3 22.3 2.0 nmf nmf 1.9 1.9 2.2 4.8 7.8 7.2 600519 CH Kweichow Moutai 22,760 132.86 Buy 177.42 CNY CNY (23.1) 15.9 9.2 8.0 0.5 5.6 4.8 2.7 5.5 6.3 31.5 39.7 37.6 000858 CH Wuliangye 9,289 14.83 Neutral 17.17 CNY CNY (22.4) 11.3 6.8 6.3 0.6 3.0 2.6 1.3 4.5 4.9 18.8 24.3 22.4 000568 CH Luzhou Laojiao 3,806 16.45 Neutral 21.84 CNY CNY (22.0) 11.5 6.1 5.5 0.5 3.3 3.1 1.8 10.7 10.9 24.1 36.7 35.3 000869 CH Yantai Changyu 2,391 24.44 CS N/A CNY CNY (24.1) 6.2 12.9 12.4 2.0 7.6 8.6 2.5 4.1 3.5 15.2 20.3 19.4 Average 68,607 18.5 15.3 0.9 9.4 7.5 2.5 3.6 4.0 17.6 24.3 23.3

China-Dairy2319 HK China Mengniu 8,683 36.70 Neutral 36.90 HKD CNY 13.4 27.0 36.0 26.2 1.0 18.6 13.2 3.3 0.6 0.8 5.0 10.4 12.5 6863 HK Huishan 4,941 2.66 CL Buy 3.60 HKD CNY nmf 40.6 23.7 16.1 0.4 19.2 12.2 2.1 - - 9.2 14.9 14.2 1117 HK Modern Dairy 2,433 3.91 NC N/A HKD CNY 45.4 60.7 33.2 17.1 0.3 19.6 15.6 2.5 0.1 0.5 4.6 9.0 13.1 600887 CH Yili 12,725 37.75 CS N/A CNY CNY 1.9 20.2 26.1 22.8 1.1 19.6 14.4 4.9 1.1 1.3 10.8 21.0 19.4 600597 CH Bright Dairy 3,861 19.11 CS N/A CNY CNY (2.3) 47.0 48.9 32.0 0.7 nmf nmf 5.4 1.2 1.8 5.4 11.1 15.7 1230 HK Yashili 1,955 4.26 NC N/A HKD CNY 21.7 24.5 22.3 18.9 0.8 13.6 11.2 3.4 4.8 2.8 11.0 14.8 17.6 1112 HK Biostime 5,373 69.20 NC N/A HKD CNY 60.7 31.3 33.6 25.5 0.8 22.2 16.2 12.6 1.7 2.5 23.8 37.2 44.5 SYUT US Synutra 454 7.92 NC N/A USD USD 53.8 30.8 20.3 14.4 0.5 nmf nmf nmf nmf nmf nmf (12.7) nmfAverage 40,425 31.3 23.3 0.8 19.4 14.0 5.1 1.1 1.3 10.2 17.8 19.8

China - Pork1068 HK China Yurun 1,064 4.53 Neutral 4.60 HKD HKD (13.7) nmf nmf 9.2 nmf 22.7 8.0 0.5 0.4 3.6 0.5 0.9 7.5 000895 CH Shuanghui 16,863 46.44 NC N/A CNY CNY 20.1 23.6 26.2 21.2 0.9 17.2 13.4 5.4 0.9 1.1 20.5 31.0 30.6 3999 HK Dachan Food 118 0.90 NC N/A HKD (10.0) nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmfPFH SP People's Food nmf nmf NC N/A SGD nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmfAverage 18,045 26.2 20.5 0.9 17.5 13.0 5.1 0.9 1.3 19.3 29.2 29.2

China Packaging468 Hk GA Pack 711 4.12 Neutral 4.60 HKD CNY (12.5) 21.7 14.7 12.1 0.6 9.2 7.6 1.9 2.0 2.5 11.7 15.2 16.3 906 HK COFCO Pack 772 6.00 NC N/A HKD CNY 17.6 22.2 12.1 9.9 0.4 7.9 6.9 1.2 nmf nmf 5.4 10.3 10.9 829 HK Shenguan 1,418 3.31 NC N/A HKD CNY (0.9) 13.3 11.0 9.8 0.7 8.1 7.0 3.2 5.2 5.6 26.2 31.3 30.6 000659 CH Zhongfu 509 2.40 NC N/A CNY CNY 19.4 nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf nmf600210 CH Zi Jiang 735 3.10 NC N/A CNY CNY 7.6 17.2 20.3 16.9 1.0 nmf nmf nmf nmf nmf nmf 5.4 6.0 9939 TT Hon Chuan 556 64.90 NC N/A TWD TWD (3.7) 12.7 13.9 12.6 1.0 nmf nmf nmf nmf nmf nmf nmf nmfAverage 4,701 13.8 11.8 0.7 8.3 7.1 2.4 4.1 4.6 17.1 18.4 18.6

Price



2014 outlook: All about competition; selective on growth

After a year of lackluster topline growth and intense competition in 2013, we believe

that the key themes driving Staples performance in 2014 will again be centered on

competitive intensity and access to growth. However, in 2014, we expect that the

category sales growth disparity between “early stage” and “later stage” consumption

categories will become even more pronounced, which will subsequently lead to

increasingly divergent competitive intensity in the two segments.

We reiterate Buy on Huishan and add it to CL; upgrade Tingyi and UPC to Buy from

Neutral; maintain Want Want and Tsingtao (A) on Buy and Hengan on Sell.

Exhibit 2 below conceptualizes our thinking behind the key themes influencing earnings

growth for Staples in 2014 and where each of the stocks under our coverage is positioned.

Exhibit 2: Conceptualizing key themes in Staples for 2014E

Note: Direction of arrows indicate our expected trend for competitive intensity. Arrows pointing to the left indicate a reduction in competitive intensity. Arrows pointing to the right indicate an increase in competitive intensity.

Source: Goldman Sachs Global Investment Research.

We can broadly separate our Staples coverage into “early stage” and “later stage”

companies based on the consumption categories that they are exposed to. We define

a consumption category as either early stage or later stage based on China’s per capita

consumption maturity vs the rest of the developed world (i.e., US, UK, Japan). For

example, we classify Instant Noodles as an early stage consumption category, as its

per capita consumption in China of 3.3kg/pp in 2013 is already close to Japan’s

4.2kg/pp. While Diapers is a later stage category as its per capita consumption is just at

15.4units/pp in 2013 vs US at 61units/pp.

For early stage consumption categories such as instant noodles, beer, carbonated soft-

drinks, we expect topline growth in 2014 to remain soft as per capita consumption matures.

However, industry profitability will likely improve driven by ongoing premiumization and

consolidation, in our view. We could also expect to see higher incidences of M&A for

companies that have a strong balance sheet in order to gain better access to growth.



In the specific case of our upgrade of Tingyi and UPC to Buy from Neutral, even though

we expect slowing top-line growth for both companies as Beverage and Noodles

growth becomes mature in China, we expect a rebound in operating margins as we

expect reduction in promotional intensity to be the key positive catalyst for the stocks.

For later stage consumption categories, we forecast more attractive topline growth in

2014E helped by consumers trading up and recent policy reforms. However,

competition will likely intensify as large numbers of competitors enter the market,

which could lead to margin erosion. We see personal care categories such as diapers

and tissues and more recently sanitary napkins as particularly susceptible to this and

hence we maintain our out-of-consensus Sell on Hengan due to earnings risk.

We continue to like Huishan and WW as both companies’ have access to high growth

categories and enjoy moderate competition. For these two companies, we believe that

company-specific execution would be the focus. We note that Want Want’s new product

launches (albeit small) are doing well and that it has increased its milk beverage ASP by

5%-8% in October 2013 to combat rising milk powder costs, which reflects its strong pricing

power. For Huishan, we reiterate Buy and add it to our CL. Recent positive news such as

being selected as part of the second batch of national champions for Infant Formula by the

Dairy Association of China, as well as continued escalation of raw milk prices into January

2014 provide added support to our forecast of 40% EPS CAGR in 2013E-2015E.

Our valuation framework

Exhibit 3 below shows the key valuation framework that we apply to our Staples

coverage. We use P/E as our primary valuation methodology as back-testing suggests

that it generates the highest alpha. Our valuation framework has been consistently

applied since we adopted it in 2H12 and has not changed in this report.

We roll forward the valuation period for all 11 of our stocks on Exhibit 3 by 6 months

from CY2014E to average CY2014E/CY2015E.

For our core, branded FMCG (Fast Moving Consumer Goods) stocks, i.e., Tingyi,

Hengan and Want Want, we value the stocks on a relative basis based on each

company’s 2-yr EPS CAGR and CROCI rank vs its Staples peers. We apply a 20% P/E

premium or discount (unchanged) to our sector target average P/E of 24.0X

(unchanged) to companies that rank in the first quartile or fourth quartile of EPS CAGR.

Moreover, we also apply another 15% premium or 5% discount (both unchanged) to

our sector target average P/E of 24.0X to companies which are either in the first or

fourth quartile for CROCI. For example, Want Want, which has 3rd quartile EPS CAGR

but first quartile CROCI relative to its Staples peers, will receive a 15% P/E premium to

our target sector average of 24.0X, resulting in a P/E valuation multiple of 27.6X. Our

target sector average of 24.0X is in-line with the sector’s P/E average from 2007.

For beer companies (Tsingtao and beer business of CRE), we use EV/EBITDA as our

primary valuation methodology as these companies tend to be cash rich and depreciation

policies can vary greatly among them. Since we value CRE’s beer business using EV/

EBITDA and retail business using P/E, with reference to peers, we value CRE on SOTP basis.

Companies that we cover but have a higher commoditized component are not included

in this framework, e.g., Huishan given its upstream dairy farming exposure. For

Huishan, we use PE-SOTP valuation, with reference to its closes peers China Modern

Dairy and Mengniu. For Greatview, we value based on a 20% discount to historical

average P/E given a 20% fall in our forecast CROCI for the stock due to margin squeeze.

For China Foods, we value the company on a SOTP-P/B basis given the company’s

forecast loss in 2013E/2014E.



Exhibit 3: Our stock calls for 2014: Top pick Huishan (add to CL-Buy), Tingyi and UPC (upgrade to Buy from Neutral),

Want Want (maintain Buy), and Hengan (maintain Sell)

Source: Datastream, Goldman Sachs Global Investment Research.

Exhibit 4: Our 2013E-2015E forecasts are generally below Bloomberg consensus forecasts except for Tingyi GS forecasts vs consensus

Source: Bloomberg, Goldman Sachs Global Investment Research.

Theoretical

Prem/Disc

Company New Old Chg New Old Chg CP

Implied

Up/Dow

nside

Target

multiple Prem/Disc Applied

Old

Multiple

2013‐15E

CAGR Rank

Premium

Applied 2014E Rank

Premium

Applied

Within valuation framework

Mengniu Neutral Neutral 36.90 33.20 11% 36.70 1% 24.0X 0% 24.0X 27% 3 0% 11% 3 0% 0%

Want Want Buy Buy 13.90 12.50 11% 10.12 37% 27.6X 15% 27.6X 24% 3 0% 38% 1 15% 15%

Hengan Sell Sell 82.90 78.30 6% 83.70 ‐1% 22.8X ‐5% 22.8X 13% 4 ‐20% 23% 1 15% ‐5%

Tingyi Buy Neutral 24.90 18.45 35% 19.70 26% * 28.8X 20% 24.0X 29% 1 20% 15% 2 0% 20%

CRE Neutral Neutral 26.50 28.40 ‐7% 22.50 18% ** 28.8X SOTP 33.5X 28% 2 0% 6% 4 ‐5% ‐5%

Tsingtao (H) Neutral Neutral 65.00 55.10 18% 55.35 17% 15.0X EV/EBITDA 15.0X 23% 4 ‐20% 14% 2 0% ‐20%

UPC Buy Neutral 8.90 7.30 22% 7.02 27% 28.8X 20% 28.8X 43% 1 20% 9% 3 0% 20%

China Foods Neutral Neutral 3.00 3.00 0% 2.60 15% ^^ 1.4X SOTP P/B 1.4X nmf nmf 0% 5% 4 ‐5% ‐5%24.0X 24.0X 27% 15%

Outside of valuation framework

Tsingtao (A) Buy Buy 50.70 44.40 14% 42.55 19% 15.0X EV/EBITDA 15.0X 23% N/A N/A 14% N/A N/A N/A

Greatview Neutral Neutral 4.60 5.35 ‐14% 4.12 12% *** 12.0X ‐20% vs hist. avg P/E 15.5X 22% N/A N/A 17% N/A N/A N/A

Huishan CL Buy Buy 3.60 3.20 13% 2.66 35% ^ 18.5X SOTP P/E 19.5X 40% N/A N/A 18% N/A N/A N/A

* We increase Tingyi's P/E multiple from 24x to 28.8x as the company's 2‐yr EPS CAGR moves into 1st quartile

** We value CRE on a SOTP valuation methodology (Beer using EV/EBITDA, Retail using P/E), the Target and Old Muliples shown above are implied P/E multiples based on our SOTP valuation.

*** We reduced the P/E multiple from 15.5x to 12.0x as the company's average 2014/15E CROCI is expected to be 20% below historical average.

^ We value Huishan on P/E based SOTP, with reference to its closest peers China Modern Dairy and Mengniu. The Target and Old multiples shown above are implied P/E multiples based on our SOTP valuation.

^^ We value China Foods on SOTP P/B basis as we expect the company to be in loss in 2013 and 2014 with low earnings visibility.

Ratings Target price Valuation multiples EPS growth CROCI

Currency

Company Ticker New Old Chg % New Old Chg % New Old Chg % F13E F14E F15E

Want Want 0151.HK USD 0.05 0.05 ‐5% 0.06 0.06 ‐3% 0.07 0.07 3% ‐4% ‐2% 7%

Tingyi 0322.HK USD 0.08 0.08 ‐5% 0.10 0.10 ‐1% 0.12 0.12 6% 1% 5% 10%

UPC 0220.HK RMB 0.14 0.12 13% 0.20 0.21 ‐5% 0.28 0.31 ‐10% ^ ‐37% ‐8% 10%

Hengan 1044.HK HKD 3.14 3.01 4% 3.29 3.43 ‐4% 3.98 4.18 ‐5% ‐2% ‐12% ‐10%

Mengniu 2319.HK RMB 0.81 0.81 ‐1% 1.09 1.09 0% 1.30 1.34 ‐3% ‐5% ‐4% ‐9%

China Foods 0506.HK HKD ‐0.26 ‐0.26 0% ‐0.01 ‐0.01 0% 0.08 0.08 0% * ‐3% ‐105% ‐46%

CRE 0291.HK HKD 0.64 0.68 ‐6% 0.79 0.85 ‐7% 1.05 1.14 ‐8% ‐10% ‐11% ‐5%

Tsingtao 0168.HK RMB 1.39 1.51 ‐8% 1.74 1.85 ‐6% 2.10 2.09 0% ^ ‐10% ‐2% 4%

Huishan 6863.HK RMB 0.09 0.09 0% 0.13 0.13 0% 0.17 0.17 0% ‐9% ‐6% ‐3%

Greatview 0468.Hk RMB 0.22 0.22 0% 0.27 0.27 ‐2% 0.33 0.35 ‐7% ‐3% ‐8% ‐10%

Sector Average

^ Consensus forecasts for UPC and Tsingtao in 2013E is a mix of pre‐one‐off and post‐one‐off estimates by brokers. Gse is pre‐one‐off's

* We are less optimistic vs street on ability to turnaround Wine business in a short time.

Note: All EPS above is shown on calendarized basis. All companies within our coverage are December year‐end, except for Huishan, which is a March year‐end.

CY2013E EPS CY2014E EPS CY2015E EPS GS vs Consensus



Latest China Staples trends: Growth deceleration continues

The latest Nielsen FMCG growth trends indicate that Staples growth continued to

decelerate into 4Q2013. November 2013 FMCG growth was 5.5%, below the rolling 12-m

average growth of 6.7% and FY12 average of 14.9%. Food growth was 5.3% (rolling 12-m

average 6.3%) vs non-food growth of 5.9% (rolling 12-m average 7.5%). For the rolling 12

months to November 2013, beverages grew 9.5%, while other foods, which includes instant

noodles, grew just 2%. Within non-food category, personal care grew 9.0%.

Exhibit 5: China total FMCG sales growth fell to 5.5% in November 2013 from average of

6.7% for the rolling 12 months to November 2013 Nielsen monthly sales growth for total FMCG, food and non-food groups in China

Source: Nielsen.

Exhibit 6: Within food, beverage sales growth in

November 2013 fell to 6.4% vs 9.5% in the rolling 12

months to November 2013 Nielsen monthly food sub-category growth

Exhibit 7: Within non-food, personal care sales growth in

November 2013 fell to 5.8% vs 9.0% in the rolling 12

months to November 2013 Nielsen monthly non-food sub-category growth

Source: Nielsen.

Source: Nielsen.

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Impulse food Beverage Dairy food Other food

‐30

‐20

‐10

0

10

20

30

40

50

60

70

Sep‐11

Nov‐11

Jan‐12

Mar‐12

May‐12

Jul‐12

Sep‐12

Nov‐12

Jan‐13

Mar‐13

May‐13

Jul‐13

Sep‐13

Nov‐13


Household Personal Care

Insect Control Hair Products



Premiumization remained a core growth driver, accounting for the larger portion of

category growth for Liquid Milk, Confectionery, Infant Milk Formula. While heavy

competition drove price erosions for RTD tea, CSD (both due to upsizing in 2013 without

increasing prices) and Facial Tissues.

Exhibit 8: Food sub-category value growth, rolling 12

months to November 2013

Exhibit 9: ASP growth contributed to a significant portion

of category growth for most food categories

Source: Nielsen.

Source: Nielsen.

Exhibit 10: Personal care sub-category value growth,

rolling 12 months to November 2013

Exhibit 11: ASP growth was still high in sanitary napkins,

but price erosion obvious for facial tissues

Source: Nielsen. Source: Nielsen.

Increasing growth divergence between early stage and later stage

consumption categories

Exhibit 12 shows the Nielsen average rolling 12-month average category growth for early

stage and later stage consumption categories. Both the early stage and later stage

consumption categories saw topline growth slow through 2013, although early stage

categories slowed more aggressively relative to later stage categories. That is, average

category sales for early stage categories slowed by 6.3 pp to 3.7% in November 2013, vs

10.0% in January 2013, while later stage categories slowed by just 2 pp, from 13.4% to 11.4%.

Euromonitor expects this diverging trend to continue through 2017 (Exhibit 13). As

category growth shifts gears, ASP is likely to become an increasingly important component

of category growth, in our view (Exhibits 14 and 15), particularly for early stage categories.

0.2

7.6

0.6 2.4 2.6

11.0

3.4

16.1

5.9 4.7

25.8

36.5

0

5

10

15

20

25

30

35

40

Nov 2013 Food Category Growth (MAT, YoY %)

(3.2) (2.2)

9.0 4.1 2.1 3.3 5.1 7.6 4.7

11.5 7.2

2.1 3.6 2.9 (1.3) (1.6)

0.5 0.1

10.4 3.2 1.2

(6.1)

17.3 33.6

(10.0)

(5.0)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Nov 13 ASP growth (MAT, YoY %) Nov 13 Volume growth (MAT, YoY %)

11.5

2.8

4.7

7.3

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Facial Tissue

Bathroom Tissue

Diaper

Sanitary Protection

Nov 2013 Non‐Food Category Growth (MAT, YoY %)

(5.7)(0.2)

3.2 8.5

18.2

3.0 1.4

(1.1)

‐10

‐5

0

5

10

15

20

Facial Tissue

Bathroom Tissue

Diaper

Sanitary Protection

Nov 13 ASP growth (MAT, YoY %) Nov 13 Volume growth (MAT, YoY %)



In 2012-2017E, we project that volume growth for early stage categories will slow from 9.4%

to 5.0%, while ASP growth will be 4.8%, accounting for approximately half of the total

category growth as consumer trading up continues. For later stage categories, although

slower than the past 5 years, volume growth of 12.7% in 2012-2017E is still respectable, and

an increasing ASP growth of 3.1% will push total category growth to close to 15% CAGR.

Exhibit 12: Growth discrepancy of early stage vs late

stage Staples categories have been increasingly

pronounced per Nielsen

Nielsen rolling 12-m average category sales

Exhibit 13: Euromonitor forecasts also support our

expectation that growth disparity between the two

groups will widen over the next several years

Early stage: biscuits, liquid milk, instant noodles, consumer packed oils, carbonates, fruit/vegetable juice, RTD tea, bathroom tissue, sanitary protection.

Later stage: milk formula, sugar confectionery, chocolate confectionery, flavored milk drinks, yoghurt and sour milk products, sweet and savory snacks, bottled water, RTD coffee, sports and energy drinks, Asian specialty drinks, nappies/diapers/pants, facial tissue.

Note: The growth rates between Nielsen and Euromonitor are slightly different as Nielsen’s data is relatively more modern trade skewed, while Euromonitor covers all channels.

Source: Nielsen. Source: Euromonitor.

Exhibit 14: Forecast ASP vs volume growth for early

stage consumption categories in 2012-2017E vs. 2007-

2012

Exhibit 15: Forecast ASP vs volume growth for later

stage consumption categories in 2012-2017E vs. 2007-

2012

Source: Euromonitor.


15.014.5

10.0 10.09.1

9.58.8

7.57.0

6.25.5

5.14.3

3.7

20.2 19.9

15.8

13.5 13.4

14.6 14.613.9 13.6

13.112.6 12.4

11.911.4

0.0

5.0

10.0

15.0

20.0

25.0

Oct‐12 Nov‐12 Dec‐12 Jan‐13 Feb‐13 Mar‐13 Apr‐13 May‐13 Jun‐13 Jul‐13 Aug‐13 Sep‐13 Oct‐13 Nov‐13

Early stage consumption categories Late stage consumption categories

12.1%

8.5%

12.1%

14.2%

10.6%10.2%

10.9%

9.3%9.1% 9.2%

15.5%

13.5%

16.5%

17.3%

14.5%

15.0%

16.9%

15.4%15.9%

15.4%

5.0%

8.0%

11.0%

14.0%

17.0%

20.0%

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

Early Stage Consumption Categories Later Stage Consumption Categories

5.0%

9.4%

4.8%

5.1%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%

'12‐'17 CAGR

'07‐'12 CAGR

Volume Growth ASP Growth

12.7%

17.1%

3.1%

1.6%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%

'12‐'17 CAGR

'07‐'12 CAGR

Volume Growth ASP Growth



Raw material outlook returns to mildly inflationary, tailwind comes

to an end

In 2012 through 1H13, most Staples companies enjoyed lower raw materials costs

including large falls in palm oil, sugar, PET prices and NZ milk powder (2012 only). As we

are expecting a mild rebound in raw material prices in 2014E/2015E, we do not expect that

companies can cushion their earnings any longer. As such, competition will become a

more important force in determining earnings growth in 2014E/2015E, in our view.

We forecast the average COGS base for the three large staples companies (Tingyi, Want

Want and Hengan) to rise by 6pp in 2014E/2015E. This will be driven by still elevated NZ

milk powder prices, mild inflation in palm oil, sugar, rice and flour, partially offset by

continued fall of PET prices as our Global Macro Research team forecasts another 9% fall in

Brent Crude Oil prices in 2014E. Contrary to the market, we also forecast pulp prices to

remain stable in 2014E (as opposed to a mild drop) as our Latin American Paper Analyst

Marcelo Aguiar believes that a tighter demand/supply due to delays and more than

anticipated complexity in new capacity ramp up will support prices.

Exhibit 16: We forecast average COGS to be stable in 2014E-2015E, but the raw material

cost tailwind that helped prop up earnings growth in 2012 and 1H13 is likely to end

Source: Bloomberg, WIND, Datastream, Goldman Sachs Global Investment Research.

70

80

90

100

110

120

130

20%

25%

30%

35%

40%

45%

50%

1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13E 1H14E 2H14E 2015E

Staples' gross margin vs. raw material price index

Want Want Hengan Tingyi Average raw material price index (RHS)

Hengan

Want Want

Tingyi

Raw material 1 2 3 4 5



Upgrade Tingyi and UPC to Buy: Competition not over, but close to

the end of a cycle

The Edgeworth pricing cycle theory1 advocates that in a market with highly

homogenous products, firms undercut each other successively to increase their

market share (price war phase) until the war becomes too costly, at which point

some firm increases its price. The other firms quickly follow, after which price cutting

begins again. The market price thus evolves in cycles.

The rivalry between Tingyi and UPC is far from over, but we believe that the current cycle

is drawing to a close. We upgrade both Tingyi and UPC from Neutral to Buy on

improving EPS growth and CROCI outlook driven by margin recovery. We forecast Tingyi

and UPC’s 2-yr EPS CAGR will accelerate to 29%/43% in 2013-2015E vs 17%/-42% in

2013E. At current P/E of 22.8X average 2014E/2015E EPS for both companies, we see re-

rating opportunities to high 20s P/E given first quartile growth vs Staples peers.

