Ottogi Decision to Accelerate ASP Hike Trend
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
Ottogi has announced an ASP markup for ramen. With an ASP hike-leaning atmosphere spreading across the industry, major players’ earnings and investment attractiveness are to recover from 2H21.
Investment attractiveness to rise in line with brisker earnings momentum in 2H21
We maintain a Positive stance towards the F&B industry. Looking at historical patterns, ASP hikes tend to usher in a valuation recovery for the sector. Moreover, strengthened fundamentals represent a long-term favorable for earnings, not a short-term event. We expect ASP hike momentum (including for ramen) to expand across the sector from 2H21, and this will lead to earnings improvement. Among F&B products, the ASP mark-up for ramen, which traditionally the most difficult item for which to achieve an ASP increase, is a signal that an overall ASP hike-leaning atmosphere is spreading in the F&B industry.
Boasting the largest market share for multiple important product categories, CJCJ should be the foremost beneficiary of an anticipated margins uptrend for the industry. Meanwhile, although Nongshim, Samyang Foods, and Orion have yet to announce ASP hikes, we expect them to join in on the growth momentum in 2H21, noting their high earnings sensitivity to ASP.
Ottogi decision to accelerate ASP hike trend
Ottogi has announced that it will boost the ASP for its major ramen products by 11.9% from August, representing its first ramen price markup in 13 years and 4 months (since Apr 2008). Of note, Ottogi has responded to competitors’ past couple of price markups (2011 and 2016) by keeping its ASP frozen. Given such, we view that the increase in 2Q21 purchase prices that Ottogi pays to Ottogi Ramen has started to put cost pressure on Ottogi.
Due to Ottogi’s ramen price hike, both direct rivals, including Nongshim and Samyang Foods, and confectionery players using similar raw materials are also likely to push up their major product ASPs. Of note, since the domestic market itself has somewhat stagnated in the case of instant noodles, ramen ASP mark-ups tend to translate into stronger share price growth momentum compared to that for other F&B products.
ASP hike sensitivity analysis
Given its planned 11.9% ramen ASP hike, we now believe that that Ottogi’s 2021 consolidated OP will be 9% higher than our previous forecast. As for Nongshim, we estimate (if putting aside overseas subsidiaries and exports) that a 5% increase in its domestic ramen ASP would boost its consolidated OP by 19% compared to our existing estimate. As for Samyang Foods, we estimate that a 5% increase in its domestic price ASP would translate into a 4% expansion in its consolidated OP, with a 16% jump in OP being possible if it also raises its export ramen price tag by 5%.
Given the competitive market landscape and its current market share, Orion’s Chinese subsidiary looks likely to push up its ASP for its chocolate pies—we estimate that a 5% ASP hike would improve OPM by 1~2%pt.
