Consumer

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Matthew Brooker is an editor with Bloomberg Gadfly. He previously was an Opening Line columnist, an editor and a bureau chief for Bloomberg News. Before joining Bloomberg, he worked for the South China Morning Post. He is a CFA charterholder.

Producers of goods from European luxury handbags to Brazilian iron ore have queued to get their shares traded in Hong Kong, seeking to be closer to the China market and burnish their local reputations. Instant noodles may be the next twist on the theme.

Nissin Foods, inventor of  the Asian snack-food staple, is considering a spinoff and listing of its China and Hong Kong operations in the former British colony, according to Nikkei. The plan may prove unappetizing for investors.

Foreign companies have a mixed record in the Hong Kong stock market. Prada, the Italian fashion company, has fallen 70 percent since its peak in 2013. Rusal, the Russian aluminum producer, is down 84 percent. The U.S. luggage maker Samsonite has gained 55 percent since its IPO in 2011, while Brazil's Vale will delist its Hong Kong shares in July because of lack of interest in trading them.

The same problem may bedevil the Nissin unit. The China region accounted for 9.6 percent of the Top Ramen maker's sales in the quarter through September, a total of 10.8 billion yen ($103 million). Goldman Sachs estimates China revenue of 40.5 billion yen for the 12 months through March 2017. Applying Nissin's current multiple of about 1.2 times sales would suggest a market value of about $470 million.

That's barely a mid-morning snack beside the $4.8 billion market capitalization of Tingyi, the Hong Kong-listed market leader, which trades on only 0.5 times sales. Tingyi, maker of the Master Kong brand, had revenue of $8.9 billion last year, all of it from China. Ting Hsin, the company's Taiwanese part-owner, has 40.5 percent of the China market, against 3.6 percent for Nissin, according to Euromonitor.

Small Fry
Despite being one of the world's top makers of instant noodles, Nissin's share of the China market is a mere 3.6 percent
Source: Euromonitor
Footnote: Ting Hsin is a major shareholder of Tingyi.

Nissin may argue that shares in its China business deserve to trade at a premium because of its growth prospects. The company certainly has scope to expand its market share. Foreign brands have an advantage in China because of the country's litany of food scandals.

But instant noodles are a low-end food. Tingyi itself has reported three years of declining revenue as cheap local competitors cut into its share. Competing on price is pointless. Overseas producers will need to move upmarket, focusing on unique flavors and packaging, according to Bloomberg Intelligence analyst Thomas Jastrzab. Lower-sodium noodles and products tailored to regional tastes -- such as spicier varieties for Sichuan province -- are among the options. Even with such innovations, producers may struggle to overcome perceptions of instant noodles as an unhealthy fast food that's destined to lose favor as consumers get richer.

Domestic Heft
Japan still dominates Nissin's revenue after a history spanning decades
Source: Bloomberg

Like many Japanese companies, Nissin, which dominates its home market, has little option but to look outward as the country's population shrinks and demand stagnates. That effort is proceeding on other fronts: The company struck an alliance this year with Premier Foods, the struggling British maker of Bisto gravy and Mr. Kipling cakes.

Secret Sauce
Tingyi's Master Kong is the world's top instant noodles brand. Nissin's market share is falling
Source: Euromonitor

In this context, the China expansion makes sense, though plans to spend 10 billion yen on plants in the region look too small to make much difference. Investors can find healthier options.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net
Matthew Brooker in Hong Kong at mbrooker1@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net