Blue Moon Issues Profit Warning for First-Half FY2021; Lowering Gross Margin Estimates and Valuation

We are lowering our fair value estimate for Blue Moon to HK $12 from HK $13, after the company issued a profit warning ahead of first-half 2021 results, which are expected in August. The company blamed a huge gross margin shortfall in the first half of the year on several factors, but the downside surprise involved competitive events that have pressured pricing power. On balance, we would treat volatility in the stock as opportunistic entry points, but we acknowledge that visibility into short-term earnings has decreased significantly and the market may not rerate the stock to our estimate of intrinsic value until Blue Moon can demonstrate that it can regain control over its pricing and the gross margin will rebound, in spite of ongoing inflationary pressures.