1Q22: Solid Bottom Line Growth; Price Hikes Will Soon Be Reflected
Bud APAC reported mild revenue growth (+0.4% yoy) with solid attributable net profit
growth (+28.3% yoy) in 1Q22. Dragged by COVID-19-related restrictions in China,
overall sales volume declined 2.7% yoy. It conducted like-for-like price hikes on partial
product categories in China and South Korea across Mar 22 and Apr 22. The economic
reopening of South Korea and India should lend support to the company amid the
tough operating environment in China. Maintain BUY and lift target price to HK$28.80.
RESULTS
• Solid bottom line growth. On a reported basis, Budweiser APAC’s (Bud APAC) revenue
grew marginally by 0.4% yoy (1.5% yoy organic growth) in 1Q22. Attributable net profit
increased 28.3% yoy to US$308m, representing 27% of our full-year estimates. Gross profit
margin shrank 1.8ppt on higher cost of sales (+3.1% yoy) while normalised EBITDA/EBIT
margin expanded by 2.5ppt/3.1ppt on the back of a: a) 7.9% yoy decline in selling, general
and administrative costs (SG&A), and b) 42.9% yoy increase in other operating income
driven by brewery asset divestments.
• Slight loss of market share (by volume) in China. Total sales volume fell 2.7% yoy in
1Q22 due to the tightened COVID-19 restrictions in China since mid-Mar 22, partially offset
by the mid-single-digit volume growth in South Korea. Specifically in China, the drop in total
sales volume (-4.3% yoy) was larger than the industry’s decline (low-single-digit). In 1Q22,
the higher unit COGS (+7% yoy) was partially offset by the overall ASP hike (+3.1% yoy)
STOCK IMPACT
• China’s COVID-19-related restrictions impacted top-line; logistics were unaffected. Its
sales volume in strong footprint areas (Guangdong, Fujian, Jilin and Heilongjiang) have
been heavily impacted by the heightened COVID-19 restrictions. It estimated that nightlife
in 100 cities was fully closed. The nightlife channel/Chinese restaurants/in-home channel
was 42/86/96% and 38/82/96% reopened as of end-Mar 22 and end-Apr 22. Total sales to
retailers (STR) dropped by high-teens in the last two weeks of Mar 22, with the Premium
and Super Premium portfolios more heavily impacted. We concur with management that
China will continue to impose sporadic lockdowns but now with shorter impact period
(except Shanghai and Jilin). On the bright side, there was no supply chain disruption thanks
to its wide brewery footprint across China and its locations close to wholesalers.
• Strategy in China unchanged given strong underlying demand. In cities unaffected by
COVID-19 restrictions, Budweiser/Super Premium portfolio grew by “strong doubledigit”/“double-digit” in 1Q22. That said, its expansion strategy for Budweiser/Super Premium
portfolio remained unchanged. In the recent two weeks, management also observed
accelerated consumer demand in Fujian and Guangdong alongside the ease in COVID-19
restrictions. In Mar 22 and Apr 22, it executed like-for-like mid-single digit price hikes in the
Core and Value segments across China. It accelerated its BEES platform expansion to
more than 28 cities as of end-Mar 22 (vs two pilot cities as of end-21), higher than initially
planned at “more than 10 cities in 1H22”. Currently, more than 20,000 customers have
been placing orders via its BEES platform.
• Continues to keep cost hikes in check. We saw an effective cost control (+6% yoy in
cost of sales per hl) despite the overall double-digit increase in most commodity prices. We
reckon the company will continue to keep up its cost control efforts via premiumisation and
other initiatives (12-month hedging policy and lower water usage).
• South Korea – Management expects 2Q22 revenue per hl to improve sequentially, given:
a) 7.7% yoy price hike in the Core segment domestic brand effective 8 Mar 22, and b) new
excise tax increased by 2.5% effective 1 Apr 22, while partially offset by c) a lower revenue
per hl as on-premise channels normalise. Management expects consumer sentiment to
improve in the upcoming quarters and exceed that of pre-COVID-19 levels.
• India – In 1Q22, its Premium and Super Premium portfolio grew strong double digits yoy.
Specifically, its Budweiser brand outperformed the industry and gained market share during
the quarter. Overall, 1Q22 revenue and EBITDA grew yoy. It added more varieties to its
non-alcoholic offerings (Budweiser 0.0 Green Apple flavour and Hoegaarden 0.0 Rose
flavour) ahead of the peak season in 2Q22.
EARNINGS REVISION/RISK
• Earnings revision. We fine-tune our earnings estimates by 1.0/1.1/1.3% for 2022-24.
• Risks. a) Uncontrolled resurgence of COVID-19 cases; and b) upmarket push below
expectations.
VALUATION/RECOMMENDATION
• Maintain BUY and lift our target price to HK$28.80. Its 1Q22 results surprised the market
on solid bottom line growth. Despite reopening rates of the on-premise channel as of endApr 22 were still similar to that of end-Mar 22 which would then likely drag 2Q22
performance, we think the company would not disappoint given: a) the like-for-like price
hikes in China and South Korea should be mostly reflected in 2Q22, b) economy reopening
in other regions like South Korea and India, and c) product mix and consumption upgrade.
Our target price implies 42.3x 2022F PE and 37.3x 2023F PE.