Tsingtao Earnings: Product Mix and Cost Control Drive Resilient Profit Growth

Narrow-moat Tsingtao Brewery posted another set of quarterly earnings that exceeded Refinitiv consensus, thanks to improving product mix and control in operating expenses. Net income rose 18% year on year. Volume growth moderately outperformed our estimates due to premium segment strength. We raise our sales and net profit projections for the year to account for better volume and operating cost control. We expect the base effect to weigh on second-half results, but view positively the company’s ability to drive product mix and navigate the bumpy operating environment.

We keep our fair value estimate unchanged at HKD 80 per share and continue to see its shares as undervalued. Our fair value implies 23 times 2023 price/earnings and 12 times EV/EBITDA, which are within the lower range of domestic peers. In the near term, we continue to prefer Tsingtao over other domestic peers under our coverage, due to its more balanced exposure to mass-market and premium beer. We also think Tsingtao has outperformed major peers in managing its premiumization efforts without overspending on channel expenses. This corroborates our view that the company has sufficient distribution leverage in its core regions to turn mix upgrade opportunities into incremental profit.

Sales grew 8.2% year on year in the second quarter, driven by a 5.4% increase in price per ton. The company delivered decent product mix improvement during the quarter. Midrange to premium product volume increased by 19% year on year, accelerating from the first quarter’s pace. The higher-priced Tsingtao brand also exhibited faster volume growth than the low-end Laoshan lineup. Compared with first-half 2020, the Tsingtao lineup delivered a three-year volume CAGR of 10.4%, versus negative 1.5% for Laoshan. We think this proves our view that the company can drive mix upgrades in its core regions to fuel top-line and profit growth in the medium term.