Coming to a boiling point

China’s instant noodle market, the world’s biggest, has been dominated for decades by Master Kong and Uni-President.

Both are from Taiwan but that doesn’t mean that competition between them is friendly. Rivalry between the two has been intense, including allegations from each that the other was spreading falsehoods about their connections to Japanese entities in a bid to fan boycotts by Chinese consumers during times of geopolitical tensions (see WiC171).

But the long-standing duopoly is under serious threat. An imminent IPO by fast-growing domestic rival Jinmailang is setting the stage for a new round of competition, turning the noodle market into a three-horse race.

Instant noodles are still hugely popular in China?

Master Kong is one of the oldest brands in the market. The company started out as a cooking oil manufacturer in Taiwan in the 1960s. In the early 1990s Wei Ing-chou, one of the brothers in the family-run business, was flying frequently across the Taiwan Strait to look for new opportunities in mainland China. He stumbled across an idea during one of his train trips. Eating a cup noodle he had brought with him from Taiwan, Wei found himself surrounded by passengers intrigued by the smell. An idea was born that went on to become a hugely successful business.

Wei recognised that China’s instant noodle market was ripe for explosive growth. The snack was perfect in a country where millions of people were starting to enjoy higher incomes and an on-the-go lifestyle. Customers needed only to add boiling water to pre-packaged plastic cups, creating a soup-based noodle dish. It helped that the Chinese had been devouring ‘fresh’ noodles for thousands of years and saw them as something of a comfort food. Wei rode a tidal wave of interest: according to Securities Daily, China’s instant noodle industry went into a “golden decade”, with annual sales mushrooming from 17.8 billion packs in 2000 to 42.5 billion by 2011.

Since then the market has slowed, however, with sales dipping below 40 billion units a year towards the end of the last decade. One commonly cited reason has been the rise of more health-aware consumers. As the Chinese get richer, they have been turning away from less nutritional foods (see WiC501). Other commentators have blamed the growth of the high-speed train network for the downtrend, on the basis that demand for noodles has decreased with shrinking journey times.

In Chinese instant noodles are known as fangbian mian (translating as ‘convenient noodle’). The Securities Daily also points out that demand has also been affected by food delivery apps such as Meituan. With a fresh-cooked meal readily available within minutes, and often at the cheapest of prices, why bother to boil the water for a less healthy serving of instant noodles?

Each of these trends contributed to a downward spiral for the noodle brands until last year, when the Covid-19 pandemic turned the world upside down. Instant noodles were suddenly sought after again as anxious consumers stocked up supplies to sustain themselves through lockdowns and uncertain times. In the first few months of 2020 – when much of the Chinese economy slowed to a standstill under the threat of a rapidly spreading virus – keyword searches for fangbian mian on e-commerce sites multiplied more than 200 times. Sales then surged for the main manufacturers by more than 20% in the first half of the year.

Step forward Jinmailang

Master Kong is still the leading player in its sector with a market share of 46.6% (as of the end of 2019). Uni-President sat second at 16.3%, says market research firm Mintel.

Local player Jinmailang is some distance behind Master Kong but it has been running neck-and-neck with Uni-President, whose revenues were Rmb22 billion ($3.4 billion) in China in 2019 – a mere Rmb200 million more than Jinmailang’s.

ThePaper.cn reports that Jinmailang has applied to go public on the A-share market, with an IPO looking likely by the middle of the year. A share sale would bring new financial firepower for the domestic brand, enabling it to surge past Uni-President as the number two player behind Master Kong.

Jinmailang was established in 1994 as a privately-owned business – then known as Hualong Foods – peddling goods in Hebei’s rural areas. At the time there were more than 1,200 minor, poorly branded instant noodle makers across the country. Jinmailang’s founder Fan Xianguo, from Hebei, decided to skirt direct competition with bigger players, such as Japan’s Nissin and Master Kong. Instead, he stayed away from the largest cities and focused on smaller, less saturated markets around second and third-tier towns and cities.

The strategy worked. By 2001, Fan was selling his products in 30 provinces, giving him near-nationwide distribution. He then started to move upmarket, creating the Jinmailang brand (it’s hard to translate, but for native Chinese speakers the name is a pun on ‘golden wheat’).

Is Jinmailang a national brand?

Many of Taiwan’s larger firms have connections with corporations from Japan, shaped by a history in which Japan ruled the island between 1895 and 1945. Master Kong is controlled by a holding firm called Tingyi, which ran into financial troubles following the Asian Financial Crisis in 1997. It sold a 33% stake to Japan’s Sanyo Foods in 1999. Uni-President also introduced Japanese investment to some of its business units, according to United Daily News, which is why some nationalistic critics of the noodle-making duo have periodically urged their Chinese compatriots to slurp down fewer cups of their product during periods of political tension with Tokyo.

Jinmailang also went to Japan in search of investment, however, tapping Nissin, a cup noodle heavyweight, as a strategic shareholder in 2004. Mirroring Sanyo’s cooperation with Master Kong, Nissin briefly raised its stake in Jinmailang to a third by 2012. But the tie-up did not last: Nissin sold the entirety of its interest back to its Chinese partner for $70 million in 2015.

The divorce was a result of “vast differences in strategy”, Nikkei Asia reported at the time, explaining that Jinmailang’s focus on “inexpensive products sold in farming villages” clashed with Nissin’s strengths in high-end noodle products for the urban middle classes.

Jinmailang also set up a bottled beverages joint venture in 2006 with Uni-President, a market leader in bottled tea. However, that partnership likewise didn’t last – it ended in 2016, when Jinmailang decided to go it alone and focus on the boiled water market instead (see WiC505).

