Qingdao beer and Chongqing beer: Beer "big guns" turned into consumer "mainstream"

Until now, the Pan-Consumption industry covered by Dolphin Analyst has almost closed the curtains. Although there has been a certain rebound recently, if someone still relies on the path dependence and hopes to obtain excess returns through consumption, it is obviously an extremely bleak situation if viewed throughout the year.

But this does not mean that all major consumer categories are in the same "downward" state: among the 15 pan-consumption companies covered by Dolphin Analyst, if your consumption is mainly on beer, the chances of winning are obviously greater. For example, Qingdao Beer Co., Ltd. (HK), which is a key focus of Dolphin Analyst's coverage, and Yanjing and AB InBev, which are compared and tracked, have all achieved rare positive returns for the whole year.

In the concepts of many ordinary people, new consumption is attractive, but how can beer, an old consumption, with an unchanged brand and channel for many years, maintain a strong stock price? In this article, Dolphin Analyst combines the third-quarter financial reports of major beer listed companies before the end of October to sort out for everyone the excess returns of this wave of beer. How far has beer's high-end trend gone, and based on recent trend changes, it looks at the opportunities and risks of several beer companies that Dolphin Analyst is following in the short term.

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1. It's not just quantity and price rising that is sexy business

Funds like the logic of industry-level penetration and company-level quantity and price rising, but when the economic growth rate of the current economy is hovering between 3-5%, such business is few and far between. If we have to choose according to this standard, beer is obviously not favored, because the domestic beer industry has not only passed the stage of total consumption volume growth, but is now in a stage of trend contraction of consumption volume. Even the logic of increasing the leading market share is getting weaker.

It sounds very bleak, but in fact, such an industry can bring many enlightenments to other consumer goods industries: because in the case of shrinking consumption, after a part of regional players ended the price war through price increase and tacit understanding to "seek profit", they achieved a story of sustained profit growth, which is a clear stream-level profit growth example for large consumer goods industries in the low-growth era. Let's take a closer look:

1) Shrinking beer consumption

a. First, let's take a look at long-term data. The figure below shows that since 2013, the total output of beer has been declining year by year. Although the downward trend was slightly stabilized in 2018 and there were disruptions due to the epidemic in the past three years, the overall trend is still in a slight contraction.

At the same time, the amount of beer consumed by a single person in China has basically reached its limit: currently, the per capita beer consumption is about 34 liters, slightly higher than the global average of 32 liters. On the one hand, there is limited room for further increase in per capita beer consumption, and on the other hand, the number of the main consumer group of domestic beer (20-45 years old) has been shrinking year by year since 2015, making the beer industry tend to be saturated. Please see the Dolphin Analyst's explanation on the industry in Qingdao Beer (Part 1: Unlocking the super high-end, is the "Maotai"-style beer a flash in the pan or a final destiny?) for details.

b. The logic of concentration of market share is coming to an end

Although the industry has been in an overall decline since 2013, the market share of the leading companies is still slowly increasing: the market share of the top four players (China Resources, Tsingtao, Budweiser, and China Resources Snow) increased by six percentage points from 2013 to 2017.

However, since 2018, the logic of this market share increase has become weaker and weaker, especially in these two years, the impact of the epidemic has affected the performance of national leading companies. The operating space of large leading companies has become smaller and smaller, squeezing the operating space of local small brands. The logic of market share increase is even gradually approaching its end.

c. Everything is aligned with "ton price"

The industry ranking in the above chart seems uneventful, but in the process of retrospection, the Dolphin Analyst found that it corresponds to a smoke-filled business war scene in the beer industry:

(1) In the early days, when the national consumption volume was still in an upward trend, the industry was characterized by local brands, and there were roughly local beer brands wherever you went.

(2) After sales peaked in 2013, the leading players entered a price war, causing a large number of beer factories with weak operating capabilities and no ability to expand beyond their local areas to die in this wave. During this period, production capacity continued to decline.

(3) Since 2018, when the rate of increase in market share of the leading companies has slowed down significantly, the dividend of large fish eating small fish has basically ended. As a benchmark, when China Resources acquired the high-end brand Heineken in 2018, the industry completely entered a path of strong mergers and acquisitions by leading companies with channel, scale, and capital advantages, and completely shifted to a high-end path. The industry competition has shifted from "tonnage" competition to "ton price" competition.

When entering the competition of ton price, compared with the fierce price war period, the leading players are more tacit and have entered the "price increase period" together. Of course, in any industry, raising prices is the simplest and most direct way to improve performance, and continuous price increases are always pleasant. However, this direct and crude method of raising prices usually only results in backlash from "inventory", and has no sustainability. d. High-end Final

Fortunately, the increase in beer prices is not an unsustainable and crude method of price increases, but is accompanied by the upgrading of user consumption needs in reality - from light and inexpensive to silky smooth and affordable, through the endogenous and exogenous high-end branding to increase the proportion of mid- to high-end sales and achieve sustainable ton-price increases.

