China Consumer - Off the Shelf:Promotions abating slightly in noodles, but shift

小圣999

China Consumer - Off the Shelf:Promotions abating slightly in noodles, but shift

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· Signs of promotional activity abating slightly in noodles. Our channelchecks indicated slightly fewer promotions and a lower level of discountingfrom both UPC and Tingyi. Both companies have stopped giving free giftssuch as plastic baskets and bowls with the purchase of pack noodles. Nevertheless, free sausages and upsized ingredient packages continue to beon offer. In addition, discounts on selected products remain. We alsonoticed higher promotional intensity in Xi'an supermarkets compared withShanghai supermarkets. We see Tingyi launching new noodles products,while we did not see new products from UPC. As we noted in our lastchannel check report, UPC management’s focus remains on existingproducts, and there is no intent to push out new products. · Tingyi seems to be shifting competitive focus to beverage segment. Tingyi has stepped up promotions in beverages. While Tingyi has stoppedgiving plastic baskets and bowls with purchase of instant noodles, it hasstarted to give plastic baskets with beverage purchases. We do not see UPCdoing this. As we noted in our recent report on Tingyi (click here for details),Tingyi management believes competition will intensify in beverages, thatUPC lacks the capacity to keep up with Tingyi in “600ml upsizing efforts”and that this will allow Tingyi to gain further market share. · Mengniu, Yili and Want Want raised prices 5-10% in Dec-13. Mostbrands have raised prices in response to higher raw milk prices (+23% y/y in2013, to Rmb4.17/kg). Mengniu raised prices on Deluxe pure milk andDeluxe low fat by 5% and 10%, respectively, and on kid’s milk future starby 8%. This was the third time Mengniu raised prices in 2013; Mengniuraised prices on the high-end Deluxe series 5-16% in Aug-13 and on lowendpure milk ~5% in Apr-13. Mengniu continues to launch more premiumproducts at higher prices. Yili raised prices on its Satine milk by 5% andpure milk prices by 3%. Want Want raised prices on Hot-kid milk by 10%. We were modeling a c7% ASP increase for this category for 2H13. A 10%ASP increase came late in the year, so revenue is likely to fall slightly shortof our expectations. However, we understand that Want Want kept inputcosts under control until 4Q, thanks to local purchases; hence, we do not seemajor downside risk to our GPM estimate. · Channel checks in Xi’an indicate relative dominance of regional dairybrands. In Xi’an supermarkets, we noticed regional players Yin Qiao (银桥)taking large shelf space and selling at lower prices than most nationalplayers. Some local brands such as Sheng Mu (圣牧) and Tianshanxue (天山雪) products also have superior store visibility. We believe regionalplayers are likely to dominate in a particular region in fresh milk and yogurt,given proximity advantages (among other factors). This is also a key driverof why foreign players have found it harder to penetrate the liquid milksegment relative to infant formula (shelf life of up to two years).