Tsingtao Brewery Earnings: Volume Dragged Results but Margins Improved on Better Mix

Narrow-moat Tsingtao Brewery’s 600600 third-quarter earnings missed our estimates on revenue and net profit. Sales declined year on year but gross and net profit still grew modestly, as margins benefited from positive mix and cost control. We fractionally reduce our 2023 revenue and net income forecasts as a result. We also lower our fair value estimate to HKD 78 per H-share (CNY 73 per A-share) from HKD 80/CNY 74 due to currency headwinds. Tsingtao’s share price has rebounded from a selloff last week following a viral video showing product sabotage that reflects safety issues. Based on company disclosure, we do not think the event should significantly affect Tsingtao’s sales, with the company expected to address safety lapses. Tsingtao’s H-shares are relatively attractive at the current price.

Major Chinese beer brewers under our coverage are trading at a notable discount versus historical multiples, likely due to soft consumer sentiment that appears likely to persist through the fourth quarter. We continue to prefer Tsingtao over Budweiser APAC and China Resources Beer, as we think Tsingtao can more efficiently leverage its distribution strength in core regions to drive mix growth. The company’s beer products are also priced at a more affordable price range versus international premium beer offerings.

Third-quarter sales fell 4.6% year on year (versus our estimate of 5.0% growth), cycling a high base. Weaker sales drove net income below our estimates despite stronger-than-expected margins. The primary drag was the Laoshan brand, where volume fell 17.7% year on year. Although the core Tsingtao brand recorded a mid-single-digit volume decline, midrange or above volume increased by 3.3%. We believe volume growth is driven by its Pure Draft and Weissbier lineups in core regions. As a result, gross and net margins finished above our forecasts by 190 and 80 basis points. Average selling price and gross profit per ton also rose 7.5% and 15.8% year on year, respectively.