- Easing COVID-19 situation to support near-term sales recovery
- Efficiency improvements across the industry to underpin margin expansion
- Cost pressure could ease in 2H22 amid softening commodity prices and beer price increase
- Our top pick is BUD APAC (1876 HK) in view of its attractive valuation, fast recovery in S. Korea and its ability to raise operating efficiency; we also like CR Beer (291 HK) and Tsingtao Brewery (168 HK).
Recovery from COVID-19 disruptions.
Given the impact from COVID-19 resurgence in China, we expect major brewers to see a slight y-o-y decline in sales volume during 1H22. As the pandemic situation becoming more under control while the on-trade channels continue to recover, leading market players should see a better 2H22. They should be able to achieve at least flattish volume growth in 2022, while average selling price (ASP) could also improve by a mid-single digit rate in China. Being the market leader in South Korea, BUD APAC should also gain a better rebound with at least mid-single digit volume growth this year riding on the strong market recovery.
High production intensity to post best efficiency improvement.
Leading operators in China are increasingly focused on capacity optimisation to enhance efficiency. As larger scale breweries have increasingly centralised production management and enhanced logistic coverage, major brewers in China should be able to achieve better capacity utilisation and cost reduction that could lead to profit margin expansion. Hence, companies with higher production intensity (e.g., BUD
APAC is c.2x of its peer average) may be able to better safeguard profit margins, while there is also ample room for improvement in the medium to longer term.
Cost pressure to ease.
Looking ahead, with the recent decline in commodity prices and potentially normalising supplies of aluminium and barley, cost pressure could ease in 2H22. In the meantime, effective cost control measures such as hedging strategies (e.g., undertaken by BUD APAC) and advance purchases (e.g., CR Beer), along with ongoing ASP growth, could more than offset the raw material cost
impact and support GP margin improvement in 2022/23. Our top pick is BUD APAC in view of its attractive valuation (currently trading at c.15x prospective EV/EBITDA vs. historic average of >20x), faster recovery momentum in 2H22 and higher operating efficiency.
