Ajisen's sales likely to take longer than expected to recover from soup-base incident

Ajisen reported 3Q SSSG with China at 2.3%.

CIMB notes that despite last year’s low base, Ajisen’s 3Q SSSG came in weaker than expected, hampered by anti-Japanese protests and a weak Chinese consumer.

"We downgrade from Outperform to Neutral as. The catalyst of a SSSG uptick in 2H due to the absence of last year’s soup base incident no longer appears likely. We cut FY12-14 earnings by 22-32% to reflect a weaker topline and operating deleverage as the sales recovery remains anaemic," said CIMB.

Here's more from CIMB:

Ajisen reported 3Q SSSG this evening, with China at 2.3%, below our expectation of 8%.

Hong Kong SSSG was 0.5%, in line with our estimate. China makes up ~85% of Ajisen’s sales. The soup base incident started at the end of July 2011, knocking SSSG in China to -45% in August and -36% in September 2011.

We had expected that with the annualisation of the event, a low base of comparison would drive a significant improvement in 2H SSSG vs. 1H’s -25%. This now appears unlikely given the weak 3Q performance resulting partly from anti-Japanese protests in September as Sino-Japanese relations tensed up over the Diaoyu Islands.

The macro backdrop has also remained difficult, as consumer spending remains tepid. Yum!, for instance, reported traffic slippage in 3Q and expects the same for 4Q.

We are reducing our topline and margin estimates as the recovery from the soup base incident has been slower and weaker than expected. 

While FY12 should still see an earnings trough, a return to FY11’s earnings level now looks likely to be pushed back from FY14 to FY16. 

Ajisen’s cash flows remain steady, however, and it should exit 2012 with HK$1.45 per share in net cash, improving thereafter.