Philippine Markets Newsletter

At just 9x Uniform P/E, this company has heated up competition in the global instant noodle market. Even celebrities can’t get enough!

March 18, 2020

Luzon is currently under an enhanced community quarantine due to the COVID-19 health crisis. Home quarantine is strictly implemented, and only one person per household is allowed to go out to buy food, groceries, medicine, or other essential items to survive for a month.

Before the community quarantine was put in place, people headed to supermarkets to stock up on alcohol, sanitizers, toilet paper, food, and water. Many purchased eggs, meat, and bread, but consumers also needed affordable food items with longer shelf life. During a crisis, many turn to instant noodles.

This company introduced instant noodles in Korea when the country was in a dire situation. What started as a solution to a food problem turned into a global favorite in recent years.

Also below, Uniform Accounting Embedded Expectations Analysis and the Uniform Accounting Performance and Valuation Tearsheet for the company.

Philippine Markets Daily:
Wednesday Uniform Earnings Tearsheets – Asia – listed Focus
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The COVID-19 pandemic has caused people from all over the world to resort to hoarding and panic buying as more areas put their residents on mandatory self-quarantine.

Sanitizers, toilet paper, and other cleaning supplies are usually the first to go in any health crisis.

Once the situation becomes even more dire, people start buying meat, eggs, milk, vegetables, and canned goods and other processed foods, particularly instant noodles in Asia.

We talked about how instant noodles were created in Japan as an entrepreneur’s answer to the food shortage problem after World War II.

Unsurprisingly, neighboring country South Korea also turned to instant noodles as a solution to their food supply problems in the 1960s when the nation faced scarcity in rice and mixed grains.

Importing the instant ramen technology from Japan, Samyang Foods Co., Ltd. gave birth to the first Korean ramen in 1963 naming it Samyang Ramen. It became so popular that up to today, Korean ramen, locally known as ramyun, remains a staple in households.

The Samyang Ramen shot to international fame in 2017 when social media exploded with the Fire Noodle Challenge. Korean netizens posted videos of themselves taking up the challenge, eating what could possibly be the world’s spiciest instant noodles.

It didn’t take long before foodies and social media influencers all over the world followed and tried the fire noodles.

The increasing influence of Korean culture in the Philippines, along with Filipino netizens’ desire to try anything that has gone viral, resulted in Filipinos also taking the challenge. Even Filipino celebrities Erwan Heussaff, Anne Curtis, and Christian Bautista couldn’t resist.

The instant noodles that was the star of the trending challenge was Hot Chicken Flavor Ramen 2x Spicy by Samyang Foods.

These noodles have a rating of more than 8,000 Scoville heat units (SHU). To give you an idea how spicy it is, it’s like eating the spiciest jalapeño that you can find in your local supermarket.

The said variant of noodles was released in December 2016 to celebrate the beginning of 2017 as the year of the Fire Rooster.

In 2018, Samyang released a mini version of these noodles, with an even hotter 12,000 SHU rating—claiming it as the spiciest instant noodle in the world.

If you can’t take the spiciness of these products, Samyang also offers more tolerable noodles, ranging from 1,000 SHU to 4,500 SHU. These products include Samyang’s Cheese Ramen, Ice Ramen, and Curry Ramen.

Samyang Foods also offers other products that consumers can enjoy.

For snacks, the company offers Buldak, Freezles, corn snacks, and Changgu in an assortment of flavors. They also sell dairy products like plain milk, flavored milk, fermented milk, Jeju milk, and cheese. A variety of condiments are also manufactured by Samyang.

Though Samyang has a wide range of products, it’s their Hot Chicken instant noodles that have captured the hearts and wallets of consumers worldwide, especially in China and Southeast Asia, to the point that it claims to have become the leading brand of K-Food.

To aid the Hot Chicken noodles’ growth as a global brand, the company created their representative character “Hochi.”

Hochi is Samyang’s brand mascot and her main purpose is to represent the brand’s personality. She is described as being addicted to spicy taste and full of confidence and motivation, which is exactly how Samyang wants consumers to perceive their Hot Chicken noodles.

Through Hochi, Samyang is able to give a visual identity to their brand while establishing an emotional connection with consumers.

Samyang’s efforts to extend their global reach and to promote and market their brand is reflected in their Uniform earnings power.

In the last three years, Uniform return on assets (ROA) has been consistently higher than as-reported ROA. Samyang reported a Uniform ROA of 10% in 2018, stronger than the as-reported ROA of 9%.

Samyang Foods’ Uniform valuation is in line with the market

Samyang Foods Co., Ltd. (003230:KOR) currently trades well below corporate and historical averages with a 8.9x Uniform P/E (blue bars), but in line with the as-reported P/E of 9.2x (orange bars).

At these levels, the market is pricing in expectations for Uniform ROA to decline to 8% in 2023, accompanied by a 5% Uniform asset growth going forward.

