Mass Consumption 10 – Sweet Tooth

For those with a sweet tooth, the upcoming Chinese New Year holiday will test your will power. In case you’re not familiar with Chinese New Year tradition, families usual keep a box of sweets at home. When friends and families come over to visit during Chinese New Year, they’re supposed to have some sweets so that they will  have a sweet year ahead.

Traditional Lunar New Year Candy Box

To give you a feel, here’s what we are stocking at home. You can see some traditional local candies like the “White Rabbit”, “Yan Chim Kee Coconut Candy”, the “Orange/Melon Jelly Candy”, as well as some western favourites like Dairy Milk and Crunchie.

Who Made Dairy Milk? Cadbury, Hershey, Kraft or Mondelez

Two of my favourite chocolate bars are the Dairy Milk Fruit & Nut and the Crunchie. While Crunchie taste pretty much the same around the world, Dairy Milk has been a source of contention. Some argue that UK version is far superior to what you can buy in the US or elsewhere.

This brings us back to the above question.

Who makes Dairy Milk? The answer is “All of the above”.

I couldn’t get my hands on an American version. Top bar Made in the UK, Bottom bar made in Australia

Officially Dairy Milk is made by Cadbury. However, in the US, Hershey has the license to manufacture and distribute Cadbury products. In the rest of the world, it would be made by Cadbury UK.

However, Cadbury UK was bought by Kraft Foods in February 2010, so one could also argue that Dairy Milk is made by Kraft. But hang on, there’s more. The Kraft Foods from 2010 is not the same as the Kraft Heinz today. In October 2012, Kraft Foods decided to spin off its North American grocery business, calling it Kraft Foods Group Inc. The original entity, Kraft Foods, was renamed as Mondelez (MDLZ). Then in 2016, Kraft Foods was merged with Heinz to form Kraft Heinz Company (KHC).

Why the long intro? That’s the most exciting part

I was first drawn to Kraft Heinz when I saw its share price chart for 2017. Against the S&P 500’s 19% gain, KHZ had fallen by 11%. MDLZ did not do much better, falling some 3% in 2017. Normally, this is the type of set up that I find interesting. Household brands that had lagged behind the broader market and potentially poised for a catch up.

However, the first thing that cooled my interest was their PE. Even with the past week’s market correction, KHC and MDLZ were both still trading at 23x. Intuitively, I tend to think of 20x PE as fair for consumer staples. While I see KHC and MDLZ as having great products, current valuation seems to already reflect that.

But is there another angle? If you cannot count on multiple expansion, what about earnings growth. Are people eating more chocolates? Buying more ketchup? What about growth from the emerging markets? Are the Chinese splashing more ketchup onto their KFC fried chicken?

Geographic spread – KHC very North America centric, Mondelez more evenly split

We start by looking at their sales distribution. Here we see quite a big difference between the previous sister companies. KHC is predominately a US and North American focused company. The US and Canada account for 70.4% and 8.7% of its sales. Europe and the Rest of the World are only 8.9% and 12.0% of KHC’s sales. I guess that’s why it had looked to Unilever to add some geographic diversification to its business.

Mondelez, on the other hand, has sales that is more evenly distributed. Europe is the biggest contributor at 37.8% of sales, followed by North America at 26.2%. AMEA (Asia Middle East and Africa) is the third biggest at 22.2% with Latin America rounding things off at 13,8%. As Cadbury is licensed to Hershey in the US, this probably explains why Mondelez’s North America business trails its European side.