We believe beverages will lead margin recovery for both Tingyi and UPC in 2014. Recent

stabilization of Beverage market share will prompt Tingyi to pull promotions to restore

margins at a rate underappreciated by the market, in our view. As UPC has generally been

a price follower, we expect the company too will restore pricing, driving margin upside for

both companies. As Beverage growth has been driven more by product innovations in the

past 2 years, we expect that both Tingyi and UPC will be more focused on developing new

products in 2014. We are already seeing this in the market, including Tingyi’s recent launch

of its milk and coffee blend beverage selling at RMB3.80/500ml bottle, more than 2X the

price of a RMB2.20/600ml bottle of RTD tea, on a per litre basis. Consequently, we forecast

that Tingyi’s Beverage OP margin will rebound from 4.9% in 2013E to 10.8% in 2015E, while

UPC’s Beverage OP margin will rebound from 4.4% in 2013E to 6.6% in 2015E.

Noodles will remain tough as UPC has recently extended its sausage promotions to

Tingyi’s flagship braised beef noodles. However, we do not expect this to materially

worsen from 2013E as our instant noodles unit cost analysis suggests that both companies

have the flexibility to shift promotional focus between different flavors. Moreover, we are

also seeing a pull-back in above the line advertising spend to fund the more direct, price-

led promotions. We expect the Noodles price-war to end by 2015E as: 1) Tingyi’s dominant

market share in braised beef noodles will be hard to challenge. Former No.2 competitor

Hualong attempted to push for market share in this category via its premium label

Jinmailang in 2009. The product added a free egg to its braised beef flavored bowl noodles

and emphasized its superior quality noodles at competitive prices. Despite some initial

success, it was not sustained and Hualong has been losing share in recent years; 2) second

consecutive year of losses, tight cash flow will necessitate UPC to pull back promotions.

Our instant noodles unit cost analysis calculates that UPC and Tingyi have each spent

an additional RMB0.19/unit and RMB0.26/unit of COGS on promotions in 2013E

compared with 2010. Given ex-factory price of just RMB1.29/unit and RMB1.57/unit

respectively, this implies that aggressive competition has cost both companies 15%-

17% in GP margin. That is, all the raw material cost savings and more, have been

reinvested back into the market for competition. If just 25% of this were to be restored,

we think both Tingyi and UPC will enjoy an incremental 3-4 pp noodles OP margin. We

forecast that Tingyi’s Noodles margins will fall from 9.7% in 2013E to 9.25% in 2015E

due to added competition in Braised Beef Noodles; while UPC’s will improve from -

2.5% to -0.6% in 2015E due to reduced competition in Lao Tan Noodles.

1 A theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles, Maskin and Tirole, 1988



Beverages to lead margin rebound in 2014 for Tingyi and UPC

Tingyi’s beverage OPM has dropped from 13% in 2008 to 5% in 2013E due to aggressive

market share defence. This is below the usual level of 10%-15% EBIT margin that is

achievable by Beverage companies with dominant market share within a certain country.

As such, we believe that the recent stabilization in RTD tea market share will prompt Tingyi

to pull promotions to restore profitability to a more desirable level.

From Exhibits 17, we see that Tingyi’s volume market share in RTD tea has rebounded

from Mar/April 2013, while UPC and third competitor Wahaha have lost market share. We

think UPC’s loss of market share could be attributed to: 1) significant slowdown of its

flagship Asamu milk tea sales (Exhibit 19) as the usual high growth cycle for an “IT”

product only lasts for c.2-3yrs; and 2) loss of market share in the RTD tea excl. milk tea

category as Tingyi has upsized its RTD tea beverages from 500ml to 600ml without

increasing prices since beginning of 2013.

However, we believe that UPC is unlikely to pursue a price war with Tingyi given its tight

cash flow and the need to fund another RMB4bn capex in 2014E. Since Tingyi has already

successfully defended its RTD tea market share in the face of UPC’s slow-down in milk tea,

we do not see further motivation for Tingyi to extend its pricing discounts in a slowing

category. In fact, we believe that there is good reason for Tingyi to pull back its promotions

in beverages in order to drive margin recovery.

In addition, we forecast PET prices to fall further in 2014E/2015E as our Global Macro

Research team is looking for another 9% drop in Brent Crude Oil prices in 2014. This should

lift Tingyi and UPC’s margins further, in our view.

Exhibit 17: Tingyi sees a rebound in volume market share

of RTD tea beverages Nielsen RTD tea volume market share

Exhibit 18: We are beginning to see a rebound in RTD tea

ASP from July/August 2013 Nielsen RTD tea ASP trend

Source: Nielsen.

Source: Nielsen.

53.5%

28.4%

7.4%0%

10%

20%

30%

40%

50%

60%

Sep‐Oct1

1

Nov‐D

ec11

Jan‐Fe

b12

Mar‐A

pr12

May‐Ju

n12

Jul‐A

ug12

Sep‐Oct1

2

Nov‐D

ec12

Jan‐Fe

b13

Mar‐A

pr13

May‐Ju

n13

Jul‐A

ug13

Sep‐Oct1

3

Volume M

kt Share (%)

TINGYI UPC WAHAHA

0.82 0.820.80 0.82 0.82 0.82 0.83

0.85 0.84

0.79

0.74 0.730.74

0.90

0.950.97 0.96

0.940.91

0.94

0.991.01

0.99

0.95

0.910.93

$0.70

$0.75

$0.80

$0.85

$0.90

$0.95

$1.00

$1.05

Sep‐Oct1

1

Nov‐Dec11

Jan‐Feb12

Mar‐A

pr12

May‐Ju

n12

Jul‐A

ug12

Sep‐Oct1

2

Nov‐Dec12

Jan‐Feb13

Mar‐A

pr13

May‐Ju

n13

Jul‐A

ug13

Sep‐Oct1

3

TINGYI UPC WAHAHA



Exhibit 19: UPC’s flagship product Asamu milk tea is seeing visible topline slowdown,

relieving market share pressure for Tingyi RTD tea growth

Source: Nielsen.

PepsiCo-Tingyi alliance likely to boost margins further from 2014E

We forecast a small profit contribution (4%/6% to group profits in 2014E/2015E) for the

PepsiCo-Tingyi alliance, which will further add to our margin recovery thesis for Tingyi.

Since formation of the alliance in 2Q12, Tingyi’s management has been targeting to turn

PepsiCo’s losses in China to break-even by 2013. Given management’s confirmation of a

profitable quarter in 2Q13 and a solid performance by Beverages in 3Q13, it appears that

this has come to fruition. From 2014E, we expect the PepsiCo alliance to contribute a small

profit to Tingyi’s beverage business as continued merging of production facilities, end POS

and coolers, gradual merging of sales team etc. will gradually drive the Pepsi business

towards Tingyi’s NPAT margin target of 8%.

With the recent appointment of Mr Ko Yuen-Yat to take over from Mr Chu Wah-Hui to head

Tingyi’s Beverage division, we believe that Tingyi is onto its 2nd stage of integration. In the

first stage, Mr Chu, a former President of PepsiCo China, was appointed to facilitate the

integration of the two businesses and to rebuild PepsiCo. In this second phase of

integration, the focus could be to maximize synergistic benefits and drive the beverage

business forward as a coherent, operational unit for Tingyi.

In 2014E/2015E, we forecast the Pepsi business to contribute US$1.79bn and US$1.89bn to

Tingyi’s top-line and US$23mn (4% of group) and US$45mn (6% of group) to net profit

after minority interest.

78.0%

63.4%

42.5%49.7%

26.3%

16.2%10.7%

‐20%

‐10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Sep‐Oct1

2

Nov‐D

ec12

Jan‐Fe

b13

Mar‐A

pr13

May‐Ju

n13

Jul‐A

ug13

Sept‐O

ct13

MARKET TINGYI UPC ASAMU Milk Tea



Exhibit 20: We forecast that PepsiCo could contribute US$45mn net profit post minority

interest or 6% uplift to group profits by 2015E

Note: CBL is PepsiCo’s share of Pepsi’s Chinese Bottlers i.e. PepsiCo only owns 78% of total Pepsi bottlers in China.

Source: Company data, Goldman Sachs Global Investment Research.

Exhibits 21 and 22 show our margin recovery projections for both Tingyi’s and UPC’s

beverage businesses.

Exhibit 21: We expect Tingyi’s Beverage OPM to rebound due to: 1) continued fall in raw

material prices; 2) recovering top-line and PepsiCo driving improved operating leverage; 3)

a pull-back in promotional intensity Tingyi’s beverage EBIT margin trend vs market share

Source: Nielsen, Company data, Goldman Sachs Global Investment Research.

2012E 2013E 2014E 2015EConsolidated from 2Q12

USD mnSales 1,607 1,685 1,790 1,892 GP 482 522 573 624 EBIT -37 12 66 127 NPAT -41 7 62 122

CBL's share at 78% -32 6 48 95 Tingyi's @ 47.5% interest -15.2 2.7 22.8 45.1 % of group reported NPAT 4% 6%

USD % GrowthSales 4.9% 6.2% 5.7%GP 8.4% 9.7% 9.0%EBIT nmf nmf 91.5%NPAT nmf nmf 97.9%

USD % MarginGP 31.0% 32.0% 33.0%EBIT 0.7% 3.7% 6.7%NPAT 0.4% 3.4% 6.4%

13.3% 13.4% 13.2%

11.1%

9.2%

5.4%

3.8%

4.9%

8.6%

10.8%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

0%

10%

20%

30%

40%

50%

60%

70%

2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Tingyi RTD tea market share (LHS) Tingyi Beverage EBIT Margin (RHS)

One More Bottle campaign

drove large increase in

market share, but higher

raw material costs more

than halved OP margins

RTD tea category

slow-down,

PepsiCo merger

and intensified

competition against

UPC's milk tea

drove margins

down fruther.

We expect

resumption of

market share gains,

lower raw material

costs, PepsiCo

profits, pull back in

competition with

UPC will drive

margin rebound.



Exhibit 22: We expect UPC’s Beverage OPM to rebound due to: 1) continued fall in raw

material prices; 2) increased new plant utilization; 3) a pull-back in promotional intensity UPC’s beverage EBIT margin trend vs market share

Source: Nielsen, Company data, Goldman Sachs Global Investment Research.

Exhibit 23: We forecast Tingyi’s underlying organic beverage margins excl. PepsiCo will

rebound to 10.3%/12.2% in 2014E/2015E Tingyi’s underlying beverage margins, excl. PepsiCo


6.8%

10.7%11.1%

13.4%

7.2%

2.1%

5.5%

4.4%

5.3%

6.6%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

0%

5%

10%

15%

20%

25%

30%

35%

2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

UPC RTD tea market share (LHS) UPC Beverage EBIT Margin (RHS)

Significant

drop in raw

material

costs

Significant

increase in

raw material

costs

Significant

growth of milk

tea, driving

positive

operating

leverage

We expect market share

expansion plateaus. Pull

back in promotions and

further falls in PET prices

drive margin expansion.

33.5%

41.1%

45.9%

40.7%39.6% 40.1%

36.9% 36.8%36.2%

36.9%

28.5%

25.7%

29.5%

31.1%

32.9%

34.5%

-1.1%

7.2%

13.3%

2.6%3.8%

14.7%13.3% 13.4% 13.2%

11.1%

9.2%

5.4%6.0% 6.5%

10.3%

12.2%

34.6%33.9%

32.6%

38.1%

35.8%

25.4%

23.6% 23.4% 23.0%

25.8%

19.3%20.3%

23.5%24.6%

22.6% 22.2%

-10%

0%

10%

20%

30%

40%

50%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Organic GPM Organic OPM Organic Opex/Sales %

We forecast margin recovery due

to positive mix; lower raw material

costs; positive operating leverage;

pull-back in promotions vs UPC



Noodles unit cost analysis suggests marketing flexibility available

Sausage promotions have dominated instant noodles headlines in 2013 on being the

primary promotional tool in Tingyi and UPC’s fight for market share. In the past month,

UPC has further extended its sausage promotion onto Tingyi’s flagship braised beef

noodles. But how much does a sausage cost and what will this mean for margins?

Exhibit 24: UPC’s braised beef noodles – the latest flavor to include sausage promotions Which categories have now become part of the sausage promotion?

Note: Crosses indicate that the free sausage promotional offer applies to this flavor’s bowl noodles


This section attempts to conduct an in-depth study in per-unit cost associated with

producing and marketing a unit of instant noodles in China in order to assess the strategic

options available to both companies in the price-war.

Methodology

In Exhibits 25-28 and 31-34 below, we have attempted to estimate the per unit cost of

instant noodles for both Tingyi and UPC. Each of the companies disclose instant

noodles segment sales, GPM and OPM.

Using total market volume sales disclosed by the World Instant Noodles Association

(WINA) and applying Euromonitor’s estimated volume market share for UPC and

Tingyi, we have derived the annual noodles volumes for both companies used to

calculate our per unit cost.

For COGS, we use 2010 as a base for the basic raw materials required for instant

noodles production, before the current cycle of price-war escalated in 2012. Indexing

this base for changes in spot raw material prices, such as the fall in palm oil prices in

2012 and 2013, we calculate the cost base for these same raw materials in 2013. The

difference between this and our forecast 2013 COGS is assumed to be the additional

COGS added in for promotional purposes due to intensified competition e.g. sausage,

sauce sachets etc.

For the different components of SG&A, we have estimated the components of Admin

expense, Transport and Salaries, with reference to group expense ratios. The

remaining SG&A costs are assumed to be advertising and promotions.

Conclusion

Noodles competition will remain tough in 2014E, but we believe that the noodles price-war

will draw to a close by 2015E.

2010: Exhibits 25 and 26 attempt to break down the unit production and marketing cost for

instant noodles for Tingyi and UPC in 2010. We note that:

1) Tingyi has a higher ex-factory price of RMB1.28/unit compared with UPC’s

RMB1.08/unit. This would suggest that Tingyi, with 3X more volumes sales vs UPC,

enjoys better bargaining power in the market.

2) Tingyi incurs higher per unit cost of production than UPC. A plausible explanation of

this is that Tingyi follows a diversified approach vs UPC’s focused approach. It appears

that economies of scale have allowed UPC to drive a lower per unit cost compared

with even the most dominant company in the market.

Lao Tan Lu Rou Braised Beef

Tingyi

UPC

egg flakes



Exhibit 25: At the height of raw material costs in 2010, we estimate that it took UPC

RMB0.62 worth of raw materials to produce 1 unit of instant noodles… GS estimate of COGS breakdown for UPC in 2010E

Source: Euromonitor, Goldman Sachs Global Investment Research.

Exhibit 26: …while it took Tingyi RMB0.73/unit

GS estimate of Tingyi’s Instant Noodles average per unit cost – 2010


1.08

0.62

- -

0.15

0.12

0.06

0.10

0.03

-0.00

-0.20

-

0.20

0.40

0.60

0.80

1.00

1.20

Ex-factory

Price

Basic raw

materials

Other

COGS

Promotions

Transpor

tationOther Selling

Exp (incl.

salaries)

Admin Operating

Profit

Additional

Raw

materials

Sausage

promotion

Rmb/Unit

1.28

0.73

- -

0.18

0.07

0.05

0.08

0.02

0.16

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

Ex-

factory

Basic raw

materials

Other

COGS

PromotionsTranspor

tationOther Selling

Exp (incl.

salaries)

Admin Operating

Profit

Additional

Raw

materials

Sausage

promotion

Rmb/Unit



2013E: Exhibit 27 to Exhibit 28 shows our estimate for how the unit costs have evolved for

Tingyi and UPC by 2013E. Most notably, the raw material cost per unit should have

declined substantially given the market price corrections for palm oil and flour during this

period. However, since per unit COGS in 2013E has actually not improved vs 2010, we

assume that the difference between our estimate of the raw materials per unit in 2013E

(assuming the same base as 2010) vs the actual raw material costs incurred to be the

additional ingredients added to intensify consumer promotions.

For example, as seen in Exhibit 25, we calculated that UPC’s base instant noodles cost

RMB0.62/unit in basic raw materials to produce. While by 2013E, given the large drops in

flour and palm oil prices, this should be close to RMB0.54/unit. However, we calculate that

UPC’s per unit raw material cost has actually increased to RMB0.73/unit. We believe that

the additional RMB0.19/unit can be attributed to additional promotions such as the

“sausage promotion”, pickled vegetables, and sauce sachets.

Interestingly, this shows that Tingyi has invested higher per unit COGS for promotions

(RMB0.26/unit) vs UPC (RMB0.19/unit), but is able to better leverage its brand promotional

expense spending only RMB0.10/unit vs UPC’s RMB0.18/unit. The total market investments

in 2013E for Tingyi and UPC in instant noodles are similar, at RMB0.36/unit and

RMB0.37/unit, respectively. With already such a high level of market investment, we

believe that things are unlikely to get materially worse. Instead, Tingyi and UPC can

moderate some of its investments in the Lao Tan category growth given its noticeable

slow-down and re-direct to defending/grow in new categories without incurring significant

additional marketing spend. That is, we believe that Tingyi has a higher degree of flexibility

with its marketing budget than perceived by the market.

Exhibit 27: By 2013E, raw materials per unit have fallen to just RMB0.54, while additional

promotional material has cost UPC an incremental RMB0.19/unit to COGS

GS estimate of COGS breakdown for UPC in 2013E


1.29

0.54

0.12

0.07

0.18

0.18

0.06

0.14

0.04 -0.03

-0.20

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

Ex-factory Price

Basic raw

materials

Other

COGS

Promotions

Transpor

tation Other Selling

Exp (incl.

salaries)

Admin Operating

Profit

Additional

Raw

materials

Sausage

promotion

Rmb/Unit



Exhibit 28: By 2013E, raw materials per unit has fallen to just RMB0.63, while additional

promotional material has cost Tingyi an incremental RMB0.26/unit to COGS

Tingyi instant noodles per unit cost – 2013E


2014E-2015E: With UPC’s Lao Tan noodle growth visibly slowing in 2013E and Tingyi

appearing to have successfully defended its market share, we ponder the next steps for these

two companies. Competitive behavior in an oligopoly is often complex because pricing

decisions are made in a highly interdependent environment. Studies on Edgeworth Price

Cycles illustrate that in a market of homogeneous goods where customers are price sensitive

(as is the case for Instant Noodles), one vendor’s actions to undercut another will be quickly

matched. Undercutting will continue until the war becomes too costly when one competitor

will restore prices. Everyone will follow as quickly as possible, and the cycle repeats.

Exhibit 29: Both companies have continued to gain share

in instant noodles at the expense of smaller companies Nielsen Volume Market Share – Instant Noodles

Exhibit 30: UPC’s instant noodles growth has slowed in

1H13 due to slowdown of Lao Tan Noodles Instant Noodles sales growth YoY (%) - Tingyi, Market, UPC

Source: Company data, Nielsen.

Source: Company data.

1.57

0.63

0.04

0.22

0.22

0.10

0.06

0.10

0.05

0.15

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Ex-

factory

Basic raw

materials

Other

COGS

PromotionsTranspor

tationOther Selling

Exp (incl.

salaries)

Admin Operating

Profit

Additional

Raw

materials

Sausage

promotion

RMB/Unit

45.7

16.8

0

5

10

15

20

25

30

35

40

45

50

Ju

n-0

6

De

c-0

6

Ju

n-0

7

De

c-0

7

Ju

n-0

8

De

c-0

8

Ju

n-0

9

De

c-0

9

Ju

n-1

0

De

c-1

0

Ju

n-1

1

De

c-1

1

Ju

n-1

2

De

c-1

2

Ju

n-1

3

Insta

nt

No

od

les V

olu

me M

ark

et

Sh

are

(%

)

Tingyi Uni-President Huafong

Hualong White Elephant

10.6%

-7.8% -6.0%

67.4% 67.3%

22.5%

10.4%

10.4%15.2% 14.6%

8.0%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2007 2008 2009 2010 2011 2012 1H13

Tingyi UPC Market



If we look at Tingyi and UPC, we believe that this price-war will hit its peak in 2014 and

pricing will be restored by 2015. This is because we forecast that after its loss in 2013E,

UPC will sustain a second year of loss (albeit smaller) in 2014E by targeting Tingyi’s

flagship product Braised Beef Noodles, with little success in gaining market share. UPC’s

balance sheet will be further stretched in 2014E by a high capex budget of RMB4bn and

rising palm oil costs, driving negative free cash flow will be in the vicinity of RMB2.2bn in

2014E. This implies that the company may be required to take on further debt, continue to

resell fixed assets back to its sister companies, consider issuing equity or a combination of

all three. If we assume that the company will resolve its cash needs via debt, the net

gearing for UPC in 2014E would potentially be 67%.

By 2015E, a combination of slowing topline and raw material inflation is likely to spell an

end to this round of price war, in our view, as companies realize that it is detrimental to the

industry profit pool and will begin to pull back on promotions. In the meantime, we think

the intense competition is likely to marginalize smaller companies further, such as Hualong

and Baixiang, which do not have the financial might to keep up, leading to a further market

share gain for incumbents.

Exhibit 31: In 2014, we expect UPC to direct a higher portion of its promotional budget to

below-the-line direct price promotions, partially funded by a reduction in above the line

brand spend, in our view. Total promotional spend will be slightly lower at RMB0.35/unit

vs RMB0.37/unit in 2013E

GSE UPC Instant Noodles per unit cost – 2014E


1.29

0.56

0.13

0.07

0.18

0.15

0.05

0.14

0.04

-0.03

-0.20

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

Ex-

factory

Basic raw

materials

Other

COGS

PromotionsTransport

ation Other Selling

Exp (incl.

salaries)

Admin Operating

Profit

Additional

Raw

materials

Sausage

promotion

Rmb/Unit



Exhibit 32: We forecast a pull-back in UPC’s sausage promotions in 2015E leading to total

RMB0.32/unit vs RMB0.35/unit in 2014E GSE UPC Instant Noodles per unit cost – 2015E


As for Tingyi, we do not believe that the company will follow UPC’s sausage offer for its

Braised Beef Instant noodles, given the high portfolio exposure to this flavor. We calculate

that if Tingyi did include a free sausage in half of its bowl noodles in response, its noodles

OP margin will drop down from 9.7% in 2013E to about 5.5% in 2014E/2015E. Moreover, a

matching of the sausage offer would be a validation of UPC’s pricing power. As such, we

believe that Tingyi is more likely to come up with a creative solution, one that in aggregate

will see a slightly higher market investment but will mostly involve a re-shifting of a

portion of brand promotions to more direct price discounts. For example, currently, Tingyi

is running a lucky draw promotional activity, where buyers of Braised Beef Noodles have a

chance of winning prizes, as high as 100 giveaways of RMB3,999 in cash. In summary, we

believe that there will be a mild erosion of Tingyi’s noodles OPM in 2014E/2015E, but we

see it to be maintained at c.9%.

1.29

0.57

0.10

0.07

0.18

0.15

0.05

0.14

0.04

-0.01

-0.20

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

Ex-

factory

Basic raw

materials

Other

COGS

Promotions

Transpor

tation

Other Selling

Exp (incl.

salaries)

Admin Operating

Profit

Additional

Raw

materials

Sausage

promotion

Rmb/Unit



Exhibit 33: We expect Tingyi to not follow UPC’s sausage offer for Braised Beef Noodles in

2014E but will extend its promotions to some smaller flavors. This will be funded by a cut

in other COGS/above the line promotions. Total promotions will be RMB0.35/unit vs

RMB0.36/unit in 2013E

Tingyi instant noodles per unit cost – 2014E


Exhibit 34: We expect that Tingyi’s total unit promotions in 2015E will further fall to

RMB0.32/unit vs RMB0.35/unit in 2014E Tingyi instant noodles per unit cost – 2015E


1.57

0.65

0.05

0.21

0.22

0.09

0.06

0.10

0.05

0.14

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Ex-

factory

Basic raw

materials

Other

COGS

Promotions

Transpor

tation

Other Selling

Exp (incl.

salaries)

Admin Operating

Profit

Additional

Raw

materials

Sausage

promotion

Rmb/Unit

1.57

0.67

0.02

0.21

0.22

0.09

0.06

0.10

0.05

0.14

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Ex-

factory

Basic raw

materials

Other

COGS

Promotions

Transpor

tation

Other Selling

Exp (incl.

salaries)

Admin Operating

Profit

Additional

Raw

materials

Sausage

promotion

Rmb/Unit



Case Study: What happened when Tingyi was involved in a price

war last time?

Our conviction on the alleviation of promotional intensity in noodles by 2015E can be

supported by a previous price-war example between Tingyi and the then second-largest

competitor Hualong (also owns the Jinmailang brand). In the early 2000s, domestic private

company Hualong (founded in 1994 in Hebei province) began garnering a lot of market

share in the lower tier cities of China by introducing a low end instant noodle priced at

under RMB1/pack. Moreover, Hualong optimized its advertising expenses by painting on

the walls of rural areas for free. By 2004, Hualong further secured RMB1.5bn investment

from instant noodles pioneer Nissin Foods to further expand its products into the premium

market via the Jinmailang brand. Between 2001-2005, Hualong’s gained 9 pp of value

market share in instant noodles, moving from 7.6% to a peak of 16.6% by 2005.

We calculate the marginal cost of production (including raw materials + transportation) for

each of Tingyi’s instant noodles to be between RMB0.6-0.7/unit and total cost of

production (including fixed COGS, SG&A) of RMB1.1/unit. Hence pricing noodles at

RMB1.00/unit, after giving away 20%-25% of the profits to distributors and retailers, would

be barely break-even for Tingyi.

Despite this, Tingyi attempted to tackle the problem head-on. Not only did it launch a low-

end brand Fumanduo, famous for its RMB1/pack noodles, it also invested RMB300mn in

another Heibei based mass market instant noodles producer Zhong Wang group during

end-2003 in an attempt to strengthen its foothold in the low-end market.

