High-end Challenges (Minutes of CR Beer's 2022H2 Performance Meeting)

Below is a summary of CR Beer's full-year performance for 2022. For detailed financial reports, please refer to "CR Beer: Expense Control Has Reached Its Limit, When Will We See the Turning Point in Gross Profit?".

Key Points:

1. 2023 Targets: 1) Overall Goals: sales volume growth, revenue growth above unit level, double-digit profit growth, actual growth may exceed expectations. 2) Above second-tier: sales increase by more than 20% YoY; in 2022, high-end beer sales accounted for 19%, and in 2023, they hope to reach 23%, with a goal of 30%-35% in the next three years. The sales target for high-end beer is 3.5 million tons. 3) Individual brand sales targets: in 2023, the growth rate of Snow will exceed last year's growth rate (30%+).

Snow: 1) High-growth sources in 2023: nationwide layout; Snow grows rapidly in developed areas of high-end wine, such as Fujian, Zhejiang, Jiangsu, Shanghai, etc. 2) Different product channels: nightlife, catering channels focus more on Xingyin, and non-drinking channels focus more on classics.

1. Q1 2023 Performance: 1) The industry: consumption is significant, and beer consumption has returned more obviously. 2) CR Beer as a whole: Q1 high-end wine sales and profit growth are the fastest in recent years.

2. Regional Performance and Planning: 1) Guangdong: actively adjusted and straightened prices in 2022, with a significant decline in sales volume; Q1 2023 sales volume stabilized and rebounded, achieving low double-digit growth (weaker than the double-digit growth in Zhejiang and Fujian). 2) Fujian: In 2022, the new product Xingyin was launched in Fujian and performed well. Snow classics grew rapidly while Snow Xingyin increased significantly in Fujian market. Overall sales in Q1 2023 increased by a high double-digit percentage. The SuperX+ Xingyin combination has entered more areas and terminals nationwide and is growing well. 3) Zhejiang: Sales volume in Q1 2023 increased by a high double-digit percentage. 4) Two markets had a certain decrease in sales volume during the price increase in 2022.

3. Production Capacity: Closed two factories in 2022 to 63, the one-time cost has a small impact on the company's profits; The capacity utilization rate remained above 60% in 2022.

4. Baijiu: 1) Soy sauce wine industry problems: blindly pursue receivables, blindly pursue high growth, and Kweichow Moutai's inventory level is in the middle of the industry. 2) The first task for Kweichow Moutai is to reduce inventory, but refuse to adopt the extreme inventory management model of beer and adopt a unique dynamic management mechanism. 3) Outlook: After three years, CR's baijiu business will have a certain scale and contribute to a certain profit. 4) Product layout: organizational, brand, product, and channel reconstruction.

5. Low-alcohol Drinks: Fruit-flavored low-alcohol drinks have a promising future, but the possibility and complexity of making them are far beyond normal beer. Beer and baijiu moving towards low-alcohol drinks may be a possible development track in the future, which should be closely watched, cautiously executed, and actively tried.

Development Strategy:

1. To become the leader of a new world of beer, we will see our opportunities in terms of quality, production level, revenue, brand, service, and high-end diversification. In 2022 and in the future, in addition to focusing on Snow, SuperX, and Pure Draft, we will continue to introduce more different products. This includes more promotion of Laoshuifa and Hei Shiwu Bai Pi in 2023, as well as the launch of non-alcoholic beer and bottled whole wheat pure draft from Snow.

2. Our key clients continue to grow, and we hope to leverage their support to facilitate our further development into the high-end market.

3. This year, we will gradually introduce small bars and taverns in flagship and community stores as venues for brand promotion and deeper consumer engagement.

4. In terms of productivity optimization, we closed down two breweries in 2022, which had little impact overall. We have plenty of other measures to optimize and enhance cost benefits. Despite the difficult environment last year, our capacity utilization rate remained above 60%.

5. Material costs will pose a pressure in 2022, especially for aluminum cans and barley, which have undergone considerable price increases. However, the pressure should not be as significant as the previous year.

6. In light of the Beer New World development strategy, we plan to establish a headquarters in Shenzhen and a beer town to promote our brand and corporate image.

7. As for our Baijiu business, we aim to invest in premium assets through CR Beer's platform and build valuable Baijiu brands for business expansion.

【Q&A】

Q: How do you balance market share, revenue, and profit? A: Our 3+3+3 strategic plan has been highly successful, exceeding our expectations in the first six years with faster-than-anticipated progress, robust performance, and target achievement. After six years of transformation, Snow Beer successfully shifted from mainstream to high-end products, achieving sustained profit growth and revitalized organizational capacity. At the same time, our brand has continued to gain momentum, and digital operations have reached new heights. This year is one of faster development, with beer consumption clearly rebounding, sales, revenue, and profit all growing comprehensively. Although our market share slightly declined in 2022, we have made critical adjustments in some key markets and performed exceptionally well in the Henan market. Our sales volume remains critical, and growth this year may exceed expectations, with positive sales volume growth, a significant increase in revenue from sizable units, and a double-digit profit growth rate.