Looking at two national brands, CR Beer and Tsingtao, the promotion of high-endization and the quantitative landing of rising prices have led to stagnant beer sales in both companies in the past four or five years, with basically no incremental growth. However, in the last three years, the proportion of high-end sales has been clearly increasing.

Looking at the industry leader's goal: CR Beer clearly set a goal at the channel partner conference in November, with the goal of doubling sales of high-end products from 2 million tons to 4 million tons in the next three to five years. From the target of the leader, there seems to be a lot of room for ton-price growth through high-endization.

And looking at the leading high-end brand Budweiser APAC, there is still a lot of room for high-endization among domestic counterparts: Budweiser APAC, which is listed, covers four regions - China, South Korea, India, Vietnam, etc., of which the China region accounts for more than 70% of sales, but contributes more than 60% of revenue to the company, and the domestic ton-price is obviously lagging behind.

Even in the lagging state, Budweiser is still the absolute high-end leader in the Chinese market: In China, Budweiser's sales accounted for more than 50% of high-end beer products.

In comparison, the current mid-to-high-end proportion of CR Beer and Tsingtao is less than 20% and 30%, respectively, and these two are clearly still in the process of high-endization, with a clear final focus in the next three to five years.

Each beer's high-end strategy is also very clear:

(1) Budweiser APAC: Use specialized dealers + traditional channel distribution to achieve full-channel coverage, further strengthen Budweiser's high-end position and national influence.

(2) CR Beer: Promote SuperX iteration in the red zone market, tilt towards high-end products in "five provinces + eight highlands", and focus on series such as Facebook, high-end fresh beer, and conquer the ends of the earth.

(3) Tsingtao Beer: Streamline the brand, promote the layout of craft beer and import markets.

(4) Chongqing Beer: Nationalize Wusu, cultivate new popular single products.

II. The Secrets of High-end: The Price Increase is the Profit Increase

Different from the price competition to win by volume, the beer industry, with packaging as the main cost and relatively high gross profit of fast-selling products, has entered the era of ton-price increase of high-endization, and price increase is actually the release of profit. In the beer industry, the main cost is concentrated in packaging materials (such as aluminum, glass, corrugated paper, etc., accounting for nearly 50%). The difference between high and low end is more in taste, good or bad, and there is not much difference in packaging.

The Dolphin Analyst selected five top beer companies for everyone to feel: high ton-price (PS: blue is profit, yellow is cost, and the total length of the column is the single ton income. We sort it according to the overall height of the column) basically corresponds to higher single ton profit, and the packaging is still cans, glass bottles, corrugated paper, etc. There's not much fundamental difference in terms of cost, the higher the unit price, the higher the gross profit margin.

Currently, the price of high-end products can reach 7,000-8,000 yuan/liter (ex-factory price), while mid-range products are only 3,000-5,000 yuan/liter, and even some lower-end products are only 2,000 yuan/liter, with a larger gap in gross profit per ton.

It's clear that the cost of high-end products for Budweiser APAC is actually not much different from that of local brands, but thanks to a series of products such as Budweiser, Time, and Corona, it has created a significant price difference, leading to higher gross profit and gross profit margins per ton. Budweiser APAC's gross profit per ton can reach 2,500 yuan, while other local brands have long been stuck in gross profit of less than 1,500 yuan per ton due to low prices.

Let's take a look at the change in the per-ton price and gross profit trend of a single company's high-end process vertically. Before the asset injection of Carlsberg in 2020, the per-ton price of Zheavy Beer wasn't high, and the cost was basically in the 2100s, relatively stable, but after the asset injection, its per-ton price growth was converted into per-ton profit while the single-ton cost remained unchanged, and the gross profit margin suddenly rose to more than 50%.

In summary: Through sections 1 and 2, we can clearly see that in the already established beer industry, the leaders have gone through the ups and downs of price wars and merger and acquisitions, and in terms of the dimension of quantity, whether it is the overall volume or the perspective of seizing others' market share, the space has been compressed to a barely perceptible level.

The only truly decisive battle at present is the final battle of "high-end"，although it entered the high-end race as early as 2018. However, if we take Budweiser as a benchmark case after completion, the dividends for domestic brands to increase their share of high-end product structured are expected to last at least another 3-5 years.

Next, let's take a look at where these companies stand in the third quarter of 2022 by comparing their financial reports.

