Blue Moon: Intensified Competition Dragged 2023 Profit; Valuation Down to HKD 3.10 From HKD 3.60

Narrow-moat Blue Moon’s profit warning for 2023 was disappointing, with guided net profit slightly below our estimates. 2023 net profit is expected to decline by at least HKD 230 million versus 2022’s HKD 611 million. Our previous estimate for 2023 earnings is HKD 488 million. We think the weak results were consistent with our cautious view toward second-half 2023 top-line growth and margins. After factoring in the guidance, we reduced our medium-term annual revenue growth forecasts from 2024 onward to an average of 5.0%, from 5.8%, as we believe the company would face headwinds from soft consumer sentiment and intensified competition. Our steady-state net margin estimate is also lowered to 8.7% from 9.3%. Consequently, we have cut our fair value estimate to HKD 3.10 per share, from HKD 3.60 per share. We believe the firm is currently undervalued, but we expect investors will stay sidelined on the stock given the uncertainty on its longer-term growth outlook. While we acknowledge that Blue Moon’s balance sheet remains strong with net cash position, we think the market is dissatisfied with the lack of earnings-accretive expansion by the management.