Products Mix

I know I have been talking a lot about Cadbury chocolates but there are actually a lot more to MDLZ. Some of its other brands include Oreo, Nabisco, Toblerone (another one of my favourites), Trident chewing gum, Halls and Tang. The three biggest sales categories are Biscuits at 41% of sales, followed by Chocolate at 30% and Gum and Candy at 15%. The reason why these seem to be increasing in proportion is due to Mondelez injecting its coffee business into what eventually became Keurig.

chart (12)

For Kraft Heinz, as the name implies, condiment & sauces and Cheese & dairy are the biggest contributors at 26% and 21%. But in case you’re wondering, its brands also includes the likes of Oscar Mayer, Planters, Maxwell House, Philadelphia, Kool-Aid and Jell-O just to name a few.

chart (11)

Sweating costs rather than top line growth

With so much acquisitions and divestments over the years, it is difficult to compare sales trends. However, if we just look at the last reported year, we see that Mondelez overall sales was flat. LatAm was the fastest growing region at 5.1%. Europe gained 0.4% but AMEA and North America both saw overall sales declining by 1.3% and 2.3%.

chart (5)

For KHC, during the first nine months of 2017, its overall sales declined by 1.4%. Sales in the Rest of the World grew 5.1% but the other three regions all declined. The US and Europe declined by 1.7% and 1.6% while sales in Canada tumbled 5.5%.

chart (9)

I don’t know whether it is just consumer staples or the fact that people are making healthier choices but the inability to grow the top line is something that we also saw in China’s instant noodle market as well (see previous post here).

chart (15)

The good news is that although it has been difficult to find top line growth, both companies have been effective in cutting costs and boosting margins. For MDLZ, over the past four years, it has managed to boost its operating margin from 11.3% to 15.0%. Through the first nine months of 2017, KHC’s operating margin was 26.5%, up 11.5pp from 2014’s pro-forma 15.1%.

Think I’ll wait for them to go on sale

While I like the margin improvement story, with fair valuation and little top line growth, my compulsion to act is low.

That said, with the recent volatility in the markets, I suspect these two great products may well be on sale soon.I just hope that it won’t be a 2-for-1 sale. If that is the case, I will need to eat a lot of chocolates to help cheer me up.

Embed from Getty Images

Small Moment – Has the high yield market hit an inflection point?

When the facts change, I change my mind. What do you do, sir? – John Maynard Keynes

When I was growing up, English lessons in my country were mostly focused on grammar. We learnt how to conjugate verbs, what punctuations to use but we never learnt about the different writing styles. I never knew there was such a thing as persuasive writing, narrative writing or writing about small moments. It wasn’t until my kids started primary school that I learnt that small moment writing is when you zoom in and focus on an object/event.

What does one company’s borrowings tell us?

For this post, we are zooming in and focusing on one company’s borrowing history to see what it can tell us about the high yield bond market.

The first chart below shows us the USD denominated bonds that this company had issued since 2013. With the exception of the August 2017 and December 2017 bonds, the other bonds were generally 4-5 years in duration.

Small moment 1 – Uptick in borrowing costs?


The first thing that struck me was how much the coupons had fallen. Five years ago, a 5-year bond would have carried a coupon around 12.25%. This has now fallen to 5.5%.

The second notable is the uptick on the far right hand side. For this company, while the latest 5-Yr bond carried a 5.5% coupon like the one that it issued 12 months ago (January 2017), its cost of borrowing has actually ticked slightly higher. Counting a lower offer price, the effective yield was 5.625%. Furthermore, although the 2017 perpetual bonds have an interest rate reset mechanism, their coupon of 5.375% is actually lower than the 5 year notes. To me, this feels like the costs of debt have reached an inflection point.

Small moment 2 – Loosening of covenants?

The second small moment that we are zooming in on are the club loans. Over the past three years, there have been four club loan arrangements. Like the above corporate bond picture, we see that interest rate spreads have compressed. Back in January 2015, the interest rate spread on a US$120mn club loan was set at 4.75% above interbank rates. This fell to 4.0% in 2016, 3.75% in January 2017 and then to 3.3% in September 2017.

chart (2)

Unlike the bond picture above, the interest rate spreads on club loans have yet to inflect. But what was interesting was the loosening of borrowing covenants. While the first three club loans all require the company to keep net borrowing to tangible net worth below 85% and EBITDA-to-interest above 3.0x, the latest loan loosened the covenant to 95% and 2.75x. As Central banks now start to normalise their balance sheet and global liquidity start to recede, it would be interesting to see if future club loans see a higher interest rate spread and/or stronger covenants.