III. The aggressive Tsingtao Beer and the small but beautiful Zheavy Beer

First of all, the conclusion is that through the comparison of the third quarter, among these companies, Dolphin Analyst is relatively optimistic about Tsingtao Beer, and Zheavy Beer is also a good choice.

a. Sales: Relying on luck as well as skill

Beer production in the first ten months of this year saw almost zero growth compared to 2021, so the industry is still stagnant in terms of quantity, and the flat sales in the first ten months were mainly due to luck: the prolonged high heat in the summer this year brought about a 11-12% growth rate in production in July and August, but the decline in production in October was quite significant.

As for the sales volume of each company in the third quarter (due to the fact that CRHK did not have the third quarter, the comparative data does not include CR), the post-epidemic situation, coupled with the hot weather with ultra-long standby period, has led to good improvements in the sales volume of beer companies in the third quarter: among which the lowest volume of heavy beer increased the most, with a growth rate close to 5% in the first nine months, and the green beer on the paper with a high base number was also good, with a growth rate of nearly 3%.

In terms of long-term ton price improvement drive: Green beer is the best, heavy beer is also good, and AB InBev APAC is clearly in a high-end state, ton price improvement has seen fatigue, and it has not yet seen sales volume improvement, with a growth rate still below that of other leading companies.

In terms of the ultimate revenue performance on the ground, AB InBev APAC is obviously in a state of fatigue, and the growth of green beer, heavy beer, and Yanjing are all good, but considering the mid-to-high-end foundation is still good, Dolphin Analyst believes that the main better product is actually green beer and heavy beer.

In terms of short-term outlook for the fourth quarter on the income side: due to the Qatar World Cup in November and the earlier Spring Festival in 2023, there is hope for year-on-year growth in sales volume in the fourth quarter. In terms of ton price, as ton price continues to rise among each company (Tsingtao middle and high-end sales growth rate exceeds 8%, Heineken growth rate is close to 20%), and beer demand during the World Cup and beer consumption products during the Spring Festival are biased towards the mid-to-high end, the ton price improvement in the fourth quarter is basically predictable.

2. Companies with more room for improvement in gross sales margin - Heavy Beer

As we know, the conflict between Russia and Ukraine has led to a certain increase in most raw material prices, which has caused a considerable impact on the gross profit margin of food and beverage companies. Although the gross profit margin of the beer industry is relatively high, due to the cost structure, packaging costs (aluminum, glass, corrugated paper) account for the largest proportion, and other raw materials are mainly agricultural and sideline products such as malt, hops, and rice.

From the situation of these companies, although each company still has a positive impact on gross profit margin due to ton price improvement in the third quarter, among other things, after the upward trend in packaging and other raw material prices before and after the recent downturn, each company is still affected by the procurement cycle, and their gross profit margin in the third quarter is still in a deteriorating state (Zhujing Beer is affected by accounting standards changes and cannot be compared, other A-share companies have adjusted for freight impacts), except for small-volume companies such as Yanjing, Only the gross profit margin performance of Tsingtao Beer remained relatively stable in the leading positions of the market.

In addition, as transportation costs have mostly been moved from sales expenses to cost items by most beer companies in recent months, and because high-end products usually correspond to higher marketing expenditures, we place greater importance on the gross sales difference when considering the actual effective gross profit margin after deducting the sales expense ratio.

In terms of the gross sales difference, Chongqing Beer is evidently the most outstanding company in Q3. With the influence of the sales expense ratio removed, Chongqing Beer, as a high-end player with a relatively high market share, has further improved in Q3, while Tsingtao Beer fell back somewhat compared to Q2. The main reason for this decrease was that Tsingtao Beer allocated sales expenses that weren't used during the pandemic period, and even added additional funds for Q3. (You can refer to the financial analysis of Tsingtao Beer on October 27, 2022 for further details in "Is Tsingtao Beer Soaring on its Own?" and "Will Tsingtao Beer Cool Down in Q4?" on Longbridge.)

If we look ahead, assuming that the package material cost as a percentage of total package cost at the end of 2021 serves as a benchmark, and after the US raises interest rates sharply in the latter half of this year, Dolphin Analyst has roughly estimated that the overall package cost for aluminum, glass, and corrugated paper will decline by about 20%.

Dolphin Analyst has estimated the gross margin elasticity brought about by the decline in package material costs: if purchasing is fully market-driven, with package material costs having already fallen by nearly 20% from last year to now, there is theoretical room for the gross profit margin to increase from 38% to approximately 43%, releasing at least five percentage points of profit space. Taking into account the purchasing cycle and pricing control risks of various companies in practice, Dolphin Analyst estimates that the cost reduction will at least contribute to improving the gross profit margin of beer companies by approximately 2-3 percentage points for the next half year or so.