Even though Tingyi’s partnership with Zhong Wang group did not work out, they got an

upper hand when Hualong’s profitability was severely challenged by a 60% jump in palm

oil prices in 2005. Moreover, Hualong attempted to push into the premium market with the

support of Nissin, but it was unable to get past Tingyi’s strong distribution network in the

higher-tier cities and its market share began to decline.

Exhibit 35: Tingyi lost share to Hualong during 2003-2005Nielsen instant noodles volume market share

Exhibit 36: It appears that Tingyi’s noodles OPM is highly

correlated with the company’s market share Tingyi Noodles market share vs OPM

Source: Nielsen. Source: Company data, Nielsen.

The key takeaways from this case study are: 1) Tingyi defended its market share fiercely in

order to maintain its price leadership; 2) with its deeper pockets, scale and distribution

advantage, we believe it is very difficult to undercut Tingyi in prices. The only way to

structurally change the market share would be via fundamental product innovation/

segment extensions; 3) when a competitor is faced with multi-year losses and no progress

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Tingyi Noodles Volume Mkt Share

Hualong Noodles Volume Mkt Share

12

.7%

13.1

%

7.2%

3.6

%

8.2

%

8.1

% 7.4%

9.7

%

13

.7%

12

.2%

10

.5%

10

.5%

0%

3%

6%

9%

12%

15%

20%

25%

30%

35%

40%

45%

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

2010

2011

2012

Tingyi Noodles Market Share % (LHS) Tingyi Noodles EBIT Margin (RHS)

SARS



in market share, they are likely to retreat from the price-war. We think that the current

price-competition with UPC may go down a similar path.

Exhibit 37: In summary, we forecast that UPC’s Instant Noodles margins will remain

negative in 2014E, before narrowing in 2015E due to a pull-back in Lao Tan promotions

and increased scale UPC’s noodle EBIT margin trend


Exhibit 38: We expect Tingyi’s noodles OPM to remain at c.9% in 2014E/2015E due to

slightly higher marketing spend on braised beef noodles Tingyi Noodles Margin Trend


-2.4%

0.1%

-4.6%

-3.3%

-0.3%

2.8%3.1%

-2.5%

-1.9%

-0.6%

-5%

-3%

-1%

1%

3%

5%

0%

4%

8%

12%

16%

20%

20

06

20

07

20

08

20

09

2010

2011

2012

201

3E

2014

E

201

5E

UPC Noodles Market Share % (LHS) UPC Noodles EBIT Margin (RHS)

Losing market

share to TIngyi

Large gain in market

share from

significant growth of

Lao Tan noodles

Tingyi

initiates

price-

war

We expect tight

balance sheet and

little inroads made on

market share would

necessitate

promotions being

pulled back in 2015E.

12.7%13.1%

7.2%

3.6%

8.2% 8.1%

7.4%

9.7%

13.7%

12.2%

10.5% 10.5%

9.7%9.1% 9.2%

0%

3%

6%

9%

12%

15%

18%

20%

25%

30%

35%

40%

45%

50%

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

2010

2011

2012

2013E

2014

E

2015E

Tingyi Noodles Market Share % (LHS) Tingyi Noodles EBIT Margin (RHS)

Price-war with

Hualong

Market share

challenged by

UPC's Lao Tan

noodles.

Beginning of price

war with UPC from

2H12

We expect

the price war

to draw to an

end by

2015E

Large market share

gain driving positive

opearting leverage

and favourable raw

materials costs



Huishan (6863.HK): Positive data boosts conviction; to CL-Buy

Source of Opportunity

We upgraded Huishan to Buy from Neutral in December 2013 (refer to

our report “Upgrade to Buy on better margin outlook and recent price

pull-back”, dated December 6, 2013) on the basis that spiking raw milk

prices and continued downstream premiumization will drive a better

GPM than anticipated. Based on our latest monitoring of data to January

2014, our thesis favoring upstream dairy farms vs downstream

processors continues to be relevant. In January 2014, China raw milk

prices for average 10 major producing provinces reached RMB4.24/kg,

up 30% yoy, while key feed prices that Huishan needs to purchase

externally, i.e., corn and soybean meal, have been trending down.

Moreover, given further pull back in stock price in the past month, and a

roll forward of our valuation period from CY2014E to average

CY14E/CY15E to be in-line with our staples peer group, the potential

upside is now 35%. We add the stock to our Conviction Buy List.

Catalysts

Some positive updates from the company post 3Q14 (ended Dec 2013):

1) the raw milk sales price has now reached RMB5,100/ton in January

2014 vs last raise of RMB5,000 in October 2013;

2) the company completed a 10%-15% price hike in all its downstream

liquid milk products, which has been a gradual process in last 3 months;

3) selected as one of the 6 companies in the second batch of national

champions as of January 2014 by the China Dairy Association;

4) our monitoring of Liaoning weather points to no further weather

shocks since CY4Q13.

These data points have been reflected in our current forecasts, but do

provide further affirmation on the company’s ability to execute. As such,

we think that our forecast of 40% EPS CAGR in 2013E-2015E is on track

and expect that the stock will re-rate as investors become more familiar

with the company’s unique vertically integrated business model.

Valuation

We value Huishan on a P/E-based SOTP, with reference to its closest HK

listed peers Modern Dairy (1117.HK, NC) and Mengniu (2319.HK,

Neutral). Our revised TP of HK$3.60 (HK$3.20 previously) is derived

from: 1) a roll forward of our valuation period from 2014E to average of

2014E/2015E; and 2) a reduction in the P/E multiple assigned to

Huishan’s upstream business from 19.0X to 18.0X, given the recent pull

back in Modern Dairy’s stock price. We have not changed our EPS

forecasts.

Key risks

Worse-than-expected raw milk production costs, raw milk and branded

product ASP, raw milk volume output, adverse weather, competition,

food safety.

Growth

Returns *

Multiple

Volatility Volatility

Multiple

Returns *

Growth

Investment Profile

Low High

Percentile 20th 40th 60th 80th 100th

* Returns = Return on Capital For a complete description of the investment

profile measures please refer to the

disclosure section of this document.

Huishan Dairy (6863.HK)

Asia Pacific Consumer Peer Group Average

Key data Current

Price (HK$) 2.66

12 month price target (HK$) 3.60

Market cap (HK$ mn / US$ mn) 38,324.7 / 4,939.9

Foreign ownership (%) --

3/13 3/14E 3/15E 3/16E

EPS (Rmb) New 0.07 0.10 0.14 0.18

EPS revision (%) 0.0 0.0 0.0 0.0

EPS growth (%) 162.7 35.1 47.6 31.8

EPS (dil) (Rmb) New 0.07 0.09 0.14 0.18

P/E (X) NM 21.9 14.8 11.2

P/B (X) NM 2.3 2.0 1.8

EV/EBITDA (X) -- 15.7 11.4 9.1

Dividend yield (%) NM 0.0 0.0 0.0

ROE (%) 30.0 13.1 14.4 16.6

CROCI (%) 18.6 16.8 18.6 18.0

50

52

54

56

58

60

62

64

66

2.4

2.5

2.6

2.7

2.8

2.9

3.0

3.1

3.2

Feb-13 May-13 Aug-13 Nov-13

Price performance chart

Huishan Dairy (L) MSCI China (R)

Share price performance (%) 3 month 6 month 12 month

Absolute (13.6) -- --

Rel. to MSCI China (8.7) -- --

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 2/10/2014 close.



Huishan Dairy: Summary financials

Profit model (Rmb mn) 3/13 3/14E 3/15E 3/16E Balance sheet (Rmb mn) 3/13 3/14E 3/15E 3/16E

Total revenue 2,552.4 3,917.8 5,902.4 8,194.3 Cash & equivalents 825.7 5,666.9 3,506.8 1,266.5

Cost of goods sold (1,174.3) (1,642.8) (2,540.7) (3,561.6) Accounts receivable 172.6 318.6 560.8 890.8

SG&A (197.2) (665.1) (984.1) (1,422.2) Inventory 446.6 547.3 843.6 1,175.1

R&D 0.0 0.0 0.0 0.0 Other current assets 696.2 1,068.7 1,610.0 2,235.2

Other operating profit/(expense) 41.5 13.3 26.1 37.9 Total current assets 2,141.1 7,601.4 6,521.1 5,567.7

EBITDA 1,291.4 1,744.1 2,573.0 3,485.1 Net PP&E 6,878.6 8,840.7 11,193.4 14,019.4

Depreciation & amortization (68.9) (120.9) (169.3) (236.6) Net intangibles 1,453.3 1,843.0 3,254.6 4,622.4

EBIT 1,222.5 1,623.2 2,403.7 3,248.5 Total investments 0.0 0.0 0.0 0.0

Interest income 4.3 20.0 30.0 20.0 Other long-term assets 37.8 37.8 37.8 37.8

Interest expense (144.2) (180.7) (180.7) (180.7) Total assets 10,510.8 18,322.9 21,007.0 24,247.2

Income/(loss) from uncons. subs. 0.0 0.0 0.0 0.0

Others (1.8) (1.4) (1.5) (1.7) Accounts payable 910.5 1,022.7 1,439.6 1,823.9

Pretax profits 1,080.9 1,461.2 2,251.5 3,086.1 Short-term debt 908.5 1,084.1 1,084.1 1,084.1

Income tax (67.0) (64.0) (133.6) (295.3) Other current liabilities 473.1 646.5 978.8 1,356.6

Minorities 0.0 0.0 0.0 0.0 Total current liabilities 2,292.1 2,753.2 3,502.5 4,264.5

Long-term debt 2,102.8 1,927.2 1,927.2 1,927.2

Net income pre-preferred dividends 1,013.9 1,397.1 2,117.9 2,790.8 Other long-term liabilities 233.0 224.7 206.4 179.3

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 2,335.8 2,151.9 2,133.6 2,106.6

Net income (pre-exceptionals) 1,013.9 1,397.1 2,117.9 2,790.8 Total liabilities 4,627.9 4,905.2 5,636.1 6,371.1

Post-tax exceptionals 0.0 (128.5) (39.4) (39.4)

Net income 1,013.9 1,268.6 2,078.5 2,751.4 Preferred shares 0.0 0.0 0.0 0.0

Total common equity 5,882.9 13,417.8 15,370.9 17,876.1

EPS (basic, pre-except) (Rmb) 0.07 0.10 0.15 0.19 Minority interest 0.0 0.0 0.0 0.0

EPS (basic, post-except) (Rmb) 0.07 0.09 0.14 0.19

EPS (diluted, post-except) (Rmb) 0.07 0.09 0.14 0.18 Total liabilities & equity 10,510.8 18,322.9 21,007.0 24,247.2

DPS (Rmb) 0.00 0.00 0.00 0.00

Dividend payout ratio (%) 0.0 0.0 0.0 0.0 BVPS (Rmb) 0.41 0.91 1.02 1.18

Free cash flow yield (%) -- (4.0) (7.1) (7.5)

Growth & margins (%) 3/13 3/14E 3/15E 3/16E Ratios 3/13 3/14E 3/15E 3/16E

Sales growth 91.5 53.5 50.7 38.8 CROCI (%) 18.6 16.8 18.6 18.0

EBITDA growth 140.6 35.1 47.5 35.5 ROE (%) 30.0 13.1 14.4 16.6

EBIT growth 144.5 32.8 48.1 35.1 ROA (%) 11.5 8.8 10.6 12.2

Net income growth 162.7 25.1 63.8 32.4 ROACE (%) 21.4 16.4 17.6 17.1

EPS growth 162.7 25.1 63.8 32.4 Inventory days 133.5 110.4 99.9 103.4

Gross margin 54.0 58.1 57.0 56.5 Receivables days 22.9 22.9 27.2 32.3

EBITDA margin 50.6 44.5 43.6 42.5 Payable days 222.9 214.8 176.9 167.2

EBIT margin 47.9 41.4 40.7 39.6 Net debt/equity (%) 37.2 (19.8) (3.2) 9.8

Interest cover - EBIT (X) 8.7 10.1 16.0 20.2

Cash flow statement (Rmb mn) 3/13 3/14E 3/15E 3/16E Valuation 3/13 3/14E 3/15E 3/16E

Net income pre-preferred dividends 1,013.9 1,397.1 2,117.9 2,790.8

D&A add-back 68.9 120.9 169.3 236.6 P/E (analyst) (X) NM 21.9 14.8 11.2

Minorities interests add-back 0.0 0.0 0.0 0.0 P/B (X) NM 2.3 2.0 1.8

Net (inc)/dec working capital 327.6 (134.4) (121.6) (277.3) EV/EBITDA (X) -- 15.7 11.4 9.1

Other operating cash flow 32.0 (175.1) (116.1) (153.2) EV/GCI (X) -- 2.4 1.9 1.5

Cash flow from operations 1,442.4 1,208.4 2,049.5 2,597.0 Dividend yield (%) NM 0.0 0.0 0.0

Capital expenditures (1,567.4) (2,419.7) (4,179.1) (4,847.8)

Acquisitions 0.0 0.0 0.0 0.0

Divestitures 0.0 0.0 0.0 0.0

Others 199.9 107.8 150.2 191.3

Cash flow from investments (1,367.5) (2,311.8) (4,028.9) (4,656.6)

Dividends paid (common & pref) 0.0 0.0 0.0 0.0

Inc/(dec) in debt 385.9 0.0 0.0 0.0

Common stock issuance (repurchase) 0.0 6,125.3 0.0 0.0

Other financing cash flows (148.0) (180.7) (180.7) (180.7)

Cash flow from financing 237.9 5,944.6 (180.7) (180.7)

Total cash flow 312.8 4,841.2 (2,160.1) (2,240.2) Note: Last actual year may include reported and estimated data.

Source: Company data, Goldman Sachs Research estimates.



Escalating raw milk prices to drive margins

Our monitoring of market spot prices for raw milk and feed cost trends continue to support

our more positive view on dairy farmers vs dairy processors. In January 2014, China raw milk

prices for average 10 major producing provinces reached RMB4.24/kg, up 30% yoy, while key

feed prices that Huishan needs to purchase externally, i.e., corn and soybean meal, have

been trending down. These twin benefits of higher ASP and lower costs pose upside risk to

upstream GP margins for Huishan in 2H14 (March 2014) and 1H15 (Sept 2014).

Exhibit 39: Average raw milk prices in China reached

RMB4.24/kg in January 2014, up 30% yoy…

Exhibit 40: …while feed costs have been trending down Price index of average raw milk, corn and soybean meal

costs in China to January 2014

Source: Dairy Association of China.


Exhibit 41: The magnitude of raw milk price increases

have far exceeded retail price hikes for liquid milk Price index of average raw milk, and liquid milk retail prices

to January 2014

Exhibit 42: Our Global Macro Research team expects NZ

milk powder prices to remain elevated through 2014E,

but to fall by 25% in 2015E to US$3,600/ton Historical and forecast NZ milk powder prices (US$/ton)


Source: Global Dairy Trade, Goldman Sachs Global Investment Research.

Nov 2012:

Rmb3.3/Kg

July 2013:

Rmb3.4/Kg

Jan 2014:

Rmb4.24/Kg,

+30% YoY

2.0

2.5

3.0

3.5

4.0

4.5

Ja

n-0

8

Ma

y-0

8

Se

p-0

8

Ja

n-0

9

Ma

y-0

9

Se

p-0

9

Ja

n-1

0

Ma

y-1

0

Se

p-1

0

Ja

n-1

1

Ma

y-1

1

Se

p-1

1

Ja

n-1

2

Ma

y-1

2

Se

p-1

2

Ja

n-1

3

Ma

y-1

3

Se

p-1

3

Ja

n-1

4

Avg. raw milk price - 10 milk producing provinces

80

90

100

110

120

130

140

150

Ja

n-0

8

Ma

y-0

8

Se

p-0

8

Ja

n-0

9

Ma

y-0

9

Se

p-0

9

Ja

n-1

0

Ma

y-1

0

Se

p-1

0

Ja

n-1

1

Ma

y-1

1

Se

p-1

1

Ja

n-1

2

Ma

y-1

2

Se

p-1

2

Ja

n-1

3

Ma

y-1

3

Se

p-1

3

Ja

n-1

4

Raw milk Corn Soybean Meal

80

90

100

110

120

130

140

150

160

170

180

190

Ma

y-0

9

Sep

-09

Ja

n-1

0

Ma

y-1

0

Sep

-10

Ja

n-1

1

Ma

y-1

1

Sep

-11

Ja

n-1

2

Ma

y-1

2

Sep

-12

Ja

n-1

3

Ma

y-1

3

Sep

-13

Ja

n-1

4

Raw Milk Price Index Retail Price Index

-

1,000

2,000

3,000

4,000

5,000

6,000

(USD/ton)

US$4800/Ton,

+3% YoY

US$3600/Ton

-25% YoY

2013 Avg.

US$4663/Ton,

+51% YoY



Valuation

We value Huishan on a P/E-based SOTP, with reference to its closest HK listed peers

Modern Dairy (1117.HK, NC) and Mengniu (2319.HK, Neutral). Our revised TP of HK$3.60

(HK$3.20 previously) is derived from: 1) a roll forward of our valuation period from 2014E

to average of 2014E/2015E; and 2) a reduction in the P/E multiple assigned to Huishan’s

upstream business from 19.0X to 18.0X, given the recent pull back in Modern Dairy’s stock

price. We have not changed our EPS forecasts.

Huishan is currently trading at 12-m fwd P/E of 15.4X, a 32% discount vs Staples sector

average of 22.5X and slightly lower than closest peer Modern Dairy’s 12-m fwd P/E of 16.3X

as per Bloomberg consensus, despite higher forecast growth and returns.

Exhibit 43: Huishan is currently trading at 32% discount

to Staples sector average Huishan P/E premium/discount to sector

Exhibit 44: Huishan is trading at 15.4X 12-m fwd P/E, 32%

discount vs Staples sector average of 22.5X Huishan historical P/E vs Staples sector average P/E

Source: Company data, Bloomberg, Goldman Sachs Global Investment Research.


Exhibit 45: Huishan is currently trading at 15.4X 12-m fwd

P/E vs historical average of 17.5x Huishan fwd 12 months P/E

Exhibit 46: We expect Huishan to re-rate as its EV/GCI

has been falling despite stable CROCI outlook Huishan EV/GCI vs 12 months fwd CROCI



-32%

-33%

-32%

-31%

-30%

-29%

-28%

-27%

-26%

-25%

De

c-1

3

De

c-1

3

De

c-1

3

Ja

n-1

4

Ja

n-1

4

Ja

n-1

4

Ja

n-1

4

Fe

b-1

4

Fe

b-1

4Huishan historical premium/discount to Staples sector average (%)

5.0

10.0

15.0

20.0

25.0

30.0

De

c-1

3

De

c-1

3

De

c-1

3

Ja

n-1

4

Ja

n-1

4

Ja

n-1

4

Ja

n-1

4

Fe

b-1

4

Fe

b-1

4

Huishan historical P/E Staples sector historical P/E

20.2

15.4

13.0

14.0

15.0

16.0

17.0

18.0

19.0

20.0

21.0

22.0

Oct

-13

Nov

-13

Nov

-13

Dec

-13

Dec

-13

Jan-

14

Jan-

14

Feb

-14

Fwd 12m P/E

+ 1 STDV

- 1 STDV

Average = 17.5x

10%

15%

20%

25%

30%

35%

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Sep‐13

Oct‐13

Nov‐13

Dec‐13

EV/GCI CROCI



Summary financials

Exhibit 47: Huishan Summary Financials


China Huishan DairyPeriod Ending Date Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16Financial Year 2011 2012 2013 2014E 2015E 2016ETotal SegmentsSegment Revenues - UnconsolidatedDairy Farming Rmb mn 247 953 1,591 2,535 3,654 4,470 Liquid Milk Rmb mn 15 564 1,707 2,448 3,321 4,409 Milk Powder Rmb mn - - 88 447 1,019 1,880 Grains Rmb mn 115 97 77 Total Unconsolidated Revenues Rmb mn 377 1,614 3,463 5,430 7,994 10,758

Elim: Internal Revenues Rmb mnDairy Farming Rmb mn -3 -281 -910 -1,512 -2,092 -2,564 Liquid Milk Rmb mn - - - - - - Milk Powder Rmb mn - - - - - - Grains Rmb mn - - - - - - Elim: Internal Revenues Rmb mn -3 -281 -910 -1,512 -2,092 -2,564

Consolidated Revenues Rmb mnDairy Farming Rmb mn 244 672 681 1,023 1,562 1,906 Liquid Milk Rmb mn 15 564 1,707 2,448 3,321 4,409 Milk Powder Rmb mn - - 88 447 1,019 1,880 Grains Rmb mn 115 97 77 - - - Consolidated Revenues Rmb mn 374 1,333 2,552 3,918 5,902 8,194

Segment COGSDairy Farming Rmb mn -141 -495 -639 -1,035 -1,550 -2,028 Liquid Milk Rmb mn -15 -479 -1,330 -1,807 -2,418 -2,935 Milk Powder Rmb mn - - -42 -314 -665 -1,163 Grains Rmb mn -100 -90 -73 Total COGS Rmb mn -257 -1,064 -2,085 -3,155 -4,632 -6,125 Eliminate: Dairy Farming Revenue Rmb mn -3 -281 -910 -1,512 -2,092 -2,564 Consolidated COGS Rmb mn -254 -783 -1,174 -1,643 -2,541 -3,562

Segment GPDairy Farming Rmb mn 105 458 952 1,500 2,105 2,442 Liquid Milk Rmb mn - 85 377 641 903 1,474 Milk Powder Rmb mn - - 46 133 354 717 Grains Rmb mn 15 7 3 Total GP Rmb mn 120 550 1,378 2,275 3,362 4,633

Segment SG&A & Other Net IncomeDairy Farming Rmb mn -9 5 -21 -129 -175 -215 Liquid Milk Rmb mn -7 -33 -119 -347 -490 -684 Milk Powder Rmb mn -2 -7 -12 -176 -293 -485 Grains Rmb mn -12 -5 -3 - - - Group SG&A & Other Net Income Rmb mn -30 -40 -157 -652 -958 -1,384

EBITDairy Farming Rmb mn 96 462 931 1,372 1,930 2,226 Liquid Milk Rmb mn -7 52 258 294 413 790 Milk Powder Rmb mn -2 -7 33 -42 61 232 Grains Rmb mn 1 1 -0 Total EBIT Rmb mn 88 509 1,221 1,623 2,404 3,248 Unallocated Rmb mn 2 -9 1 -128 -39 -39 Group Underlying EBIT Rmb mn 89 500 1,223 1,495 2,364 3,209

Period Ending Date Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16Financial Year 2011 2012 2013 2014E 2015E 2016EGrowth YoY

Consolidated Revenues %Dairy Farming % 175% 1% 50% 53% 22%Liquid Milk % 3567% 203% 43% 36% 33%Milk Powder % 408% 128% 85%Grains % -16% -21%Consolidated Revenues % 256% 92% 53% 51% 39%

EBIT %Dairy Farming % 381% 101% 47% 41% 15%Liquid Milk % -845% 395% 14% 41% 91%Milk Powder % 223% -605% -227% -245% 280%Grains % 109% -112%Total EBIT % 480% 140% 33% 48% 35%Unallocated % -714% -112% -69% 0%Group Underlying EBIT % 459% 145% 22% 58% 36%

Margin

Segment GP %Dairy Farming % 42.7% 48.0% 59.8% 59.2% 57.6% 54.6%Liquid Milk % 0.0% 15.1% 22.1% 26.2% 27.2% 33.4%Milk Powder % 51.8% 29.9% 34.8% 38.2%Grains % 12.8% 7.2% 4.2%Total GP % 32.0% 41.2% 54.0% 58.1% 57.0% 56.5%

EBIT %Dairy Farming % 39.0% 48.5% 58.5% 54.1% 52.8% 49.8%Liquid Milk % -45.5% 9.2% 15.1% 12.0% 12.4% 17.9%Milk Powder % 37.7% -9.5% 6.0% 12.3%Grains % 0.6% 1.6% -0.2%Total EBIT % 23.9% 37.5% 47.9% 38.2% 40.1% 39.2%



Exhibit 48: Huishan’s key segment assumptions


China Huishan DairyPeriod Ending Date Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16Financial Year 2011 2012 2013 2014E 2015E 2016EDairy Farming

Calves and Heifer<12mths Heads 10,170 16,240 24,078 34,383 46,821 59,920 Heifers >12mths Heads 26,798 42,793 38,884 55,900 69,908 85,369 Milkable cow Heads 18,584 31,221 49,889 68,632 89,791 113,037 Total Heads 55,552 90,254 112,851 158,915 206,520 258,326

Yield/Cow Tons/Cow 3.27 8.96 9.00 9.00 9.10 9.10

Total Raw Milk Produced Tons 60,741 223,097 365,066 533,345 720,738 922,756 Used to feed calves Tons 3,360 9,177 12,655 13,334 18,018 23,069 Used for commercial production Tons 57,381 213,920 352,411 520,011 702,719 899,687

Internal demand Tons 605 62,837 200,980 310,197 402,262 516,069 External sales Tons 56,776 151,083 151,431 209,813 300,458 383,618 Raw milk used for commercial production Tons 57,381 213,920 352,411 520,011 702,719 899,687

