2021 results miss our expectation

Kemen Noodle announced its 2021 results: Revenue grew 9.32% YoY to Rmb4.33bn, and attributable net profit declined 76.95% YoY to Rmb67mn. In 1Q22, revenue fell 0.61% YoY to Rmb1.1bn, and attributable net profit dropped 29.11% YoY to Rmb60mn. The 2021 and 1Q22 results missed our expectations on sharper-than-expected rise in wheat prices.

Trends to watch

2H21 revenue increased 12.70% YoY, 1Q22 revenue fell 0.61% YoY, 2H21 revenue from flour and instant food maintained high growth. In 2H21, revenue from noodles dropped 1.30% YoY, while that from flour and instant food grew 46.05% and 24.10% YoY. Sales volume of the firm’s noodle products fell 8.7% YoY in 2H21, with selling prices rising 8.1% YoY. We attribute the rapid growth in revenue from flours to the firm’s increased production capacity. Meanwhile, revenue from instant food also maintained robust growth. In 1Q22, revenue declined 0.61% YoY, mainly due to a high base in the same period last year and to distributors’ preparations for the earlier-than-usual arrival of the 2022 Chinese New Year (CNY) holiday.

2H21 net margin under pressure; 1Q22 recurring net margin returned to normal. Net margin stood at 2.10% in 1H21 and 1.07% in 2H21. The firm incurred losses in 2Q21 and 4Q21, which we attribute to declining gross margin due to increased production of flour and the rising revenue contribution from flour products (which have lower margins), as well as mounting cost pressure from rising wheat prices (about 10% YoY increase). In 1Q22, recurring net margin fell 0.9ppt YoY to 5.1%, mainly due to a 1.1ppt YoY decline in gross margin caused by mounting cost pressure and rising revenue contribution from flour products.

Looking ahead into 2022, we believe that consumer demand for stocking up on food will be robust amid the COVID-19 headwinds. We suggest paying attention to the trends in wheat prices and changes in prices of the firm’s flour and fine dried noodle products. Against the backdrop of COVID-19 resurgence in multiple regions in China, we believe that the longer time spent at home has enhanced households’ demand for stockpiling food, leading to accelerated growth in the firm’s revenue in April. In our opinion, profit is highly correlated with gross margin. We suggest paying attention to the trends in wheat prices and changes in the prices of the firm’s products. According to Wind’s Wheat Price Index, wheat prices in 1Q22 increased 10% from 2H21. We see uncertainties in wheat prices and continued price hikes by competitors in 2H22.

Financials and valuation

The firm may face cost pressure amid rising wheat prices in 2022. In addition, some of its low-GM flour products will be sold to external parties once new flour production capacity comes on-stream. As such, we lower our 2022 profit forecast 54.4% to Rmb192mn, and introduce our 2023 forecast of Rmb221mn. We expect the firm’s profit to rise 184.7% YoY in 2022 to Rmb192mn and 15.4% YoY in 2023 to Rmb221mn. The stock is trading at 20.3x 2022e and 17.6x 2023e P/E. Considering cost pressure, we maintain OUTPERFORM and cut our TP by 25% to Rmb15 (26.3x 2022e and 22.7x 2023e P/E), offering about 30% upside.

Risks

Wheat prices continue to soar; food safety issues.