Nissin Foods: Initiation: A Chip Off The Old Block

Hong Kong Consumer Staples 26 September 2018
Nissin Foods (1475 HK)

Nissin F oods
Target price: HKD4.13

Share price (24 Sep): HKD3.42 | Up/downside: +20.8%
Initiation: a chip off the old block Jonathan Ho

(852) 2848 4056
 Dominant position in Hong Kong, with a 65% market share jonathan.ho@hk.daiwacm.com
 Strong partnerships to drive further expansion in China Anson Chan, CFA

(852) 2532 4350
 Initiating with a Buy (1) rating and 12-month TP of HKD4.13 anson.chan@hk.daiwacm.com
Investment case: We initiate coverage of Nissin Foods (NF), a leading Share price performance
manufacturer of instant noodles, with a Buy (1) call and 12-month TP of (%)
(HKD)
HKD4.13. Alongside its well-established parent company, Nissin Foods 5.5 150
Holdings (2897 JP, JPY7,910, Hold [3]), NF has several well-known 4.8 133
premium brands in its diversified product portfolio. We expect NF to 4.0 115
3.3 98
maintain its leading position in Hong Kong’s instant noodle market and
2.5 80
leverage its parentco’s brand reputation to further expand in China. Dec-17 Mar-18 Jun-18 Sep-18
Nissin Foo (LHS) Relative to HSI (RHS)

Market-share gains. NF has a 65% share of Hong Kong’s instant noodle
market, and 19% of the premium noodle segment in China. In April 2018, it
12-month range 2.99-5.10
formed a JV with Japan’s Kagome to enter the vegetable juice market, Market cap (USDbn) 0.47
allowing it to extend its distribution network and product portfolio. We see 3m avg daily turnover (USDm) 1.07
Shares outstanding (m) 1,074
NF continuing to capture market share by further extending its distribution
Major shareholder Nissin Foods Holdings Limited (73.9%)
network, while seeking strategic partnerships to tap other markets.
Financial summary (HKD)
Cup and bowl noodles driving the premium instant noodle segment. Year to 31 Dec 18E 19E 20E
According to Frost & Sullivan, the premium instant noodle or high value- Revenue (m) 3,330 3,733 4,097
Operating profit (m) 316 370 399
added instant noodle market in Hong Kong will reach HKD2bn in sales Net profit (m) 213 253 273
value by 2021E, a CAGR of 5.1% (2016-21E), while in China the premium Core EPS (fully-diluted) 0.199 0.236 0.254
market will reach CNY13bn by 2021E, a CAGR of 11.7% from 2016-21E. EPS change (%) (16.6) 18.8 7.8
Daiwa vs Cons. EPS (%) (3.1) 3.9 5.9
We see cup and bowl type (premium) noodles driving the uptrend in the
PER (x) 17.2 14.5 13.5
segment and overall instant noodle market growth over our forecast period. Dividend yield (%) 2.3 2.3 2.3
DPS 0.079 0.079 0.079
PBR (x) 1.0 1.0 0.9
Growing piece of the pie to underpin margin expansion. We expect
EV/EBITDA (x) 3.3 2.6 2.1
NF’s China revenue to deliver a 13% CAGR (2016-21E), faster than peers’ ROE (%) 6.1 6.9 7.1
1-6% CAGR for 2016-20E. Leveraging its solid market position, we forecast Source: FactSet, Daiwa forecasts
NF’s China instant noodle gross margin to go from 34.2% in 2018 to 35% in
2019. In April 2018, NF collaborated with ramen restaurant chain Ippudo to
sell cup-type noodles exclusively via 7-Eleven outlets in Hong Kong and
China (900+/2,600+ POS), and we expect more collaborative products in
2018.
Catalysts: This year NF has boosted its salesforce by c.100, mostly in

China, which we believe will extend its distribution network. We also look to
further strategic partnerships with established brands to drive earnings.
Valuation: Our 12-month TP of HKD4.13 is based on a PER of 19x, a 27%

discount to the 26x average of the China industry leaders, on our average
2018-19E EPS. We see key positives in NF’s: 1) position in the premium
instant noodles market, 2) growing distribution network, 3) partnerships,
and 4) R&D capability, which we believe are not factored into its valuation.
Risks: 1) food safety and reputational risk, 2) shift in consumer preference,

3) raw-material cost inflation, and 4) price control risk.
See important disclosures, including any required research certifications, beginning on page 26
Nissin Foods (1475 HK): 26 September 2018
Table of contents
Market leader broadening its reach ........................................................................ 6
Dominant in Hong Kong and ready to take off in China ......................................................6
Consumption upgrade in instant noodles .............................................................10
Nissin Foods set to capture premium uptrend ..................................................................10
Margin expansion on product-mix upgrades ........................................................13
No longer simply a replacement meal ..............................................................................13
Financials .................................................................................................................16
Valuation ..................................................................................................................19
Risks................................................................................................................................20
Company background .............................................................................................22
2
How do we justify our view?

Growth outlook Valuation Earnings revisions
Growth outlook NF: net-profit and net-profit-margin trend
We forecast a 12% earnings CAGR over 2017-20E, and (HKDm) (%)

the net-profit margin to widen over 2017-19 to 6.8% in 300 8
6.7 6.8 6.7
6.4 7
2019E on operating leverage and product-mix upgrades. 250 5.9
We note the company realised steady double-digit revenue 6
200
5
growth in its more established sales regions in southern 3.9
3.5
150 4
and eastern China in 1H18, and recently entered northern
3
China, where it recorded over 20% YoY revenue growth for 100
2
1H18. Management targets quality growth as its priority 50
1
through volume expansion and product-mix upgrades.
0 0
2014 2015 2016 2017 2018E 2019E 2020E
Net profit Net profit margin (RHS)
Source: Company, Daiwa forecasts
Valuation NF: 12-month-forward PER
NF is trading currently at a 16x PER based on our average (HKD)

2018-19E EPS, representing discounts of 25% to Tingyi 5.5
(322 HK, HKD14.06, Hold [3]) and 15% to Uni-President 5.0
China (UPCH) (220 HK, HKD8.2, Outperform [2]). We 4.5
initiate coverage with a target price of HKD4.13, based on 4.0

3.5
a target PER of 19x, representing a 27% discount to its
3.0
peer average of 26x (on our forecasts), applied to our
2.5
average 2018-19E EPS. We view NF’s prevailing valuation
2.0
as inexpensive, given: 1) its strong position riding on rapid Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18
growth in the premium instant noodle segment in China, 2)
Nissin 14x 16x
its expanding distribution network in China, 3) possible 18x 20x 23x
future strategic partnerships with established global Source: Bloomberg, Daiwa forecasts
brands, and 4) NF’s R&D capabilities in product and
flavour development.
Earnings revisions NF: consensus EPS revisions
The Bloomberg-consensus forecasts for NF have been (HKD)

revised up for 2018 and 2019 by 7% and 10% YTD. Based 0.27
on our forecasts, we see further upside in the market’s
0.25
2019 earnings forecasts as we expect faster-than-expected
0.23
top-line growth in China and an improving revenue mix.
Our EPS forecasts are 4% and 6% higher than the 0.21
consensus figures for 2019E and 2020E, as we expect 0.19
faster top-line growth in China. 0.17
0.15
Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18
2018 2019
Source: Bloomberg
3
Financial summary
Key assumptions
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Sales growth YoY - Hong Kong n.a. 0.0 0.4 (0.3) 18.9 13.2 8.4 6.1
Sales growth YoY - PRC n.a. 0.0 6.4 0.4 3.6 16.2 15.4 12.8
GPM % - Hong Kong (ex- MCMS) n.a. 0.0 41.4 44.3 37.0 34.0 35.0 36.0
Gross margin % - PRC n.a. 0.0 35.0 35.8 34.2 34.6 35.4 35.4
SG&A ratio (%) n.a. 0.0 23.9 27.0 28.5 26.4 25.2 25.6
Profit and loss (HKDm)

Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Hong Kong n.a. 1,165 1,170 1,166 1,386 1,568 1,700 1,802
PRC n.a. 1,371 1,459 1,464 1,516 1,762 2,034 2,295
Other Revenue n.a. 0 0 0 0 0 0 0
Total Revenue n.a. 2,536 2,629 2,630 2,902 3,330 3,733 4,097
Other income n.a. 32 36 32 38 45 45 45
COGS n.a. (1,656) (1,618) (1,482) (1,731) (2,041) (2,273) (2,488)
SG&A n.a. (606) (709) (751) (767) (838) (956) (1,074)
Other op.expenses n.a. (75) (70) (261) (153) (180) (180) (180)
Operating profit n.a. 231 268 168 290 316 370 399
Net-interest inc./(exp.) n.a. 0 0 0 0 0 0 0
Assoc/forex/extraord./others n.a. 0 (85) 0 0 0 0 0
Pre-tax profit n.a. 231 183 168 290 316 370 399
Tax n.a. (58) (66) (61) (70) (79) (92) (100)
Min. int./pref. div./others n.a. (23) (15) (16) (25) (24) (24) (26)
Net profit (reported) n.a. 149 101 91 195 213 253 273
Net profit (adjusted) n.a. 149 186 91 195 213 253 273
EPS (reported)(HKD) n.a. 0.241 0.129 0.113 0.238 0.199 0.236 0.254
EPS (adjusted)(HKD) n.a. 0.241 0.238 0.113 0.238 0.199 0.236 0.254
EPS (adjusted fully-diluted)(HKD) n.a. 0.241 0.238 0.113 0.238 0.199 0.236 0.254
DPS (HKD) n.a. 0.000 0.000 0.672 0.372 0.079 0.079 0.079
EBIT n.a. 231 268 168 290 316 370 399
EBITDA n.a. 246 283 274 427 463 516 546
Cash flow (HKDm)

Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Profit before tax n.a. 231 268 168 290 316 370 399
Depreciation and amortisation n.a. 15 15 107 137 147 147 147
Tax paid n.a. (632) 543 (81) (41) (39) (84) (91)
Change in working capital n.a. (17) (444) 573 (74) 29 (0) 0
Other operational CF items n.a. 0 0 0 0 0 (0) 0
Cash flow from operations n.a. (403) 381 766 312 453 432 455
Capex n.a. (153) (428) (422) (215) (180) (150) (150)
Net (acquisitions)/disposals n.a. 0 0 31 89 0 0 0
Other investing CF items n.a. 0 0 0 0 0 0 0
Cash flow from investing n.a. (153) (428) (391) (126) (180) (150) (150)
Change in debt n.a. 0 0 0 0 0 0 0
Net share issues/(repurchases) n.a. 0 0 44 951 0 0 0
Dividends paid n.a. 0 0 (540) (400) (85) (85) (85)
Other financing CF items n.a. 2,053 176 (63) (70) (26) (35) (38)
Cash flow from financing n.a. 2,053 176 (559) 481 (111) (120) (123)
Forex effect/others n.a. 0 0 0 0 0 0 0
Change in cash n.a. 1,497 129 (184) 667 162 162 182
Free cash flow n.a. (556) (46) 344 97 273 282 305
Source: FactSet, Daiwa forecasts
4
Financial summary continued …

Balance sheet (HKDm)
Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Cash & short-term investment n.a. 1,497 1,626 1,443 2,109 2,271 2,433 2,615
Inventory n.a. 161 166 215 291 330 365 397
Accounts receivable n.a. 304 316 296 421 483 541 594
Other current assets n.a. 64 600 81 108 111 115 120
Total current assets n.a. 2,026 2,708 2,035 2,929 3,195 3,454 3,725
Fixed assets n.a. 599 907 1,159 1,295 1,340 1,354 1,369
Goodwill & intangibles n.a. 50 46 43 72 72 72 72
Other non-current assets n.a. 761 198 198 165 165 165 165
Total assets n.a. 3,435 3,860 3,435 4,461 4,772 5,045 5,332
Short-term debt n.a. 0 0 0 0 0 0 0
Accounts payable n.a. 152 137 154 268 313 347 378
Other current liabilities n.a. 360 484 551 589 677 740 800
Total current liabilities n.a. 512 621 704 857 990 1,087 1,177
Long-term debt n.a. 0 0 0 0 0 0 0
Other non-current liabilities n.a. 30 26 27 53 94 103 111
Total liabilities n.a. 542 647 732 910 1,084 1,190 1,288
Share capital n.a. 0 0 0 0 0 0 0
Reserves/R.E./others n.a. 2,812 3,129 2,619 3,439 3,575 3,743 3,930
Shareholders' equity n.a. 2,812 3,129 2,619 3,439 3,575 3,743 3,930
Minority interests n.a. 82 84 85 112 113 113 113
Total equity & liabilities n.a. 3,435 3,860 3,435 4,461 4,772 5,045 5,332
EV n.a. 2,259 2,132 2,316 1,677 1,516 1,354 1,172
Net debt/(cash) n.a. (1,497) (1,626) (1,443) (2,109) (2,271) (2,433) (2,615)
BVPS (HKD) n.a. 4.535 3.999 3.259 3.201 3.327 3.484 3.659
Key ratios (%)

Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E
Sales (YoY) n.a. n.a. 3.7 0.0 10.4 14.7 12.1 9.8
EBITDA (YoY) n.a. n.a. 15.0 (3.0) 55.6 8.5 11.5 5.7
Operating profit (YoY) n.a. n.a. 15.8 (37.3) 73.0 9.1 16.9 8.0
Net profit (YoY) n.a. n.a. 24.6 (51.3) 115.2 9.2 18.8 7.8
Core EPS (fully-diluted) (YoY) n.a. n.a. (1.2) (52.6) 110.8 (16.6) 18.8 7.8
Gross-profit margin n.a. 34.7 38.4 43.6 40.4 38.7 39.1 39.3
EBITDA margin n.a. 9.7 10.7 10.4 14.7 13.9 13.8 13.3
Operating-profit margin n.a. 9.1 10.2 6.4 10.0 9.5 9.9 9.7
Net profit margin n.a. 5.9 7.1 3.5 6.7 6.4 6.8 6.7
ROAE n.a. n.a. 6.3 3.2 6.4 6.1 6.9 7.1
ROAA n.a. n.a. 5.1 2.5 4.9 4.6 5.2 5.3
ROCE n.a. n.a. 8.8 5.7 9.3 8.7 9.8 10.1
ROIC n.a. 12.4 13.5 7.5 16.3 16.6 19.5 21.0
Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Effective tax rate n.a. 25.3 24.8 36.1 24.0 25.0 25.0 25.0
Accounts receivable (days) n.a. n.a. 43.1 42.5 45.1 49.5 50.0 50.5
Current ratio (x) n.a. 4.0 4.4 2.9 3.4 3.2 3.2 3.2
Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Net dividend payout n.a. 0.0 0.0 595.0 156.4 40.0 33.7 31.2
Free cash flow yield n.a. n.a. n.a. 9.4 2.6 7.4 7.7 8.3
Source: FactSet, Daiwa forecasts
Company profile
Nissin Foods was listed on the HKEX in December 2017. It has 2 core corporate brands (Nissin and
Doll) and is a subsidiary of Japan-listed Nissin Foods Holdings (2897 JP), which owns 74% of the
company. It has a 65.3% market share in Hong Kong’s instant noodle market and is expanding in
mainland China.
5
Market leader broadening its reach

Dominant in Hong Kong and ready to take off in China
Solid foundation with an established Japanese brand name
Strongly positioned via Nissin Japan was a first-mover in the instant noodle industry, with the company’s founder,
its instant noodle Momofuku Ando, widely credited as the inventor of instant noodles. NF, its Hong Kong-
product range, NF is listed subsidiary, continues to hold a leading market position, and according to Frost &
actively expanding its Sullivan, claimed a market share of 65.3% in Hong Kong by value and 62.6% by volume in
product offerings 2016.
through different brands
NF has 2 corporate brands, Nissin and Doll, with 5 flagship product brands – Damae Iccho
(出前一丁), Cup Noodles (合味道), Fuku (福), Doll Instant Noodles (公仔), and Doll Frozen
Foods – together offering over 540 SKUs. The company is actively expanding its product
range, and enjoys a well-developed and diverse product portfolio, which can be
categorised into 4 main types: 1) frozen foods, 2) potato chips, 3) organic foods, and 4)
other products, for example granola, which was brought in from the parent company in
Japan and launched in Hong Kong in 2017. We see little risk of product cannibalisation on
the introduction of new flavours as NF expands in Hong Kong by introducing new products
and strategic partnerships, along with its in-house R&D capabilities and support from the
parent company to enhance its brand presence and reputation.
NF: multi-brand strategy