However, analysts project Uniform ROA to increase to 20% in 2020, accompanied by a 5% Uniform asset growth.

Samyang Foods’ profitability is actually better than you think it is, and improving

As-reported metrics are understating Samyang Foods’ profitability.

For example, as-reported ROA was 9% in 2018, lower than Uniform ROA of 10%. Uniform ROA has been higher than as-reported ROA in 14 of the past 16 years. As-reported ROA is making the company look like a weaker business than real economic metrics highlight, distorting the market’s perception of the firm’s historical profitability trends.

Samyang Foods’ Uniform ROA ranged from 1% to 12% over the past 16 years. After dropping from a peak of 12% in 2003 to a historical low of 1% in 2007, Uniform ROA rose to 10% in 2009. Afterwards, Uniform ROA dropped to 2% in 2015, before increasing to 10% in 2018.

Samyang Foods’ margins are weaker than you think, but asset turnover makes up for it

Cyclicality in Uniform ROA has been primarily driven by trends in Uniform earnings margin, with peaks and troughs lining up historically with that of Uniform ROA.

Uniform earnings margin decreased from a historical high of 9% in 2003 to a low of 1% in 2007, before recovering to 7% in 2008. Thereafter, Uniform earnings margin fell to 1% in 2015, before rising to 7% in 2018.

Meanwhile, after increasing from 1.3x in 2003 to 1.7x in 2005, Uniform asset turns fell to 1.4x in 2007, before recovering to 1.6x in 2009. Uniform asset turns faded to 1.2x to 1.3x levels from 2010-2016, and it improved to 1.7x in 2017 before fading back to 1.5x in 2018.

Summary and Samyang Foods Tearsheet

As the Uniform Accounting tearsheet for Samyang Foods highlights, they are trading at 8.9x Uniform P/E, which is well below market average valuations and slightly below historical average levels.

Low P/Es require low EPS growth to sustain them. In the case of Samyang Foods, the company has recently shown a 25% Uniform EPS growth.

Sell-side analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, sell-side analysts’ near-term earnings forecasts tend to have relevant information.

We take sell-side forecasts for Korean International Financial Reporting Standards (K-IFRS) earnings and convert them to Uniform earnings forecasts. When we do this, Samyang Foods’ sell-side analyst-driven forecast is for Uniform earnings to grow by 107% in 2020 and then by 12% in 2021.

Based on current stock market valuations, we can back into the required earnings growth rate that would justify KRW 83,000 per share. These are often referred to as market embedded expectations.

In order to meet the current market valuation levels of Samyang Foods, the company would have to have Uniform earnings shrink by 1% each year over the next three years. What sell-side analysts expect for Samyang Foods’ earnings growth is well above what the current stock market valuation requires.

To conclude, Samyang Foods’ Uniform earnings growth is above peer averages in 2020 and it is trading below peer average valuations.

The company’s earning power, based on its Uniform return on assets calculation, is greater than corporate average returns. Furthermore, with cash flows and cash on hand consistently exceeding obligations, Samyang Foods has low credit and dividend risk.

About the Philippine Markets Daily
“Wednesday Uniform Earnings Tearsheets – Asia-listed Focus”

Some of the world’s greatest investors learned from the Father of Value Investing or have learned to follow his investment philosophy very closely. That pioneer of value investing is Professor Benjamin Graham. His followers:

Warren Buffett and Charles Munger of Berkshire Hathaway; Shelby C. Davis of Davis Funds; Marty Whitman of Third Avenue Value Fund; Jean-Marie Eveillard of First Eagle; Mitch Julis of Canyon Capital; just to name a few.

Each of these great investors studied security analysis and valuation, applying this methodology to manage their multi-billion dollar portfolios. They did this without relying on as-reported numbers.

Uniform Adjusted Financial Reporting Standards (UAFRS or Uniform Accounting) is an answer to the many inconsistencies present in GAAP and IFRS, as well as in PFRS.

Under UAFRS, each company’s financial statements are rebuilt under a consistent set of rules, resulting in an apples-to-apples comparison. Resulting UAFRS-based earnings, assets, debts, cash flows from operations, investing, and financing, and other key elements become the basis for more reliable financial statement analysis.

Every Wednesday, we focus on one company listed in Asia that’s relevant to the Philippines and that’s particularly interesting from a UAFRS vs as-reported standpoint. We highlight one adjustment that illustrates why the as-reported numbers are unreliable.

This way, we gain a better understanding of the factors driving a particular stock’s returns, and whether or not the firm’s true profitability is reflected in its current valuations.

Hope you’ve found this week’s Uniform Earnings Tearsheet on an Asian company interesting and insightful.

Stay tuned for next week’s Asia company highlight!


Angelica Lim & Joel Litman
Research Director & Chief Investment Strategist
Philippine Markets Daily
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