Consistently improving product mix
- China Resources Beer (CRB) announced that revenue grew by 7.0% yoy in 1H22 to Rmb21bn, and that core net profit rose by 20.4% to Rmb3.8bn, slightly better than we expected due to more effective expenses control.
- The mix upgrade trend continued in 1H22, with the sales volume of premium products growing by 10.0% yoy. We expect the premiumization trend to continue in 2H22F.
- CRB also fully mitigated the raw material cost pressure in 1H22 through a mix upgrade and selling price increases; management expects cost pressure to fall hoh.
- Reiterate Add with a higher DCF-based TP of HK$75.
1H22 results slightly above our expectations
Total revenue grew by 7.0% yoy in 1H22, driven by the 7.7% yoy ASP improvement. Sales volume dropped slightly by 0.7% yoy to 6.3mt in 1H22. CRB raised its selling prices for certain products in various markets in 1H22 to mitigate the cost pressure. The GPM remained relatively stable at 42.3% in 1H22, in line with that of 1H21. CRB also effectively controlled its expenses. The distribution and admin expenses ratios fell by 1.4ppt and 1.9ppt yoy to 15.3% and 6.4%, respectively, in 1H22. Adjusted by impairment losses related to a plant closure and land disposal gain in 1H21, core earnings grew by 20.4% yoy to Rmb3,802m in 1H22 vs. Rmb3,159m in 1H21. CRB currently has 18.3mt production capacity, with a 68.8% utilization rate in 1H22 vs. 67.8% in 1H21.
No change in the premiumization trend
Although the Covid situation slowed down the growth of premium products in 1H22, the overall trend has changed. The sales volume of premium products accounted for 18.1% of total sales volume in 1H22, vs. 16.4% in 1H21. Management said that the Heineken brands achieved over 30% yoy sales growth in 1H22 and the other premium products, like CRB draft, Super X and Mars Green, all achieved positive sales volume growth. CRB launched Black Lion fruit beer and carbonated beer drinks in 1H22, and plans to launch Heineken bubble beer in the near future. Management believes that the premiumization trend is just beginning in China and that premium products will reach over a 20% yoy sales CAGR in the next five years. The smoothing Covid situation and hot weather has facilitated a beer consumption recovery since Jun. Management said sales volume achieved c.10% yoy growth in Jul and high-teens yoy growth in Aug. We expect CRB’s sales volume growth to return to yoy positive for FY22F. We also expect the premiumization trend to speed up in 2H22F. We now expect CRB to achieve sales growth of 8.3% and 7.5% yoy, respectively, in 2H22F and FY22F. The company also strengthened its large-customer management in 1H22, with the number of large customers increasing by 20.
Increasing raw material costs should be manageable
Management now expects the cost of goods sold to increase by Rmb1.2bn–1.3bn in FY22F, owing to increasing raw material prices, lower than the previous guidance of Rmb1.6bn–1.8bn. Barley and aluminum prices were up by 25% and 17% yoy, respectively, in 1H22, but both fell by 12% and 9% mom in July. We expect CRB to achieve GPM expansion of 0.4ppt and 0.1ppt yoy to 35.0% and 39.3% in 2H22F and FY22F, respectively.
Reiterate Add with a new DCF-based TP of HK$75
We reiterate our Add rating, since we believe there is large growth potential for CRB through a mix upgrade and market share improvement. We raised our FY22F–24F EPS forecasts by 1.1–5.2% to reflect better-than-expected expenses control. A positive catalyst would be stronger-than-expected sales volume growth in 2H22F. A risk is higher-than-expected raw material costs. Our TP is derived from a DCF valuation, with 8.5% WACC and a 3% terminal growth rate (details on page 2).