Flagship and well- Key Brands (HK & mainland China)
established brands Signature sesame Seafood flavoured Cup

Demae Iccho Cup Noodles
offering various types of flavour is a Hong Kong
favourite. NF has 4
noodles to be promoted
worldwide, 16 SKUs
products, including SKUs available available
instant noodles, pasta,
Pasta products for
frozen foods such as Nissin Fuku
Fuku brand: deep-fried
Nupasta consumers who
noodles and
dim sum, and packaged Foods vermicelli products
prefer international
cuisine
foods like potato chips;
Dried-fried noodles,
Demae Iccho is the most Japanese Raoh noodles,
popular instant noodle Others dim sum cups, among a
wide variety of
brand in Hong Kong, offerings
while its Cup Noodles
are a popular choice in Winner Doll
Doll brand: mass
instant noodles and
China Food frozen foods
Source: Daiwa
Hong Kong: market share of instant noodles by value in 2016 Hong Kong: market share of instant noodles by volume in 2016
Others Others
18.3% 22.5%
Unilever PLC
2.6%
Samyang Food Unilever PLC
2.9% 2.2%
Indofood
Sau Tao Nissin
Nissin 3.0%
5.4% 62.6%
65.3% Nong Shim
Nong Shim 3.5%
5.5% Sau Tao
6.2%
Source: Frost & Sullivan Source: Frost & Sullivan
6
Long-term benefits of acquiring a distributor

In 2017, NF acquired In March 2017, NF acquired 51% of MCMS for HKD42.5m. MCMS is a Hong Kong-based
51% of MCMS, a Hong distribution company with a diverse product profile that distributes beverages, processed
Kong-based distribution food and sauce products for brands such as Danone, Kagome and Kewpie. MCMS, which
company with an also distributes NF’s Demae Iccho in Hong Kong, generated net sales of HKD218m in
extensive portfolio of 2016. MCMS also has an online store on online shopping site HKTVmall, where it sells a
global brands like Evian, portfolio of global brands, such as Evian, Volvic, Cocoway and Lea & Perrins. We believe
Volvic and Lea & Perrins MCMS’s experience and existing product portfolio will aid its distribution of new products in
the future, which we view as a further driver of NF’s revenue over the long term.
JV with Kagome to enter the beverage market

NF announced in April 2018 that it had entered into a JV with Kagome with a 70%
shareholding, contributing HKD3.5m in cash to the share capital of the JV, to enter the
vegetable juice business. The new JV places NF in a strong position for future expansion
in the beverage business and for revenue growth in Hong Kong, Macau and mainland
China, in our view. Details of new product plans are yet to be announced, but we believe
the expansion of its product portfolio will help NF introduce product categories other than
instant noodles, while entering new regions in China.
Kagome: vegetable juice selection (720ml/280ml)
Source: Company
Further expanding its territory in China

In a position to capture further market share
NF had a market share of According to Frost & Sullivan, in 2016 NF had a market share of 19.8% in the premium
19.8% in the premium instant noodle market by value in China, with its signature product, Cup Noodles (合味道),
instant noodles market and best-selling seafood tonkatsu and spicy roast beef flavours, placing it second in terms
by value in China in 2016 of market share after Tingyi, with UPCH placing third. We believe NF’s R&D ability to
develop new flavours and innovative packaging means it is well-placed to capture
consumption upgrades in China as consumers seek higher-quality instant noodles with
more sophisticated flavours. As of June 2017, NF had 541 distributors in China.
China: market share of premium instant noodles by value China: market share of premium instant noodles by volume
(2016) (2016)
Others Others
7.0% 8.9%
Baixiang Jinmailang
8.3% Nissin 8.1% Nissin
19.8% 18.2%
Jinmailang Baixiang
9.6% 8.8%
UPC UPC
Tingyi Tingyi
17.4% 16.5%
37.9% 39.5%
7
Eyeing northern and NF has a strong presence in southern and eastern China, due to the popularity of instant
western China; southern noodles as well as the region’s tastes. In 1H18, Nissin booked sales growth in southern
China remains NF’s China of 10% HoH, eastern China >10%, northern China >20% and flat sales growth in
strongest region in western China. We estimate that southern China represents 60-70% of Nissin’s China
terms of sales sales currently, with the company enjoying the strongest sales performance in Guangzhou
and Dongguan. Eastern China contributed 20-30% of China sales in 1H18, where
Shanghai and Hangzhou were the major contributors. NF continues to expand its POS
near business and financial areas, through convenience stores and key accounts, or
modern channels where cup and bowl type noodles are consumed. NF currently has 16
SKUs of cup noodles (合味道) in Hong Kong and mainland China, though not all of its
flavours are available in all regions in China.
NF: China instant noodles sales by type NF: China sales by region
(CNY m) China sales on our
17-20E CAGR 1929 1H18 growth estimates (%) Status
2,000
Bag +5.3% 1705 Southern 10% 60-70 >50% sales from traditional channel
Bowl +16.4%
1474 Eastern >10% 20-30 Equally weighted in both channels
1,500
1223 1262 Northern >20% < 10 Strong Ippudo sales
1136 Western flat <5 Newly entered
1057
1,000
500
0
2014 2015 2016 2017 2018E 2019E 2020E
Bowls/Cups Bags
Source: Company, Daiwa estimates Source: Company, Daiwa estimates
NF: established markets and target markets in China
Shenyang
Beijing
Qingdao North and West: 6.9% of PRC sales
East: 26.4% of PRC sales

Suzhou
Shanghai South: 66.7% of PRC sales
Chengdu Hangzhou
Established markets Xiamen

Target markets Guangzhou Shantou
Dongguan
Zhuhai
Source: Company
Distribution network and flavour profile widening

100 salespersons added NF has added 100 salespeople this year, mostly in mainland China. We believe its
this year, mostly in partnership with 7-Eleven (900+ POS in Hong Kong and 2,600+ in mainland China) for its
mainland China Ippudo branded product will attract more established brands to partner with NF while
expanding its distribution network through modern channels. As of June 2017, NF had 605
distributors in Hong Kong and mainland China, and it is looking to increase the number of
distributors in target markets for further expansion.
8
Strategic partnership with prominent global ramen chains

First of many in the pipeline – Ippudo
Cup type Ippudo NF recently launched a new SKU, Ippudo cup noodles, in collaboration with Japanese
noodles sold exclusively global ramen restaurant chain Ippudo. Ippudo cup noodles were launched in Hong Kong
at 7-Eleven outlets in and mainland China in 7-Eleven stores in April 2018. There are currently 182 Ippudo
Hong Kong and restaurants globally across 13 countries in Asia, Europe and the US. Ippudo entered
mainland China mainland China in 2012 and now has 10 stores there. The Ippudo cup noodles are priced
at HKD12 and CNY8.9 in Hong Kong and China, respectively. We believe the new SKU
improves NF’s product mix; NF’s cup noodles (合味道) are priced at HKD7.6, as are
Damae Iccho (出前一丁). Given Ippudo’s increasing exposure in mainland China, where it
has 6 stores in Shanghai alone, and recently opened outlets in western and northern
China, we believe NF’s collaboration with Ippudo will boost awareness of the NF brand in
mainland China while saving on marketing expenses.
Ippudo: global store count
Store count
Japan 120
China 13
Thailand 10
Taiwan 8
Singapore 7 China sotre count
Shanghai 6
Hong Kong 7
Beijijng 2
Australia 6 Guangzhou 2
Malaysia 4 Shenzhen 1
US 3 Chengdu 1
Chongqing 1
UK 3
Indonesia 2
Phillippines 1
France 1
Total 185
Source: Ippudo website, Daiwa
We expect more product collaborations in 2018

Following the launch of its cup-type Ippudo noodles, NF has collaborated with another
ramen restaurant, Butao, launching 2 SKUs in July 2018. The available flavours are “Black
Super Rich Tonkatsu” and “Butao Super Rich Tonkatsu”, currently only available in Hong
Kong and priced at HKD15. We estimate the cup-type noodle product collaborations will
make a single-digit contribution to NF’s total revenue in full-year 2018.
NF: collaborative cup-type noodles with global ramen chains – Ippudo (left) and Butao (right)
Source: Company
9
Consumption upgrade in instant noodles