Raw milk sales price Rmb/ton 4,298 4,453 4,515 4,875 5,200 4,968 Feed cost Rmb/ton -887 -1,743 -1,318 -1,542 -1,735 -1,774 D&A Rmb/ton -337 -119 -121 -126 -136 -130 Total Labor & Other Farm Opex Rmb/ton -1,239 -451 -374 -368 -370 -378

Total Revenues Rmb mn 247 953 1,591 2,535 3,654 4,470 Net Feed Cost Rmb mn -51 -373 -465 -802 -1,219 -1,596 D&A Rmb mn -19 -26 -43 -66 -95 -117 Total Labor & Other Farm Opex Rmb mn -71 -96 -132 -192 -260 -340 Total COGS Rmb mn -141 -495 -639 -1,059 -1,574 -2,053

Gross Profit Rmb mn 105 458 952 1,476 2,080 2,417 Other Income/(Expense) Rmb mn 3 5 6 Selling Expesne Rmb mn -9 5 -21 -55 -70 -87 Admin Rmb mn -76 -110 -134 OP Rmb mn 96 462 931 1,347 1,905 2,201

MarginsGPM % 42.7% 48.0% 59.8% 58.2% 56.9% 54.1%Other Income/(Expense) % 0.0% 0.0% 0.0% 0.1% 0.1% 0.1%Selling Expense/Sales % -3.7% 0.5% -1.3% -2.2% -1.9% -2.0%Admin/Sales % 0.0% 0.0% 0.0% -3.0% -3.0% -3.0%D&A/Sales % -7.8% -2.7% -2.7% -2.6% -2.6% -2.6%OP Margin % 39.0% 48.5% 58.5% 53.1% 52.1% 49.3%

China Huishan DairyPeriod Ending Date Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16Financial Year 2011 2012 2013 2014E 2015E 2016ELiquid MilkNE Region Tons 1,563 85,107 246,162 318,577 387,256 469,375 Rest of China Tons 5,300 10,600 20,140 Total Volume Tons 1,563 85,107 246,162 323,877 397,856 489,515 NE Region Rmb/ton 9,845 6,631 6,935 7,249 7,861 8,271 Rest of China Rmb/ton 26,131 26,131 26,131 ASP Rmb/ton 9,845 6,631 6,935 7,558 8,348 9,006 NE Region Rmb mn 15 564 1,707 2,309 3,044 3,882 Rest of China Rmb mn 138 277 526 Total Revenue Rmb mn 15 564 1,707 2,448 3,321 4,409

Total raw milk cost Rmb mn -6 -279 -881 -1,468 -1,975 -2,371 Other Variable Costs Rmb mn -8 -193 -439 -324 -410 -519 Total D&A Rmb mn -1 -8 -11 -15 -33 -44 Total COGS Rmb mn -15 -479 -1,330 -1,807 -2,418 -2,935

Gross Profit Rmb mn - 85 377 641 903 1,474 Other Income/(Expense) Rmb mn 7 13 19 Total Selling Expense Rmb mn -7 -33 -119 -280 -401 -565 Total Admin Rmb mn -75 -102 -138 Total OP Rmb mn -7 52 258 294 413 790

MarginsGPM % 0.0% 15.1% 22.1% 26.2% 27.2% 33.4%Other Income/(Expenses) % 0.0% 0.0% 0.0% 0.3% 0.4% 0.4%Selling Expense/Sales % -45.5% -5.8% -7.0% -11.4% -12.1% -12.8%Admin/Sales % 0.0% 0.0% 0.0% -3.1% -3.1% -3.1%D&A/Sales % 9.2% 1.3% 0.6% 0.6% 1.0% 1.0%OP Margin % -45.5% 9.2% 15.1% 12.0% 12.4% 17.9%

Milk PowderB2B Tons 357 6,750 15,808 28,059 B2C Tons 991 3,000 6,000 10,800 Total Volume Tons 1,348 9,750 21,808 38,859 B2B 25,908 23,296 27,166 27,137 B2C 79,519 110,000 115,500 121,275 ASP 65,320 45,846 46,721 48,380 B2B Rmb mn 9 157 429 761 B2C Rmb mn 79 330 693 1,310 Less: D90 internal sales Rmb mn - -40 -104 -191 Total Revenue Rmb mn 88 447 1,019 1,880

Total Raw Milk Cost Rmb mn -11 -44 -117 -192 Total Other Variable Costs Rmb mn -47 -229 -507 -895 Total D&A Rmb mn 15 -40 -41 -75 Total COGS Rmb mn -42 -314 -665 -1,163

Gross Profit Rmb mn 46 133 354 717 Other Income/(Expense) Rmb mn 4 8 13 Total Selling Expense Rmb mn -12 -161 -260 -423 Total Admin Rmb mn -18 -41 -75 Total OP Rmb mn 33 -42 61 232

MarginsGPM % 52% 30% 35% 38%D&A/Sales % 17.6% -8.9% -4.0% -4.0%Other Income/(Expense) % 0.0% 0.8% 0.8% 0.7%Selling Expense/Sales % -14.2% -36.1% -25.5% -22.5%Admin/Sales % 0.0% -4.0% -4.0% -4.0%Total OP Margin % 37.7% -9.5% 6.0% 12.3%



Tingyi (0322.HK): Positive inflection on OP margins; up to Buy

Source of opportunity

We upgrade Tingyi from Neutral to Buy, TP: HK$24.90 (from HK$18.45),

implying 26% potential upside. We believe after two years of intense

competition between Tingyi and UPC, they are nearing the end of the

current price-war. We believe Beverage recovery will come first, driven by:

1) We think stabilization of RTD tea market share will prompt Tingyi to pull

promotions to restore profitability to a more desirable level. Its Beverage

margins dropped from 13% in 2008 to 5% in 2013E, below global industry

leaders’ 10%-15% OPM level. We expect this to return to 11% by 2015E;

2) We expect UPC to follow to restore prices, driving margin upside for

both companies;

3) Beverage growth in recent years has been more reliant on product

innovation. We see that both companies are launching more new,

premium products in the market as opposed to deepening discounts.

Noodles will remain tough, as UPC has recently extended its sausage

promotions to Tingyi’s flagship product Braised Beef noodles. However,

we do not expect Tingyi to follow nor this to translate into large market

share gains for UPC as Tingyi’s dominant brand strength in this flavor

has proven difficult for previous competitors to challenge. For example,

former No. 2 Jinmailang attempted to target this flavor by adding a free

egg to its bowl noodles in 2009 but was unsuccessful in denting Tingyi’s

market share. Instead, we believe that the price-war will end by 2015E as

UPC’s continued loss in Noodles and tight cash flow will necessitate a

pull-back in promotions.

Catalyst

Our increase in 12-m TP from HK$18.45 to HK$24.90 is based on: 1) roll

forward of our valuation period from 2014E to average 2014E/2015E;

and 2) forecast EPS revisions of -5%/-1%/+6 due to lower topline growth

in 2013, but improving OP margins in 2014E/2015E. We are forecasting

10% sales CAGR for Tingyi in 2013E-2015E, but 29% EPS CAGR

driven by 2 pp improvement in group OPM.

On beverages, we expect the company’s OPM to increase from 5%

in 2013E to 11% in 2015E, driven primarily by our expectations for:

1) reduced promotional intensity; 2) lower PET prices in

2014E/2015E; and 3) a turn from loss to small profit for the PepsiCo

alliance. For Noodles, we forecast OPM to fall moderately from 9.7%

to 9.2% in 2014E/2015E due to slightly higher promotional spend to

defend braised beef noodles market share.

Valuation

We value Tingyi on 28.8X P/E (previously 24.0x) on average 2014E/2015E

recurring EPS (previous 2014E). This is a 20% premium to our target Staples

sector average of 24X, justified based on Tingyi’s first quartile EPS CAGR vs

the Staples group. At current P/E of 22.8X we see a re-rating opportunity.

Key risks

Worsening competition resulting in worse than expected margins and

sales, worse than expected inflation in raw material prices.

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Tingyi (Cayman Islands) Holdings (0322.HK)


Key data Current

Price (HK$) 19.70




12/12 12/13E 12/14E 12/15E

EPS ($) New 0.06 0.08 0.10 0.12

EPS revision (%) 0.0 (5.5) (1.5) 5.9

EPS growth (%) (14.2) 17.3 30.4 27.1

EPS (dil) ($) New 0.08 0.08 0.10 0.12

P/E (X) 43.6 33.8 25.9 20.4

P/B (X) 6.1 5.1 4.5 4.0

EV/EBITDA (X) 17.1 12.4 9.5 7.7

Dividend yield (%) 1.2 1.5 1.9 2.5

ROE (%) 19.6 16.2 18.6 21.0

CROCI (%) 13.4 12.6 15.1 16.9

19,500

20,500

21,500

22,500

23,500

24,500

25,500

18

19

20

21

22

23

24



Tingyi (Cayman Islands) Holdings (L) Hang Seng Index (R)


Absolute (9.4) 1.3 (10.7)

Rel. to Hang Seng Index (4.5) 2.4 (3.9)




Tingyi (Cayman Islands) Holdings: Summary financials

Profit model ($ mn) 12/12 12/13E 12/14E 12/15E Balance sheet ($ mn) 12/12 12/13E 12/14E 12/15E

Total revenue 9,211.9 10,763.2 11,890.9 13,050.4 Cash & equivalents 837.9 1,217.7 1,302.5 1,542.0


SG&A (2,168.1) (2,474.9) (2,668.7) (2,856.5) Inventory 478.1 472.7 519.9 565.9

R&D 0.0 0.0 0.0 0.0 Other current assets 419.3 489.8 541.1 593.8

Other operating profit/(expense) 31.2 (84.3) 35.0 82.8 Total current assets 1,968.4 2,482.1 2,729.5 3,103.5

EBITDA 1,005.4 1,234.6 1,585.2 1,922.5 Net PP&E 5,001.7 5,108.3 5,217.7 5,327.8

Depreciation & amortization (387.8) (524.0) (569.1) (616.9) Net intangibles 312.9 429.0 533.7 628.1

EBIT 617.6 710.6 1,016.1 1,305.6 Total investments 139.5 139.5 139.5 139.5




Others 0.0 0.0 0.0 0.0 Accounts payable 1,043.3 1,457.1 1,602.4 1,744.4

Pretax profits 637.3 741.9 1,071.0 1,382.3 Short-term debt 499.7 787.8 397.6 349.6

Income tax (227.8) (225.7) (289.2) (359.4) Other current liabilities 1,251.5 1,443.0 1,598.0 1,752.1

Minorities (49.7) (93.9) (230.8) (322.7) Total current liabilities 2,794.5 3,687.9 3,598.0 3,846.0

Long-term debt 984.8 497.0 499.4 99.8

Net income pre-preferred dividends 359.9 422.3 551.0 700.3 Other long-term liabilities 196.7 186.9 177.6 168.7

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 1,181.5 683.9 677.0 268.5

Net income (pre-exceptionals) 359.9 422.3 551.0 700.3 Total liabilities 3,976.0 4,371.7 4,274.9 4,114.5

Post-tax exceptionals 95.3 10.5 0.0 0.0

Net income 455.2 432.8 551.0 700.3 Preferred shares 0.0 0.0 0.0 0.0


EPS (basic, pre-except) ($) 0.06 0.08 0.10 0.13 Minority interest 946.3 1,040.3 1,271.1 1,593.7

EPS (basic, post-except) ($) 0.08 0.08 0.10 0.13

EPS (diluted, post-except) ($) 0.08 0.08 0.10 0.12 Total liabilities & equity 7,473.3 8,209.7 8,671.2 9,249.7

DPS ($) 0.03 0.04 0.05 0.06

Dividend payout ratio (%) 39.6 50.0 50.0 50.0 BVPS ($) 0.46 0.50 0.56 0.63

Free cash flow yield (%) 1.7 5.0 4.5 6.1




EBIT growth (2.6) 15.1 43.0 28.5 ROA (%) 6.9 5.5 6.5 7.8

Net income growth 8.5 (4.9) 27.3 27.1 ROACE (%) 10.6 12.4 18.9 24.2

EPS growth 8.4 (4.9) 27.3 27.1 Inventory days 22.3 23.2 22.0 22.1



EBIT margin 6.7 6.6 8.5 10.0 Net debt/equity (%) 18.5 1.7 (9.2) (21.3)

Interest cover - EBIT (X) NM NM NM NM

Cash flow statement ($ mn) 12/12 12/13E 12/14E 12/15E Valuation 12/12 12/13E 12/14E 12/15E

Net income pre-preferred dividends 359.9 422.3 551.0 700.3

D&A add-back 387.8 524.0 569.1 616.9 P/E (analyst) (X) 43.6 33.8 25.9 20.4

Minorities interests add-back 49.7 93.9 230.8 322.7 P/B (X) 6.1 5.1 4.5 4.0

Net (inc)/dec working capital 273.0 471.4 137.8 161.6 EV/EBITDA (X) 17.1 12.4 9.5 7.7

Other operating cash flow 85.7 4.6 (7.1) (8.6) EV/GCI (X) 2.1 1.7 1.6 1.4

Cash flow from operations 1,156.0 1,516.2 1,481.5 1,792.8 Dividend yield (%) 1.2 1.5 1.9 2.5

Capital expenditures (881.5) (752.6) (789.0) (827.2)

Acquisitions (9.0) 0.0 0.0 0.0


Others 231.6 5.8 5.8 5.8

Cash flow from investments (658.9) (746.8) (783.2) (821.4)

Dividends paid (common & pref) (247.7) (203.3) (262.1) (387.7)

Inc/(dec) in debt (21.6) (199.7) (387.8) (447.6)

Common stock issuance (repurchase) 3.9 0.0 0.0 0.0

Other financing cash flows 6.2 13.4 36.3 103.3

Cash flow from financing (259.2) (389.6) (613.6) (731.9)

Total cash flow 237.8 379.8 84.8 239.5 Note: Last actual year may include reported and estimated data.




We value Tingyi on 28.8X P/E (previously 24.0x) on average 2014E/2015E recurring EPS.

This is a 20% premium to our target Staples sector average of 24X, which is justified based

on Tingyi’s first quartile 2013E-2015E 2-yr EPS growth vs the Staples group. Our increase in

12-m target price from HK$18.45 to HK$24.90 is based on: 1) roll forward of our valuation

period from 2014E to average 2014E/2015E; and 2) forecast EPS revisions of -5%/-1%/+6

due to lower topline growth in 2013 but improving OP margins in 2014E/2015E.

At present, Tingyi is trading at 25.0X 12-m fwd P/E, which is lower than its historical average

of 26.8X and represents 11% premium to the Staples sector average of 22.5X. We believe that

the re-rating can be justified on a rebound in the company’s CROCI as margins recover.

Exhibit 49: Tingyi is trading at 11% premium to Staples

sector average vs its historical average of 14% premiumTingyi P/E premium/discount to sector

Exhibit 50: Tingyi is currently trading at 25.0X 12-m fwd

P/E vs sector average of 22.5X Tingyi historical P/E vs. sector P/E



Exhibit 51: Tingyi is trading at 25.0X 12-m fwd P/E vs

historical average of 26.8X Tingyi fwd 12-m P/E

Exhibit 52: We expect Tingyi to re-rate given improving

CROCI outlook Tingyi EV/GCI vs. CROCI



-11%

48%

11%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Ja

n-0

7

May

-07

Sep

-07

Ja

n-0

8

May

-08

Sep

-08

Ja

n-0

9

May

-09

Sep

-09

Ja

n-1

0

May

-10

Sep

-10

Ja

n-1

1

May

-11

Sep

-11

Ja

n-1

2

May

-12

Sep

-12

Ja

n-1

3

May

-13

Sep

-13

Ja

n-1

4

Tingyi historical premium/discount to Staples sector average (%)

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

Ja

n-0

7

Ju

n-0

7

No

v-0

7

Ap

r-0

8

Sep

-08

Fe

b-0

9

Ju

l-0

9

De

c-0

9

Ma

y-1

0

Oct-

10

Ma

r-1

1

Au

g-1

1

Ja

n-1

2

Ju

n-1

2

No

v-1

2

Ap

r-1

3

Sep

-13

Fe

b-1

4

Tingyi historical P/E Staples sector historical P/E

39.0

17.4

25.0

15.0

20.0

25.0

30.0

35.0

40.0

Jan-

06

Apr

-06

Jul-0

6

Oct

-06

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Tingyi fwd 12m P/E

+ 1 STDV

+ 2 STDV

- 1 STDV

- 2 STDV

Historical avg. 26.8x

10%

15%

20%

25%

30%

35%

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Ja

n-0

7

May

-07

Sep

-07

Ja

n-0

8

May

-08

Sep

-08

Ja

n-0

9

May

-09

Sep

-09

Ja

n-1

0

May

-10

Sep

-10

Ja

n-1

1

May

-11

Sep

-11

Ja

n-1

2

May

-12

Sep

-12

Ja

n-1

3

May

-13

Sep

-13

Ja

n-1

4

EV/GCI CROCI



Exhibit 53: Tingyi Summary Financials


Tingyi (0322.HK)USD mnDivisional P/L 2013 Q1 2013 Q2 2013 Q3 2013 Q4E 1H11 2H11 1H12 2H12 1H13 2H13E 2011 2012 2013E 2014E 2015E 13-'15 2Yr CAGR

Pepsi since 31/03/12

Pepsi since 31/03/12

External RevenuesInstant Noodles 1,105 888 1,153 1,194 1,618 1,974 1,873 2,087 1,993 2,347 3,592 3,960 4,340 4,689 5,049 8%Beverages 1,462 1,787 2,160 685 2,392 1,607 2,504 2,427 3,250 2,845 3,999 4,931 6,094 6,824 7,555 11%Bakery 57 42 55 49 94 107 114 120 99 103 201 234 202 233 279 17%Others 24 58 22 23 36 38 42 45 81 45 74 87 126 145 167 15%Segment Total 2,648 2,775 3,390 1,951 4,140 3,726 4,533 4,678 5,423 5,340 7,867 9,212 10,763 11,891 13,050 10%Unallocated 0 0 0 0 -1 1 0 0 0 0 0 0 0 0 0Group Revenues 2,648 2,775 3,390 1,951 4,140 3,727 4,533 4,678 5,423 5,340 7,867 9,212 10,763 11,891 13,050 10%

Operating ProfitInstant Noodles 127 67 139 90 132 247 198 218 194 229 379 416 422 427 466 5%Beverages 58 91 210 -61 205 10 144 45 149 150 215 189 298 586 820 66%Bakery 1 -8 -4 -5 2 2 0 5 -7 -9 4 6 -15 -6 7 nmfOthers 2 23 0 0 41 -5 8 3 25 0 36 11 25 29 33 15%Segment Total 188 173 345 25 380 254 350 272 361 370 634 622 731 1,036 1,326 35%Unallocated -7 -6 0 4 0 0 183 4 -14 4 0 187 -9 -20 -20Group EBIT 180 167 345 29 379 255 533 275 347 374 634 808 721 1,016 1,306 35%

YoY Growth (%)

Revenues Instant Noodles 7% 5% 11% 14% 22% 23% 16% 6% 6% 12% 23% 10% 10% 8% 8%Beverages 79% 6% 19% 13% 32% -6% 5% 51% 30% 17% 13% 23% 24% 12% 11%Bakery -3% -24% -14% -13% 22% 28% 21% 12% -13% -14% 25% 16% -14% 15% 20%Others 13% 175% 2% -2% 39% 24% 17% 18% 94% 0% 31% 17% 45% 15% 15%Total 37% 6% 15% 13% 28% 8% 10% 26% 20% 14% 18% 17% 17% 10% 10%

Operating ProfitInstant Noodles 2% -9% 3% 7% -5% 13% 50% -12% -2% 5% 6% 10% 1% 1% 9%Beverages 41% -12% 46% nmf 0% -91% -30% 336% 3% 233% -33% -12% 58% 97% 40%Bakery 290% -5549% -244% -278% 10% 582% -79% 173% -1718% -261% 90% 47% -366% -61% -216%Others -44% 258% -102% nmf 343% -114% -81% -161% 225% -90% -27% -69% 131% 15% 15%Recurring OP 11% -5% 20% -246% 7% -33% -8% 7% 3% 36% -13% -2% 18% 42% 28%

Margins

Gross ProfitInstant Noodles 30.2% 28.0% 29.8% 29.2% 25.1% 29.0% 29.4% 30.5% 29.2% 29.5% 27.2% 30.0% 29.3% 27.7% 26.9%Beverages 28.4% 31.7% 34.1% 25.6% 26.7% 24.1% 30.0% 29.3% 30.2% 32.0% 25.7% 29.6% 31.1% 32.7% 34.1%Bakery 38.2% 35.1% 38.4% 35.7% 34.8% 37.5% 37.7% 40.2% 36.9% 37.1% 36.2% 39.0% 37.0% 37.5% 38.0%Others 18.6% 27.9% 19.2% 18.9% 12.0% 15.0% 15.8% 17.0% 25.2% 19.0% 13.5% 16.4% 23.0% 23.0% 23.0%Total 29.3% 30.4% 32.6% 28.0% 26.1% 27.0% 29.8% 30.0% 29.9% 30.9% 26.5% 29.9% 30.4% 30.7% 31.3%

Operating ProfitInstant Noodles 11.5% 7.5% 12.0% 7.5% 8.1% 12.5% 10.6% 10.5% 9.7% 9.7% 10.5% 10.5% 9.7% 9.1% 9.2%Beverages 3.9% 5.1% 9.7% -8.9% 8.6% 0.6% 5.7% 1.8% 4.6% 5.3% 5.4% 3.8% 4.9% 8.6% 10.8%Bakery 1.8% -18.5% -6.8% -10.0% 2.1% 1.8% 0.4% 4.4% -6.7% -8.3% 1.9% 2.5% -7.5% -2.5% 2.5%Others 8.5% 39.8% -0.4% 1.8% 114.5% -14.1% 18.3% 7.2% 30.7% 0.7% 48.3% 12.6% 20.0% 20.0% 20.0%Total 7.1% 6.2% 10.2% 1.3% 9.2% 6.8% 7.7% 5.8% 6.7% 6.9% 8.1% 6.7% 6.8% 8.7% 10.2%

Consolidated P/L 2013 Q1 2013 Q2 2013 Q3 2013 Q4E 1H11 2H11 1H12 2H12 1H13 2H13E 2011 2012 2013E 2014E 2015E 13-'15 2Yr CAGRExternal Sales 2,648 2,775 3,390 1,951 4,140 3,727 4,533 4,678 5,423 5,340 7,867 9,212 10,763 11,891 13,050 10%COGS -1,873 -1,930 -2,285 -1,405 -3,057 -2,721 -3,182 -3,276 -3,803 -3,691 -5,779 -6,457 -7,493 -8,241 -8,971Gross profit 775 845 1,104 545 1,082 1,006 1,352 1,403 1,620 1,650 2,088 2,754 3,270 3,650 4,079 12%Other Op. Rev/Exp -5 36 27 -132 58 0 185 36 31 -105 58 222 -74 35 83SG&A -590 -714 -786 -384 -761 -751 -1,004 -1,164 -1,304 -1,171 -1,512 -2,168 -2,475 -2,669 -2,857Reported EBIT 180 167 345 29 379 255 533 275 347 374 634 808 721 1,016 1,306 35%D&A -107 -115 -119 -184 -145 -176 -192 -196 -222 -302 -321 -388 -524 -569 -617EBITDA 288 281 464 213 524 431 725 471 569 676 955 1,196 1,245 1,585 1,923 24%Net Interest 5 6 6 9 14 15 11 5 11 15 29 16 25 48 68Associate Income/(Loss) 2 4 9 -9 0 0 5 -1 6 0 0 4 6 7 9Profit before tax 187 177 360 29 393 270 548 279 364 389 663 828 752 1,071 1,382 36%Income taxes -70 -49 -82 -25 -86 -77 -125 -102 -119 -107 -163 -228 -226 -289 -359Profit after tax 117 128 278 4 307 192 423 177 245 282 500 600 527 782 1,023 39%Minority interest -12 -36 -93 47 -78 -2 -136 -9 -48 -46 -80 -145 -94 -231 -323Reported Net income 105 92 186 50 229 191 287 168 197 236 420 455 433 551 700 27%

Less: net one-off's 11 39 0 95 0 11 0 39 95 11 0 0Recurring net income 105 81 186 50 190 191 191 168 186 236 380 360 422 551 700 29%

EPS (Adj., diluted, US$/Sh 0.019 0.014 0.033 0.009 0.034 0.034 0.034 0.030 0.035 0.040 0.068 0.064 0.075 0.098 0.125 29%

YoY Growth %Sales 37.4% 6.5% 15.1% 12.6% 27.6% 8.4% 9.5% 25.5% 19.6% 14.1% 17.7% 17.1% 16.8% 10.5% 9.8%GP 38.2% 6.9% 19.7% 13.5% 7.5% 12.6% 24.9% 39.5% 19.9% 17.6% 9.9% 31.9% 18.7% 11.6% 11.8%SG&A 53.6% 15.4% 27.7% 32.0% 54.9% 29.9% 0.6% 21.2% 43.4% 14.2% 7.8% 7.0%OP (GP less SG&A) 4.6% -7.4% -16.6% 8.0% -6.0% -9.1% 100.4% -11.7% 1.9% 35.5% 23.4% 24.6%Reported EBIT -49.4% -5.2% 22.6% -592.8% 5.8% -30.0% 40.5% 8.2% -34.8% 35.8% -12.2% 27.5% -10.8% 40.9% 28.5%Reported NPAT -47.4% 5.2% 18.4% 338.7% 9.9% -29.0% 25.2% -11.6% -31.4% 40.2% -12.0% 8.5% -4.9% 27.3% 27.1%Recurring NPAT 0.7% -6.9% 18.4% 338.7% -8.9% -29.0% 0.8% -11.6% -2.8% 40.2% -6.8% -5.4% 17.3% 30.5% 27.1%

MarginsGP 29.3% 30.4% 32.6% 28.0% 26.1% 27.0% 29.8% 30.0% 29.9% 30.9% 26.5% 29.9% 30.4% 30.7% 31.3%OP (GP less SG&A) 7.0% 4.7% 9.4% 8.3% 7.8% 6.8% 7.7% 5.1% 5.8% 9.0% 7.3% 6.4% 7.4% 8.3% 9.4%Reported EBIT 6.8% 6.0% 10.2% 1.5% 9.2% 6.8% 11.8% 5.9% 6.4% 7.0% 8.1% 8.8% 6.7% 8.5% 10.0%Reported NPAT 4.0% 3.3% 5.5% 2.6% 5.5% 5.1% 6.3% 3.6% 3.6% 4.4% 5.3% 4.9% 4.0% 4.6% 5.4%Recurring NPAT 4.0% 2.9% 5.5% 2.6% 4.6% 5.1% 4.2% 3.6% 3.4% 4.4% 4.8% 3.9% 3.9% 4.6% 5.4%

SG&A/Sales -22.3% -25.7% -23.2% -19.7% -18.4% -20.2% -22.2% -24.9% -24.1% -21.9% -19.2% -23.5% -23.0% -22.4% -21.9%Effective Tax Rate % 37.3% 27.9% 22.7% 87.6% 21.8% 28.7% 22.9% 36.7% 32.7% 27.5% 24.6% 27.5% 30.0% 27.0% 26.0%



UPC (0220.HK, Buy): Price restoration on the horizon; up to Buy


We upgrade UPC to Buy from Neutral with a revised 12-m TP of HK$8.90

(previously HK$7.30), implying 27% potential upside. After two years of

intense competition, we believe that Tingyi has reclaimed the driver’s seat

in RTD tea, prompting it to pull promotions to restore profitability in 2014.

