One Man's Loss Is Nissin Foods' Gain in Hong Kong Outbreak

Key takeaways：

• Nomura says Nissin Foods is profiting from recent panic buying in Hong Kong, adding it sees more than 30% potential upside to its stock
• The instant noodle maker is valued higher than its peers, suggesting the market thinks it is better positioned to succeed in the vast mainland market

By Jony Ho

Who would have imagined? Hong Kong, an international financial center known for its wheeling-and-dealing cool ways, has suddenly been plunged into chaos as it struggles with a major Covid wave. The storm has left a trail of empty supermarket shelves in its wake, “plundered” by the city’s panicked residents.

As unlikely as it seems, that scene has been playing out across Hong Kong during its recent outbreak, reminiscent of more limited runs on items like toilet paper seen early in some western markets early in the pandemic.

But the panic has left a handful of companies looking strangely blessed by the huge demand for their food products. One of those is Nissin Foods Co. Ltd. NFPDF, a premium instant noodle maker focused on the Chinese mainland and Hong Kong markets. Amid the chaos sweeping Hong Kong over the last week, investment bank Nomura raised its revenue forecast for the company due to the bump in local demand, saying it saw potential upside of 30% or more for the company’s stock.

Nomura published a report last Thursday showing that Nissin looked set to do well thanks to its 60% of Hong Kong’s instant noodle market, as well as it local production to cater direct to the market. It raised its projected growth for Nissin’s Hong Kong sales in the company’s 2022 fiscal year from 1% to 6.1%. It also adjusted its target price up by 2.7% to HK$7.60, and maintained its “overweight” rating. Thus, Nissin’s closing price of HK$5.68 last Friday implies the stock has a further 34% upside.

The stock has already benefited from the pandemic, even before the Hong Kong outbreak. When Covid-19 first hit the world in 2020, Nissin’s share price soared from HK$6 to a record high of HK$9.20. But as things stabilized, the momentum faded and it gave back those gains. Until the more infectious Omicron variant struck early this year, that is, pushing its share price back up to HK$6.55 at one point.

While Nomura might be rooting for the stock, others don’t seem quite as bullish. On the day the investment bank released the report, Nissin Foods’ stock actually dipped by around 1%.

Pandemic aside, the company has been busy improving its production efficiency and capacity as part of its ordinary operation. Last November, it announced that it had secured funding from Hong Kong’s Innovation and Technology Commission, and that it planned to build new smart production lines with total investment of HK$194 million ($24.9 million) to fully automate its instant noodle production process. But that project won’t be complete until 2023, making it too far off to help with the recent spike in demand.

So, why is panic-buying plaguing Hong Kong now after the city managed to control its local situation over the past two years? The answer lies in one word: Omicron. Two flight attendants brought the highly contagious variant to Hong Kong, leading to the current outbreak in a matter of two months. By March 4, the city was recording more than 50,000 new cases daily, and a cumulative total of more than 400,000 people infected.

To deal with the pandemic, the city’s government is planning to roll out citywide mandatory testing. Some officials even suggested a lockdown could be coming, mimicking standard practice across the border on the Chinese mainland. Such rumors are the primary source of the latest panic, sending throngs of people to stores vying for daily necessities in case they get locked at home for days at a time.

Nissin’s instant noodles are already popular in Hong Kong because they are cheap and easy to store. For those reasons, they have quickly sold out both in brick-and-mortar stores and online platforms during the current outbreak.

More and more Hong Kongers have been flocking to instant noodles over other foods since the pandemic began two years ago as they are forced to eat more at home due to government limits on when restaurants can open and how many people can eat at a table. The wider adoption of working from home has also boosted the trend, giving a lift to Nissin Food.

Even before the latest panic buying, the company had been growing steadily since the global pandemic began. In the first nine months of last year, its revenue rose 6.4% year-on-year to HK$2.86 billion, with its revenue in the mainland Chinese market surging 12.9% to HK$1.82 billion, mostly on its instant noodle sales.

But while its mainland revenue surged, a slowdown in demand in Hong Kong caused its revenue for the city to sink by 3.2% to HK$1.04 billion in the first nine months of last year as the virus remained under control. The nine-month period also saw its gross margin fall by 1.9 percentage points year-on-year to 31.5%, while its net profit declined by 12.3% to HK$231 million, partly due to higher raw material prices.

Gross margin rebound

To address its declining performance, the company in January announced it would raise its instant noodle prices from March 1 by mid-single-digit percentage amounts, representing its first price hike in 11 years. Its Japanese parent, Nissin Foods Holdings (2897.T), also announced in February that it would increase the prices of its 180 products in Japan in June by a maximum of 13% to offset rising costs associated with flour, including rising transportation costs.

The market doesn’t think such moves will weigh on the company’s revenue since consumers are less price sensitive towards instant noodles compared to other products, and demand has been strong during the pandemic. 

During the first three quarters of last year, Nissin Foods’ Hong Kong revenue accounted for around 36.4% of its total. As sales surge from the latest panic buying in the city, the company can also probably expect its Hong Kong business to take up a larger share of its total revenue pie. That explains why Nomura is still upbeat about its prospects, even as its stock stumbles.

While Nissin’s gross margin fell last year, Nomura believes it could rebound soon since 85% of its products in the Chinese market are becoming more expensive. It estimated the company’s gross margin could rise by 0.8 percentage points to 32.3%. Coupled with the spike in demand for its products, the brokerage raised its revenue estimates for the company in 2022 and 2023 by up to 2.8% and its net profit forecast by up to 3.3%.

In addition to its popularity in Hong Kong, Nissin stands out for its Japanese background and its high-end products that are widely popular on the mainland. That premium also shows up in the company’s valuation. Annualizing its profit for last year gives it an estimated price-to-earnings (P/E) ratio of around 20 times, higher than the 18 times of Tingyi Holding TCYMF and 16 times for Uni-President China UNPSF.