4. Which company has the greatest elasticity in terms of improving the chat-greater-than-profit?

Since there has not been an obvious rebound in the cost side in the first three quarters, and with the influence of the post-pandemic price, brand, and sales expense inputs, the net profit margin of several beer companies has not improved significantly. From the results perspective, AB Inbev Asia Pacific performed the worst, Tsingtao Beer the best, and Chongqing Beer was also relatively satisfactory.

Looking forward to the fourth quarter of this year and beyond, Dolphin Analyst prefers to find players whose volume and price can increase simultaneously. Among the high-end players in this wave of beer industry, two clear imbalances can be observed in the income side: AB Inbev APAC and Chongqing Brewery. Tsingtao Brewery has maintained basic stability on a large base, and the gap in gross sales shows that Chongqing Brewery is still rising on a high base, with obvious performances, while Tsingtao Brewery is relatively lower due to the pace of sales investment, and the situation deteriorated in the third quarter. Considering overall profit improvement, Tsingtao Brewery managed to uphold the growth rate of the previous two quarters despite the decrease in gross profit margin, while Chongqing Brewery performed relatively well; the worst-performing player is obviously AB Inbev APAC in the end.

Therefore, overall, in the current stage, Dolphin Analyst believes that Chongqing Brewery and Tsingtao Brewery are the two beer brands that it is most optimistic about. The logic behind Chongqing Brewery's income end is better, while Tsingtao Brewery has more space to release profit due to improvements in gross profit margin and packaging costs in the past.

IV. Tsingtao Brewery: Cost Improvement Delivered, Real Profit Released

Among the beer companies that Dolphin Analyst has been continuously tracking, the main ones covered are Tsingtao Brewery and CR Snow. As CR Snow has no third-quarter performance, Dolphin Analyst has mainly updated its valuation judgment on Tsingtao Brewery. As for the logic behind the valuation, Dolphin Analyst simply explains it here:

In the short term, besides the fact that Tsingtao Brewery's income is relatively stable and high-end brewing continues to advance, the World Cup in the fourth quarter will boost income. The company's inventory corresponds to half a year's income, and raw material prices have fallen significantly since the second half of this year, especially since the third quarter. After using up the high-priced inventory, the lower cost of packaging materials is expected to begin to be reflected in income from the fourth quarter onwards. Moreover, Tsingtao Brewery has relatively low gross profit margin compared to other beer brands, so its gross profit margin elasticity will also be higher.

Even under the relatively conservative gross profit margin and profit release expectations of Dolphin Analyst, assuming WACC=11% & perpetual growth rate g=3% hypothesis, under DCF valuation, Tsingtao Brewery's corresponding stock price under DCF valuation is HKD 82.80, which has 11% upside potential compared to the current closing price.

1. From the perspective of PE, the prospective P/E ratio of Tsingtao Brewery in 2023 is 30%, and looking at the fluctuation space of PE in the past, it is still in the middle and lower ranges, and has not yet returned to the average range.

Research on the Beer Industry and Related Listed Companies by Dolphin Analyst

$ Qingdao Beer Co., Ltd. HK

Earnings Season

October 27, 2022 Earnings Review "Qingdao Beer: Rising to the Challenge Regardless of the Circumstances? The Fourth Quarter May Not Be Too Cold After All"

August 31, 2022 Telephone Conference Call "Qingdao Beer: Continuous High-End Development"

August 26, 2022 Earnings Review "The Advancing Qingdao Beer: Price Hikes Are the Way to Go"

April 28, 2222 Earnings Review "Qingdao Beer: Further Price Increases Relieved Cost Pressure"

October 28, 2021 Earnings Review "Qingdao Beer: Slow Sales Growth Is a Permanent Fixture, High-End Breakthrough Still Needs Effort"

In-depth

February 10, 2022 "Qingdao Beer (Part 2): How to Value Qingdao Beer at the Present Stage after Fosun's Reduction of Shares?"

January 25, 2022 "Qingdao Beer (Part 1): Unlocking the High-End Market, Is Beer 'Getting Moutai-fied' a Temporary Fad or an Inevitable Fate?"

$ China Resources Beer Holdings Co., Ltd. HK

Earnings Season

August 17, 2022 Telephone Conference Call "Continuous High-End Development, Striving for Number One"

August 17, 2022 Earnings Review "China Resources: The Lone Warrior Brave Enough to Take on the World Will Soar Even Higher"

March 25, 2022 Telephone Conference Call Summary of Results "China Resources Beer Results Telephone Conference: High-End Development Trend Remains, Short-Term Cost Pressure"

March 24, 2022 Earnings Review "Amid the Epidemic, China Resources Beer Remains Resolute in High-End Development" 2021 March 22 Earnings Report Review "China Resources Beer: Is Tsingtao falling apart? Too short-sighted?"

Risk disclosure and statement: Dolphin Analyst Disclaimer and General Disclosure.