Can a hot index whet appetite for noodles?

Business | Ivan Tong 21 Oct 2019

Domestic demand stocks have been favored by investors recently. But if investors feel that Meituan Dianping (3690), whose shares hit record highs, is overpriced, they could shift their focus to instant noodle stocks, which are not so popular.

Because this kind of stock is resilient amid economic downward pressures, and as noodles are considered a consumer staple, their price will not slump sharply.

While foreign investors might only know of the "Li Keqiang Index" as an indicator of the Chinese economy, the concept of an instant noodles index has become popular in the mainland these days.

So, what is the instant noodles index?

The mainland's instant noodles market witnessed lackluster sales for almost five years from 2013 until last year, when market revived to hit 40 billion bowls and packets.

Then in the first half of this year, the noodle market continued to grow, increasing 7.5 percent year-on-year in sales value and up 1.4 percent in sales volume, despite being slower than last year.

In 2005, some economic consultants conducted a research to compare Thailand's Mama Noodles Index to the country's economy.

The research found that the index, which was launched to reflect the sales of Mama noodles, was negatively connected with Thailand's economy.

When the economy did well, the sales of Mama noodles dipped, and vice versa.

So the instant noodles index is considered a contrarian indicator of economic growth.

As China is expected to become the world's largest consumer market this year with domestic sales of instant noodles accounting for about 40 percent of global sales, the index's reference value is not small.

However, some analysts say investors should not take the index too seriously.

Because if we take a closer look, from last year to the first half this year, the sales value of Chinese instant noodles were much higher than sales volumes, reflecting that the average price was rising and the proportion of premium instant noodle sales was also going up.

Therefore, there might be no simple correlation between the instant noodle market recovery and an economic recession.

In addition, when compared with major instant noodles markets like Japan and South Korea, China still offers ample room for growth, given that the average price of noodles in those two counties are 13 times and 2.5 times higher than the price of noodles in China, respectively.

While the so-called instant noodle index may not be a scientific-based indicator, if the Chinese economy is facing significant downside pressures, diners will of course tighten their belts.

Meanwhile, there are not many dishes on food delivery platforms priced at less than 10 yuan (HK$11.07) due to a decline in discounts and promotions amid rising delivery costs, while there still are so many choices in instant noodles market priced between 7 yuan and 10 yuan.

Currently, there are three instant noodle stocks trading in Hong Kong's stock market: Tingyi Cayman Islands (0322) with a market capitalization of HK$59.16 billion and a price-to-earnings ratio of 21.66, Uni-President China (0220), whose market cap has reached HK$36 billion and whose PE ratio is 24.78, and popular stock Nissin Foods (1475) which only has a market cap of HK$7.6 billion but a PE ratio of 31.11.

But what's interesting that Tingyi, with the biggest cap, has performed the worst among the three while the smallest, Nissin Foods, has been most traded by investors.

For investors who are interested in the instant noodles market, Nissin Foods is still their first choice. So unless China's economy really slumps and its citizens are forced to eat instant noodles as austerity bites, major players such as Tingyi and Uni-President China do not have large growth potential.

So, if you have many shares of Meituan Dianping but don't want to sell right now, you could buy some instant noodle stocks to hedge your risks. Just kidding!

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