Super Group's Chinese coffee market foray has profit potential

Could soon become a significant contributor.

"China branded consumer sales currently make up less than 5% of Super’s total revenue (through cereal), but we believe this segment has the potential to become a significant contributor in the next 2-3 years," according to Maybank Kim Eng in its latest company update covering Super Group.

Here's the complete analysis from Maybank:

Making a splash in China. Super recently launched its coffee products in China, where it used to just sell instant cereals. The new products and brand identity were unveiled to the media on 18 August, along with endorsement from famous Chinese actress and singer Wang Luodan. In the accompanying trade fair, more than 1,000 regional distributors turned up. We understand from management that sales orders and reception were very positive.

Converting 1.4b tea drinkers. Admittedly, China is a tea-drinking country with no coffee culture. But coffee consumption is picking up, driven mainly by a younger audience influenced by the Starbucks Culture and patient marketing by market leader Nestle. From a low base, consumption of instant coffee is expected to grow at 12% CAGR over the next five years and we believe the time is ripe for Super to capitalise on this expected growth without overinvesting.

Early mover in instant cup format. A major marketing thrust is the introduction of a new instant cup format that will be sold mainly through convenience stores. In recent years, companies like XiangPiaoPiao have generated huge sales from bubble tea in instant cup formats, and Super hopes to achieve the same results for coffee. In our view, being remembered as an early mover in a popular product category does wonders for building brand equity.

New JV to enhance ingredients capability. Super recently announced a 40:60 JV in China with a local company, Shanghai Shang Heng. The JV will undertake the manufacturing of liquid glucose syrup solid, a key ingredient for non-dairy creamer. Super’s cash investment is estimated at USD3m. With its non-dairy creamer production facilities and existing distribution network in Jiangsu Province, we believe the execution risk for its China branded consumer strategy is lower.

Reiterate BUY. China branded consumer sales currently make up less than 5% of Super’s total revenue (through cereal), but we believe this segment has the potential to become a significant contributor in the next 2-3 years.