Small moment 3 – Increased borrowing frequency

Our third and last small moment is the borrowing frequency. Since the start of 2017, this company has issued four bonds and arranged two club loans.

chart (3)

Unlike previous years, when borrowing were arranged every 6-12 months, the past four bonds were issued on January, August, December and January. Either investors’ bond appetite is still very strong or you’ve got a very smart CFO that is locking in cheap money while he can.

Collectively, these three small moments are suggesting to me that there is a smarter person on the other side of this trade. I think I’ll let this pitch pass. After all, we’re not writing about baseball here.

Mass Consumption 9 – Battle of the Robotic Surgeons

Do you remember the movie “Big Hero 6”? Can you believe it came out nearly four years ago?

It was a pretty good movie but what really stood out to me was its idea of a robot. You see, I grew up with the likes of Transformers and Gundam, so for its Hero to be a soft and cuddly robotic “Michelin Man”, this was something new. But not to be overlooked were the tiny microbots that Hiro created.

Embed from Getty Images

During the robotics competition, people initial laughed at the microbots but once they realise what the small nimble robots could do, it proved to be a game changer.

Source: Big Hero 6 Wiki

Well, in the real world of robotics-assisted surgical systems, how would a small player stack up against a competitor that is 75x its size? What are the similarities and differences when one generates US$2.7bn of sales and another just US$36mn?

Big Guy Versus the Little Guy

In our previous post Mass Consumption Part 5 – The Six Million Dollar Man, we examined the medical equipment market. In that post, Intuitive Surgical (ISRG) played the role of the small and nimble up and comer while the big incumbents were the likes of Medtronics and Stryker.

In this post, when when we compare ISRG against another maker of robotics-assisted surgical systems, Mazor Robotics (MZOR), ISRG is now the big giant. In terms of revenue, ISRG’s US$2.7bn in 2016 was 75x larger than MZOR’s US$36mn.


System Sales versus Recurrent Income

When we initially reviewed ISRG back in August, one aspect that caught our eye was its large recurrent income base from the sale of (i) instruments and accessories and (ii) service and maintenance fees. Together, these two revenue items made up 71% of ISRG’s overall sales and provided a good source of recurrent income.

chart (1)

For MZOR, given its smaller base, system sales still make up more than 50% of its sales. The recurrent incomes of supplies and disposable plus service and maintenance make up a smaller 46% of sales. However, as system sales continue to rise, we could see MZOR’s recurrent income base starting to rise in the future.

US market remains the key sales driver

chart (2)

For both players, the US is by far the most important market. For ISRG, the US make up 73% of overall sales. For MZOR, it is even bigger at 84%. So even as MZOR grows and diversifies into other international markets, it is probable that the US would remain the key to its future success.

SG&A is the key to profitability

Although ISRG’s sales is 75x larger than MZOR’s, the two companies actually have fairly similar gross margins. As the following chart shows, in the latest 9M 2017 results, ISRG and MZOR’s gross margins were both around 70%.

chart (5)

Another area that has started to converge is Research and Development. In 9M 2017, R&D expenses was 12.4% of MZOR’s sales. For ISRG, it was 10.8%. But of course, if one were to look at this in absolute terms, ISRG spent US$242mn versus MZOR’s US$5.7mn.

chart (3)

While ISRG and MZOR’s gross margin and R&D expenses are similar, the biggest difference and the key to profitability was actually Sales and Marketing.

