Budweiser APAC Earnings: Volume Remained the Main Drag to Results; Reducing Valuation by 3%

Narrow-moat Budweiser APAC’s third-quarter earnings were weighed on by sluggish volume in China, primarily in the on-trade channels such as restaurants and nightlife premises. Despite lower commodity costs being a tailwind, gross margin expansion was partially offset by a lower mix of on-trade channel sales, which have better margins. The near-term demand headwind was more severe than our expectation, but we retain our long-term constructive view on Budweiser APAC’s ability to monetize on the beer premiumization trend in China. We think the soft demand in on-trade channels reflects cautious spending behavior of consumers in the near term, but it does not impair the company’s competitiveness from the channel’s and product portfolio’s perspectives. We lowered our 2024 earnings estimate by 16%, due to lower revenue and higher operating cost assumptions, but we expect volume sales to rebound in 2025 when consumer sentiment improves. As a result, the reductions in our 2025-28 revenue and net income estimates are more moderate at 3%-4%, driving our fair value estimate lower to HKD 17.00 per share, from HKD 17.50. We continue to view Budweiser APAC as our top pick in the sector.