Nissin Foods set to capture premium uptrend
Nissin Japan launched the first ever cup-type noodles in 1971
By definition, cup and bowl-type instant noodles are packed and sold in a cup, foam bowls
or paper food containers and can be consumed directly from the containers. Bag-type
instant noodles are packaged and sold in laminated bags that also contain separate
servings of flavouring powders and/or seasoning, and need to be consumed with additional
utensils. The world’s first cup-type instant noodles were launched by NF’s parent, Nissin
Japan, in 1971. Cup and bowl-type noodles typically command a higher selling price than
bag-type noodles and tend to lie in the premium segment. For example, Demae Iccho bag-
type noodles are sold for HKD3.50, whereas the cup noodle variant is sold for HKD7.50.
Premium noodles generally refer to instant noodles with a price equal to or higher than
HKD6.0/CNY5.0 per serving, while mass noodles refer to instant noodles with a price of
less than HKD6.0/CNY5.0 per serving.
Cup and bowl-type noodles fuelling industry growth

The instant noodle market has experienced consistent demand growth in recent years, and
consumers are increasingly switching to premium products. Sales of the higher-ASP, or
premium, segment (>HKD6) will reach HKD1.1bn in value and 148m servings by 2021E,
representing CAGRs of 5.1% and 2.2% through 2016-21E, respectively, according to Frost
& Sullivan. Sales of bowl-type instant noodles are riding the uptrend of growth in the
premium segment, and expected to reach HKD950m in 2021E, a 7.5% CAGR in value
terms and 4.5% in sales volume over 2016-21E, according to Frost & Sullivan.
Hong Kong: retail sales value of premium instant noodles Hong Kong: retail sales volume of premium Instant noodle
market market
(HKDm) (mn servings) CAGR 2.2%
CAGR 5.1%
1,200 160 148
1,053 CAGR 4.0% 142 145
1,002 136 139
CAGR 6.0% 954 140 127 132
1,000 910 122 123
865
820 113
768 120
800 703 725
649 100
600 80
400 60
40
200
20
0 0
2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
NF Hong Kong: revenue remains driven by bag-type noodles

Sesame flavoured Across the range of NF’s product offerings, its Demae Iccho (出前一丁), ramen-style bag
Demae Iccho instant noodles, remain the most popular in Hong Kong, enjoying 60% market share on our
estimates. NF introduced new packaging in 2Q18 across all bag and cup Damae Iccho
products. Responding to increasing consumer demand for higher-quality and healthier
products, NF introduced non-oil fried Japanese ramen bag noodles (186g) in 2017 priced
Non-oil fried Japanese at HKD8 (vs. Damae Iccho bag noodles [101g] at HKD3.50). We believe the new non-oil
ramen fried bag noodles not only cater to health-conscious consumers, but are also indicative of
NF’s aim to capture the uptrend in the premium segment. We forecast revenue for NF’s
bag noodles to expand at an 11% CAGR from 2016-21E through: 1) volume growth on
Damae Ichho, and 2) product-mix upgrades to higher-ticket bag-ramen noodles.
10
Hong Kong: RSV (value) of instant noodles market NF: Hong Kong instant noodles sales revenue by type
(HKDm) 12/16 CAGR 16/21E CAGR (HKDm) 17-20E CAGR
Bags -2.1% Bags -2.6% 1,600 Bag +11.4%
1,400 1260 1314 1265 Bowls 5.9%
1218 Bowls 7.5% Bowl +7.7%
1159 1,400
1,200 1109 1070 1042 1024 1015 1,200
1,000 949
1,000 821 880
800 745
893 800 635
836
600 778 589 566 532
720 600
660
566 565 604
400 526 400
542 580 610
200 200 386 488
352 365
0 0
2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2014 2015 2016 2017 2018E 2019E 2020E
Bags Bowls/Cups Bowls/Cups Bags
Source: Frost & Sullivan Source: Company, Daiwa estimates
China: riding on faster growth in cup and-bowl type noodles

China premium noodles Frost & Sullivan forecasts the China premium instant noodle market (>CNY5) to reach
forecast to expand at CNY13bn in value and 2bn serves by 2021E, representing CAGRs of 11.7% and 6.1%
CAGRs of 11.7% and through 2016-21E, respectively. Cup and bowl type instant noodles are riding the
6.1% in value and sales premiumisation growth trend, and Frost & Sullivan expects these products to drive the
over 2016-21E overall instant noodle market going forward and reach CNY45.8bn in sales value in 2021E,
for CAGRs of 3.6% in value and 1% in sales volume for 2016-21E.
China: retail sales value of premium instant noodle market China: retail sales volume of premium instant noodle market
(2012-21E) (2012-21E)
(CNY bn) (bn servings)
14 CAGR 11.7% 13 2.5 CAGR 6.1%
11.6
12 2
10.4 1.9
2.0 CAGR 6.3% 1.8
CAGR 11.2% 9.3 1.7
10 1.6
8.2 1.5
7.5 1.4 1.4
8 6.8 6.9 1.5 1.3
1.2
5.9
6 4.9
1.0
4
0.5
2
0 0.0
2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
China: retail sales value of instant noodle market (2012-21E) China: retail sales volume of instant noodle market (2012-21E)
(CNY bn) 12/16 CAGR 16/21E CAGR (bn servings) 12/16 CAGR 16/21E CAGR
Bags -0.2% Bags 2.3% 35 Bags -4.1% Bags -1.7%
60 31 30
Bowls 1.0% Bowls 3.6% 29 Bowls -3.4% Bowls -1.0%
47 47 48 30 26
50 44 46 46 24
43 44 43 43 43 23
25 23 23 23 22
40
41 43 20
41 41 39 40
37 38 38 15 15 14
30 13 13
15 13 12 12 12 12
20 10
10 5
0 0
2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Bags Bowls/Cups Bags Bowls/Cups
11
China: consumers shift to premium products on higher disposable income

Premium instant noodles Given their relatively low price, ease of preparation and long shelf life, instant noodles have
outgrowing the market long been a popular ready-to-eat food option for China’s budget-conscious consumers.
despite a decline in However, faced with a wide array of healthy food options and greater disposable incomes,
overall growth consumer tastes and preferences are shifting from the mass market (bag-type instant
noodles priced at <CNY2) to both the premium (cup and bowl-type instant noodles priced
at >CNY5 and bag-type priced at >CNY3) and high-end segments (cup and bowl type
instant noodles priced at <CNY5 and bag-type priced at CNY2-3). According to AC
Nielsen, the premium instant noodle segment is outgrowing the high-end segment (39%
growth in the premium market vs 2.7% growth in the high-end segment in 2017).
We believe NF stands to benefit from this trend given its larger proportion of products in
the premium segment, and despite an overall decline in the instant noodle market in China,
as the premium segment (cup >CNY5) grew in value by 39% YoY in 2017, representing
7.3% of the entire market. In 1Q18, the segment continued to outgrow the industry and
increased by 0.8pp to 8.1% of the broader market. Meanwhile, the mass noodle segment
recorded a decline of 2.2pp, representing 35.9% of the China instant noodle market, down
from 38.1%.
China: instant noodle market structure by sales
Market structure Market growth

by sales
2017 2Q18 2017
Premium NF is well-placed
7.3% 8.1% +39% Cup > CNY 5 to
Bag > CNY 3 capture
consumption
upgrade trends as
consumers
move up from
High -end mass products to
54.6% 56.0% +2.7% Cup < CNY 5 premium products
Bag CNY 2 -3
Mass
38.1% 35.9% -7.7%
bag < CNY 2
Source: AC Nielsen
12
Margin expansion on product-mix upgrades