We expect that UPC will also follow to restore pricing discipline as it has

been the company’s strategy to not engage in price-war, but focus on

product differentiation. Currently, we are seeing UPC launching more new

products into the market including a premium milk tea and green tea

blended beverage, which is selling for RMB4.00/450ml PET bottle, more

than 2x the price of its standard RMB2.30/500ml RTD teas. The premium

mix shift will help boost margins. As such, we forecast Beverage OP

margin to rebound from 4.4% in 2013E to 6.6% by 2015E.

We expect Noodles to remain in loss in 2014E as competition remains

intense. However, we expect an end to this by 2015E as a second year of

losses and tight cash flow will necessitate UPC to pull back in noodles

promotions. We believe that UPC’s current attempt to gain share in instant

noodles by extending its sausage offer to Tingyi’s flagship product Braised

Beef Noodles will prove to be tough. Past attempts including that from

former number 2 instant noodles player Jinmailang has not proven

successful in the face of Tingyi’s dominant brand strength. Our per unit

cost analysis for Instant Noodles suggests that in 2013E, UPC invested an

additional RMB0.19/unit of COGS in promotions and RMB0.06/unit in

promotional expenses for one unit of instant noodles vs 2010. This implies

an incremental 19% margin investment for a unit of noodle averaging

RMB1.29/unit ex-factory price. If UPC pulled its noodles total promotions

back by c.25%, it would potentially achieve an incremental 3-4% OPM, in

our view.

Catalyst

We forecast accelerating EPS CAGR of 43% in 2013E-2015E vs 42%

decline in 2013E. This will be driven by: 1) rebound in Beverage margins

from 4.4% in 2013E to 6.6% by 2015E; and 2) a pull-back in noodles

promotions by 2015E, which will narrow its noodles losses from -2.5%

OPM in 2013E to -0.6% OPM by 2015E. Topline growth is expected to be

muted at 10% 2-year CAGR as RTD tea and Noodles growth in China

approaches maturity. We adjust our 2013E-2015E recurring NPAT by

13%/-5%/-10% due to higher foreign exchange gains in 2H13 but lower

sales growth forecasts in 2014E/2015E.

Valuation

We value UPC on average 2014E/2015E (previously 2014E) P/E multiple

of 28.8X (unchanged). This is based on a 20% premium to our staples

sector target average of 24.0X given UPC’s first quartile 2-yr EPS CAGR

relative to staples peers. Given current P/E of 22.8X, we see a re-rating

opportunity.

Key risks

Worsening competition resulting in worse than expected margins and

sales, worse than expected inflation in raw material prices.

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Uni-President China Holdings Ltd. (0220.HK)


Key data Current

Price (HK$) 7.02



Foreign ownership (%) 0.0

12/12 12/13E 12/14E 12/15E

EPS (Rmb) New 0.24 0.14 0.20 0.28

EPS revision (%) 0.0 13.4 (4.9) (9.8)

EPS growth (%) 173.3 (42.1) 42.9 43.7

EPS (dil) (Rmb) New 0.24 0.28 0.20 0.28

P/E (X) 24.6 39.8 27.9 19.4

P/B (X) 2.7 2.3 2.2 2.0

EV/EBITDA (X) 13.5 15.4 12.8 9.6

Dividend yield (%) 0.8 1.3 0.9 1.3

ROE (%) 11.8 12.4 8.1 10.9

CROCI (%) 11.8 8.5 9.3 10.3

50

52

54

56

58

60

62

64

66

68

70

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0



Uni-President China Holdings Ltd. (L) MSCI China (R)


Absolute (9.4) (0.6) (21.0)

Rel. to MSCI China (4.2) (3.6) (12.9)




Uni-President China Holdings Ltd.: Summary financials


Total revenue 21,405.7 24,491.7 27,093.1 29,591.2 Cash & equivalents 2,290.8 3,403.9 2,935.2 2,940.9


SG&A (6,765.9) (8,008.5) (8,577.6) (8,980.3) Inventory 1,284.9 1,536.8 1,755.4 1,960.9



EBITDA 1,684.5 1,512.6 2,017.9 2,678.3 Net PP&E 7,912.1 10,354.7 12,901.6 13,439.9

Depreciation & amortization (803.0) (966.1) (1,207.4) (1,411.0) Net intangibles 1,433.7 1,609.8 1,777.2 1,841.7

EBIT 881.5 546.5 810.5 1,267.3 Total investments 1,329.6 1,434.8 1,550.6 1,678.0





Pretax profits 1,076.9 769.7 919.8 1,347.8 Short-term debt 408.6 717.2 923.0 923.0


Minorities 0.0 0.0 0.0 0.0 Total current liabilities 4,948.2 5,489.5 5,879.6 6,040.3

Long-term debt 3,562.3 6,253.7 8,047.9 8,047.9

Net income pre-preferred dividends 855.9 495.6 708.2 1,017.6 Other long-term liabilities 358.2 358.2 358.2 358.2


Net income (pre-exceptionals) 855.9 495.6 708.2 1,017.6 Total liabilities 8,868.7 12,101.4 14,285.7 14,446.4


Net income 855.9 1,000.9 708.2 1,017.6 Preferred shares 0.0 0.0 0.0 0.0





DPS (Rmb) 0.05 0.07 0.05 0.07


Free cash flow yield (%) (5.4) (13.9) (11.2) 0.9



EBITDA growth 112.8 (10.2) 33.4 32.7 ROE (%) 11.8 12.4 8.1 10.9

EBIT growth 237.5 (38.0) 48.3 56.4 ROA (%) 5.7 5.4 3.2 4.3

Net income growth 174.4 16.9 (29.2) 43.7 ROACE (%) 9.6 3.8 5.3 6.8

EPS growth 164.2 16.9 (29.2) 43.7 Inventory days 33.4 31.7 33.3 34.6



EBIT margin 4.1 2.2 3.0 4.3 Net debt/equity (%) 21.9 42.0 67.4 61.6

Interest cover - EBIT (X) NM NM 123.5 27.1


Net income pre-preferred dividends 855.9 495.6 708.2 1,017.6

D&A add-back 803.0 966.1 1,207.4 1,411.0 P/E (analyst) (X) 24.6 39.8 27.9 19.4


Net (inc)/dec working capital 1,035.0 (93.1) (96.6) (104.6) EV/EBITDA (X) 13.5 15.4 12.8 9.6

Other operating cash flow (152.9) (105.3) (115.8) (127.4) EV/GCI (X) 1.5 1.3 1.1 1.0




Divestitures 275.5 620.0 0.0 0.0

Others (8.3) 401.0 0.0 0.0



Inc/(dec) in debt 879.8 3,000.0 2,000.0 0.0


Other financing cash flows (0.1) 0.0 0.0 0.0

Cash flow from financing 786.0 2,828.8 1,749.8 (177.1)

Total cash flow (78.2) 1,113.1 (468.7) 5.7 Note: Last actual year may include reported and estimated data.




We value UPC on 28.8X P/E (unchanged), which is a 20% premium to our target Staples

sector average of 24.0X as justified by the company’s first quartile 2-yr EPS CAGR vs

Staples peers. Our increase in 12-m TP from HK$7.30 to HK$8.90 is due to: 1) roll forward of

the valuation period from 2014E to average 2014E/2015E; and 2) EPS forecast revisions of

+13%/-5%/-10% in 2013E-2015E due to higher foreign exchange gains in 2H13E and lower

sales growth in 2014E/2015E.

At present, UPC is trading at 26.3X 12-m fwd P/E, vs historical average of 19.9X. This is at a

17% premium to Staples sector average of 22.5X. The company has continued to re-rate

following successful product focus strategy in recent years, and is now trading at mid-

range valuations since 2012 when Milk Tea and Lao Tan noodles saw significant growth.

We expect the company to re-rate given improving EPS growth outlook and CROCI.

Exhibit 54: UPC is trading at 17% premium to the Staples

sector average P/E vs historical average of 14% discount

UPC P/E premium/discount to sector

Exhibit 55: UPC is currently trading at 26.3X 12-m fwd

P/E vs Staples sector average of 22.5X

UPC historical P/E vs. sector P/E



Exhibit 56: UPC is trading at 26.3X 12-m fwd P/E vs

historical average of 19.9X UPC fwd 12-m P/E

Exhibit 57: We expect UPC to re-rate given its improving

CROCI UPC EV/GCI vs. CROCI



-54%

17%

-21%

17%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Ja

n-0

8

Ju

l-08

Ja

n-0

9

Ju

l-09

Ja

n-1

0

Ju

l-10

Ja

n-1

1

Ju

l-11

Ja

n-1

2

Ju

l-12

Ja

n-1

3

Ju

l-13

Ja

n-1

4UPC historical premium/discount to Staples sector average (%)

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Ja

n-0

8

Ju

n-0

8

No

v-0

8

Ap

r-0

9

Se

p-0

9

Fe

b-1

0

Ju

l-1

0

De

c-1

0

May

-11

Oct-

11

Ma

r-1

2

Au

g-1

2

Ja

n-1

3

Ju

n-1

3

No

v-1

3

UPC historical P/E Staples sector historical P/E

7.6

28.5

26.3

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

Jan

-14

UPC fwd 12m P/E

+ 1 STDV

+ 2 STDV

- 1 STDV

- 2 STDV

Historical avg. 19.9x

0%

5%

10%

15%

20%

25%

0.0

0.5

1.0

1.5

2.0

2.5

De

c-0

8

Ma

r-0

9

Ju

n-0

9

Sep

-09

De

c-0

9

Ma

r-1

0

Ju

n-1

0

Sep

-10

De

c-1

0

Ma

r-1

1

Ju

n-1

1

Sep

-11

De

c-1

1

Ma

r-1

2

Ju

n-1

2

Sep

-12

De

c-1

2

Ma

r-1

3

Ju

n-1

3

Sep

-13

De

c-1

3

EV/GCI CROCI



Exhibit 58: UPC Summary Financials


Uni-President China (220.HK)RMB mnDivisional P/L 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 2010 2011 2012 2013E 2014E 2015E 13-'15 2Yr CAGR

RevenuesBeverages 4,594 4,203 5,834 4,855 7,114 6,800 8,262 7,838 8,797 10,689 13,914 16,100 17,750 19,273 9.4%Instant Noodles 1,471 2,078 2,794 3,143 3,420 3,849 3,777 4,293 3,549 5,936 7,270 8,069 8,891 9,709 9.7%Others 99 146 172 135 114 109 166 157 245 307 223 323 452 610 37.5%

Total 6,164 6,427 8,799 8,133 10,648 10,758 12,204 12,287 12,591 16,932 21,406 24,492 27,093 29,591 9.9%

EBITBeverages 408 229 145 84 429 336 449 263 637 229 764 713 937 1,268 33.4%Instant Noodles -13 3 52 113 178 48 -60 -138 -10 165 225 -199 -169 -58 -45.9%Others -13 14 -3 -18 8 -11 13 14 2 -21 -3 27 43 58 45.4%Segment Total 383 246 194 178 614 372 402 139 629 372 986 541 811 1,267 53.0%Unallocated -40 -31 -38 -73 -73 -31 219 292 -71 -111 -105 511 0 0Group Total 343 215 156 105 540 341 620 431 558 261 882 1,052 811 1,267 9.8%

YoY Growth %

RevenuesBeverages 30% 24% 27% 16% 22% 40% 16% 15% 27% 22% 30% 16% 10% 9%Instant Noodles 54% 79% 90% 51% 22% 22% 10% 12% 67% 67% 22% 11% 10% 9%Others 340% 278% 73% -7% -34% -20% 46% 44% 301% 25% -28% 45% 40% 35%Total 37% 40% 43% 27% 21% 32% 15% 14% 38% 34% 26% 14% 11% 9%

EBITBeverages -25% -41% -64% -64% 195% 302% 5% -22% -31% -64% 234% -7% 31% 35%Instant Noodles 52% 106% 512% 4237% 243% -58% -134% -390% 86% 1760% 36% -188% -15% -66%Others -132% 416% 76% -229% 354% -40% -69% -230% 117% -1376% -84% -896% 57% 35%Total -24% -32% -55% -51% 247% 224% 15% 27% -26% -41% 165% -45% 50% 56%

Margins

GP margin Beverages 36.6% 31.4% 29.1% 29.5% 35.0% 36.2% 35.9% 36.0% 34.1% 29.3% 35.6% 35.9% 36.8% 38.1%Instant Noodles 29.6% 27.0% 27.4% 32.0% 34.3% 32.2% 30.4% 28.8% 28.1% 29.8% 33.2% 29.5% 27.3% 26.0%Others 6.4% 26.8% 10.3% 17.8% 14.7% 16.9% 18.5% 19.0% 18.5% 13.6% 15.8% 18.8% 18.8% 18.8%Total 34.4% 29.9% 28.2% 30.3% 34.6% 34.6% 34.0% 33.2% 32.1% 29.2% 34.6% 33.6% 33.4% 33.7%

EBIT marginBeverages 8.9% 5.4% 2.5% 1.7% 6.0% 4.9% 5.4% 3.4% 7.2% 2.1% 5.5% 4.4% 5.3% 6.6%Instant Noodles -0.9% 0.1% 1.9% 3.6% 5.2% 1.2% -1.6% -3.2% -0.3% 2.8% 3.1% -2.5% -1.9% -0.6%Others -12.7% 9.7% -1.8% -13.6% 6.7% -10.2% 7.8% 9.1% 0.7% -7.0% -1.5% 8.5% 9.5% 9.5%Total 6.2% 3.8% 2.2% 2.2% 5.8% 3.5% 3.3% 1.1% 5.0% 2.2% 4.6% 2.2% 3.0% 4.3%

Consolidated P/L 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 2010 2011 2012 2013E 2014E 2015E 13-'15 2Yr CAGR

Sales 6,164 6,427 8,799 8,133 10,648 10,758 12,204 12,287 12,591 16,932 21,406 24,492 27,093 29,591 9.9%COGS -4,041 -4,507 -6,318 -5,671 -6,968 -7,036 -8,059 -8,204 -8,548 -11,989 -14,004 -16,264 -18,053 -19,614Gross Profit 2,123 1,920 2,481 2,462 3,680 3,722 4,145 4,083 4,043 4,943 7,402 8,228 9,040 9,978 10.1%SG&A -1,830 -1,786 -2,409 -2,432 -3,235 -3,530 -3,888 -4,120 -3,616 -4,841 -6,766 -8,008 -8,578 -8,980 5.9%Other Op. Rev/Exp 50 81 84 75 96 150 364 468 131 159 246 832 348 270Reported EBIT 343 215 156 105 540 341 620 431 558 261 882 1,052 811 1,267 9.8%D&A -174 -198 -233 -297 -363 -440 -517 -449 -372 -530 -803 -966 -1,207 -1,411EBITDA 517 413 389 403 903 781 1,137 881 930 792 1,685 2,018 2,018 2,678 15.2%Net Interest Expense 26 29 30 65 12 52 61 57 55 95 64 118 -7 -47Associate Income/(Loss) 0 0 42 -2 64 68 48 57 0 40 132 105 116 127JCE Income/(Loss) 28 41 0 0 0 0 0 0 69 0 0 0 0 0Profit Before Tax 398 285 227 169 616 461 729 546 683 396 1,077 1,275 920 1,348 2.8%Tax Expense -99 -64 -51 -38 -111 -110 -154 -120 -163 -84 -221 -274 -212 -330Minority Interest 0 0 0 0 0 0 0 0 0 0 0 0 0 0Reported NPAT 298 221 177 135 505 351 575 426 519 312 856 1,001 708 1,018 0.8%Net One-off's 12 37 7 16 12 -3 200 306 48 23 9 505 0 0Recurring NPAT 287 184 170 119 493 354 375 120 471 289 847 496 708 1,018 43.3%

EPS (Adj., diluted, RMB/Sh) 0.080 0.051 0.047 0.033 0.137 0.098 0.104 0.033 0.131 0.080 0.235 0.138 0.197 0.283 43.3%

YoY Growth %Sales 37% 40% 43% 27% 21% 32% 15% 14% 38% 34% 26% 14% 11% 9%Operating Profit -30% -51% -76% -77% 519% 533% -42% -119% -38% -76% 523% -65% 111% 116%EBIT -24% -32% -55% -51% 247% 224% 15% 27% -27% -53% 237% 19% -23% 56%Reported NPAT -30% -21% -41% -39% 186% 159% 14% 21% -26% -40% 174% 17% -29% 44%Recurring NPAT -33% -34% -41% -35% 190% 197% -24% -66% -32% -39% 193% -42% 43% 44%

MarginsGross Profit 34.4% 29.9% 28.2% 30.3% 34.6% 34.6% 34.0% 33.2% 32.1% 29.2% 34.6% 33.6% 33.4% 33.7%Operating Profit 4.8% 2.1% 0.8% 0.4% 4.2% 1.8% 2.1% -0.3% 3.4% 0.6% 3.0% 0.9% 1.7% 3.4%EBIT 5.6% 3.3% 1.8% 1.3% 5.1% 3.2% 5.1% 3.5% 4.4% 1.5% 4.1% 4.3% 3.0% 4.3%EBITDA 8.4% 6.4% 4.4% 5.0% 8.5% 7.3% 9.3% 7.2% 7.4% 4.7% 7.9% 8.2% 7.4% 9.1%Reported NPAT 4.8% 3.4% 2.0% 1.7% 4.7% 3.3% 4.7% 3.5% 4.1% 1.8% 4.0% 4.1% 2.6% 3.4%Recurring NPAT 4.7% 2.9% 1.9% 1.5% 4.6% 3.3% 3.1% 1.0% 3.7% 1.7% 4.0% 2.0% 2.6% 3.4%

SG&A/Sales -29.7% -27.8% -27.4% -29.9% -30.4% -32.8% -31.9% -33.5% -28.7% -28.6% -31.6% -32.7% -31.7% -30.3%Effective Tax Rate -25.0% -22.5% -22.4% -22.4% -18.0% -23.9% -21.2% -21.9% -23.9% -21.3% -20.5% -21.5% -23.0% -24.5%D&A/Sales -2.8% -3.1% -2.6% -3.7% -3.4% -4.1% -4.2% -3.7% -3.0% -3.1% -3.8% -3.9% -4.5% -4.8%



Want Want (0151.HK): Restructuring to bear fruit; maintain Buy


We maintain Buy on the stock as we continue to believe that Want Want

(WW) is one of the best positioned Staples stocks in terms of its access

to high growth categories and moderate pricing competition. We believe

that recent share price weakness due to concerns on escalating NZ milk

powder prices and weak topline demand is overdone. The company’s

hike in Hot Kid Milk prices by 5%-8% in October 2013 and yoghurt drink

market share gains strengthens our positive view.

In 2013E-2015E, we forecast 2yr sales CAGR of 18% and EPS CAGR of

24% driven by higher contribution of new products and price hikes. We

anticipate group OPM expansion from 19.2% to 21.7% due to: 1) NZ milk

price correction; 2) improving mix shift towards snack foods; and 3)

enhanced operating efficiency as Project Want Want Unite bears fruit.

Our revised TP of HK$13.90 (prior HK$12.50)–based on rolled forward

valuation and small changes to EPS–implies 37% upside potential.

Catalysts

We see 3 key catalysts for WW in 2014E/2015E: 1) Continued market share

gain for new products: WW’s yoghurt drink value market share increased

from 0.9% in Nov/Dec 2011 to 1.6% in Sept/Oct 2013, as per Nielsen.

Moreover, management notes that its banana milk products are doing well,

with total sales over RMB200mn in its first 9mths of launch in 2013. Our

market analysis suggests that the banana milk market could bring an

additional US$2.5bn sale to China’s flavored milk market, which is a

significant market opportunity for WW given its early mover advantage.

2) Price hike insulates 2014E margins: WW has increased its Hot Kid milk

prices by 5%-8% in October 2013 to combat the recent run in NZ milk

powder prices, reflective of its strong pricing power. Moreover, our Global

Macro Research team is expecting a correction of 25% in average NZ milk

powder spot prices in 2015E as global supply resurges on higher prices. We

expect this to benefit WW’s GPM as product prices tend to be downward

sticky. 3) Meaningful efficiency gains We compared 4 key sales productivity

metrics (sales per 1st tier distributor, sales per staff, sales per POS and sales

per household) with Tingyi and Hengan and found that WW ranked in either

2nd or 3rd position in all four measures. The Want Want Unite project

announced in 1H13 was launched to specifically address these inefficiencies

and could further margin upside for WW. Our -5%/-3%/+3% change in

2013E-2015E EPS reflects: 1) lower macro demand; 2) negative mix in rice

crackers for 2013E, offset by improving group margins in 2014E/2015E due

to better sales growth; 3) NZ milk powder correction, improving efficiency.

Valuation

We raise our 12-m TP for WW to HK$13.90 from HS$12.50 primarily

based on a roll forward of our valuation period from 2014E to average of

2014E/2015E. We value WW on 27.6X (unchanged), implying a 15% P/E

premium to the sector’s target average P/E multiple of 24X (unchanged)

due to its first quartile CROCI of 38% in 2014E relative to peers.

Key risks

Worse than expected execution of restructuring plan, significant slow-

down in sales, worse than expected hike in raw material prices.