Q: After merging financial statements, what about issues with soy sauce channel inventory? A: The existing payment system in the Baijiu market has dampened revenue growth and caused an excess inventory buildup, especially for soy sauce. Therefore, we will lower inventory, adjust inventory management strategies, tidy up our client base, and use CR Beer's dynamic management model. We will enhance dynamic management of channel inventory, product pricing, promotion optimization, key client management, and collection policies. We will continue to pursue stable performance and cultivate new growth drivers instead of just focusing on collection.

Q: What are the volume and profit margin targets for the premium market in 2025? What are the growth prospects for major brands such as Heineken, SuperX, and Chunshe? A: The next three years will bring substantial changes to the beer industry. The top five players in the beer market will undergo significant shifts, with high-end beer becoming the leader of the New Beer World. Our company aims to surpass main rivals' high-end beer in volume and tier within a certain time frame. The proportion of high-end beer will gradually increase to between 30% and 35% in the next three years. Our company has significant profit margin potential driven by increased profitability in less profitable markets, price increases for mid-to-high-end products, the decrease of raw material cost, lean sales operations, organizational transformation, and increased profits from the high-end market. The high-end market of the future will bring further profit growth. Q: How do you see the growth of high-end and above this year?

A: This year, double-digit growth will be achieved, higher than last year's figure of 12.6%. This year, growth will be at least 20%+, with an increase of more than 400,000 tons. Based on Q1, prospects are good, because the high-end beer market is strong, and there will be considerable elasticity after the pandemic. Many high-end consumer goods have been affected, but high-end beer represents value, and the impact is not significant. In the past, high-end beer has been greatly affected, mainly in nightclubs and restaurants, but after reopening, high-end beer will perform better.

Q: How do you anticipate changes in the industry's competitive landscape this year, particularly in Zhejiang, Fujian, and Guangdong's strategy?

A: Although the markets in Zhejiang, Fujian, and Guangdong are under pressure, Tsingtao Brewery's aggressive offensive remains unchanged, and the pace is accelerating. Growth over the three years after the pandemic will be substantial. The new product, Starway Silver, has been well received by consumers, and saw a large increase last year. It and Tsingtao beer have grown rapidly in national markets. Tsingtao Brewery has adopted a channel incentive policy and has signed high-growth contracts with customers. Based on Q1, the completion rate of these contracts is good, achieving high double-digit growth. In the Guangdong market, we have excluded old mainstream channels and products, and focused mainly on high-end product portfolios, making proactive adjustments. It has been surprising to see how fast the main competitors in the Southeastern coastal markets have grown over the past three years, exceeding our expectations. Tsingtao Brewery's growth rate in 2022 was over 30%, and this growth was still accelerating, due to redeployment across the country and growth in developed high-end liquor regions. Pure Draft and SuperX are currently performing well, but Tsingtao's growth is still faster.

Q: What are the expansion plans for Starway Silver? How will parallel imports impact the market? What changes will there be in the high-end market? What specific measures will the company take to develop its beer business in the future?

A: Tsingtao Brewery's development plan and future prospects:

Tsingtao Brewery is the company's overall plan. Starway Silver and Classic have different focus areas in different scenarios, with Classic currently being more than Starway Silver, though Starway Silver has the fastest growth rate. The company has established a volume control mechanism for parallel imports, which is currently relatively stable and effective. However, it is necessary to pay attention to the impact of Starway Silver, which is listed globally and parallel imported overseas in 600ml bottles. The goal is to achieve a basic plate and ballast at three price levels, with Tsingtao, Pure Draft and SuperX as the three brands. Black Lion and Laoxue are the personalized supplements of the "3+2" high-end brand matrix. In the next three years, the company's business composition, sales revenue, and profits cannot be compared with the top 5 beer companies. We need to rebuild a high-end, intensive, lean, and digital industrial pattern. The pandemic has led to greater changes in the industry, and Snow Beer has promoted a high-end strategy and strengthened digital development. The industry still has development potential.

Q: How do you consider the incentives for the 8-10 yuan price range competition, how to consider wedging and breakthroughs to achieve the high-end growth target? How to consider the price range below 6 yuan?

A: The 8 yuan price range is the competitive focus, where Tsingtao Classic, 1903, and other beers will raise prices this year. SuperX and YongChuang will also see price hikes; U8 is also developing rapidly, leading to significant expansion of the 8 yuan segment. In recent years, the rise in raw material costs has meant that many companies' price hikes have been unstable, often rapidly increasing from 8 yuan to 9 yuan, even 10 yuan. The beer market is highly competitive but has vast potential for growth. We plan to focus on developing our three brands: Super X, Heineken, and Pure Draft. The 8+ market is expected to increase from 8 million tons to 20 million tons, which will significantly raise the industry's high-end level. The inventory of premium liquor is increasing rapidly, while mid-range and mainstream beers are also seeking growth.