No longer simply a replacement meal
Consumers are open to new flavours
NF’s industry expertise Instant noodles are increasingly viewed by consumers as a pleasurable snack, or comfort
opens the door to new food rather than a meal replacement; and as such, consumers are increasingly looking for
products to fulfil market greater quality than quantity, and also healthier options, such as non-fried noodles. The
demand success of instant noodles came as a result of frying the noodles to preserve them prior to
packaging, allowing them to be quickly rehydrated with boiling water for almost immediate
consumption. While concerns about high salt and saturated fat content have curbed
consumer enthusiasm for the popular snack, with overall consumption declining by 1% and
3% in Hong Kong and China in retail sales volume, respectively, over 2012-16, noodle
makers have sought to upgrade their products by offering healthier alternatives or
premiumising their product range.
Historically, in China the top-selling flavoured noodles have been roast beef flavoured.
While remaining popular among consumers, younger consumers appear keen to try new
flavours, like seafood, tonkatsu and spicy, which are gaining popularity. To align with its
parent company’s strategy for global expansion, NF has also developed Southeast Asian
flavours like Thai Tom Yum Kung and Singaporean Laksa to target other Asian markets.
Apart from catering to regional tastes, the cup containers also have different designs, eg,
noodles in the Philippines are smaller in size in order to meet local preferences.
Given NF’s higher market share in terms of value in 2016 of 19.8% vs UPCH’s 17.4%, and
as we estimate there was no significant movement in premium market positions in 2017,
NF looks set to ride the consumption upgrade trend in China to further capture market
share in the premium market. In this context, the launch of its Ippudo (一風堂) cup-type
noodles adds to NF’s premium collection of instant noodles.
Higher priced, healthier and more profitable

NF: higher margin with faster growth than peers
We forecast NF’s revenue to expand at a 13% CAGR over 2016-20E in mainland China,
given NF’s higher-ASP product mix compared with its peers. On our estimates, the instant
noodle sales of UPCH and Tingyi in China will expand at 0.5% and 4.5% CAGRs over
2016-20E, respectively. NF’s advantageous position is more apparent when we compare
the company’s gross margin in China of 33.5% in 2017, on our estimates, which is 6pp
higher than Tingyi’s and 5pp higher than UPCH’s. This reflects NF’s greater proportion of
premium products, with key revenue drivers such as its “cup noodles (合味道)”.
China: 2016-20E instant noodle revenue CAGR and gross margin (2017) comparison
We forecast NF to (%) (%)
14 34
achieve the fastest 33.5 33.2
12 33
growth among peers in 32
the China instant 10
31
noodles space with a 8
29.8 30
13% revenue CAGR over 6 28.8 29
28.3
2016-20E 4
28
27
2 26
0 25
Nissin UPCH Tingyi Nongshim Indofood
2016-2020E CAGR Gross margin in 2017 (RHS)
Source: Bloomberg, Daiwa estimates
13
We see NF’s gross margin gradually widening in both Hong Kong and mainland China
through product-mix upgrades as higher-priced products and collaborative items are added
to its product portfolio. Although initially a drag on its gross margin in Hong Kong in 2017
given the transition post-acquisition of MCMS, the Hong Kong distributor of Demae Iccho,
we look for an uptrend in NF’s gross margin in Hong Kong and mainland China over our
forecast horizon as MCMS fully ramps up its operations and NF continues to produce its
own packaging materials at its Dongguan production plant, which commenced operation in
2016.
Benefiting from viable geographical and flavour expansion

Sustainable growth Although NF does not have plans to raise prices in the market at the current stage, we
through volume believe the company enjoys a favourable pricing position to capture market share in the
expansion premium noodles segment. In 2018, we have seen a healthier competitive environment in
the instant noodles market, especially in southern China, following aggressive promotions
in 2017, such as higher rebates to distributors. We believe NF’s stable pricing strategy
allows it to better manage channel inventory and its relationships with distributors in the
long term, and can aid its expansion into other products like beverages, frozen foods and
other products.
NF: Hong Kong gross-margin trends by product NF: China gross-margin trends
(%) (%)
55 40
50
38
46.6
45 40.1 35.8
42.9 38.4 39.2 35.4 35.4
37.4 36 35.0
40 44.3 34.6
39.2 34.2
37.6 41.4 36.7 37.9
35 35.5 34 35.1
37.0 35.0 35.1
36.6 36.0 32.0 34.5
30 34.0 35.0 34.2
32 33.5
25
31.9
20 30
2014 2015 2016 2017 2018E 2019E 2020E 2014 2015 2016 2017 2018E 2019E 2020E
Instant noodles Hong Kong Hong Kong (ex-MCMS) Instant noodles PRC
Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts
R&D capabilities to develop new flavours and product categories

Enhancing flavour development and product range with quality delivery
Experienced R&D team Keeping in mind the preferences of global customers, NF focuses on product innovation.
that is exploiting its The company has a team of 6-7 R&D specialists in China based in Shanghai, focusing on
inherited know-how creating a variety of flavours to target local or regional tastes. NF’s experienced product
development team ensures it stays ahead of rapid changes in consumer habits (eg,
introducing non-fried noodle options and vegetarian recipes in its frozen food range for
increasingly health-conscious customers). Apart from flavours, the company offers different
cup shapes, accessories (fork in cups) and sizes to meet diverse consumer preferences.
According to management, NF is capable of creating many types of spicy flavours to meet

consumer demand in developing regions, and specifically meet mainland Chinese
consumers’ preference for heavier flavours, in addition to regional preferences for Chinese
spices, curry, XO and Southeast Asian spices. Management believes new cup noodle (合
味道) flavours should be introduced in the market at a sustainable pace. We believe NF is
well positioned to expand in the China premium instant noodle market by offering a wider
product range with currently 16 SKUs of cup noodle flavours in mainland China to date.
14
NF: overview of key products in Hong Kong and mainland China

Hong Kong consumers Nissin Nongshim Sautao
prefer sesame flavoured
Demae Iccho, while the Hong Kong
best seller for NF in
China is seafood Best-selling flavors
flavoured cup noodles
Nissin UPC Tingyi
PRC
Best-selling flavors
Source: Company, JD.com, HKTVmall.com
NF: diversified product portfolio

NF is actively widening Nissin Foods - - Well-known diversified portfolio
its product portfolio in
instant noodles and
other products to ensure Non-fried
it stays ahead of rapid
Launched April 2018
changes in food habits;
for example, it has
introduced non-fried Frozen foods &
noodle options and Other products
vegetarian recipes in its
frozen food range for
health-conscious
customers Fuku Brand
Doll Brand
Pasta, Dried fried

noodles & Udon
(HK & PRC)
Rice noodles
Curry & Dessert
Source: Company, JD.com, HKTVmall.com
15
Financials
Revenue growth likely to be driven by volume and product-mix upgrades
Benefiting from increasing demand for cup and bowl-type noodles
We see faster growth in NF’s overall revenue increased by 10% YoY for 2017 to HKD2.9bn, with Hong Kong
China than Hong Kong contributing 48%. Revenue from Macau, Taiwan and others targeting Chinese customers
and the revenue mix reached HKD1.4bn (+19% YoY), while China contributed HKD1.5bn, up 4% YoY. Hong
shifting towards China Kong and overseas markets saw a robust recovery from 2H17 as consumer spending
over 2018-20E; we picked up, driving volume growth. In China, cup noodles remained the key revenue driver,
forecast China to along with the cup-type Ippudo noodles, which were exclusively rolled out in 7-11s in Hong
account for 52% of total Kong and mainland China. NF has no plans to raise retail prices at this time, and expects
revenue in 2018E revenue to be driven by product-mix upgrades and volume expansion. We forecast
revenue from Hong Kong and China to increase by 13% YoY and 16% YoY for 2018E,
respectively, with contributions from China continuing to outgrow Hong Kong as NF further
expands its distribution network. We expect China to contribute 53% to NF’s revenue in
2018E, increasing to 56% in 2020E with >90% of revenue contributed by cup-type noodles.
NF: revenue breakdown by region (2014-20E) NF: revenue breakdown by product in China (2017-20E)
(HKD m) (%) (HKD m) (%)
14.9 16.5
4,500 16.0 2,500 15.4 18.0
4,000 12.1 14.0 16.0
2,000 12.8
3,500 10.2 12.0 14.0
9.8
3,000 12.0
10.0 1,500
2,500 10.0
8.0 6.4
2,000 8.0
6.0 1,000
1,500 3.7 6.0
3.3
1,000 4.0 4.0
500
500 0.0 2.0 0.4 2.0
0 0.0 0 0.0
2015 2016 2017 2018E 2019E 2020E 2015 2016 2017 2018E 2019E 2020E
Hong Kong PRC Overall YoY growth Instant noodles Frozen food Overall YoY growth
Source: Company, Daiwa estimates Source: Company, Daiwa estimates
Higher-margin cup-type noodles to drive overall gross margin