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Want Want China Holdings (0151.HK)


Key data Current

Price (HK$) 10.12




12/12 12/13E 12/14E 12/15E

EPS ($) New 0.04 0.05 0.06 0.07

EPS revision (%) 0.0 (4.6) (2.9) 3.3

EPS growth (%) 32.0 14.2 18.3 29.8

EPS (dil) ($) New 0.04 0.05 0.06 0.07

P/E (X) 28.7 27.3 23.1 17.8

P/B (X) 9.9 9.5 8.2 6.9

EV/EBITDA (X) 19.3 18.3 15.4 11.8

Dividend yield (%) 2.4 2.5 3.0 3.8

ROE (%) 37.9 37.2 38.3 42.3

CROCI (%) 38.2 36.8 37.7 41.7

19,500

20,500

21,500

22,500

23,500

24,500

25,500

10.0

10.5

11.0

11.5

12.0

12.5

13.0



Want Want China Holdings (L) Hang Seng Index (R)


Absolute (9.3) (2.3) (8.2)

Rel. to Hang Seng Index (4.4) (1.3) (1.2)




Want Want China Holdings: Summary financials

Profit model ($ mn) 12/12 12/13E 12/14E 12/15E Balance sheet ($ mn) 12/12 12/13E 12/14E 12/15E



SG&A (664.0) (786.2) (905.2) (1,047.1) Inventory 460.8 543.8 650.2 747.2



EBITDA 798.4 914.4 1,081.5 1,401.2 Net PP&E 1,045.7 1,212.0 1,420.8 1,683.2


EBIT 710.5 812.8 963.5 1,263.5 Total investments 11.5 11.5 11.5 11.5




Others 0.6 0.0 0.0 0.0 Accounts payable 231.4 263.3 303.5 336.0

Pretax profits 749.0 855.5 1,012.0 1,313.9 Short-term debt 350.0 50.0 50.0 50.0

Income tax (195.0) (222.7) (263.4) (342.0) Other current liabilities 599.3 680.2 774.6 860.4

Minorities (0.2) (0.2) (0.2) (0.3) Total current liabilities 1,180.7 993.5 1,128.1 1,246.4

Long-term debt 653.0 1,253.0 1,253.0 1,253.0

Net income pre-preferred dividends 553.8 632.6 748.3 971.6 Other long-term liabilities 23.9 22.7 21.5 20.5

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 676.9 1,275.7 1,274.5 1,273.5

Net income (pre-exceptionals) 553.8 632.6 748.3 971.6 Total liabilities 1,857.5 2,269.2 2,402.7 2,519.9


Net income 553.8 632.6 748.3 971.6 Preferred shares 0.0 0.0 0.0 0.0


EPS (basic, pre-except) ($) 0.04 0.05 0.06 0.07 Minority interest 8.1 8.3 8.5 8.9

EPS (basic, post-except) ($) 0.04 0.05 0.06 0.07

EPS (diluted, post-except) ($) 0.04 0.05 0.06 0.07 Total liabilities & equity 3,461.1 4,086.4 4,507.7 5,029.9

DPS ($) 0.03 0.03 0.04 0.05

Dividend payout ratio (%) 68.3 68.3 68.3 68.3 BVPS ($) 0.12 0.14 0.16 0.19





EBIT growth 36.0 14.4 18.6 31.1 ROA (%) 16.8 16.8 17.4 20.4





EBIT margin 21.2 20.8 21.0 23.4 Net debt/equity (%) (30.9) (29.3) (27.9) (27.5)


Cash flow statement ($ mn) 12/12 12/13E 12/14E 12/15E Valuation 12/12 12/13E 12/14E 12/15E

Net income pre-preferred dividends 553.8 632.6 748.3 971.6



Net (inc)/dec working capital (40.2) (7.6) (20.3) (37.6) EV/EBITDA (X) 19.3 18.3 15.4 11.8

Other operating cash flow 14.1 (0.1) (0.1) (0.1) EV/GCI (X) 8.4 8.0 6.9 5.8

Cash flow from operations 615.8 726.8 846.1 1,072.0 Dividend yield (%) 2.4 2.5 3.0 3.8

Capital expenditures (243.4) (270.4) (329.0) (402.4)

Acquisitions (0.4) 0.0 0.0 0.0


Others (0.2) 0.0 0.0 0.0

Cash flow from investments (244.0) (270.4) (329.0) (402.4)


Inc/(dec) in debt (21.2) 300.0 0.0 0.0


Other financing cash flows 2.2 (1.2) (1.1) (1.1)


Total cash flow 62.2 336.0 55.2 101.6 Note: Last actual year may include reported and estimated data.




NZ milk powder prices stabilizing

The 51% hike in NZ milk powder prices is likely to hurt WW’s 2H13 GP margin, which we

forecast to drop from 43% in 1H13 to 34% in 2H13. However, WW has raised prices for its

Hot Kid Milk products by 5%-8% in October 2013 and we expect this will help insulate

margins somewhat in 2014E. Moreover, our Global Macro Research team projects that

prices will fall back to US$3,600/ton (-25% YoY) as high demand is partially relieved from a

pick-up in domestic raw milk production in China.

Exhibit 59: Our Global Macro Research team expects NZ milk powder prices to remain

elevated through 2014E, but will fall by 25% in 2015E to US$3,600/ton

Historical and forecast NZ milk powder prices (US$/Ton)

Source: Global Dairy Trade, Goldman Sachs Global Investment Research.

Exhibit 60: We forecast that WW’s Dairy Beverage GPM in 2H13E will dip to 34% before

recovering to 36%/38% in 1H/2H 2014E as the company’s 5%-8% Hot Kid Milk price hike in

October 2013 takes effect Historical and forecast NZ Milk Price (LHS, US$/Ton) vs WW GPM (RHS, %)

Source: Company Data, Global Dairy Trade, Goldman Sachs Global Investment Research.

-

1,000

2,000

3,000

4,000

5,000

6,000

(USD/ton)

US$4800/Ton,

+3% YoY

US$3600/Ton

-25% YoY

2013 Avg.

US$4663/Ton,

+51% YoY

38%39%

33%33% 34%

38%

34% 35%34%

33%

36%

42% 43%

34%

36%

38%

30%

35%

40%

45%

50%

55%

60%

1500

2100

2700

3300

3900

4500

5100

NZ Milk Price, 6mths delay WW GPM %



Focus on initial products bearing fruit

Under the Want Want Unite project announced during 1H13 results, management put forth

as its primary focus to enhance the success rate of new product launches in the market. As

per our monitoring of the market, we believe that two products (Yoghurt drinks and

Banana milk) that WW launched in the past 1-2yrs have been delivering stand-out results.

Firstly, in Yoghurt Drinks, while still a small category for WW, its market share as

monitored by Nielsen has nearly doubled since the launch of been noticeably improving

since launch of its Oligo enhanced prebiotic yoghurt drinks in 1H12 (see Exhibit 61).

Moreover, we have noticed that the ASP for the product has risen by 8.9% in Sept/Oct 2013

YoY, outperforming the market 3.9%.

Exhibit 61: Want Want yoghurt drink market share has

close to doubled in the past 22 months

Exhibit 62: WW has also been able to realize price hikes

above market

Source: Nielsen.

Source: Nielsen.

Banana milk

Another stand-out product that the company launched in 1H13 is the WW Banana Milk. We

note that there is already a high per capita consumption of fruit flavored milk in China.

However, we believe that if this flavor could help lift per capita consumption from

2.5litres/pp to Korea’s 3.0 litres/pp, then the incremental sales could be a sizeable US$2.5bn,

thereby providing a significant opportunity for WW given its early mover advantage.

0.91.0

1.11.1 1.2 1.2

1.31.3 1.3

1.3

1.51.6

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

ND 11 JF 12 MA 12 MJ 12 JA 12 SO 12 ND 12 JF 13 MA 13 MJ 13 JA 13 SO 13

Want Want Yoghurt Drink Value Mkt Share (%)

8.26

8.83

12.26

13.80

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

14.00

15.00

ND 11 JF 12 MA 12 MJ 12 JA 12 SO 12 ND 12 JF 13 MA 13 MJ 13 JA 13 SO 13

Market Average ASP (RMB/Kg) Want Want ASP (Rmb/Kg)



Exhibit 63: China already has a relatively high per capita

consumption of fruit juice flavored milk beverage, but

South Korea has the highest

Exhibit 64: We estimate that the popularization of

banana milk can bring an additional US$2.5bn sales to

China’s flavored milk market Current flavored milk market of US$13.4bn sales as per

Euromonitor, additional US$2.5bn sales incremental from

banana milk as per GS estimates



Significant room for sales productivity improvement ahead

We focus on the WW Unite project to lift overall sales efficiency. Below, we have compared

several key indicators of efficiency vs WW’s peers Tingyi and Hengan. Tingyi leads in all

the four KPIs: 1) sales per first tier distributor; 2) sales per staff; 3) sales per point of sale

(POS); 4) sales per household. For example, Tingyi has the highest staff productivity where

each staff generated RMB731K in revenues for the company in 2012, while for Want Want,

each staff only generated RMB378K of revenues, 48% lower. This could be partially

explained by Tingyi’s more automated operations where the entire instant noodles line

requires only to be operated by a small number of ground staff. In comparison, WW’s rice

crackers lines are still manual labor intensive and the company is looking to improve this

by enhanced automation.

Exhibit 65: Comparison of sales per first tier distributors –

Tingyi, Hengan, WW (2012)

Exhibit 66: Comparison of sales per staff – Tingyi,

Hengan, WW (2012)



2.5

0.5

3.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

China Japan South Korea

Per capita consumption of flavored milk drinks with fruit juice (Ltrs/pp)

1.7ltrs/pp is banana milk US$13.4bn

US$15.9bn

9,360

4,859

2,645

‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Tingyi Hengan WW

Sales per first tier distributor (Rmb'000)

731

441 378

‐

100

200

300

400

500

600

700

800

Tingyi Hengan WW

Sales per staff (Rmb'000)



Exhibit 67: Comparison of sales per Point Of Sale (POS) –

Tingyi, Hengan, WW (2012)

Exhibit 68: Comparison of sales per household – Tingyi,

Hengan, WW (2012)

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

Interestingly, if we drill down into the RMB171 per year household spend on total Want

Want products (see Exhibit 69) at ex-factory level, it would equate to RMB228 per year at

retail sales level assuming a 25% profit for distributors/retailers. This equates to RMB4.4

retail spend per week, or just above 2X 125ml Hot Kid Milk. In comparison, it appears that

most households consume up to 3.7 units of Tingyi’s RTD tea or instant noodles every

week vs just 1.7 units of UPC.

Exhibit 69: Units consumed by each household per week

Source: Company data, Kantar WorldPanel, Goldman Sachs Global Investment Research.

48,362

14,529

35,266

‐

10,000

20,000

30,000

40,000

50,000

60,000

Tingyi Hengan WW

Sales per POS controlled by company (Rmb'000)

392

125

171

‐

50

100

150

200

250

300

350

400

450

Tingyi Hengan WW

Sales per household (Rmb/household)

Tingyi UPC Hengan Want Want

Household spend p.a. : ex‐factory (Rmb) 392 181 125 171

Household spend p.a. : retail (Rmb) 522.83 241.87 166.04 227.52

Household spend per week: retail (Rmb) 10.05 4.65 3.19 4.38

Per unit price* 2.75 2.75 11.5 2.00

Estimated units consumed per week 3.7 1.7 0.3 2.2

Per unit price:

2) We assume RMB11.5/unit for Hengan, which is the retail price of an 18 piece Space‐7 sanitary napkin pack.

3) We assume RMB2.00/unit for Want Want, which is the retail price of Hot Kid Milk.

1) We assume RMB2.75/unit for Tingyi and UPC, which is the average of an RMB2.5/unit RTD tea drink and an

RMB3.0/unit instant noodles.



Valuation and earnings revisions

We value WW at 27.6X average of 2014E/2015E P/E. This implies a 15% premium on our target

Staples sector average of 24.0X due to the company’s first quartile CROCI relative to its Staples

peers. We lift WW’s TP from HK$12.50 to HK$13.90 on: 1) roll forward of the valuation period

from 2014E to average 2014/15E; and 2) -5%/-3%/+3% change to EPS due to softer macro

demand and higher raw materials cost pressure than previously anticipated in 2013E/2014E

while slightly higher GPM due to forecast correction in NZ milk powder prices in 2015E.

The company is currently trading at 22.2X 12-m fwd P/E. This is 1% discount to Staples

sector average of 22.5X, vs historical premium of 4%. We believe that WW should trade at

a premium to its Staples peers given first quartile CROCI of 37% in 2013E. Moreover, we

expect this premium to extend further as WW’s EPS CAGR accelerates to 24% in 2013E-

2015E from 14% in 2013E.

Exhibit 70: WW is trading at 22.2X 12-m fwd P/E, 1%

discount to Staples average vs historical 4% premium WW P/E premium/discount to sector

Exhibit 71: WW is trading at 22.2X 12-m fwd P/E vs

sector average of 22.5X WW historical P/E vs. sector P/E



Exhibit 72: WW is trading at 22.2X 12-m fwd P/E vs

historical average of 23.4X WW fwd 12-m P/E

Exhibit 73: We expect WW to re-rate as its CROCI outlook

improves WW EV/GCI vs. CROCI



-9%

21%

-1%

-20%

-10%

0%

10%

20%

30%

Ma

y-0

8

Sep

-08

Ja

n-0

9

Ma

y-0

9

Sep

-09

Ja

n-1

0

Ma

y-1

0

Sep

-10

Ja

n-1

1

Ma

y-1

1

Sep

-11

Ja

n-1

2

Ma

y-1

2

Sep

-12

Ja

n-1

3

Ma

y-1

3

Sep

-13

Ja

n-1

4

Want Want historical premium/discount to Staples sector

average (%)

10.0

15.0

20.0

25.0

30.0

35.0

May-0

8

Sep

-08

Ja

n-0

9

May-0

9

Sep

-09

Ja

n-1

0

May-1

0

Sep

-10

Ja

n-1

1

May-1

1

Sep

-11

Ja

n-1

2

May-1

2

Sep

-12

Ja

n-1

3

May-1

3

Sep

-13

Ja

n-1

4

Want Want historical P/E

Staples sector historical P/E

29.1

22.2

10

15

20

25

30

35

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Fwd 12m P/E

+ 1 STDV

+ 2 STDV

- 1 STDV

- 2 STDV

Average = 23.4x

30%

31%

32%

33%

34%

35%

36%

37%

38%

39%

2

3

4

5

6

7

8

9

10

11

12

Ma

r-0

8

Ju

l-0

8

No

v-0

8

Ma

r-0

9

Ju

l-0

9

No

v-0

9

Ma

r-1

0

Ju

l-1

0

No

v-1

0

Ma

r-1

1

Ju

l-1

1

No

v-1

1

Ma

r-1

2

Ju

l-1

2

No

v-1

2

Ma

r-1

3

Ju

l-1

3

No

v-1

3

EV/GCI CROCI



Summary financials

Exhibit 74: WW Summary Financials


Want Want (151.HK)USD mnDivisional P/L 1H11 2H11 1H12 2H12 1H13 2H13E 2011 2012 2013E 2014E 2015E 2013-2015E 2Yr CAGR

RevenuesRice crackers 278.6 538.2 277.2 534.9 320.1 618.4 816.8 812.1 938.5 1,051.8 1,193.6 13%Dairy Products and Beverages 623.4 770.3 796.2 912.4 942.2 1,109.1 1,393.6 1,708.6 2,051.2 2,507.4 3,026.8 21%Snack foods 369.3 353.7 450.3 379.5 488.2 415.2 723.0 829.8 903.4 1,019.5 1,161.7 13%Others 8.2 4.9 3.8 4.4 4.0 5.1 13.1 8.2 9.1 10.6 12.4 17%Total 1,279.5 1,667.0 1,527.5 1,831.1 1,754.5 2,147.8 2,946.5 3,358.7 3,902.2 4,589.3 5,394.6 18%

Operating IncomeRice crackers 35.9 124.6 34.4 111.8 37.8 117.0 160.5 146.3 154.9 187.2 216.1 18%Dairy Products and Beverages 126.7 147.9 187.7 246.3 272.8 227.8 274.6 434.0 500.6 581.8 817.3 28%Snack foods 62.9 69.8 101.9 82.4 116.9 99.9 132.7 184.3 216.8 260.0 302.1 18%Others -0.5 0.5 -0.4 -0.1 0.6 -1.2 0.0 -0.5 -0.6 -0.7 -0.7 10%Segment Total 225.1 342.7 323.7 440.4 428.1 443.6 567.8 764.1 871.6 1,028.3 1,334.7 24%Unallocated -21.5 -23.9 -25.9 -27.7 -30.8 -28.1 -45.3 -53.5 -58.9 -64.8 -71.3Group EBIT 203.6 318.9 297.8 412.7 397.3 415.5 522.5 710.5 812.8 963.5 1,263.5 25%

YoY Growth %

RevenuesRice crackers 18% 37% 0% -1% 15% 16% 30% -1% 16% 12% 13%Dairy Products and Beverages 29% 32% 28% 18% 18% 22% 31% 23% 20% 22% 21%Snack foods 35% 37% 22% 7% 8% 9% 36% 15% 9% 13% 14%Others -24% -20% -54% -10% 6% 15% -23% -37% 11% 17% 17%Total 28% 34% 19% 10% 15% 17% 31% 14% 16% 18% 18%

Operating IncomeRice crackers -29% 44% -4% -10% 10% 5% 17% -9% 6% 21% 15%Dairy Products and Beverages 42% 26% 48% 67% 45% -8% 33% 58% 15% 16% 40%Snack foods -12% 27% 62% 18% 15% 21% 5% 39% 18% 20% 16%Others -157% -178% -8% -125% -236% 915% n.a. n.a. n.a. n.a. n.a.Total 6% 32% 44% 28% 32% 1% 21% 35% 14% 18% 30%

Margins

GP MarginRice crackers 32.1% 40.4% 35.2% 41.0% 35.6% 40.0% 37.6% 39.0% 38.5% 39.5% 39.5%Dairy Products and Beverages 33.8% 33.1% 36.4% 42.2% 42.5% 34.2% 33.4% 39.5% 38.0% 37.0% 41.0%Snack foods 32.8% 36.3% 39.6% 41.3% 42.7% 43.4% 34.5% 40.4% 43.0% 44.0% 44.0%Others 8.0% 44.6% 15.8% 14.8% 21.4% 92.5% 21.7% 15.3% 61.2% -1.7% -50.1%Total 33.0% 36.2% 37.1% 41.6% 41.2% 37.8% 34.8% 39.5% 39.3% 39.0% 41.1%

EBIT MarginRice crackers 12.9% 23.1% 12.4% 20.9% 11.8% 18.9% 19.6% 18.0% 16.5% 17.8% 18.1%Dairy Products and Beverages 20.3% 19.2% 23.6% 27.0% 28.9% 20.5% 19.7% 25.4% 24.4% 23.2% 27.0%Snack foods 17.0% 19.7% 22.6% 21.7% 23.9% 24.1% 18.4% 22.2% 24.0% 25.5% 26.0%Others -5.8% 9.7% -11.5% -2.7% 14.7% -23.4% 0.0% -6.7% -6.6% -6.2% -5.9%Total 17.6% 20.6% 21.2% 24.0% 24.4% 20.7% 19.3% 22.7% 22.3% 22.4% 24.7%

Consolidated P&L 1H11 2H11 1H12 2H12 1H13 2H13E 2011 2012 2013E 2014E 2015E 2013-2015E 2Yr CAGRSales 1,279.5 1,667.0 1,527.5 1,831.1 1,754.5 2,147.8 2,946.5 3,358.7 3,902.2 4,589.3 5,394.6 18%COGS -857.5 -1,064.1 -961.2 -1,069.4 -1,030.8 -1,336.7 -1,921.6 -2,030.6 -2,367.4 -2,797.7 -3,177.2Gross Profit 421.9 602.9 566.3 761.8 723.7 811.1 1,024.9 1,328.1 1,534.8 1,791.6 2,217.4 20%SG&A -248.9 -314.8 -292.2 -371.8 -367.9 -418.3 -563.7 -664.0 -786.2 -905.2 -1,047.1Operating Profit 173.0 288.1 274.1 389.9 355.7 392.8 461.1 664.1 748.6 886.4 1,170.4 25%Other income/expenses 30.6 30.7 23.7 22.8 41.5 22.6 61.3 46.4 64.2 77.1 93.1Reported EBIT 203.6 318.9 297.8 412.7 397.3 415.5 522.5 710.5 812.8 963.5 1,263.5 25%D&A -35.5 -34.8 -42.3 -45.5 -48.3 -53.4 -72.3 -87.8 -101.7 -117.9 -137.7EBITDA 239.1 353.7 340.1 458.2 445.6 468.8 594.7 798.4 914.4 1,081.5 1,401.2 24%Net finance costs 5.5 10.2 19.8 18.0 21.9 20.8 15.7 37.8 42.7 48.5 50.5Other non-operating income (expense 0.0 0.1 0.0 0.7 0.6 -0.6 0.1 0.6 0.0 0.0 0.0Pretax income 209.1 329.1 317.6 431.4 419.9 435.6 538.2 749.0 855.5 1,012.0 1,313.9 24%Provisions for taxes -42.0 -76.6 -86.6 -108.4 -112.4 -110.3 -118.7 -195.0 -222.7 -263.4 -342.0Minority interest (I/S item) 0.0 -0.1 -0.1 0.0 0.2 -0.4 -0.1 -0.2 -0.2 -0.2 -0.3Reported NPAT 167.0 252.4 230.9 322.9 307.6 325.0 419.5 553.8 632.6 748.3 971.6 24%

EPS - Diluted (US$/Sh) 0.013 0.019 0.017 0.024 0.023 0.025 0.032 0.042 0.048 0.057 0.073

YoY Growth %Sales 27.6% 34.3% 19.4% 9.8% 14.9% 17.3% 31.3% 14.0% 16.2% 17.6% 17.5%GP 10.5% 30.2% 34.2% 26.3% 27.8% 6.5% 21.3% 29.6% 15.6% 16.7% 23.8%SG&A 21.8% 30.0% 17.4% 18.1% 25.9% 12.5% 26.2% 17.8% 18.4% 15.1% 15.7%OP -2.4% 30.5% 58.5% 35.3% 29.8% 0.7% 15.9% 44.0% 12.7% 18.4% 32.0%EBIT 4.2% 30.8% 46.3% 29.4% 33.4% 0.7% 19.0% 36.0% 14.4% 18.6% 31.1%NPAT 3.6% 28.1% 38.2% 27.9% 33.2% 0.6% 17.0% 32.0% 14.2% 18.3% 29.8%

MarginsGP 33.0% 36.2% 37.07% 41.6% 41.2% 37.8% 34.8% 39.5% 39.3% 39.0% 41.1%EBIT 15.9% 19.1% 19.5% 22.5% 22.6% 19.3% 17.7% 21.2% 20.8% 21.0% 23.4%OP 13.5% 17.3% 17.9% 21.3% 20.3% 18.3% 15.6% 19.8% 19.2% 19.3% 21.7%NPAT 13.1% 15.1% 15.1% 17.6% 17.5% 15.1% 14.2% 16.5% 16.2% 16.3% 18.0%

-11.1% -12.0% -12.5% -11.5%SG&A/Sales -19.5% -18.9% -19.1% -20.3% -21.0% -19.5% -19.1% -19.8% -20.1% -19.7% -19.4%Effective tax rate (%) -20% -23% -27% -25% -27% -25% 22% 26% 26% 26% 26%



Hengan (1044.HK): Sanitary napkins feel the pressure; maintain Sell


Despite the stock’s recent pull-back, we believe that the market is still too

optimistic on the competitive risks confronting Hengan in 2014E/2015E. In

addition to tissues and diapers, the sanitary napkins market—which

accounts for over 50% of Hengan’s group OP over 2013E-2015E— is

witnessing increasing competitive pressure. Following Unicharm’s

upgrade of its product quality in 1H13 which Hengan quickly matched

without hiking prices, Kimberly Clark, which grew diaper sales by 35% yoy

in 2013, staged a major re-launch of its feminine care products in 4Q13.

Kimberly Clark recently re-launched its premium U by Kotex portfolio,

which targets the same audience as Hengan’s Space-7. We are currently

forecasting Sanitary Napkins for Hengan to still see some margin

improvement from 43.1% in 2013E to 44.5% by 2015E. However, if

competition does mount, there could be downside risk to our forecasts.

We forecast 14% 2yr sales CAGR and 13% EPS CAGR for Hengan, as we

expect the group OPM to be relatively flat. Our revised TP of HK$82.90

implies 1% potential downside. Maintain Sell. We revise our 2013E-2015E

earnings by +4%/-4%/-5% on lower sales growth but better margins in

2013E before deteriorating in 2014E/2015E. Our estimates are now -12%/-

10% vs Bloomberg consensus EPS in 2014/2015.

Catalyst

Our recently updated China Tissue Industry supply-demand model

suggests that excess capacity will escalate in 2014E/2015E. For the top 4

competitors (Hengan, APP, Vinda, Zhongshun) that have deeper pockets

to compete, total announced capacity additions, as per CNHPIA, will

more than double from 650K tons in 2013 to 1.35mn tons in 2014. As

such, excess capacity is likely to reach 2.9mn tons in 2014 vs just 1.6mn

in 2011. For Hengan, management noted during its recent pre-results

black-out call that it may increase its production of OEM tissues (which

is at lower margins) and/or begin discounting its primary brand Heartex

to combat competition. While some investors has previously expected

falling pulp prices to provide some relief, GS LatAm Paper analyst

Marcelo Aguiar has a constructive view on pulp prices in 2014E/2015E vs

the street, which is negative for Hengan. As for Diapers, we believe that

a slowdown in the company’s push into mother/baby stores (now 10K

stores vs market 55K) may be conservative, in our view, and will hamper

Hengan’s long-term growth as mother/baby stores continue to take

share from modern trade.

Valuation

We value the stock at 22.8X (unchanged) average 2014E/2015E P/E

(previously 2014E) as we apply a net 5% discount to our target staples

sector P/E average of 24.0X. The net 5% discount is calculated by a 15%

premium for Hengan’s 1st quartile CROCI, offset by a 20% discount

given its 4th quartile 2-yr EPS growth relative to peers.

Key risks

Upside risks: Better than expected top-line growth and margins. Higher

than expected fall in pulp prices benefiting Hengan’s margins.