For ISRG, SG&A ate up 26.5% of sales. But for MZOR, it was a whopping 82.5%. On a net basis, this results in ISRG having a net margin of 31% while MZOR’s net margin remains negative at -26%.

chart (6)

The importance of sales and marketing has been a consistent theme. Even for the medical giants like Medtronic and Stryker, SG&A expenses were the biggest cost item, accounting for some 30%+ of sales.

chart (11)

Organically driven growth so far…

Unlike the big medical behemoths like Medtronics and Stryker where M&A plays a key role in driving growth, ISRG and MZOR are more organically driven. Goodwill only make up 3.6% and 1.6% of ISRG and MZOR’s asset base. By comparison, for Medtronics and Stryker, in December 2016, goodwill accounted for 39% and 31% of its total assets.

chart (4)

Microbots + Death Star

Given the importance of sales and marketing to growth and profitability, how does the tiny microbot catch up? One way would be to continue to pour money into sales and marketing staff and hope that sales growth offset increased expenses. Another way would be through M&A (that’s why there are such large goodwill balances on the books of the big medical giants). A third way is through strategic alliances.

Mazor chose option 3 and entered into a strategic partnership with Medtronics. In addition to investing US$72mn in Mazor (potentially up to US$125mn counting conversion of warrants), the partnership also sees Medtronic assuming worldwide distribution for Mazor X system. As Medtronic generates annual sales of US$30bn, this would be like the microbots being backed up by the Death Star.

Logically, this makes a lot of sense. I just hope they didn’t do the silly Star Wars thing and leave a critical 2 metre exhaust port for the rebel forces to hit.




Your Money’s Worth? MPF Fees

On 3 January 2018, MiFID II came into effect. For many, this was supposed to spell the death of sell-side research. In our previous post MiFID II – What would you pay for content?, we found that in the world of online literature only 6% of readers pay for content and the average pay rate was only Rmb20 per month. The silver lining from those figures was that both are rising. This suggests that if the content is good, there is money to be made but you need massive volumes.

In this post, we take a look at the other side of the coin. Fees charged by the Buy-side.

Average Fees for 556 MPF Schemes – 1.56%

According to data from Hong Kong’s Mandatory Provident Scheme Authority, the average fee (i.e. Fund Expense Ratio or FER) for the 556 MPF funds that it list is 1.56%. Money market funds have the lowest fee ratio at 0.60% (for MPF Conservative) and 0.95% (for MPF Non-Conservative). This is likely due to the very low returns that money market funds get in today’s low-interest environment. If they were to try to charge higher fees, annual returns would probably be negative.

At the other end of the spectrum, fees for Guaranteed Funds are the highest with average FER of 2.06%. The most popular products are those with an equity component. Mixed asset funds and equity funds make up 45% and 33% of the 556 total MPF funds. These have the second and third highest FER ratios at 1.72% and 1.55%

chart (42)

Average fees reduced by 24.27% since 2007

Although the MPF Authority’s Fee Comparison website proudly state that average FER has been reduced by 24.27% since the site was launched in 2007, I don’t want to jump to the conclusion that lower fees are better, although this is generally true.

For now, let’s leave the possibility that some of these funds are charging higher fees so that they can invest in more research/systems and drive better returns. After all, if revenues (investment gains) are rising faster than costs (fees) then we are all better off, right?

What would you pay just to track the index?

While we can apply the above argument to many actively managed funds, it should not apply to passive funds. For those unfamiliar with the term, Morningstar defines passively managed fund as a “fund whose investment securities are not chosen by a portfolio manager, but instead are automatically selected to match an index or part of the market.”

Since passive funds are designed to match or track an index, higher fees are just higher fees. Theoretically, the higher fees should not lead to any outperformance. In fact, this would be considered a tracking error.

Screen Shot 2018-01-08 at 3.54.45 AM

FERs are way too high still at 0.71-1.14%

When we reviewed the data from the MPFA for several funds that track Hong Kong’s Hang Seng Index, we found that their Fund Expense Ratios ranged from 0.71% to 1.14%. At first glance, these may seem reasonable when you compare it to the 1.55% average fees charged by the equity funds but remember these are passive products that are just supposed to track and not outperform an index.

