1H22 revenue slightly beats market expectations; profit in line

Kemen Noodle’s revenue grew 17.72% YoY to Rmb2.41bn in 1H22, beating market expectations on robust demand in 1Q22 and strong sales of instant food products. Attributable net profit surged 88.71% YoY to Rmb81mn, in line with market expectations. In 2Q22, revenue increased 39.11% YoY to Rmb1.32bn, and attributable net profit was Rmb21mn.

Trends to watch

2Q22 revenue exceeded Rmb1.3bn; revenue from fine dried noodles and instant food grew strongly in 1H22. Revenue from noodles, flour, instant food, and other products increased around 24%, 1.3%, 44%, and 1.8% YoY in 1H22, and accounted for around 62%, 14%, 9%, and 15% of total revenue. Revenue from noodles and instant food posted high growth in 1H22. Thanks to the firm’s efforts to improve its product mix since 3Q21, the structure of its fine dried noodle products was balanced in 1H22. This, coupled with price hikes and robust demand in 2Q22, drove the rapid growth of noodle products in 1H22. Go for Happiness, a variety show exclusively sponsored by The Cereal Way (a brand under Kemen Noodle), helps increase the firm’s brand awareness and boost its online and offline sales.

1H22 net margin returned to a normal level at around 3.4%. The firm’s gross margin rose 0.9ppt YoY to around 16% in 1H22. Specifically, gross margin of noodles and flour increased 0.25ppt and 1.34ppt YoY, while that of instant food dropped 3.19ppt YoY. We attribute the increase in gross margin of fine dried noodles to the firm’s efforts to adjust its product mix and pass on cost increases via price hikes. We attribute the decline in gross margin of instant food to increased sales promotions as the firm strived to boost revenue growth. Selling expense ratio fell 1.5ppt YoY to 6.7% in 1H22. Specifically, sales personnel salary expense ratio dropped 1.7ppt YoY, while other sales expense ratios also declined. We attribute the decline in the firm’s expense ratio to its rapid revenue growth and increased amortization of expenses.

Adjusting growth targets for ESOP; revenue likely to maintain rapid growth in 2H22. Given intensifying competition in the fine dried noodle industry in 2021 and a relatively large increase in wheat prices since 2021, the firm has adjusted the growth targets for its 2020 Phase I employee stock ownership plan (ESOP). Specifically, employees would be granted 100% of their vested shares under the ESOP if the firm’s cumulative revenue in 2020-2022 increases no less than 334% from 2019. The firm continued to raise the prices of its fine dried noodle products by around 5% in mid-July amid robust demand. We expect the firm’s revenue to maintain rapid growth, driven by rising sales volume and prices. Meanwhile, we think the firm’s cost will likely decline steadily in 3-4Q22 with increasing selling prices. We expect its gross margin in 2H22 to improve compared with 2Q22 and return to the 2H21 level.

Financials and valuation

Considering the rising prices of the firm’s fine dried noodles and increasing awareness of its instant food brand, we raise our 2022 and 2023 revenue forecasts 6.6% and 6.3% to Rmb4.90bn and Rmb5.18bn. We lower our 2022 profit forecast 11% to Rmb171mn (given the high cost pressure in 2022), but raise our 2023 forecast 5.3% to Rmb233mn. The stock is trading at 25.9x 2022e and 19.0x 2023e P/E. We maintain OUTPERFORM and lift our TP by 6.7% to Rmb16 (31.6x 2022e and 23.1x 2023e P/E), offering 22% upside.

Risks

Intensifying competition; volatile raw material prices and production costs; food safety issues.