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Hengan International (1044.HK)


Key data Current

Price (HK$) 83.70




12/12 12/13E 12/14E 12/15E

EPS (HK$) New 2.86 3.14 3.29 3.98

EPS revision (%) 0.0 4.2 (4.2) (4.9)

EPS growth (%) 32.7 9.6 5.0 20.9

EPS (dil) (HK$) New 2.86 3.14 3.29 3.98

P/E (X) 25.8 26.7 25.4 21.0

P/B (X) 6.5 6.5 6.1 5.4

EV/EBITDA (X) 18.3 18.6 17.4 14.2

Dividend yield (%) 2.3 2.2 2.3 2.8

ROE (%) 26.6 25.9 24.8 27.1

CROCI (%) 25.9 24.4 23.1 25.0

50

55

60

65

70

75

80

70

75

80

85

90

95

100



Hengan International (L) MSCI China (R)


Absolute (6.7) (5.0) 3.5

Rel. to MSCI China (1.3) (7.9) 14.1




Hengan International: Summary financials

Profit model (HK$ mn) 12/12 12/13E 12/14E 12/15E Balance sheet (HK$ mn) 12/12 12/13E 12/14E 12/15E


Cost of goods sold (10,209.0) (11,609.3) (13,347.2) (14,786.1) Accounts receivable 1,870.5 2,531.6 2,625.1 3,438.7

SG&A (4,139.2) (4,963.2) (5,766.4) (6,787.6) Inventory 3,830.5 3,925.8 5,064.8 4,976.0



EBITDA 5,063.7 5,592.5 6,034.8 7,267.8 Net PP&E 10,149.7 10,985.0 12,163.4 12,576.7



Interest income 275.6 497.5 546.0 546.0 Other long-term assets 2,273.0 2,280.6 2,288.6 2,296.9




Pretax profits 4,539.0 5,107.1 5,432.4 6,566.8 Short-term debt 7,440.6 8,589.7 8,589.7 8,589.7

Income tax (1,001.2) (1,225.7) (1,358.1) (1,641.7) Other current liabilities 1,577.9 1,602.3 1,821.7 2,070.3


Long-term debt 3,787.2 7,019.1 7,019.1 7,019.1

Net income pre-preferred dividends 3,518.7 3,860.5 4,052.4 4,898.6 Other long-term liabilities 187.9 178.5 169.6 161.1






EPS (basic, pre-except) (HK$) 2.86 3.14 3.29 3.98 Minority interest 330.0 350.9 372.8 399.3

EPS (basic, post-except) (HK$) 2.86 3.14 3.29 3.98

EPS (diluted, post-except) (HK$) 2.86 3.14 3.29 3.98 Total liabilities & equity 29,204.8 35,788.6 37,288.6 40,119.5

DPS (HK$) 1.70 1.86 1.95 2.36

Dividend payout ratio (%) 59.4 59.4 59.4 59.4 BVPS (HK$) 11.45 12.78 13.78 15.54





EBIT growth 42.9 8.3 6.6 21.8 ROA (%) 13.4 11.9 11.1 12.7





EBIT margin 24.3 23.1 21.6 22.9 Net debt/equity (%) 11.7 6.7 11.4 1.5


Cash flow statement (HK$ mn) 12/12 12/13E 12/14E 12/15E Valuation 12/12 12/13E 12/14E 12/15E




Net (inc)/dec working capital (1,156.7) (211.9) (988.6) (78.2) EV/EBITDA (X) 18.3 18.6 17.4 14.2

Other operating cash flow 14.5 35.9 35.6 35.2 EV/GCI (X) 5.3 5.4 4.7 4.4





Others (524.4) (3,000.0) 0.0 0.0


Dividends paid (common & pref) (1,843.5) (2,214.3) (2,809.7) (2,732.8)

Inc/(dec) in debt 4,000.8 4,381.0 0.0 0.0


Other financing cash flows (834.5) 2,990.6 (8.9) (8.5)

Cash flow from financing 1,323.3 5,157.4 (2,818.6) (2,741.3)

Total cash flow 1,286.2 4,994.8 (908.4) 1,694.7 Note: Last actual year may include reported and estimated data.




Tissue oversupply to deteriorate further in FY14E/FY15E

We expect margin pressure for Hengan’s tissue segment to increase significantly in 2014.

The key reason is that industry supply will accelerate in 2014, driving further deterioration

of the oversupply situation in China. More specifically, the announced capacity for the top 4

competitors (Hengan, APP, Vinda and Zhongshun) as per CNHPIA is expected to double

from 650K tons in 2013 to 1.35mn tons of new capacity in 2014. For the whole market, we

are expecting c.net 1mn tons of new capacity in 2014E after accounting for elimination of

400K tons of substandard capacity from the market. This will take the market to a total of

2.9mn tons of excess capacity vs just 1.6mn tons in 2011. We expect that the oversupply

will be carried through to 2015E as the pipeline of capacity additions continues.

Exhibit 75: Latest China S/D model suggests widening excess capacity

Source: CNHPIA, Company data, Goldman Sachs Global Investment Research.

6.26.9

7.78.7

9.610.4

5.2 5.8

6.3 6.6 7.3

8.0

4.75.3 5.6

6.16.8

7.4

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2010 2011 2012 2013E 2014E 2015E

Estimated Industry Capacity Estimated Industry Production

Estimated Industry Demand

1.6mn tons

excess capacity

1.2mn tons/18%

over supply

1.6mn tons/20%

over supply

(mn tons)

2.9mn tons

excess capacity

3.0mn tons

excess capacity

(mn tons)



Exhibit 76: We forecast another 960K tons of new tissue capacity to come on board in

2014E GS Detailed China Tissue S/D model

Source: CNHPIA, Company data, Goldman Sachs Global Investment Research.

On the ground evidence of increasing price pressure, and in-particular for facial tissues

(c.60-65% of Hengan’s tissue segment sales) are mounting. The latest Nielsen data shows

that while the facial tissue segment continues to experience high volume growth, the

industry average ASP has declined 5.7% (the lowest among our monitored staples

categories) in the past 12 months (Exhibit 78).

Exhibit 77: Facial tissue segment growth remains high as

consumer trade-up occurs. But intensifying erosion is

leading to worsening price discounts Nielsen’s facial tissue category rolling 12mths value, ASP,

volume growth yoy

Exhibit 78: Facial tissue ASP erosion is one of the worst

among Staples in 2013

Source: Nielsen.

Source: Nielsen.

Consequently, we forecast Tissue 2-yr sales CAGR of 13% in 2013E-2015E and OP margin in

2014E to erode from 12.1% in 2013E to just 8.4% in 2014E. This reflects the company’s

strategies to potentially: 1) increase higher volumes of OEM, which we believe will be at

lower margins to its current branded portfolio; and 2) begin discounting on its main

Heartex/Mind Upon Mind brand. We expect the OP margin to rebound back to 9.9% in

2015E as the company enjoys the benefits of lower pulp prices out of South America.

Supply (mn tons) 2010 2011 2012 2013E 2014E 2015EOpening capacity 6.08 6.17 6.86 7.73 8.68 9.64 Add: New capacity 0.41 0.88 1.27 1.35 1.36 1.20 Less: Retirement -0.32 -0.19 -0.40 -0.40 -0.40 -0.40 Net capacity 6.17 6.86 7.73 8.68 9.64 10.43 Utilization 85.0% 85.0% 80.0% 80.0% 80.0% 80.0%Total Production 5.25 5.82 6.27 6.56 7.33 8.03 ...New Capacity 0.68 0.87 0.95 0.96 0.80

DemandPer capita consumption (kg) 3.48 3.90 4.20 4.49 4.94 5.39 ...yoy growth 12% 8% 7% 10% 9%China population (mn) 1,340 1,347 1,354 1,361 1,367 1,374 Total demand (mn tons) 4.66 5.25 5.69 6.11 6.76 7.40 ...New demand 0.59 0.43 0.43 0.65 0.65

Over/(Under) Capacity 1.51 1.60 2.04 2.56 2.88 3.03 As a % of Net Capacity 24% 23% 26% 30% 30% 29%

(10.0)

(5.0)

0.0

5.0

10.0

15.0

20.0

25.0

Facial Tissue Value Growth (%) ASP Growth (%)

Volume Growth (%)

(5.7)

(0.2)

3.2

8.5

(8.0)

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

Jan‐13 Mar‐13 May‐13 Jul‐13 Sep‐13 Nov‐13

Rolling 12mths ASP growth YoY (%)

Facial Tissue Bathroom Tissue Diaper Sanitary Protection



Diapers – structural disadvantage in channel will continue to hurt

Hengan’s competitive position in diapers is structurally challenged in our view. Admittedly,

the industry growth will be aided by increasing per capita penetration and the recent

loosening of the one-child policy. However, we think Hengan’s ability to capitalize on this

growth opportunity will be hampered by the fact that it: 1) does not have a quality

advantage over peers that are priced similarly; 2) is a late entrant into new-found sales

channels (e-commerce and mother/baby stores) that are taking share from traditional

supermarkets/hypermarkets. As seen in the latest Nielsen market share, Hengan’s market

share has fallen from close to 20% in March/April 2009 to 11.9% in September/October

2013. While Hengan has been working hard to premiumize its products via quality

upgrades, it remains in more mass market price points, and does not have a successful

premium product offering to capture the customer trading up. In comparison, US

competitor Kimberly Clark has recently launched a super-premium product to complement

its more mainstream price-point products and has been taking market share.

Exhibit 79: Hengan continues to lose market share in

Diapers, while Kimberly Clark has been gaining share Nielsen Diaper category value market share (%)

Exhibit 80: Hengan’s diapers’ ASP has been improving as

upgraded Super-Absorbent series improves in

contribution Nielsen Diaper category ASP trend (RMB/unit)

Source: Nielsen.

Source: Nielsen.

On the increasing importance of e-commerce and mother/baby store channels, i.e. where

Hengan is typically not strong, the two channels made up for 50.2% of the market in May

2013, according to Kantar WorldPanel vs 43.9% a year ago. We understand that these two

channels combined are still low single digits of Hengan’s diaper sales. Hengan entered into

10K mother/baby stores in 2H13 vs a total market of c.55K stores. However, these stores

will generate an initial loss as the entry expenses are now high given the proven retail

format. Moreover, in order to fight for shelf space, Hengan will need to squeeze a

competitor off the shelves and the mother/baby stores are generally unwilling to do that

unless they secure very favorable terms from Hengan, which will hurt Hengan’s diaper

margins. In what may be reflective of the company’s unwillingness to spend, it has pulled

back on its expansion plans in the mother/baby store channel, to a more gradual progress.

We believe that this could affect the company’s longer term top-line growth.

11.9%

36.6%

15.5%

11.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

MA 10

MJ 1

0

JA 10

SO 10

ND 10

JF 11

MA 11

MJ 1

1

JA 11

SO 11

ND 11

JF12

MA12

MJ12

JA12

SO12

ND12

JF13

MA13

MJ13

JA13

SO13

Value M

kt Share (%)

KIMBERLY CLARK PROCTER & GAMBLE

UNI‐CHARM HENG AN

1.13

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

MA 10

MJ 1

0

JA 10

SO 10

ND 10

JF 11

MA 11

MJ 1

1

JA 11

SO 11

ND 11

JF12

MA12

MJ12

JA12

SO12

ND12

JF13

MA13

MJ13

JA13

SO13

KIMBERLY CLARK PROCTER & GAMBLE UNI‐CHARM

HENG AN MARKET



Exhibit 81: E-Commerce and Mother/Baby stores now account for up to half of baby-

product sales, according to Kantar WorldPanel Baby Product Value contribution

Source: Kantar WorldPanel.

Pulp price correction delayed

Our Latin American Paper analyst Marcelo Aguiar is more positive than consensus on

global pulp prices in 2014E/2015E because of a tighter market balance at least through

3Q14. For hardwood pulp prices, he is looking for an average price decline of 2% in 2014E

and 9% in 2015E. The key difference here is that Marcelo Aguiar believes that the market is

under-appreciating the complexity required in capacity ramp ups of plants that are

expected to bring on new capacity. Moreover, one of the major mills in Uruguay - Montes

del Plata has been delayed from 2Q13 to 1Q14. Including ramp up required, we see pulp

prices holding stable in 1H14. From 2H14, the ramp-up of the Maranhao/Montes Del Plata

mills, totally 2.8mn tons, should lead the market to weaken more noticeably.

Exhibit 82: Our Latin American Paper Analyst Marcelo Aguiar has a bullish outlook on pulp

prices in 2014E/2015E Hardwood/Softwood pulp prices Europe list price (US$/ton)


12.9% 10.7%

28.5%23.2%

29.5%

28.8%

14.4%21.4%

3.7% 5.5%3.7% 3.5%7.2% 6.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

May 2012 May 2013

Supermarket/CVS Hypermarket Baby Store

Internet Oversea Purchase Gift

Others

Hardwood pulp 2013 2014E 2015E

End-of-period 770 729 739

Change, seq -1% -5% 1%

Average 792 777 709

Change, seq 4% -2% -9%

Softwood pulp 2013 2014 2015

End-of-period 905 849 849

Change, seq 12% -6% 0%

Average 857 905 819

Change, seq 5% 6% -10%



Hengan valuation

We value Hengan using 22.8X average of 2014E/2015E P/E. This implies a 5% discount to our

Staples target sector average of 24.0X. This is calculated as the net of: 1) 20% discount for the

stock’s 4th quartile 2013E-2015E EPS CAGR among peers; and 2) 15% premium for its first

quartile CROCI. Our TP for Hengan has increased from HK$78.30 to HK$82.90 because: 1) we

have rolled forward the valuation period from 2014E to average 2014E-2015E; and 2) we have

revised our 2013E-2015E EPS by +4%/-4%/-5%. The key reasons for this include better than

expected protection of margins in 2H13E while we expect competitive intensity to worsen in

2014E/2015E as strong competitors are stepping up their market investments not only in

Tissues but also Diapers and most recently Sanitary Napkins.

The company is trading at 12-m fwd P/E of 24.7x, a 10% premium to Staples sector average of

22.5X vs historical average of 1% premium. We believe that the de-rating is warranted as we

expect Hengan’s CROCI to fall due to higher capex being spent on lower margin products i.e.

Tissues and competitive tension in Diapers and Sanitary Napkins may pose margin risk.

Exhibit 83: Hengan is trading at 10% premium to sector

vs historical 1% premium Hengan P/E premium/discount to sector

Exhibit 84: Hengan is trading at 24.7x vs staples sector

average of 22.5X 12-m fwd P/E Hengan historical P/E vs. sector P/E



Exhibit 85: Hengan is trading at 24.7x 12-m fwd P/E vs

historical average of 24.1x Hengan fwd 12-m P/E

Exhibit 86: We expect Hengan to de-rate as its CROCI

outlook is hampered by margin erosion due to

intensifying competition Hengan EV/GCI vs. CROCI



-27%

22%

15%

10%

-30%

-20%

-10%

0%

10%

20%

30%

Ja

n-0

7

Ju

l-0

7

Ja

n-0

8

Ju

l-0

8

Ja

n-0

9

Ju

l-0

9

Ja

n-1

0

Ju

l-1

0

Ja

n-1

1

Ju

l-1

1

Ja

n-1

2

Ju

l-1

2

Ja

n-1

3

Ju

l-1

3

Ja

n-1

4

Hengan historical premium/discount to Staples sector average

(%)

10.0

15.0

20.0

25.0

30.0

35.0

40.0Ja

n-0

7

Ju

l-0

7

Ja

n-0

8

Ju

l-0

8

Ja

n-0

9

Ju

l-0

9

Ja

n-1

0

Ju

l-1

0

Ja

n-1

1

Ju

l-1

1

Ja

n-1

2

Ju

l-1

2

Ja

n-1

3

Ju

l-1

3

Ja

n-1

4

Hengan historical P/E Staples sector historical P/E

32.1

24.7

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Jan-

06

May

-06

Sep

-06

Jan-

07

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

Sep

-12

Jan-

13

May

-13

Sep

-13

Jan-

14

Fwd 12m P/E

Hist. avg 24.1x

+ 1 STDV

+ 2 STDV

- 1 STDV

- 2 STDV

0%

5%

10%

15%

20%

25%

30%

35%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Ja

n-0

7

Ju

l-0

7

Ja

n-0

8

Ju

l-0

8

Ja

n-0

9

Ju

l-0

9

Ja

n-1

0

Ju

l-1

0

Ja

n-1

1

Ju

l-1

1

Ja

n-1

2

Ju

l-1

2

Ja

n-1

3

Ju

l-1

3

Ja

n-1

4

EV/GCI CROCI



Exhibit 87: Hengan Summary Financials


Hengan International (1044.HK)HK$ mnDivisional P/L 1H11 2H11 1H12 2H12 1H13 2H13E FY11 FY12 FY13E FY14E FY15E 13-'15 2yr CAGRRevenues (external only)Sanitary Napkins 1,848 2,266 2,265 2,651 2,860 3,172 4,114 4,915 6,032 7,288 8,557 19.1%Diapers 1,232 1,491 1,321 1,364 1,432 1,510 2,723 2,685 2,942 3,263 3,635 11.2%Tissue Papers 3,920 4,098 4,411 4,736 5,065 5,179 8,018 9,147 10,244 11,445 13,011 12.7%Food & Snacks 859 683 809 578 932 678 1,543 1,387 1,609 1,899 2,279 19.0%Skincare 330 323 236 153 126 146 653 389 272 191 133 -30.0%

8,189 8,862 9,042 9,483 10,415 10,686 17,051 18,524 21,100 24,085 27,615 14.4%

Operating ProfitSanitary Napkins 626 831 931 1,198 1,199 1,401 1,456.7 2,129 2,599 3,206 3,804 21.0%Diapers 158 202 271 334 304 327 360.0 604 631 727 850 16.0%Tissue Papers 402 382 700 711 675 562 783.4 1,411 1,237 962 1,284 1.9%Food & Snacks 63 26 41 11 57 51 88.5 52 108 137 175 27.6%Skincare 35 156 33 14 10 14 191.3 46 25 19 15 -22.6%

1,284 1,596 1,975 2,267 2,245 2,355 2,880 4,241 4,600 5,051 6,129 15.4%Other gains 82 231 54 273 137 213 313 327 350 227 292 Unallocated -16 -26 -22 -43 -44 -28 -42 -65 -72 -79 -87 Group OP 1,349 1,801 2,006 2,497 2,337 2,541 3,151 4,503 4,878 5,199 6,333 13.9%

YoY Growth (%)

Revenues (external only)Sanitary Napkins 28% 31% 23% 17% 26% 20% 30% 19% 23% 21% 17%Diapers 8% 14% 7% -9% 8% 11% 11% -1% 10% 11% 11%Tissue Papers 34% 29% 13% 16% 15% 9% 31% 14% 12% 12% 14%Food & Snacks 28% 28% -6% -15% 15% 17% 28% -10% 16% 18% 20%Skincare 32% 30% -28% -53% -46% -5% 31% -40% -30% -30% -30%

27% 27% 10% 7% 15% 13% 27% 9% 14% 14% 15%Operating ProfitSanitary Napkins 26% 30% 49% 44% 29% 17% 28% 46% 22% 23% 19%Diapers -43% -10% 71% 65% 12% -2% -28% 68% 5% 15% 17%Tissue Papers -30% -2% 74% 86% -4% -21% -19% 80% -12% -22% 34%Food & Snacks -5% -20% -34% -59% 39% 382% -10% -42% 109% 27% 28%Skincare 87% 111% -7% -91% -68% 4% 106% -76% -47% -22% -23%

-10% 17% 54% 42% 14% 4% 3% 47% 8% 10% 21%

Margins

Gross ProfitSanitary Napkins 59.6% 61.1% 64.1% 67.3% 65.1% 67.0% 60.4% 65.8% 66.1% 67.0% 68.0%Diapers 35.3% 35.1% 41.6% 44.2% 43.5% 44.0% 35.2% 42.9% 43.8% 44.8% 46.4%Tissue Papers 31.4% 31.4% 36.1% 34.7% 34.9% 31.3% 31.4% 35.4% 33.1% 30.4% 32.9%Food & Snacks 32.0% 32.9% 37.9% 38.6% 42.6% 44.0% 32.4% 38.2% 43.2% 43.2% 43.2%Skincare 35.7% 68.6% 41.7% 40.7% 48.9% 49.1% 52.0% 41.3% 49.0% 49.5% 50.0%

38.6% 41.1% 44.2% 45.5% 45.2% 44.7% 39.9% 44.9% 45.0% 44.6% 46.5%

Operating ProfitSanitary Napkins 33.9% 36.7% 41.1% 45.2% 41.9% 44.2% 35.4% 43.3% 43.1% 44.0% 44.5%Diapers 12.9% 13.5% 20.5% 24.4% 21.2% 21.7% 13.2% 22.5% 21.5% 22.3% 23.4%Tissue Papers 10.2% 9.3% 15.9% 15.0% 13.3% 10.9% 9.8% 15.4% 12.1% 8.4% 9.9%Food & Snacks 7.3% 3.8% 5.1% 1.8% 6.1% 7.5% 5.7% 3.7% 6.7% 7.2% 7.7%Skincare 10.7% 48.3% 13.8% 8.8% 8.2% 9.7% 29.3% 11.9% 9.0% 10.0% 11.0%

15.7% 18.0% 21.8% 23.9% 21.6% 22.0% 16.9% 22.9% 21.8% 21.0% 22.2%

Consolidated P/L (HK mn 1H11 2H11 1H12 2H12 1H13 2H13E FY11 FY12 FY13E FY14E FY15E 13-'15 2yr CAGR

Revenue 8,189 8,862 9,042 9,483 10,415 10,686 17,051 18,524 21,100 24,085 27,615 14.4%COGS -5,029 -5,221 -5,043 -5,166 -5,704 -5,906 -10,250 -10,209 -11,609 -13,347 -14,786 GP 3,160 3,640 3,999 4,316 4,711 4,780 6,800 8,315 9,491 10,738 12,829 Other income 82 231 54 273 137 213 313 327 350 227 292 SG&A (excl. other rev/exp -1,892 -2,070 -2,046 -2,093 -2,510 -2,453 -3,963 -4,139 -4,963 -5,766 -6,788 EBIT 1,349 1,801 2,006 2,497 2,337 2,541 3,151 4,503 4,878 5,199 6,333 13.9%D&A -212 -232 -261 -300 -348 -366 -443 -561 -715 -836 -935 EBITDA 1,561 2,033 2,267 2,797 2,685 2,907 3,594 5,064 5,593 6,035 7,268 14.0%Net Finance Exp. 65 40 46 -10 130 99 105 36 229 234 234 Profit Before Tax 1,414 1,841 2,052 2,487 2,467 2,640 3,255 4,539 5,107 5,432 6,567 13.4%Tax -206 -363 -411 -591 -584 -625 -570 -1,001 -1,226 -1,358 -1,642 Minority Interest -26 -11 -15 -4 -24 -11 -37 -19 -21 -22 -26 NPAT Attributable to S/h 1,182 1,467 1,626 1,892 1,859 2,004 2,649 3,519 3,860 4,052 4,899 12.6%One-off's after tax - - - - - - - - - - - Recurring NPAT 1,182 1,467 1,626 1,892 1,859 2,004 2,649 3,519 3,860 4,052 4,899 12.6%

EPS - Diluted (HKD/Sh) 0.96 1.19 1.32 1.54 1.51 1.63 2.16 2.86 3.14 3.29 3.98 12.6%

Growth Sales 27% 27% 10% 7% 15% 13% 27% 9% 14% 14% 15%GP 8% 21% 27% 19% 18% 11% 14% 22% 14% 13% 19%SG&A 24% 24% 8% 1% 23% 17% 24% 4% 20% 16% 18%OP (GP less SG&A) -9% 16% 54% 42% 13% 5% 3% 47% 8% 10% 22%EBIT -9% 19% 49% 39% 17% 2% 5% 43% 8% 7% 22%Recurring NPAT -2% 19% 38% 29% 14% 6% 9% 33% 10% 5% 21%

MarginsGP 38.6% 41.1% 44.2% 45.5% 45.2% 44.7% 39.9% 44.9% 45.0% 44.6% 46.5%OP (GP less SG&A) 15.5% 17.7% 21.6% 23.4% 21.1% 21.8% 16.6% 22.5% 21.5% 20.6% 21.9%EBIT 16.5% 20.3% 22.2% 26.3% 22.4% 23.8% 18.5% 24.3% 23.1% 21.6% 22.9%Recurring NPAT 14.4% 16.6% 18.0% 20.0% 17.8% 18.8% 15.5% 19.0% 18.3% 16.8% 17.7%

SG&A/Sales -23.1% -23.4% -22.6% -22.1% -24.1% -23.0% -23.2% -22.3% -23.5% -23.9% -24.6%Effective Tax Rate -15% -20% -20% -24% -24% -24% -18% -22% -24% -25% -25%



Tsingtao (600600.SS, Buy; 0168.HK, Neutral): Price discounts fading


We are increasingly constructive on China’s beer industry as we believe

that current industry consolidation (4-firm concentration ratio of c.60%)

is at a point where industry profitability may take a turn for the better. In

the US during 1965-1974, when the 4-firm concentration ratio increased

from c.30% to c. 50%, the beer industry enjoyed a period of fast margin

expansion as national competitors were able to leverage their scaled

advertising advantage to force out the smaller companies, reducing

competition. In China, we believe that the recent phasing out and/or

consolidation of small local companies as well as a clear trend of

premiumization will turn market competition in 2014E/2015E to become

more brand driven as opposed to price-led. Tsingtao’s recent bid for the

top ad-spot during CCTV’s news hour; ABI’s Harbin Beer appointment of

British advertising agency Bartle Bogle Hegarty (BBH) as its new creative

partner and Yanjing’s move to increase prices by 15%-20%, the first time

since January 2011, supports our view. As brand-led competition should

benefit national companies most, due to scalability, we forecast

Tsingtao’s group EBITDA margins to improve from 10.3% in 2013E to

11.7% by 2015E. We do expect the margin expansion to be more gradual

vs the US due to: 1) still higher degree of brand proliferation; and 2)

global brewers pushing into the market.