Tracker Fund Charge Ratio is Only 0.1%

If these are compared to a the Tracker Fund of Hong Kong, we see how unreasonably high those fees are. The Tracker Fund of Hong Kong currently has net asset value around HK$102bn. It tracks the performance of the Hang Seng Index and has an ongoing charge ratio of 0.1%.

Yup, that is 0.1% compared to the 0.71%-1.14% above.

chart (43)

Yes, some of this may be down to base effect (0.1% of HK$102bn is still HK$102mn) but for some funds that are essentially just ploughing 99% of the money received to the Tracker Fund, what is the value add from an annual 1% admin fee?

I guess paper and ink to print annual fund statements must be pretty expensive. Come to think of it, Hong Kong’s largest listed paper manufacturing company did rise 64% last year. Hmmm…

Screen Shot 2018-01-08 at 5.17.17 AM
Source: Google Finance


HK Housing: Fear of Losing Out Part 2 – Money Supply

According to my high school economics teacher, the price of a product is set at where the supply and demand curves intersect. Theoretically, if some force were to act on the supply or demand curve and shift it inwards or outwards, this will result in a new equilibrium price. This is how things are supposed to work.

Source: Wikipedia


As we noted last week, Hong Kong’s housing supply has increased by 31% over the past three years. Whether this was due to higher prices causing developers to increase supply (i.e. moving up the supply curve) or a more proactive government supplying land (i.e. an outward shift in supply curve) is up to debate. What is clear is that supply has definitely increased.

Ironically, Housing Demand is Driven by Money Supply

This week, we turn to the demand side of the equation. Ironically, in order to gauge housing demand, we will be looking at “Money Supply”.

M1, M2 and M3. No, not BMW’s but Money Supply

Embed from Getty Images

Simply put, money supply is how much money there is in circulation or in existence in a country. Economist generally measures money supply using three terms – M1, M2 and M3.

  • M1 is the narrowest definition. In Hong Kong, it would include all of the physical notes and coins in the hands of the public as well as demand deposits in the bank. As of Oct 2017, Hong Kong’s M1 money supply stood at HK$2,997bn.
  • M2 includes all of M1 and adds all of the deposits with licensed banks (i.e. savings deposit, time deposit and negotiable certificate of deposit). As of Oct 2017, HK’s M2 money supply was HK$13,951bn, roughly 4.7x the size of M1.
  • M3 includes all of M1 and M2 and further adds deposits with restricted licence banks and deposit taking companies. In HK, M3 is only slightly larger than M2 at HK$14,003bn.

M3 has increased 27% over the past three years

Over the past three years, Hong Kong’s M3 money supply has increased by 27% from HK$11trn to HK$14trn. Narrow money supply, M1 (i.e. the notes and coins in circulation as well as demand deposits) increased by 71% from HK$1.75trn to HK$3trn.

chart (33)

If one were to go back to the onset of the Global Financial Crisis back in October 2008, Hong Kong’s broad money supply, M3, has more than doubled, rising 131% from HK$6trn to HK$14trn.

Incidentally, home prices have risen 27% also

Incidentally, between October 2014 to October 2017, Hong Kong’s home price index has risen by 27%. And between October 2008 to October 2017, the Rating & Valuation Department’s home price index has increased by 196%.

chart (34).png

That’s the past, what about the next three years?

Looking back, we can reason that with a larger pool of cash shifting out the demand curve, asset prices have increased. Now, the questions is what will happen to Hong Kong’s money supply in the next three years?

The way that I see it, there are three factors at play.

  1. Potential in/outflow of global liquidity
  2. Will HK banks increase their loan-to-deposit ratios?
  3. Change in reserve ratio and discount rate

Central Bank balance sheet expected to shrink sometime in 2018

Hong Kong being a small open economy has and will be subjected to change in global liquidity conditions. Over the past 10 years, a big driver of its money supply has been the expansion of the various Central banks’ balance sheets. Looking ahead, with the US Fed starting to allow its holdings to roll off and the ECB expected to taper its asset buying program, Central bank balance sheets are expected to start to shrink sometime in 2018.

