On November 28, Master Kong (00322.HK) released its Q3 results. In Q3 2016, revenue was USD 2,722 million (RMB 18.789 billion), down 1.52% YoY; net profit was USD 221 million (RMB 1.525 billion), up 17.37% YoY. Notably, the overall revenue decline in Q3 slowed significantly compared to the 13.94% decline in H1 (excluding FX impact, Q3 grew about 4% YoY).

Master Kong's Q3 sales and profit have shown a reversal from the sharp drop in Q2 net profit. For the entire FMCG industry in a downturn, Master Kong's solid performance is a positive signal, indicating that the company has found ways to recover performance and confidence.

Earlier, competitor Uni-President reported a Q3 loss of RMB 19 million. In a downturn, companies need multiple strategies to cope.

Regarding the improvement, Master Kong stated that in 2016, the group's performance and financials improved in Q3 compared to H1, with a long-term steady growth strategy, continuous innovation, and introduction of international strategic partners' resources to strengthen product price diversification to meet the diverse needs of the rising middle class.

Credit Suisse issued a report saying that Master Kong's management believes 2016 business can bottom out, expecting a "U-shaped" recovery, with sales expected to rebound and outperform gross margin improvements.

Below, we review the performance of Master Kong's three major business segments: instant noodles, beverages, and convenient foods.

Instant Noodles: Black Pepper and White Pepper Noodles Shine, Monthly Sales Nearly 1 Million Boxes in Q3

In Q3 2016, instant noodle revenue was USD 969,047 thousand (RMB 6.687 billion), down 8.75% YoY, accounting for 35.61% of total revenue. The classic return strategy has shown initial results, with the YoY decline narrowing compared to the first two quarters.

According to the latest Nielsen data, in Q3 2016, the overall instant noodle market volume declined 5.4% YoY, while value grew 2.3%. Master Kong's instant noodle volume and value market shares were 42.5% and 50.0%, respectively, maintaining market leadership.

High-price noodles: Black Pepper and White Pepper series sold nearly 1 million boxes per month in Q3.

The Black Pepper and White Pepper series, with innovative flavors and cool packaging, has won consumer favor and received the "China Instant Food Innovation Award" and "Most Popular Instant Food Award" at the 16th China Instant Food Conference. Through effective communication campaigns, average monthly sales in Q3 approached 1 million boxes. Additionally, Soup Master upgraded its flavors, and after launching new specifications and flavors, it continued strong momentum with significant growth in Q3.

Mid-price/dry noodles: Q3 value share reached 44%, solidifying market leadership.

According to latest Nielsen data, Master Kong's mid-price noodle market share continued to rise, reaching 44% in Q3, solidifying its No.1 position. Among them, "Jinshuang Ramen 120" launched with larger portions to capture the RMB 2.0 bag noodle market; dry noodle "Crispy Whirlwind" upgraded with multiple specifications, including boxed versions with beans, making it more personalized and snack-like to meet different occasions and consumption times.

Beverage Business Revenue RMB 11.705 Billion, All Three Categories Grow

In Q3 2016, beverage business revenue was USD 1,696,349 thousand (RMB 11.705 billion), up 3.55% YoY, accounting for 62.33% of total revenue. Beverage net profit grew 84.83% YoY, the highlight of this report.

According to Nielsen data, in Q3 2016, China's beverage industry volume and value grew 4.6% and 5.4% YoY, respectively, both better than Q2. In Q3, Master Kong's ready-to-drink tea (including milk tea) volume share reached 54.2%, firmly No.1. Packaged water volume share in Q3 was 16.2%, ranking third, up from Q2; juice drinks, leveraging Master Kong's juice brands and Pepsi's Tropicana brand, had a volume share of 19.2%, ranking second.

Pepsi carbonated beverages overall market share rose to 31.4% YoY; in the cola segment, "Pepsi-Cola" had a 49.4% share in Q3, ranking first; in fruit-flavored carbonated, it had a 40.1% share, ranking second.

Ready-to-drink tea: Q3 revenue USD 714 million, up 7.23% YoY.

Among them, Master Kong Iced Tea grew against the trend in a saturated market; Green Tea, with the joint IP campaign with "Qing Yun Zhi" in Q3, drove significant growth; Jasmine series benefited from the IP effect of "Love O2O," with significant growth in Q3.

Carbonated beverages: Q3 revenue USD 421 million, up 2.49% YoY.

Among them, Pepsi-Cola launched 8 emoji cans, attracting collectors nationwide and driving sales growth. Mirinda integrated online and offline marketing, strengthening brand-consumer communication.

Packaged water: Revenue USD 337 million, up 3.06% YoY.

Since April, "Master Kong Packaged Drinking Water" adjusted strategy to return to the RMB 1-1.5 market, striving to regain share. Q3 results fermented, with significant sales growth. Youyue purified water, launched in April, has seen brand awareness and market share rise; 74 plants producing Youyue water obtained NSF international certification, ensuring food safety and building an international brand image.

Convenient Foods: Egg Crisp Roll Market Share 19.0%, No.1

Revenue: Q3 2016 revenue reached RMB 240 million, down 4.06% YoY, accounting for 1.28% of total revenue. Net profit: USD -1,172 thousand (RMB 8.0921 million), up 79.26% YoY.

Benefiting from improved production models and lower raw material prices, gross margin rose to 37.02% YoY. Master Kong said it optimized supply chain layout and strictly controlled expenses, reducing Q3 losses to USD 1,172 thousand, an improvement of 79.26% YoY.

According to latest Nielsen data, the traditional biscuit market continued to underperform. In Q3 2016, overall biscuit market volume declined 2.0% YoY, value slightly declined 0.5% YoY, with sandwich biscuits declining more (volume -2.8%, value -2.7%). In Q3, Master Kong's egg crisp roll market share was 19.0%, No.1; sandwich biscuit share was 12.4%, No.2.

For Q3 2016 alone, Master Kong showed an encouraging reversal, performing admirably. An industry insider said: "To some extent, this may not be due to strategic errors but rather the sluggish industry environment. In 2016, Wahaha's sales plummeted, and Uni-President's Q3 loss of RMB 19 million fully indicate the industry has entered an adjustment period with growing pains. For companies, the one who laughs last laughs best."

Compiled and published by References: Food Business, New Food Review

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