As such, we forecast 2013E-2015E 2-yr sales CAGR of 14%, but EBITDA

growth of 21.5%, as we expect group EBITDA margins to improve from

10.3% in 2013E to 11.7% in 2015E. Between Tsingtao (H) and Tsingtao

(A), we maintain our Buy on Tsingtao (A) and Neutral on Tsingtao (H) as

after a significant run in Tsingtao (H), the upside potential is limited. For

Tsingtao (A), the A/H price disparity would add another 2% implied

upside, driving total upside potential of 19%.

Catalysts

We revise Tsingtao’s 2013-2015E EPS by -8%/-6%/0% to factor in slightly

lower sales and higher SG&A in 2013E as the company steps up brand

investment. We expect that in 2014E/2015E, selling expenses will reduce

by 1pp of sales, from 20.7% in 2013E to 19.7% by 2015E driving

accelerated EBITDA growth. A fall in barley prices in 2014E will further

reverse margin pressure seen over the past two years.

Valuation

We have increased our 12-m TP for Tsingtao (H) from HK$55.10 to

HK$65.00 and for Tsingtao (A) from RMB44.40 to RMB50.70. This is

premised on: 1) a roll forward of both stock’s valuation period from

2014E to average 2014E/2015E; and 2) a 15X (unchanged) EV/EBITDA

valuation multiple, which is in-line with the stock’s average since 2009.

This implies 23.0X/22.6X average 2014E/2015E P/E for Tsingtao (H)/(A).

Key risks

Upside/Downside: better/worse than expected competition driving prices

and margin up/down. Better/worse than expected raw material inflation.

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Tsingtao Brewery (A) (600600.SS)


Key data Current

Price (Rmb) 42.55

12 month price target (Rmb) 50.70

Market cap (Rmb mn / US$ mn) 57,484.3 / 9,480.5


12/12 12/13E 12/14E 12/15E

EPS (Rmb) New 1.30 1.39 1.74 2.10

EPS revision (%) 0.0 (7.9) (5.7) 0.4

EPS growth (%) (1.2) 6.5 25.7 20.3

EPS (dil) (Rmb) New 1.30 1.59 1.74 2.10

P/E (X) 26.0 30.7 24.4 20.3

P/B (X) 3.7 4.0 3.6 3.2

EV/EBITDA (X) 14.7 17.3 13.7 11.2

Dividend yield (%) 1.2 1.1 1.3 1.5

ROE (%) 14.9 16.0 15.5 16.5

CROCI (%) 11.7 13.9 13.6 14.7

5,400

5,600

5,800

6,000

6,200

6,400

6,600

6,800

7,000

34

36

38

40

42

44

46

48

50



Tsingtao Brewery (A) (L) FTSE Xinhua 600 Index (R)


Absolute (0.8) (1.5) 21.5

Rel. to FTSE Xinhua 600 Index 2.0 (1.1) 42.7




Tsingtao Brewery (A): Summary financials




SG&A (6,200.3) (7,288.6) (8,291.8) (9,083.0) Inventory 2,360.1 2,336.3 2,753.2 3,150.9



EBITDA 2,785.3 2,992.5 3,716.4 4,417.7 Net PP&E 8,343.7 9,104.3 9,796.7 10,421.0

Depreciation & amortization (839.0) (915.5) (1,000.9) (1,086.3) Net intangibles 2,546.6 2,697.2 2,830.5 2,946.7


Interest income 282.2 320.0 365.0 425.0 Other long-term assets 2,457.6 2,638.6 2,819.7 3,000.7



Others 344.7 (48.4) 220.9 200.8 Accounts payable 2,075.3 2,479.3 2,799.4 3,073.5

Pretax profits 2,484.2 2,513.1 3,226.0 3,881.8 Short-term debt 150.4 147.6 147.6 147.6



Long-term debt 1,861.8 1,861.8 1,861.8 1,861.8

Net income pre-preferred dividends 1,758.9 1,873.3 2,355.0 2,833.7 Other long-term liabilities 1,412.3 1,412.3 1,412.3 1,412.3









DPS (Rmb) 0.40 0.49 0.54 0.64





EBITDA growth (1.1) 7.4 24.2 18.9 ROE (%) 14.9 16.0 15.5 16.5

EBIT growth (8.1) 6.7 30.7 22.7 ROA (%) 7.8 8.6 8.6 9.4





EBIT margin 7.5 7.2 8.1 8.8 Net debt/equity (%) (39.9) (41.2) (43.5) (46.5)




D&A add-back 839.0 915.5 1,000.9 1,086.3 P/E (analyst) (X) 26.0 30.7 24.4 20.3


Net (inc)/dec working capital 696.0 632.5 381.5 265.1 EV/EBITDA (X) 14.7 17.3 13.7 11.2

Other operating cash flow (276.1) 318.5 0.0 0.0 EV/GCI (X) 1.9 2.2 2.0 1.8





Others 383.4 (270.0) (30.0) (30.0)



Inc/(dec) in debt 58.4 (2.8) 0.0 0.0


Other financing cash flows 216.2 0.0 0.0 0.0


Total cash flow 1,010.6 974.5 1,106.2 1,501.4 Note: Last actual year may include reported and estimated data.




Competition shifting from price-led to brand-building

China’s beer industry performed well during 2013, with both volume and revenue growth

accelerating in 2012. Volumes were up c.4.59% (vs 3.06% in 2012) and industry revenues

were up 9.44% (year-to-November 2013 vs 7.67% a year ago).

As current industry concentration is already at a point with the 4-firm concentration ratio at

60%, we believe that the form of competition going forward will be driven more by product

and brand as opposed to price. This will benefit national competitors most, due to

scalability of advertising costs. In fact, we are seeing that market leaders are increasingly

investing in brand building exercises, including Tsingtao’s recent RMB83mn bid for the top

ad-spot during CCTV’s new hour and ABI’s Harbin Beer appointment of British advertising

agency Bartle Bogle Hegarty (BBH) as its new creative partner.

Moreover, Yanjing has announced that it has risen its prices by 15%-20% from January 1st

2014 in Beijing. This would be the first time that the company has hiked prices since

January 2011, when industry-wide price hikes took place to recoup raw material cost

inflation. Tsingtao or CR Snow (beer arm of CRE) has not confirmed on whether they will

follow, but it does indicate to us that market competition is increasingly less price-based.

Exhibit 88: Prices have been largely steady in 2013, Tsingtao’s draft beer has realized

significant price hike during the year Unit retail price per Yihaodian.com (Rmb/330ml tin)

Source: Wind (sourced from Yihaodian.com), Goldman Sachs Global Investment Research.

US experience suggests that China is ready for margin uplift

In the US during 1965-1974 when the 4-firm concentration increased from c.30% to c.50%,

national brewers were able to leverage costly, national advertisement programs to build a

self-reinforcing entry barrier that drove out smaller competitors over time and resulted in

continued market share gains.

Further, according to the U.S. Brewing Industry Data and Economic Analysis, Tremblay and

Tremblay, published in 2005, we note that during 1965-1974, the US brewing industry

average real advertising spend fell, thus leading to industry net profit margins jumping

from just over 2% to c.4%.

6.90

7.80

3.80

8.80

5.20

4.50

2.20

6.50

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14

Tsingtao (Draft) Tiger Beer Carlsberg Harbin Beer Heineken

Kirin (Ichiban) Asahi (Crisp) Budweiser Suntory (Crisp) Tsingtao (Draft)

Suntory

Harbin

Beer

Asahi

Kirin

Tsingtao

Draft/Bu

dweiser

Heineken

Carlsberg

Tiger

Brand

Rmb/330ml tin



With the Chinese 4-firm concentration ratio at c.60% and the competitive dynamics now

turning from price-led to brand driven, in our view, the ability for national competitors to

drive margin improvement through scalability in advertisements will become increasingly

obvious. As such, we are forecasting higher gross profit margin and OP margin for

Tsingtao and CR Snow premised on higher gross profit per KL, as driven by

premiumization while SG&A costs per KL will plateau.

Exhibit 89: We forecast gross profit per KL for Tsingtao

and CR Snow to improve due to operating leverage and

product premiumization Gross Profit forecasts – RMB/KL

Exhibit 90: While SG&A costs per KL are likely to plateau

given the less intense competitive environment SG&A forecasts – RMB/KL



Lower Barley prices an added bonus

Average China import barley prices for 2H2013 were 5.5% yoy vs 9.2% for 1H2013 due to a

rebound in supply and a good quality crop this year. Malt barley makes up for c.13.5% of

Tsingtao’s total COGS and every 1pp inflation above/below our current forecast of -6%/+4%

in 2014E/2015E will impact NPAT by 1.5%/2.1% respectively.

Exhibit 91: China’s import barley prices were up an average of 5.5% in 2H13 vs 9.2% yoy in

1H13 due to improving global supply Barley spot prices

Source: Bloomberg, Datastream, Goldman Sachs Global Investment Research.

-

200

400

600

800

1,000

1,200CRE Tsingtao Yanjing

-

100

200

300

400

500

600

700

800

900

Tsingtao Yanjing CRE

0

50

100

150

200

250

300

350

0

500

1,000

1,500

2,000

2,500

3,000

3,500

De

c-9

9

De

c-0

0

De

c-0

1

De

c-0

2

De

c-0

3

De

c-0

4

De

c-0

5

De

c-0

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-1

1

De

c-1

2

De

c-1

3

Estimated China Import Barley Price (LHS)

Barley spot price (Winni peg, RHS)(RMB/ton) (CAD/ton)



Valuation

We value Tsingtao (A) and (H) on 15X EV/EBITDA, which is in-line with its historical

average. We have chosen to value the company on EV/EBITDA as opposed to P/E as we

believe that the company’s rich cash balance and large differences in each beer companies

depreciation policies will disadvantage Tsingtao if we valued the company on a P/E basis.

Our 12-m TP for Tsingtao (A) has changed from RMB44.40 to RMB50.70 and for Tsingtao (H)

from HK$55.10 to HK$65. This is because: 1) we have rolled forward our valuation period from

2014E to average 2014E/2015E, and 2) we have revised our 2013E-2015E EPS by -8%/-6%/0% to

factor in higher SG&A expenses and lower sales in 2013E. However, we do expect a gradual

improvement in selling expenses as a ratio of sales as our study of the beer market has

concluded with an expectation that competitive intensity is reducing and the market structure is

turning more towards oligopolistic pricing behaviour – i.e. less price based competition.

Tsingtao (A) is trading at 13.0X EV/EBITDA vs its historical average of 14.5X. While

Tsingtao (H) is trading at 13.4X EV/EBITDA vs its historical average of 15.2X EV/EBITDA.

While we like the story for Tsingtao, we see better upside in Tsingtao (A) vs Tsingtao (H) as

we calculate a 2% pricing difference between the (A) and (H) stock, pushing the upside

from 17% for (H) to 19% for (A). Buy (A) and Neutral (H)

Exhibit 92: Tsingtao (A) is trading at 13.0x EV/EBITDA Tsingtao (A) EV/EBITDA

Exhibit 93: …vs. Tsingtao (H) trading 13.4x EV/EBITDA Tsingtao (H) EV/EBITDA

Source: Company data, Datastream, Goldman Sachs Global Investment Research.

Source: Company data, Datastream, Goldman Sachs Global Investment Research.

Exhibit 94: Tsingtao (H) is currently trading at 24.1X 12-m

fwd P/E vs historical average of 28.2X Tsingtao (H) fwd 12mth P/E

Exhibit 95: We expect Tsingtao’s CROCI outlook to be

stable; re-rating driven by accelerating EBITDA CAGR Tsingtao (H) EV/GCI vs. CROCI



13.0

25

30

35

40

45

50

55

10

11

12

13

14

15

16

17

18

19

20

Sep

-09

Nov

-09

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10

Mar

-10

May

-10

Jul-1

0

Sep

-10

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-10

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11

Mar

-11

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-11

Jul-1

1

Sep

-11

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-11

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12

Mar

-12

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-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

(x) Tsingtao (A) EV to EBITDA (LHS) +1 SD Mean -1 SD Tsingtao (A) PX (RHS)

Average EV/EBITDA since Sept 2009 = 14.5X

13.4

10

20

30

40

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60

70

10

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12

13

14

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16

17

18

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20

Sep

-09

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Jul-1

0

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-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

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-11

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12

Mar

-12

May

-12

Jul-1

2

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-12

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-12

Jan-

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Mar

-13

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-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

(x) Tsingtao (H) EV to EBITDA (LHS) +1 SD Mean -1 SD Tsingtao (H) PX (RHS)

Average EV/EBITDA since Sept 2009 = 15.2X

56.4

52.2

24.1

5.0

15.0

25.0

35.0

45.0

55.0

65.0

Jan-

06

May

-06

Sep

-06

Jan-

07

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

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May

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Sep

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Jan-

10

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Sep

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Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

Sep

-12

Jan-

13

May

-13

Sep

-13

Jan-

14

Fwd 12m P/E

Hist. avg 28.2x

+ 1 STDV

+ 2 STDV

- 1 STDV

- 2 STDV

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Jan‐07

May‐07

Sep‐07

Jan‐08

May‐08

Sep‐08

Jan‐09

May‐09

Sep‐09

Jan‐10

May‐10

Sep‐10

Jan‐11

May‐11

Sep‐11

Jan‐12

May‐12

Sep‐12

Jan‐13

May‐13

Sep‐13

Jan‐14

EV/GCI CROCI



Exhibit 96: Tsingtao Summary Financials


Tsingtao (168.HK)RMB mnKey drivers 2013 Q1 2013 Q2 2013 Q3E 2013 Q4E 1H11 2H11 1H12 2H12 1H13 2H13E 2011 2012 2013E 2014E 2015E 13-'15 2Yr CAGRChina Beer Industry ('000 KL)Production volumes 10,443 14,533 15,970 9,670 23,502 25,486 23,988 25,032 24,975 25,640 48,990 49,020 50,615 52,640 54,746 4.0%Market share 17.5% 18.9% 18.5% 13.1% 16.0% 13.3% 17.4% 14.9% 18.3% 16.4% 14.6% 16.1% 17.4% 19.0% 20.0%

Volumes ('000 KL)Tsingtao brand 1,046 1,354 1,430 825 2,030 1,960 2,200 2,090 2,400 2,255 3,990 4,290 4,655 5,074 5,505 8.7%Secondary & Other brands 783 1,397 1,520 442 1,720 1,440 1,980 1,630 2,180 1,962 3,160 3,610 4,142 4,953 5,442 14.6%Total 1,829 2,751 2,950 1,266 3,750 3,400 4,180 3,720 4,580 4,216 7,150 7,900 8,796 10,026 10,947 11.6%

ASP (RMB/ltr) 3.45 3.15 3.13 3.79 3.21 3.27 3.21 3.33 3.27 3.33 3.24 3.26 3.30 3.36 3.46 2.5%

Total Sales 6,312 8,659 9,221 4,801 12,050 11,108 13,406 12,376 14,971 14,022 23,158 25,782 28,994 33,708 37,909 14.3%

YoY Growth (%)China Beer IndustryProduction volumes 16.1% -3.1% 0.5% 5.8% 11.0% 7.8% 2.1% -1.8% 4.1% 2.4% 9.3% 0.1% 3.3% 4.0% 4.0%Market share (ppt) -0.7% 2.0% 1.9% -0.5% 1.3% -0.4% 1.5% 1.5% 0.9% 1.6% 0.4% 1.5% 1.3% 1.7% 0.9%

Volumes ('000 Kl)Tsingtao brand 10.1% 8.3% 2.1% 1.8% 23.0% 7.1% 8.4% 6.6% 9.1% 7.9% 14.7% 7.5% 8.5% 9.0% 8.5%Secondary & Other brands 13.5% 8.3% 22.6% 2.8% 17.8% 1.4% 15.1% 13.2% 10.1% 20.3% 10.1% 14.2% 14.7% 19.6% 9.9%Total 11.5% 8.3% 11.7% 2.1% 20.6% 4.6% 11.5% 9.4% 9.6% 13.3% 12.6% 10.5% 11.3% 14.0% 9.2%

ASP (RMB/ltr) 1.1% 2.4% -1.6% 17.9% 0.7% 6.5% -0.2% 1.8% 1.9% 0.0% 4.9% 0.8% 1.0% 2.0% 3.0%

Total Sales 12.7% 10.9% 9.9% 20.4% 21.4% 11.4% 11.2% 11.4% 11.7% 13.3% 18.1% 11.3% 12.5% 16.3% 12.5%

Consolidated P&L 2013 Q1 2013 Q2 2013 Q3E 2013 Q4E 1H11 2H11 1H12 2H12 1H13 2H13E 2011 2012 2013E 2014E 2015E 13-'15 2Yr CAGRBeer Sales 11,873 10,917 13,206 12,112 14,757 13,716 22,790 25,318 28,472 33,103 37,227 Other Sales 177 191 199 264 215 306 368 463 521 606 681 Total Sales 6,312 8,659 9,221 4,801 12,050 11,108 13,406 12,376 14,971 14,022 23,158 25,782 28,994 33,708 37,909 14.3%COGS -3,705 -5,048 -5,491 -2,908 -6,840 -6,576 -7,979 -7,455 -8,753 -8,399 -13,417 -15,434 -17,153 -19,823 -22,258 Taxes -513 -697 -706 -560 -1,056 -968 -1,166 -1,035 -1,210 -1,265 -2,024 -2,201 -2,475 -2,878 -3,236 Gross Profit 2,093 2,915 3,024 1,333 4,154 3,563 4,260 3,886 5,008 4,358 7,717 8,147 9,366 11,007 12,414 15.1%SG&A -1,489 -2,208 -2,174 -1,418 -2,870 -2,728 -3,026 -3,174 -3,697 -3,591 -5,599 -6,200 -7,289 -8,292 -9,083 11.6%EBIT 605 706 850 -84 1,283 835 1,234 712 1,311 766 2,118 1,946 2,077 2,716 3,331 26.6%Depreciation -267 -303 -331 -354 -369 -371 -571 -685 -739 -808 -876 Amortization -47 -80 -76 -78 -82 -95 -127 -154 -176 -193 -211 EBITDA 605 706 850 -84 1,598 1,218 1,642 1,144 1,761 1,231 2,816 2,785 2,992 3,716 4,418 21.5%Net finance costs 41 55 83 35 -2 39 84 94 96 119 36 178 215 260 320 Other non-op. rev/ (exp) 53 303 90 44 1,394 190 101 259 356 134 301 360 490 251 231 Pretax income 698 1,064 1,024 -5 1,391 1,064 1,419 1,065 1,762 1,019 2,455 2,484 2,782 3,226 3,882 Provisions for taxes -189 -136 -252 -7 -345 -313 -369 -271 -325 -259 -657 -639 -584 -807 -970 Minority interest (I/S item) -22 -21 -2 -11 -57 -3 -43 -43 -43 -13 -60 -86 -56 -65 -78 Reported NPAT 488 907 770 -23 990 748 1,007 751 1,395 747 1,738 1,759 2,142 2,355 2,834 15.0%Less: net one-off's - 268 - 0 - -41 - 0 268 0 -41 - 268 - - Recurring NPAT 488 638 770 -23 990 790 1,007 751 1,126 747 1,779 1,759 1,873 2,355 2,834

EPS (Adj., diluted, RMB/Sh) 0.361 0.473 0.570 -0.017 0.733 0.584 0.746 0.556 0.834 0.553 1.317 1.302 1.387 1.743 2.098

YoY Growth %Sales 12.7% 10.9% 9.9% 20.4% 21.4% 11.4% 11.2% 11.4% 11.7% 13.3% 16.4% 11.3% 12.5% 16.3% 12.5%GP 20.1% 15.8% 7.6% 23.9% 16.4% 3.8% 2.6% 9.1% 17.5% 12.1% 10.2% 5.6% 15.0% 17.5% 12.8%SG&A 22.2% 22.1% 9.4% 19.5% 12.9% 11.1% 5.4% 16.3% 22.2% 13.2% 12.0% 10.7% 17.6% 13.8% 9.5%EBIT -15.1% 0.3% -3.4% 23.5% 25.1% -14.6% -3.8% -14.7% 6.2% 7.6% 5.7% -8.1% 6.7% 30.7% 22.7%NPAT 8.3% 62.9% 14.0% -130.3% 21.6% 5.9% 1.8% 0.5% 38.5% -0.6% 14.3% 1.2% 21.8% 10.0% 20.3%

Margins (on total sales)GP 33.2% 33.7% 32.8% 27.8% 34.5% 32.1% 31.8% 31.4% 33.5% 31.1% 33.3% 31.6% 32.3% 32.7% 32.7%EBIT 9.6% 8.2% 9.2% -1.8% 10.7% 7.5% 9.2% 5.8% 8.8% 5.5% 9.1% 7.5% 7.2% 8.1% 8.8%EBITDA 9.6% 8.2% 9.2% -1.8% 13.3% 11.0% 12.2% 9.2% 11.8% 8.8% 12.2% 10.8% 10.3% 11.0% 11.7%NPAT 7.7% 10.5% 8.4% -0.5% 8.2% 6.7% 7.5% 6.1% 9.3% 5.3% 7.5% 6.8% 7.4% 7.0% 7.5%

SG&A/Sales -23.6% -25.5% -23.6% -29.5% -23.8% -24.6% -22.6% -25.6% -24.7% -25.6% -24.2% -24.0% -25.1% -24.6% -24.0%Effective tax rate (%) -27% -13% -25% 148% -25% -29% -26% -25% -18% -25% -27% -26% -21% -25% -25%



Summary of changes/risks for Neutral-rated stocks

Exhibit 97: Summary of revisions for Neutral-rated stocks and key risks


Company Ticker Rating New TP Old TP Chg Reporting

HK$ HK$ % Currency CY13 CY14 CY15 CY13 CY14 CY15 CY13 CY14 CY15

Mengniu 2319.HK Neutral 36.90 33.20 11% RMB 0.81 1.09 1.34 0.81 1.09 1.30 ‐0.6% 0.3% ‐2.9%

CRE 0291.HK Neutral 26.50 28.40 ‐7% HKD 0.68 0.85 1.14 0.64 0.79 1.05 ‐5.8% ‐6.7% ‐7.8%

China Foods 0506.HK Neutral 3.00 3.00 0% HKD ‐0.26 ‐0.01 0.08 ‐0.26 ‐0.01 0.08 0.0% 0.0% 0.0%

Greatview 0468.HK Neutral 4.60 5.35 ‐14% RMB 0.22 0.27 0.35 0.22 0.27 0.33 0.0% ‐2.1% ‐7.0%

Old EPS New EPS EPS Chg

Company Comments Risks

Mengniu We revise our 12‐m P/E‐based TP to HK$36.90 (1% upside potential) based on: 1) roll forward of

valuation period from 2014E to average of 2014E/2015E; and 2) EPS revisions for 2013E‐2015E due

to slight downward revision for Yashili forecasts as we understand topline sales in 2H13E are

impacted by Fonterra's botulism scare in August 2013 and a build up of inventory in the channels.

Better/worse than expected raw milk price inflation, ASP driven by

premiumization, execution risk on consolidation of new businesses and

internal restructuring, competition.

CRE We revise our 12‐m SOTP‐based TP to HK$26.50 (18% upside potential) based on: 1) roll forward of

valuation period from 2014E to average 2014E/2015E; and 2) EPS revisions due to lower topline

growth outlook given weaker macro demand, and lower Beverage margin outlook as the company

continues to prioritize market share expansion over margin improvement.

Retail: Turnaround of losses from Northern Region, ability to extract synergies

and reduce losses from Tesco JV likely at end 2014; Beer: raw material cost

fluctuation, better/worse than expected level of competition and ability to

premiumize brand.

China Foods Our 12‐m P/B‐based TP of HK$3.0 (15% upside potential) is unchanged even though we roll forward

our valuation period from 2014E to average 2014E/2015E as the book value of the company for

these two periods has changed little. The implied P/B for the group in 2014E/2015E remains at 1.4x

(unchanged).

Ability to turnaround losses in Wine, Confectionery and Consumer Packed Oils

by new management, better/worse than expected level of competition with

imported wine, Wilmar in Oil, Tingyi/Pepsi for Beverage business, raw material

cost fluctuations.

Greatview We revise our 12‐m P/E‐based TP to HK$4.60 (12% upside potential) based on: 1) roll forward of

valuation period from 2014E to average 2014E/2015E; and 2) EPS cut in 2013E‐2015E as we trim

sales growth due to our expectations that supply constraints of raw milk in China will last at least

through 2014, while its attempt to fill capacity with non‐carbonated soft drink orders may drive

lower margins.

Better/worse than expected volume growth of UHT milk in China given supply

constraints, ability to turn to profit for Germany business, expansion in Europe

and raw material cost fluctuations.



Disclosure Appendix

Reg AC

We, Lisa Deng and Xiaochun Ni, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject

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Coverage group(s) of stocks by primary analyst(s)

Lisa Deng: Asia Pacific Consumer and Retail.

Asia Pacific Consumer and Retail: Ace Hardware Indonesia, Amorepacific, CJ CheilJedang, China Foods, China Resources Enterprise, China Yurun

Food Group, E-Mart, GS Retail Co., Greatview Aseptic Packaging Company, Hengan International, Huishan Dairy, Hyundai Department Store, KT&G,

LG Household & Healthcare, Lotte Shopping, Matahari Department Store, Mengniu Dairy, Mitra Adiperkasa, Orion, PT Gudang Garam Tbk, PT

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Shinsegae, Stella International Holdings, Sun Art Retail Group, Tingyi (Cayman Islands) Holdings, Tsingtao Brewery (A), Tsingtao Brewery (H), Uni-

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