Management expects We expect NF’s gross margin in China to remain stable and the Hong Kong gross margin
packaging costs to to recover gradually following the ramp-up post the acquisition of MCMS, the distributor of
remain a pressure on Damae Iccho (出前一丁), which was a drag in 2017. Management expects flour and palm
NF’s gross margin oil prices to remain stable in 2018, but packaging costs remained high in 1H18 and are
likely to stay elevated in 2H18. We believe NF’s overall gross margin will improve in 2018-
20E as we see higher-margin cup-type noodles continuing to be the major contributor
(accounting for 43% and 88% of the company’s instant noodle revenue in Hong Kong and
China in 2017, on our estimates). Although Hong Kong consumers still prefer bag noodles,
the introduction in 2017 of higher-priced bag noodles will be non-margin dilutive, in our
view.
NF: breakdown of cost of sales (%)

(%)
100
80
67.8 66.2 65.7 68.0 64.2
60 19.9 21.0 25.0 26.6 25.4 51.7
40 18.8
20.8 19.2 13.2 13.6 12.9
10.4
20 8.1 8.4 10.2 11.0 9.4
5.8 5.1 5.4 5.2 4.8 8.2
5.0
13.2 12.5 11.9 11.7 11.6 9.4
0
2014 2015 2016 2017 1H16 1H17
Wheat flour Palm oil Seasoning
Packaging Others ingredients Other cost
Raw material and packaging
Source: Company
16
NF: gross-margin trend by region (2014-20E)

(%)
51
44.3
46 41.4 40.1 39.2
41 37.0 37.4 38.4
36.6 35.0 35.8 35.0 35.4 36.0 35.4
34.2 34.0 34.6
36 32.0 39.6
37.9
31 35.6 35.2 35.7
34.1 34.3
26
21
16
11
6
2014 2015 2016 2017 2018E 2019E 2020E
Hong Kong (ex-MCMS) Hong Kong PRC Overall
Source: Company, Daiwa forecasts
Flour prices Palm oil prices

(CNY/mt) (USD/lb) (CNY/mt) (USD/mt)
9,000 6 1,400 12,000
8,000 1,200
5 10,000
7,000
1,000
6,000 4 8,000
5,000 800
3 6,000
4,000 600
3,000 2 4,000
400
2,000 2,000
1 200
1,000
0 0 0 0
Nov-09
Dec-16
Aug-10
Jun-11
Jan-13
Aug-14
Aug-18
Mar-12
Oct-13
Mar-16
May-15
Oct-17
Nov 08
Sep 10
Dec 15
Nov 16
Sep 17
Aug 18
Jan 08
Jul 11
Jun 12
Jan 15
Oct 09
Apr 13
Mar 14
Nanning (LHS) Brazil (RHS) "Tianjin (LHS)" "Malaysia (RHS)"

Source: Bloomberg Source: Bloomberg
Operating/net margins likely to rise on higher operating leverage in 2019E

NF focusing on quality We expect NF to enjoy higher operating leverage in 2019E as all production plants will be
growth as a priority ramped-up by then and administration costs should have stabilised. We see room to
improve the efficiency of its production plants as the utilisation rate increases. We forecast
its SG&A ratio to remain stable at 25% in 2018E and 26% in 2019E, due mainly to higher
promotion expenses required to expand its distribution network, and slightly increased staff
costs on its expanded sales team in mainland China this year. Management is focusing on
quality growth as a priority and aims to maintain a net-profit margin of 6.4% in 2018E. We
forecast NF’s net-profit margin to rise gradually and reach 6.7% in 2020E, led by likely
revenue growth and stable SG&A expenses.
NF: operating margin by region NF: net-margin trend

(%) (%)
14 8
12 7
10 10.1 10.1 9.9 9.8 6 6.7 6.8 6.7
9.5 9.5 6.4
8 8.4 5 5.9
6 4
4 3 3.9
3.5
2 2
0 1
2014 2015 2016 2017 2018E 2019E 2020E
0
Hong Kong PRC Overall 2014 2015 2016 2017 2018E 2019E 2020E
17
Dividend payout ratio likely to remain stable

We forecast NF’s net profit to expand at a 13% CAGR over 2018-20E. The company
recorded a net-cash position of HKD2.1bn in 2017, and although management has not
provided any guidance on its dividend payout ratio, it posted a dividend payout ratio of
40% for 2017; we are optimistic that the ratio will remain at similar levels going forward.
Management plans to focus on vertical integration, and intends to invest in distributors and
warehouses in mainland China for future geographical expansion. NF is also interested in
expanding its logistics chains, mainly in northern and western China.
NF: capex and free cash flow NF: net-cash position

(HKDm) (HKD m)
400 3,000
2,615
300 2,433
200 2,500 2,271
2,109
100
2,000
0 1,626
1,497 1,443
(100) 1,500
(200)
(300) 1,000
(400)
500
(500)
2015 2016 2017 2018E 2019E 2020E
0
Capex (LHS) Free cashflow (LHS) 2014 2015 2016 2017 2018E 2019E 2020E
18
Valuation
Initiating with a Buy (1) and 12-month TP of HKD4.13
Valuation appears inexpensive compared with peers
We initiate with a Buy (1) We initiate coverage of NF with a TP of HKD4.13, based on a 19x PER on our average
rating and 12-month TP 2018-19E EPS, representing a 27% discount to its peer average of 26x. While we believe
of HKD4.13, based on a the stock serves as a benchmark for our China food and beverage universe, our TP is at a
19x 2018-19E PER 28% discount to Tingyi and 24% to UPCH, which are NF’s direct competitors and are
trading currently at PERs of 27x and 25x, respectively, on our average 2018-19E EPS. We
believe these discounts are warranted to reflect Tingyi’s 20x and UPCH’s 8x higher
revenue than that of NF in 2017.
Both competitors have diversified product ranges and strong beverage profiles, which we
believe warrant a valuation premium given our positive view on the long-term growth
prospects of the beverage market. NF is currently moving into the beverage market, and
we believe it will catch up on valuation in the future as it further expands into the snacks
and beverage segments. NF was in a net-cash position of HKD2.1bn as of 2017; on
comparing their PERs excluding net cash, NF is trading at a PER of 12x on average 2018-
19E earnings which we view as inexpensive vs. Tingyi’s 27x and UPC’s 25x.
NF’s share price had declined by >30% from its May 2018 peak before the 1H18 results,
following the release of disappointing 2Q18 China results by the parent company, including
a 35% YoY drop in 2Q18 operating profit, a week prior to the reporting date of the Hong
Kong-listed entity. However, NF’s 1H18 results were not as disappointing as indicated by
the parent company, with its operating profit declining by only 2% YoY.
We believe the impact of the shock of the disappointing 1H18 numbers released by the
parent company has already been priced in. Management indicated that the vast gap
between the parent’s numbers and its own was due to accounting differences in the
reporting of: 1) R&D expenses, 2) accrual expenses, and 3) forex translation. We expect
NF’s share price to recover on likely higher operating leverage in 2019E as its utilisation
rate at the Zhejiang plant increases and the number of salespersons grows after its
expansion in 2018.
NF: 12-month-forward PER