Screen Shot 2017-12-04 at 3.57.31 PM
Source: JPM AM via Business Insider

Will HK banks increase their loan-to-deposit ratios?

Assuming that global liquidity flows are unchanged, another way to increase money supply would be for the banks to increase lending by raising their loan-to-deposit ratios. As of October 2017, Hong Kong banks’ loan-to-deposit ratio is only around 71%. Although this has risen by more than 10pp since 2008, one could argue that there is still scope for this figure to head higher and banks to lend more.

Screen Shot 2017-12-04 at 4.11.54 PMHowever, if one were to consider the rise in household debt, I have my doubts on how keen the banks are to further increase their lending to households.

According to the HKMA’s Half-Yearly Monetary and Financial Stability Report, Hong Kong’s household debt-to-GDP ratio has climbed to 68.3% in 1H 2017. Two things shout out at me when I look at the chart below. Firstly, 68.3% is the highest household-debt-to-GDP that Hong Kong has seen since 2000 when the data started. Secondly, look at the breakdown of this debt. Mortgage and credit cards have remained broadly stable but “Loans for other private purpose” has driven almost the entire increase in household debt.

Screen Shot 2017-12-04 at 4.12.43 PMI’m not sure what this is but judging by the commercials on prime time television, it is probably people consolidating their credit card debt or taking out high interest loans to fund their down payments to fill the gap from residential mortgage LTVs have been capped.

For now, as long as liquidity is plentiful and asset prices are rising, this number may yet rise. But my guess is that when the tide goes out, this would be one of the charts that people point to and say we should have seen it coming.

Change in reserve ratio and discount rate

Just like the first two questions, the reserve ratio question is debatable. Some would argue that although the discount rate has risen from its low of 0.50% to 1.50%, it is still very low and Central banks would surely come to the rescue and cut reserve ratios and discount rates on any sign of trouble.

This could happen but unlike 2007 when the discount window was reduced from 6.75% to 0.5% within a span of 18 months, there is a lot less ammo this time around. Furthermore, with the HKD pegged to the USD, for our base rate to be cut, it would require a synchronised downturn with the US.

chart (35)

Three key takeaways on demand

  • Hong Kong’s money supply has increased by 27% and 131% since October 2014 and October 2008. This is coincidentally close to the 27% and 196% increase in local home prices over the same period.
  • Will HK’s money supply continue to expand in the next three years? Well, we know that:
    • the G4 Central bank balance sheet is expected to start shrinking sometime around Q2/Q3 2018.
    • Although overall LDR at 71% is still low, HK’s household debt-to-GDP ratio at 68% is the highest that it’s ever been at. Furthermore, this increase has almost entirely been driven by “Loans for other private purpose”

For the die-hard property bulls, yes, it is possible that Central banks can put off shrinking their balance sheet and banks can increase their lending even more. But, with the Fed clearly spelling out their asset reduction program and household debt-to-GDP at the highest levels ever, to hope that Hong Kong’s monetary base will expand at the same pace would require one to turn a blind eye to some clear and present risks.



HK Housing: Fear of Losing Out? Part 1 – Supply Snapshot

If after ten minutes at the poker table you do not know who the patsy is—you are the patsy.      Poker Proverb

Hong Kong is one of the most expensive and most unaffordable housing markets in the world. This has been the case for years but 2017 has taken us to new heights. Year-to-date, home prices have soared another 11%. Through the first 10 months of 2017, home buyers have snapped up HK$199bn of new homes, up a staggering 36% over the same period last year.

chart (31)

The fear of missing out

One of the biggest problems with buying a home is the emotional attachment. For most people, your home is the biggest investment you ever make. If you buy and the market falls, you risk a drop in your net worth. If you don’t buy and the market keeps going up, then you worry about the decline in your purchasing power. In a rising market, there is a huge fear of missing out.

