China Packaged Food and Beverage Sector: snacks the main course as drinks lose fizz

Investment case.

    We initiate coverage of the ChinaPackaged Food and Beverage Sectorwith a Neutral rating. While thecompanies in the sector are tradingat high valuations, we believe this isjustified for some of them by highearnings visibility and theirresilience to macroeconomicheadwinds.

    Among the different sub-segments,we prefer the snack and instant-foodcompanies to the non-alcoholicbeverage (soft drinks) ones given lessfierce competition in the former.

    Want Want, on which we initiatecoverage with a Buy (1) rating, is ourtop sector pick on the back of therecent share-price sell-off (it is down22% from its peak in April this year)and the acceleration we expect inrevenue over 2H14. We forecast thecompany to maintain an operatingmargin of more than 22% over 2014-16, compared with 4-6% for the softdrinkplayers and a range of -3% to13% for the instant-noodle makers.

    In the drinks segment, we expect thebottled-water players to fare betterthan the juice-drink and carbonateddrinkproducers over the near term,on the back of downtrading byconsumers and increased healthawareness. We prefer Tingyi, onwhich we initiate coverage with anOutperform (2) rating, to UPCH