(HKD)
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18
Nissin 14x 16x 18x 20x 23x
Source: Bloomberg, Daiwa forecasts
We initiate with a Buy (1) rating on NF on the back of: 1) its strong position in the fast-
growing premium instant noodles segment in China, 2) its expanding distribution network
in China, which we expect will provide potential upside via future product penetration, 3)
likely future strategic partnerships with established global brands in different food or
beverage product segments, and 4) its R&D capabilities in product and flavour
development, which we have not yet factored into its valuation.
19
When we look at NF’s expansion in China from its dominant position in Hong Kong, we
believe the best comparable stock is Vitasoy (345 HK, NR) with a market cap of
USD3.3bn. Vitasoy is a protein beverage company based in Hong Kong with a dominant
local market share. Vitasoy’s strong brand recognition in Hong Kong has helped it rapidly
increase its product penetration in China. Vitasoy’s China revenue contributed more than
50% to its total FY17 revenue, and its share price has increased by 16% so far in FY18,
with the stock trading currently at a 34x FY19E PER, according to the Bloomberg
consensus, having rerated to a c.34x 12-month-forward PER currently from 22x in 2012.
When comparing Vitasoy with mainland China dairy leaders Mengniu (2319 HK,
HKD24.75, Buy [1]) and Yili (600619 CH, not rated), we note that Vitasoy trades at a 62%
premium to Mengniu’s 20x 2018-19E PER and Yili’s 21x consensus 2018-19E PER
(market caps are 3.5x and 7x that of Vitasoy, respectively).
Increasing focus in NF shares a similar expansion story and competitive landscape with Vitasoy, except NF
mainland China offers a largely focuses on instant noodles and Vitasoy operates in the beverage segment. As
potential rerating discussed previously, we believe NF has a strong brand position in Hong Kong, driven by
catalyst its Japanese heritage and historical presence in Hong Kong; this allows it to differentiate
itself from domestic peers and gain market share. We believe its increasing focus on China
offers a potential rerating catalyst. We look for its organic revenue from China to expand at
a 15% CAGR over 2017-20E (vs. 10% CAGR in Hong Kong, ex. the MCMS acquisition).
NF has increased its salesforce by 100 so far in 2018, with >90% of these new hires based
in mainland China as NF seeks to tap into more regions to expand its China presence. We
see scope for new strategic partnerships and JVs to enable NF to launch new products
and tap new markets, offering a further potential rerating catalysts.
China food and beverage sector: valuation comparison (closing prices as of 24 September 2018)
EPS growth YoY EV/EBITDA Sales growth EBIT margin FCF yield
PER (x) (%) (x) YoY (%) (%) (%)
Market
cap
Company Ticker Rating USDm
HKD 18E 19E 20E 18E 19E 20E 18E 19E 18E 19E 17 18E 19E 18E 19E 20E
Major China food and beverage players
Nissin Foods 1475 HK Buy 548 3.42 17.2 14.5 13.5 -17 19 8 3.3 2.6 15 12 10 9.5 9.9 7.4 7.7 8.3
Want Want China 151 HK Buy 9,239 6.57 23.3 20.2 18.0 -8 15 12 12.9 11.2 -3 6 8 24.0 20.7 22.2 4.4 5.8
Tingyi 322 HK Hold 8,896 14.06 28.5 24.7 22.0 37 15 12 9.3 8.1 6 7 4 6.3 6.6 7.5 7.1 8.4
Uni-President China 220 HK Outperform 3,998 8.20 27.6 22.7 20.0 29 21 13 9.9 8.4 1 3 3 5.6 6.5 7.8 2.7 4.4
Dali Food 3799HK Buy 8,702 5.63 17.7 15.5 13.4 12 14 16 10.4 8.7 11 13 12 22.0 22.3 23.4 5.0 6.1
CR Beer 291 HK Buy 11,681 31.90 44.6 26.5 20.7 74 68 28 16.6 12.4 4 12 16 6.5 8.7 12.4 2.5 3.0
Tsingtao Brewery 168 HK Hold 5,429 35.60 28.8 25.6 24.6 17 13 4 12.2 10.1 1 1 3 5.0 5.3 6.8 1.7 2.1
China Mengniu 2319HK Buy 10,971 24.75 26.5 17.8 15.8 56 48 13 13.9 10.1 12 15 10 4.9 5.9 7.8 1.8 4.6
Health & Happiness 1112HK Buy 3,449 48.50 20.0 15.2 11.2 -5 32 35 10.8 8.6 24 29 18 26.2 24.1 24.7 6.0 7.5
Yili Industries 600887 CH NR 22,549 25.49 22.8 19.2 16.2 13 19 18 16.1 13.6 17 12 10.5 9.6 10.3 3.1 3.4 n.a.
Vitasoy 345 HK NR 3,551 26.10 40.2 34.4 29.4 17 17 17 22.1 19.2 13 15 12.6 13.1 13.4 2.3 2.9 n.a.
Market-cap weighted average 28.0 23.2 20.7 24 45 22 16.7 13.2 6 9 10.4 11.8 12.6 6.3 4.2 3.7
Source: Bloomberg forecasts for non-rated stocks, Daiwa forecasts
Risks
Food safety and reputational risk
Failure to detect Failure to detect defective products and other quality control issues could damage the
defective products and reputation of NF’s products and impact sales, and is the key downside risk to our call.
quality control issues is Shortcomings in this regard may also lead to liability claims and adverse publicity for the
the key risk to our call company.
Substitution, shift in consumer preferences

Due to NF’s concentrated focus on instant noodles, any deviation or shift in consumer
preferences towards other types of instant food products would negatively impact NF. We
believe instant noodles are in competition with the takeaway and delivery food business;
however, we believe NF benefits as instant noodles remain in a much lower price range
than substitutes.
20
Raw-material price inflation

The instant noodle industry is subject to various operational risks, such as those related to
commodity costs (ie, surges in flour and palm oil prices), labour costs, weather conditions
(ie, adverse weather could increase consumption) and consumers’ income levels.
21
Company background
NF was listed on the Hong Kong Stock Exchange in December 2017. It has 2 core
corporate brands (Nissin and Doll) and is a subsidiary of Japan-listed Nissin Foods
Holdings, which owns 74% of the company. NF has 9 plants that produce instant noodles,
frozen foods (dim sum) and other food products in Hong Kong and China under 5 flagship
product brands – Damae Iccho (出前一丁), Cup noodles, Fuku, Doll instant noodles and
Doll frozen foods – with over 540 SKUs. The current CEO is the grandson of the founder of
Nissin Foods Holdings, Momofuku Ando, who is also credited with inventing instant
noodles in the 1950s. NF has a very experienced management team with several years of
experience in the firm across departments, in addition to industry experience and those
garnered from the Japanese parent company.
NF: shareholding and business structure
Mr. Kiyotaka Nissin Japan Employee

Public
Ando (*) (Japan) Trust
1% 73.9 % 0.1% 25%
Nissin Foods HK (1475 HK)
Nissin
Winner Food Nissin Koikeya Nissin Foods Nissin China
Management MCMS (HK) (4)
(HK) (1) Foods (2) HK (3) Holding(PRC)
(HK)
100% 66% 100% 100% 100% 51%
Gangyongnan Zhuhai Winner Zhejiang Nissin Shanghai Fujian Nissin Guangdong Dongguan
(PRC) (PRC) (PRC) Nissin (PRC) (PRC) Nissin (PRC) Nissin (PRC)
100% 70.5% 100% 100% 100% 100% 100%
(*) Executive Director, Chairman of the Board and Chief Executive Officer
(1) Doll brands and Doll Dim Sum brand

(2) Potato Chips and other products
(3) Brands include Cup Noodles, Demae Iccho, Fuku and other brands
(4) Distribution business for beverages, processed foods and sauce products of other brands
Source: Company
NF: management team

Name Age Joined since Position Responsibilities
Mr. Kyotaka Ando 38 Mar-09 Executive Director, Chairman of the Board Aged 38; Executive Director, Chairman of the Board and Chief Executive Officer of the Group; grandson
and Chief Executive Officer of Mr. Momofuku Ando (founder of Nissin Japan); joined the group in March 2009; responsible for
strategic planning and managing the overall business and operations of the Group
Mr. Shinji Tatsutani 53 Apr-87 Executive Director and Chief Financial Aged 53; Executive Director and Chief Financial Officer of the Group; responsible for overseeing and
Officer managing overall finance functions of the Group; has over 26 years of experience in finance and
accounting
Mr. Munehiko Ono 50 Apr-91 Executive Director and Chief Production Aged 50; Executive Director and Chief Production Officer of the Group; responsible for overseeing and
Officer managing overall production functions of the Group
Mr. Yoshihide Semimaru 50 Apr-10 Executive Director and Chief Research Aged 50; Executive Director and Chief Research Officer of the Group; responsible for overseeing and
Officer managing overall research and development functions of the Group
Mr. Hijiri Fukuoka 51 Sep-09 Executive Director and General Manager Aged 51; Executive Director and General Manager in the southern China of Nissin China; responsible for
of Nissin China Holding (Southern China) overseeing and managing operations of sales of Nissin brand products in mainland China
Source: Company
Production capabilities
Pinghu plant, which NF has 6 production plants in China and 3 production plants in Hong Kong, which are
commenced production divided by product categories and packaging. The company categorises production plants
in May 2017, will in terms of oil-fried and non-oil friend noodle plants as they require completely different
increase distribution to production equipment and technology. A cup noodle production line can generally produce
northern and eastern 400 cups per minute, requiring 45 workers on the line. NF’s non-oil fried instant noodle
China plant in Xiamen currently has a utilisation rate of 86.8%, producing the 3 non-oil fried
products (Ippudo, ROAH and light cup noodles).
22
NF: production plant location map NF: production plant overview