Trust the process? Have the fundamentals change

With home prices having risen 28% over the past three years, my fear of losing out is starting to get the better part of me. Do you chase the market or do you trust the process? Have the fundamentals change to make this expensive market reasonable?

Taking a fresh look at HK housing supply

As a starting point, let’s take a look at Hong Kong’s housing supply picture. Although I’ve seen some of the headlines, I haven’t spent a lot of time with the detailed supply figures  for a few years. As I updated the various data points, I was struck by how much bigger the supply figures have become.

Primary supply up 31% since 2014

In December 2014, Hong Kong’s private primary housing supply (i.e. the amount of stock on the hands of the developers) was 74,000 units. As of September 2017, this figure has now reached 97,000 units, an increase of 31%.

chart (29)

Current supply equals 64 months of sales

Although housing sales (red line above) have also increased, supply (blue line above) has clearly outpaced demand. If one were to look at supply in terms of the number of months inventory (total supply divided by average monthly sales), the current supply pipeline is equal to 64 months of sales.

chart (28)

64 months is not particularly high in the historical context. In fact, since the data began in Q3 2004, the long run average months of supply has been 70 months. And when demand was particularly weak, the effective months of supply have been more than 150 months and as high as 208 months.

Composition of supply: Is it creating a false sense of shortage?

As I reviewed the supply picture, another key aspect that struck me was the composition of this supply. The Hong Kong government splits housing supply into (1) unsold units from completed projects, (2) unsold units from project under construction and (3) unsold units from disposed sites.

Since developers are allowed to pre-sell units within 20 months of completion, (1) and (2) [or the red and blue areas below] would represent the readily available supply that potential home buyers would see. However, as construction works begin on disposed sites, over time, the yellow part of the supply picture would transition to the red part, increasing the apparent supply to the market.

chart (30)

If one were to look the breakdown of housing supply, we can see that the percentage of supply where construction has not yet started (i.e. long dated supply) is now at 32%, near the highest that it has ever been at. On the flipside, the percentage from unsold units in already completed projects (i.e. leftover units) is at 9.3%.

chart (32)

At this point, there is little incentive for developers to clear stock. However, if future demand should weaken and long-dated supply starts to turn into ready supply, the goldilocks environment that has driven price up 11% and primary sales up 36% may be difficult to replicate in 2018.

Three Key Supply Takeaways

Next week, we turn our attention to demand, specifically, how much money there is to chase after Hong Kong’s housing stock. In the meantime, our three supply takeaways are:

  • Private primary supply has increased 31% over the past three years to 97,000 units.
  • Although demand has been strong, supply has risen even faster At 97,000 units, this is equal to 64 months of supply (based on elevated demand).
  • The current supply mix has created a “false” sense of supply shortage. Of the 97,000 units, 32% are from recently disposed sites for which construction work has yet to start. As construction begins, ready-for-sale units will increase and potentially alleviate the perceived supply shortage.

How instant noodles reflect where you’re from?

When I say “Instant Noodles”, what’s the first image that comes to your mind?

Do you think of the cake of instant noodles that you cook in boiling water and add the packet of MSG? Or do you think of something more along the lines of “Cup noodles?”

Your choice of instant noodle says a lot about you

Before we go into how the type of instant noodle reflect who you are, let’s start by firstly reviewing the instant noodle market in Hong Kong and China.

Instant Noodle Market Growth is Anaemic in both HK & China

According to an industry report from Frost & Sullivan, Hong Kong’s instant noodle market was worth around HK$1.8bn. Over the past four years, growth has been anaemic with sales value only rising 0.5% p.a. while sales volumes have actually contracted by 1.3% p.a.

chart (14)

Although China’s instant noodle market is much bigger, it is also not growing much. The Rmb81bn of instant noodle sales in 2016 only represent a p.a. growth rate of 0.4% over the 2012-2016 period. Volume wise, the number of instant noodle serving has actually fallen by 3.9% p.a.

chart (15)

Who eats more instant noodles?

