CR Beer Earnings: Lower Price Growth Expectations for Beer in 2023; Lowering Valuation

Narrow-moat China Resources Beer 00291 delivered first-half results that slightly outpaced our estimates and largely met Refinitiv’s consensus. Although the firm delivered 20% EBIT growth, the share price still reacted negatively likely due to the slight miss in price growth for beer. We reduce our 2023 price growth and net profit estimate to account for weaker third-quarter sales and an unfavorable mix for the beer segment in the second half. We currently assume price growth would rebound in 2024 as broader consumption improves, but we retain our longer-term view that CR Beer’s premium segment volume growth would slow from 2025 onward.

The softer profit estimate, together with a weaker CNY, lowers our fair value estimate to HKD 55 per share, from HKD 58, which implies 17 times 2023 EV/EBITDA and 33 times P/E. We think the market is concerned about demand for CR Beer’s premium beer in the near term as well as soft sales entering third quarter. CR Beer’s share price could continue to face pressure until beer volume and price growth regain momentum. We prefer Tsingtao Brewery in the near term due to its more balanced exposure to the mass market and premium beer, as well as its sole focus on the core beer business.

Beer sales grew 8.9% year on year, thanks to 4.4% increase in both volume and price. Price growth is slightly below market estimates of mid-single digits. We reduced our full-year price growth estimate, but kept the volume assumptions unchanged, as we account for volume decline entering third quarter. We also cut the gross margin estimate to account for a less favorable mix.

Management reiterated the potential of increasing profitability of Guizhou Jinsha through improving operational efficiencies and leveraging CR Beer’s distribution. We note 2023 will be a transitional period for the baijiu segment and reduced our net margin estimate to account for higher inventory clearance and administrative costs. On a company level, we cut our net income estimate by 12%.