Location Utilisation rate Categories
Pinghu 60-70% Instant noodles production, commenced in May 2017
Xiamen 86.8% Non-oil fried instant noodles production
Dongguan n.a. Packaging materials for instant noodles
Shunde 64.2% Instant noodles
21.2% Potato chips production
Zhuhai 73.3% Instant noodles production
Hong Kong 67.3%/50.9% Two instant noodle production plants
72.5% Frozen food production plant
n.a. Packaging, soup
Source: Company Source: Company
Globalisation strategy for cup noodles

Nissin Japan has been actively expanding its cup noodle brands in different countries
since the 1990s to globalise its cup noodle sales. It introduced seafood and curry flavoured
cup noodles in the US in 2018, while 4 flavours of cup noodles were introduced in the UK
for test marketing in October 2017. Nissin Japan continues to focus on BRICs, and we
believe the enhancement of the cup noodle brand will help Nissin Japan remain the
leading innovator of instant noodles globally.
Nissin Japan: global cup noodles coverage

Nissin Japan’s key
strategic plan for 2018 is
to globalise cup noodles
using unique packaging
and flavours designed
for each region
Source: Nissin Japan
23
Daiwa’s Asia Pacific Research Directory

HONG KONG SOUTH KOREA
Takashi FUJIKURA (852) 2848 4051 takashi.fujikura@hk.daiwacm.com Sung Yop CHUNG (82) 2 787 9157 sychung@kr.daiwacm.com
Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles;
Jiro IOKIBE (852) 2773 8702 jiro.iokibe@hk.daiwacm.com Shipbuilding; Machinery
Co-head of Asia Pacific Research Mike OH (82) 2 787 9179 mike.oh@kr.daiwacm.com

John HETHERINGTON (852) 2773 8787 john.hetherington@hk.daiwacm.com Banking; Capital Goods (Construction and Defence); Utilities; Steel
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Industrial (Hong Kong/China)
Jay LU (852) 2848 4970 jay.lu@hk.daiwacm.com TAIWAN
Rick HSU (886) 2 8758 6261 rick.hsu@daiwacm-cathay.com.tw
Automobiles and Components (Hong Kong/China)
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(Regional)
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Consumer (Hong Kong/China)
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Consumer (Hong Kong/China)
Andrew CHUNG (852) 2773 8529 andrew.chung@hk.daiwacm.com IT/Technology Hardware (Handsets and Components)
Helen CHIEN (886) 2 8758 6254 helen.chien@daiwacm-cathay.com.tw
Head of Gaming (Hong Kong/China)
John CHOI (852) 2773 8730 john.choi@hk.daiwacm.com Small/Mid Cap
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Small/Mid Cap (Hong Kong/China)
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Saurabh MEHTA (91) 22 6622 1009 saurabh.mehta@in.daiwacm.com
Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE
(Hong Kong/China) Capital Goods; Utilities
Don LAU (852) 2848 4469 don.lau@hk.daiwacm.com
Power, Utilities, Renewable and Environment (PURE) – Utilities (Hong Kong) SINGAPORE
Anna LU (852) 2848 4465 anna.lu@hk.daiwacm.com Ramakrishna MARUVADA (65) 6228 6742 ramakrishna.maruvada@sg.daiwacm.com
Power, Utilities, Renewable and Environment (PURE) – Nuclear (China) Head of Singapore Research; Telecommunications (China/ASEAN/India)
Jonas KAN (852) 2848 4439 jonas.kan@hk.daiwacm.com David LUM (65) 6228 6740 david.lum@sg.daiwacm.com
Head of Hong Kong and China Property Banking; Property and REITs
Cynthia CHAN (852) 2773 8243 cynthia.chan@hk.daiwacm.com Royston TAN (65) 6228 6745 royston.tan@sg.daiwacm.com
Property (China) Oil and Gas; Capital Goods

Bryan CHIK (852) 2773 8741 bryan.chik@hk.daiwacm.com Jame OSMAN (65) 6228 6744 jame.osman@sg.daiwacm.com
Custom Products Group Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore)
Selwyn CHENG (852) 2773 8716 selwyn.cheng@hk.daiwacm.com
Custom Products Group JAPAN
Yukino YAMADA (81) 3 5555 7295 yukino.yamada@daiwa.co.jp
PHILIPPINES Strategy (Regional)

Renzo CANDANO (63) 2 737 3022 renzo.candano@dbpdaiwacm.com.ph
Consumer
Micaela ABAQUITA (63) 2 737 3021 micaela.abaquita@dbpdaiwacm.com.ph
Property
Gregg ILAG (63) 2 737 3023 gregg.ilag@dbpdaiwacm.com.ph
Utilities; Energy
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Disclosure of investment ratings

Rating Percentage of total
Buy* 70.4%
Hold** 21.1%
Sell*** 8.5%
Source: Daiwa
Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 June 2018.
* comprised of Daiwa’s Buy and Outperform ratings.
** comprised of Daiwa’s Hold ratings.
*** comprised of Daiwa’s Underperform and Sell ratings.
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Nissin Foods: Initiation: A Chip Off The Old Block

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Nissin Foods: Initiation: A Chip Off The Old Block

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Hong Kong Consumer Staples 26 September 2018

Nissin Foods (1475 HK)

Target price: HKD4.13

Initiation: a chip off the old block Jonathan Ho

 Strong partnerships to drive further expansion in China Anson Chan, CFA

premium brands in its diversified product portfolio. We expect NF to 4.0 115

Nissin Foo (LHS) Relative to HSI (RHS)

Catalysts: This year NF has boosted its salesforce by c.100, mostly in

Valuation: Our 12-month TP of HKD4.13 is based on a PER of 19x, a 27%

Risks: 1) food safety and reputational risk, 2) shift in consumer preference,

How do we justify our view?

Growth outlook NF: net-profit and net-profit-margin trend

We forecast a 12% earnings CAGR over 2017-20E, and (HKDm) (%)

Valuation NF: 12-month-forward PER

NF is trading currently at a 16x PER based on our average (HKD)

(322 HK, HKD14.06, Hold [3]) and 15% to Uni-President 5.0

China (UPCH) (220 HK, HKD8.2, Outperform [2]). We 4.5

initiate coverage with a target price of HKD4.13, based on 4.0

Earnings revisions NF: consensus EPS revisions

The Bloomberg-consensus forecasts for NF have been (HKD)

Profit and loss (HKDm)

Cash flow (HKDm)

Financial summary continued …

Key ratios (%)

Market leader broadening its reach

NF: multi-brand strategy

established brands Signature sesame Seafood flavoured Cup

Source: Frost & Sullivan Source: Frost & Sullivan

Long-term benefits of acquiring a distributor

JV with Kagome to enter the beverage market

Kagome: vegetable juice selection (720ml/280ml)

Further expanding its territory in China

Source: Frost & Sullivan Source: Frost & Sullivan

NF: established markets and target markets in China

Qingdao North and West: 6.9% of PRC sales

East: 26.4% of PRC sales

Established markets Xiamen

Distribution network and flavour profile widening

Strategic partnership with prominent global ramen chains

Ippudo: global store count

Source: Ippudo website, Daiwa

We expect more product collaborations in 2018

Consumption upgrade in instant noodles

Cup and bowl-type noodles fuelling industry growth

NF Hong Kong: revenue remains driven by bag-type noodles

China: riding on faster growth in cup and-bowl type noodles

China: consumers shift to premium products on higher disposable income

China: instant noodle market structure by sales

Market structure Market growth

Margin expansion on product-mix upgrades

Higher priced, healthier and more profitable

Benefiting from viable geographical and flavour expansion

R&D capabilities to develop new flavours and product categories

According to management, NF is capable of creating many types of spicy flavours to meet

NF: overview of key products in Hong Kong and mainland China

Source: Company, JD.com, HKTVmall.com

NF: diversified product portfolio

Pasta, Dried fried