Not yet out of the woods; we suggest that investors take profit

Deutsche Bank Markets Research Rating Sell Asia China Consumer Food & Beverage Company Tingyi Date 19 October 2016 Initiation of Coverage Not yet out of the woods; we suggest that investors take profit Reuters Bloomberg Exchange Ticker 0322.HK 322 HK HSI 0322 ADR Ticker ISIN TCYMY US8874953073 Forecasts And Ratios Year End Dec 31 2014A 2015A2016E2017E2018ESales (USDm) 10,238.0 9,102.88,433.28,196.48,028.7EBITDA (USDm) 1,142.1 1,027.3939.3997.71,032.7Reported NPAT (USDm) 400.5 256.3163.7194.2225.7Reported EPS FD(USD) 0.07 0.050.030.030.04DB EPS FD (USD) 0.07 0.050.030.030.04DB EPS growth (%) -1.8 -35.9-36.118.716.2PER (x) 37.7 42.839.433.228.6EV/EBITDA (x) 15.4 13.09.48.57.9DPS (net) (USD) 0.04 0.020.010.020.02Yield (net) (%) 1.3 1.21.31.51.8Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close Fundamental improvement may be short lived ________________________________________________________________________________________________________________Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Price at 18 Oct 2016 (HKD) 8.94Price target - 12mth (HKD) 6.6252-week range (HKD) 14.00 - 6.51HANG SENG INDEX 23,038 Charlie Chen Research Analyst (+852 ) 2203 6178 charlie.chen@db.com Price/price relative 48121620242810/144/1510/154/16TingyiHANG SENG INDEX (Rebased) Performance (%) 1m3m12mAbsolute -0.328.6-35.2HANG SENG INDEX -1.35.7-0.1Source: Deutsche Bank Comparatives Uni-President China (0220.HK),HKD5.56 NR 2015A 2016E2017EP/E (x) 25.5 21.518.4EV/EBITDA (x) 9.4 8.06.9Price/book (x) 1.8 1.71.6Source: Deutsche Bank We believe Tingyi’s recent share price rally has been driven by improving market sentiment with the expectation of strong 3Q results and sequentially improving earnings in 2H 2016 and 1H 2017, due to a low base effect. While we admit that Tingyi's fundamentals are improving, we are concerned that the market’s expectations for Tingyi's 2017 performance are too high. Our analysis suggests that Tingyi's earnings may be 20% below Bloomberg consensus, and every 1% change in revenue can have a 3.7% impact on its recurring EBIT. With continued revenue pressure in 2017 and beyond, we believe Tingyi's share price has overrun and suggest that investors take profit at current levels.Initiating coverage with Sell recommendation and target price of HK$6.62 Our main concern is that Tingyi’s fundamental recovery turns out to be short lived, and we remain cautious on its 2017 earnings. The elimination of restructuring expenses should help Tingyi’s net profit rebound 19% in 2017. However, given the sustained pressure on Tingyi’s main business (including instant noodles, carbonates and juice), 2017 net profit will likely remain below that recorded in 2015. Our EPS forecasts are 18% and 17% below Bloomberg consensus in 2017 and 2018, respectively. Core competitiveness yet to be proven We view Tingyi’s ongoing market share loss in the instant noodle and beverage segments to be a result of its lackluster new product launches. Although Tingyi’s management has become more aggressive and has been working on product re-positioning, it still trails competitors by a wide margin, and the effectiveness of the product repositioning has yet to be seen. Our financial forecasts imply that Tingyi will continue to lose market share. Target price of HK$6.62 based on DCF model We use a DCF model to derive our target price of HK$6.62, implying 24.6x FY17 PE and 7.2x EV/EBITDA. Upside risks: weaker raw material prices, a better-than-expected competitive environment and the successful launch of new products. Distributed on: 19/10/2016 09:00:00 GMT 19 October 2016 Food & Beverage Tingyi Page 2 Deutsche Bank AG/Hong Kong Model updated:18 October 2016 Running the numbers Asia Chin