China Instant Noodles:UBS Evidence Lab Survey,can healthier noodles stimulate industry growth?

　　UBS Evidence Lab: industry downturn could continue for the next 6-12 months

　　We collaborated with UBS Evidence Lab, interviewing 1,625 consumers across Tier 1-5cities to better understand consumers' perceptions, upgrade intentions and brandpreferences for instant noodles. The survey suggests continued negative incrementalspending, with 20-30% of respondents cutting spending in the past six months, mainlydue to rising health concerns. However, 29% of all respondents, and 62% ofrespondents in Tier 1 cities, expressed interest in consuming nutritious instant noodles,though this might not translate to immediate financial benefits for producers, givenrelated consumer education expenses.

　　We expect competition to intensify as Tingyi aims to recover lost market share

　　Tingyi Cayman Islands (Tingyi) is the industry leader (with dominant market share basedon company data). Its upgrade strategy has not been well received, and since October2015 it has lost market share. In May 2016, it returned to pre-October 2015 pricelevels. Uni-President China (UPC), the second-largest player, has gained market sharefrom Tingyi, as it did not follow Tingyi’s price hikes. We believe this shows a lack ofpricing power even for an industry leader, suggesting China is still a challenging marketfor all the instant noodle manufacturers. We expect intensifying competition in the next6-12 months, led by Tingyi's increased advertising and promotions (A&P) spending torecover market share losses. For more details, please refer to the section on Tingyi.

　　Overseas companies’ expansion to be capped by supply constraints

　　Overseas companies such as Nissin Foods (Nissin) and Nongshim have had robustgrowth in China due to their premium market positioning and low base, and appear tobe optimistic on future expansion. However, the UBS Evidence Lab survey suggests:1) brand recognition is still low for overseas companies; and 2) exposure is largelylimited to top-tier cities and developed regions. We expect moderate profit growth foroverseas companies, as further penetration will require increasing investment in brandbuilding, channel development, and ramping up manufacturing capacity.

　　Stock implications: Neutral rating on Tingyi; Sell ratings on UPC and Nissin

　　We foresee earnings pressure for major industry players over the next 6-12 months, aswe expect intensifying competition amid a continued decline in instant noodleconsumption volume. We remain Neutral on Tingyi, but cut our price target 13.5%;downgrade UPC from Neutral to Sell; and maintain our Sell rating on Nissin due to a lullin profit growth.