Q: What is the contribution of baijiu in the next 5 years?

A: At least 10 billion yuan. We believe that 10 billion yuan is the minimum requirement for a central enterprise to produce baijiu; otherwise, there is no point in entering the market. Our target of 10 billion yuan is different from other companies because we may achieve this goal with two or three brands. It is a preliminary goal and not a long-term one. We hope to achieve this goal through the development of our three brands in three to four years.

Q: The competition in the Jinzhongzi and Jingsha tracks is fierce. What strategy can be implemented to break through? How do you balance focusing on single products and having multiple brands?

A: We will use effective distribution and independent development strategies to enhance the synergies between liquor, beer, and white liquor. We will also improve our strategic planning and management models, build our team, strengthen brand development, and enhance liquor and beer products.

China Resources Beer is positively exploring the baijiu market, hoping to create its single product. They have proposed a three-step plan to achieve this.

Step 1: Learning and exploration - learning from the experience of other famous liquors, baijiu, and beer, exploring their own methods, and enhancing the synergies between beer and white liquor. At the same time, they hope to optimize the management of accounts receivable, inventory, pricing, and expenses.

Step 2: Improvement - In the second year, China Resources Beer will enhance its internal capabilities to better leverage its strengths and inherit the benefits of other companies.

Step 3: Growth - By the third year, China Resources Beer hopes to establish a more competitive business in the national or regional market. They plan to revamp high-end, mid-range, and screw-capped baijiu products, unlocking its potential market.

China Resources Beer aims to explore, optimize, and develop through a three-year practice. China's baijiu market is enormous, making it possible to earn significant profits. China Resources Beer is already competitive in the baijiu market.

Q: What is the product layout of baijiu? What strategies can be implemented for Jinzhongzi and Jingsha in dining and takeout channels?

A: Four Baijiu Reshaping Strategies:

1. Organizational Reshaping: The organizational restructuring is moving very fast. The first round of organizational reshaping has been completed in about three months, including the restructuring of its organizational structure, management responsibilities, talent selection, and personnel optimization. Following the beer sector's experience and abilities, it appears that baijiu restructuring is even faster.

2. Brand Reshaping: The brand of several baijiu companies requires reshaping now. Because its brand image, definition, and target customers are not clear. The flavor, aroma, and cultural history of the leading baijiu brands have not yet been comprehensively developed.

3. Product Reshaping: The leading seed is the product reshaping, a combination of Jinge and China Resources' King of Seeds product reshaping. Jinge will release the first type of seeds soon, followed by other companies gradually releasing new products for the next six to seven months. Jingsha may be slower, starting in February. Jingsha's brand reshaping is underway, and there are already some details from the first round. Jingsha will need to reshape its takeaway and summary strategies, although it is good, reshaping the brand is necessary for us.

4. Structural Reshaping: The structural reshaping of the liquor industry has been completed by the joint venture platform, mainly to maintain and upgrade a healthy and stable liquor market order. There is still a lot of room for exploring the tension and connotation of abstract and value mining. Channel reshaping is now mainly empowering beer and cultivating and developing big customers, which is the channel management model of Snow. It is not only borrowing but also empowering management mode. Currently, Jinzhongzi and Jingzhi have made great progress, while Jingsha has not started yet. These reshaping efforts (organization, brand, product, and channel) are basically underway. The summary and sand return tasks are different: Jinsha sand return-reshape attack, Jinsha summary-inventory management, price recovery, upgraded and optimized versions are gradually being launched. Sales mode of Chinese high-end liquor: Innovative practice of Snow's special high-end liquor or business banquet mode in Jinsha, launched in April and May.

Q: What are the development goals and strategies of the big customer platform this year?

A: Baijiu needs to develop the big customer market. There are more than 1,000 big beer customers, accounting for more than 20% of high-end sales. The accurate second batch in Fujian and Zhejiang has a great supporting role in the high-end development of Snow Beer. The accurate second batch faces the direct sales terminal and has a precise assessment mechanism. The better the development trend of brands such as Tsingtao, the greater the possibility of the second batch willing to cooperate with Snow Beer. Big customers and accurate second batches should establish a strong cooperative relationship.

Q: Cross-border competition in the low-alcohol field?

A: In recent years, low-alcohol beverages have received increasing attention, especially among young people. The characteristics of low-alcohol beverages are non-irritating, slightly drunk, and pleasant, which are popular among young people in small towns and Z generation. The low-alcohol fruit wine market in China has broad prospects, but it is even harder to do than craft beer due to its complexity. Beer is a typical representative of low-alcohol beverages, and the Chinese market currently focuses on two major weapons-high-strength alcohol and low-strength alcohol. For future development directions, beer should develop towards low-alcohol beverages and try fruit wine and other tracks; while baijiu should try to become low-alcohol baijiu and mix with other wines. Low-alcohol beverages need long-term attention, practice, and observation because they may be one of the main development directions of the liquor industry in the future.