In absolute terms, China’s 37.2bn serving of instant noodles is 90x larger than Hong Kong’s 415mn servings. However, if you consider that China’s 1.3bn population is actually 186x larger than Hong Kong’s 7 mn population, the data actually shows that Hong Kong people actually eat more instant noodle than their mainland cousins.

HK 59.2 servings Vs. China 28.6 servings

In 2016, Hong Kong people ate 59.2 servings of instant noodles, almost twice as much as the average 28.6 servings consumed by those in China.

chart (24)

What do you eat? Cups, Bowls or Bags

When we examine the data further, we see another interesting distinction between Hong Kong and China’s instant noodle connoisseurs. In Hong Kong, bag-type instant noodles make up nearly two-thirds of the overall sales volume. In China, the mix is almost 50/50 with bags taking up 53% of sales.

chart (18)chart (19)

In this respect, if you associate instant noodle with those that come in a little plastic bag that you cook yourself, then you’re most likely from Hong Kong. Conversely, if you think about pouring water into a little cup/bowl then you’re most likely from China.

What brand do you prefer? 出前一丁 or 康師傅

If you go to a Cha Chan Teng in Hong Kong and order instant noodle for breakfast, you are usually given a choice of upgrading to 丁麵 (Demae Iccho) for a few extra bucks. But what you may not realise is that in Hong Kong, 出前一丁, 公仔麵, 福麵 and Cup Noodles are all carried by Nissin Foods.

chart (22)

The multiple brand strategy has helped Nissin Group become a clear leader in the Hong Kong market with a market share of 65.3%. Nong Shim (maker of Shim Ramyun) and Sau Tao, are a very distant second and third and only have a 5.5% and 5.4% market share respectively.

In China, the names are very different. Taiwanese noodle makers like Tingyi (康師傅) and Uni-President dominate the instant noodle market and hold market shares of 46.5% and 17.8% respectively. Nissin Foods is much smaller and only holds a market share of 2.8%.

chart (21)

So if you associate instant noodle with Cup Noodle and 出前一丁, you’re most likely from Hong Kong. On the other hand, if you think of 康師傅 or 來一客, then you are most likely from China.

These two distinction is even more stark when you consider the revenue breakdown of Nissin Foods in the two areas. In Hong Kong, the revenue split between Bag type instant noodles, cup/bowl type and frozen foods are almost even at 39/28/33. Whereas, in China, the revenue split for Nissin Foods is 85/13/2 .

chart (20)

The Premium-isation of Instant Noodles

In a way, China’s instant noodle market is very unique. Unlike the other industries that we have looked at in our Mass Consumption series (travel, beer, coffee and fried chicken, online games), the instant noodle market is NOT growing. In fact, Frost and Sullivan forecast that the number of instant noodle servings will decline from 2016’s 37.2bn to 34.5bn in 2021E.

With volume in decline, the only way to make more money is to try to raise ASP through the premium-isation of instant noodles.

As the bowls get bigger…

Noodles - 1

…and fancier…


…so does the ASP. In China, over the past four years, the average selling price of instant noodles have risen by 4.4% p.a. since 2012 (faster than Hong Kong’s 1.75% ASP growth). chart (16)

However, with the “Big Cup” noodle now weighing in 80 grams, 450 calories and 1,600mg of sodium, I suspect this premium-isation trend could be hard to sustain. Furthermore, while the past few years’ increase in ASP appear to have helped with gross profit margins, the benefits do not appear to have flowed to the bottom line.

chart (26).png

I am Satay Flavour出前一丁

As for me, I’ve been told that I make the best instant noodles with the exact right balance of soup to noodle. If I had to choose one type of noodle to eat, it would be the satay flavour 出前一丁.

Screen Shot 2017-11-24 at 2.03.12 PM

Now what does that say about me?


P.S. In the first collage, there is one picture that does not belong, can you spot it.