After severing its connections with overseas partners Nissin and Uni-President, Jinmailang started to market itself as a ‘national brand’ and began planning for expansion via a local A-share listing. This national identity allowed it to position itself separately from its larger rivals and is viewed as an important selling point in bringing in Chinese investors, who have been embracing a flurry of food market IPOs over the past year.

For instance, Kuok Khoon Hong, nephew of the Malaysian billionaire Robert Kuok, secured permanent residency from the Chinese government a few years prior to his IPO of China’s biggest cooking oil producer Yihai Kerry last year (see WiC515). The residency move was made to give Yihai Kerry more of a “local flavour”, Sina Finance believes.

What are Jinmailang’s plans?

“Over the past 30 years the [instant noodle] market has been about the competition between Master Kong and Uni-President,” Jinmailang boss Fan told an industry conference last year. “Starting from 2020 it will be more of a Romance of Three Kingdoms [a reference to a classic Chinese novel about the iconic historical period when three rival states battled each other to reunify and dominate the country].”

Fan also told journalists that Jinmailang’s revenues were set to surpass Rmb30 billion in 2020 and his plan was to grow the top line to more than Rmb100 billion after going public this year.

That looks ambitious. The Rmb100 billion threshold has been a glass ceiling for some of China’s best-known food brands in the past. In a prominent example, Wahaha was once the strongest F&B brand in the country and its founder Zong Qinghou was ranked as China’s richest man for several years. Back in 2012 Wahaha also set itself a goal to smash through the Rmb100 billion sales threshold – reckoning it would take about five years. However, its income peaked in 2013 at Rmb78.3 billion and then fell back below Rmb50 billion for several years prior to 2020.

Master Kong reported net profit of Rmb3.3 billion in 2019 on revenue that grew 2% to Rmb62 billion. That said, the 2020 figures look set to improve strongly because of higher demand during the pandemic – but will likely still be well sort of the magic Rmb100 billion figure Fan has cited.

In truth, the Covid-19 outbreak is not the only reason the instant noodle business is making a comeback. During the leaner years of the market downturn, the noodle firms were forced to rethink their offerings and innovate. Some started to offer higher-quality, higher-priced packs. Last year the People’s Daily noted that it was not uncommon to find quality cup noodle brands priced at more than Rmb50 apiece, which – thanks to more authentic flavours – were increasingly popular with customers despite the higher cost.

There are healthier offerings too. Producers have experimented with chicken soup or rib soup varietals – recipes traditionally considered more nutritious by Chinese – in an attempt to undercut the perception that noodles are unhealthy. Since Japan’s Momofuku Ando was inspired by fried tempura to invent the instant noodle in 1958, the dehydrated food has mostly been prepared by deep-frying in oil. But Jinmailang has tried a different approach, claiming it has fundamentally “reinvented” the product through a healthier steam-and-boil technique. Noodles prepared in this way are less fatty and more nutritional, the company posits.

In a further bid to close the gap on Master Kong, Jinmailang says it is adding more fresh vegetables and meat to its recipes. It also argues that its local background is a growing advantage in the Chinese marketplace, supporting a wider suite of sales channels and allowing it to offer a more diverse range of products to different consumers in different regions. Another advantage, it says, is that it owns several wheat-producing bases in China, which means that the company can produce healthier products at competitive prices.

How about Jinmailang’s market valuation?

Achieving the Rmb100 billion sales target still looks like a massive challenge for Jinmailang. Nonetheless, the share prices of a number of China’s food and beverage brands have benefited from the bull market in the second half of 2020. Yihai Kerry’s shares have jumped nearly four times from their offer price last September and Kuok’s cooking oil producer is now the most valuable firm on Shenzhen’s ‘growth’ bourse ChiNext, with a market capitalisation of more than Rmb700 billion. Hong Kong-listed Nongfu Spring is another major winner, with a market value that has reached more than HK$300 billion ($40 billion) since the bottled water producer’s IPO last year, transforming its founder Zhong Shanshan into China’s richest man.

The IPO price for Jinmailang is yet to be decided. Master Kong and Uni-President – both of which have shares listed in Hong Kong – were worth HK$75 billion and HK$35 billion as of this week. The chances are that Jinmailang could be valued somewhere in-between, although the prospect of the Chinese firm challenging Master Kong for the top spot could add a further premium to its shares.

Master Kong’s valuation peaked in early 2012, when it was worth nearly HK$150 billion. At the time the Kuomintang’s Ma Ying-jeou had just won a second presidential term in Taiwan. A month earlier, Master Kong had been added to Hong Kong’s benchmark Hang Seng Index. In one of Beijing’s worst-kept strategic secrets, the wider idea was to get more of Taiwan’s most influential businesses more wedded to markets in mainland China, in the hope that closer commercial ties would foster support for political reunification across the Taiwan Strait.

Beijing has been forced to adjust some of its Taiwan strategy after the Kuomintang (KMT) lost the last two general elections (the KMT has traditionally supported a more accommodating position on Cross-Strait ties, adhering to the One-China principle).

Coincidentally, Master Kong lost its blue-chip status as part of the Hang Seng Index in Hong Kong a few months after Tsai Ing-wen of the Democratic Progressive Party (DPP) took over as Taiwan’s president in 2016 (the DPP has been more hostile to Beijing and does not accept the One-China principle.)

Master Kong’s share price has slumped by nearly half in the intervening years. Nor has the rebounding popularity of instant noodles been mirrored in its share price, which has been flat over the past 12 months. Some wonder whether this reflects tougher conditions for Taiwanese businesses on the mainland as well, as the more acrimonious political mood starts to crimp the commercial opportunities for the island’s tycoons. Of course, a trend like that could further boost ‘national champion’ Jinmailang…

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