Nissin Foods Looks 'Down Under' To Escape China Pressure Cooker

Key Takeaways:

• Nissin Foods is purchasing Australian frozen dumpling maker ABC Pastry for $23.3 million, seeking to tap demand from the country’s growing Asian population
• Nissin is looking to diversify geographically from its base in Mainland China and Hong Kong with other recent moves into Vietnam and Taiwan

By Doug Young

If you can’t stand the heat from China’s economic slowdown, you get out of the kitchen.

Perhaps that’s just a slight exaggeration if your name is Nissin Foods Co. Ltd. NSFCF, the China subsidiary of Japan’s Nissin Food Holdings NFPDF, the former of which still gets nearly all its revenue from its two main markets in Mainland China and Hong Kong. But the Hong Kong-listed Nissin is increasingly creeping beyond those two main markets with several strategic moves, laying the groundwork for a more diversified revenue base.

In its latest move in that direction, the company announced on Friday it will purchase Australian frozen dumpling maker ABC Pastry for a cool A$33.7 million ($23.3 million). The purchase price looks quite affordable for Hong Kong-listed Nissin, which is debt-free and had HK$1.32 billion ($170 million) in net cash and another HK$820 million in banking facilities at the end of June.

In addition to the purchase price, Nissin said it also has the option to purchase the land where ABC’s factory produces its dumplings for another A$8.8 million.

Nissin called the deal a “premium opportunity” to expand its business into Australia. “The Australian frozen food market size is expected to experience robust growth as the frozen dumplings, in particular, have been benefiting from the rising Asian migration to Australia,” it said.

Nissin’s Hong Kong shares rose 2.24% in Monday morning trade after the announcement. The stock has been quite the laggard lately compared with its peers, reflecting the difficulties the company is facing during China’s economic slowdown. Nissin’s shares are down 29% so far this year, in sharp contrast to rivals Tingyi (0322.HK) and Uni-President China (0220.HK), which are up 17% and 27%, respectively.

Nissin used to be a leader among that trio in terms of valuation, reflecting its market positioning. With its Japanese roots and status as the inventor of instant noodles, the company bills itself as a premium brand within its class. But as its stock has sunk, its price-to-earnings (P/E) ratio has fallen to 14, trailing Tingyi’s 17 and Uni-President’s 16.

Nissin’s positioning as a premium brand seems to be increasingly problematic in the current environment where consumers are reining in their spending and downgrading from higher-end products to more affordable ones. As that happens, the company’s revenue began contracting last year after several years of solid growth during the pandemic when consumers slurped up its cheap and convenient stay-at-home foods.

Nissin’s revenue contraction continued in the first half of this year, falling 5.5% year-on-year to HK$1.82 billion. That decline contrasted sharply with a slight 0.1% revenue increase for Tingyi during the same period, and an even larger 6% rise for Uni-President China. Weilong Delicious (9985.HK), a maker of cheap snacks costing just pennies each, reported its revenue jumped 26% during the period, partly due to the growing consumer fondness for cheap eats.

Growing Global Footprint

Nissin’s Japanese parent is quite the global company, with its signature Cup Noodles available in most major markets throughout the world. Within Asia, the Japanese company is active in most major Southeast Asian markets, including the Philippines, Thailand, Singapore, Malaysia and Indonesia.

The Hong Kong-listed Nissin is still largely confined to the Hong Kong and Mainland China markets, with those two accounting for about 40% and 60% of its revenue, respectively, in the first half of this year. Both markets experienced revenue declines in the latest six-month period, with Hong Kong down 6% while Mainland China fell 3% in yuan terms.

Even though its revenue fell, Nissin’s profit held mostly steady at HK$169 million, down slightly from HK$172 million a year earlier, thanks to a 0.9 percentage point improvement in its gross margin due to falling raw material costs.

The newly acquired Australia operation, by comparison, looks a bit healthier, at least in terms of profitability. Nissin said ABC Pastry recorded revenue of A$15.2 million for its fiscal year through June this year, though it didn’t provide any previous-year comparisons. That figure is quite small compared to Nissin’s own revenue, equating to about 2% of the HK$3.83 billion Nissin generated last year.

ABC Pastry also looks quite profitable, with its profit after tax rising 27% to A$2.84 million in the fiscal year through June from A$2.23 million a year earlier. That equates to a net profit margin of 18.7% for ABC Pastry, or roughly double Nissin’s own net margin of 9.3% in the first six months of this year. All this shows that ABC Pastry is quite profitable and probably growing in terms of revenue, meaning it could serve as a good base for Nissin to quickly expand in the market.

Australia is just the latest regional market where the Hong Kong-listed Nissin is expanding its footprint as it tries to diversify geographically beyond Hong Kong and Mainland China.

The company took its first fledgling step outside those two core markets last July, when it purchased 67% of its parent company’s Vietnamese business. That operation consists mostly of a single instant noodle factory, and the unit lost $1.4 million in its fiscal year through March 2023. Nissin mentioned the Vietnam operation in its latest half-year report, but said only that “a good performance was achieved, and the overall business outlook was encouraging,” suggesting it still generates relatively small revenue.

More recently, Nissin established an office late last year in Taiwan, where its products are currently sold through distributors and wholesalers. In its latest report it said the operation “is expected to achieve sales growth subsequently,” but didn’t elaborate on potential plans to beef up the operation or potentially set up any local manufacturing.

Here, we should note that Taiwan is the home turf for both Uni-President and Tingyi, and thus Nissin will face extremely tough competition from these two players if it makes a serious attempt to expand in the market. Then again, Taiwanese are also famous for their love of all things Japanese, and thus local consumers might enjoy such a new instant noodle option.

At the end of the day, this diversification strategy looks prudent for the Hong Kong-listed Nissin as its two main markets head into what could become a prolonged period of uncertainty. Vietnam and Taiwan are probably both already quite competitive but could still have some potential due to Nissin’s positioning as a premium brand. Meantime, the latest move into Australia could have even greater potential due to the country’s growing Asian population and a lower level of competition in foods catering to this customer group.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.