Sales channels are recovering

Although Budweiser Brewing Company APAC Limited's management did not disclose its July sales in our recent NDR, we can infer some sales trends through its main sales channels. In the second quarter of 22, sales fell 6.5% from a year earlier. Management estimates that at the peak of the COVID-19 blockade in April, the opening rates of night shows and restaurants in China were 38 per cent and 82 per cent, respectively. These operating rates rose to 91% in June, respectively, to 98%. The opening rate will affect Budweiser Brewing Company APAC Limited's sales, so overall sales rose by single digits year-on-year in June. Although the opening rate in July is estimated to have fallen slightly to 81% and 97%, we still expect sales to increase in July. Given that our basic assumption is that there will be no large-scale blockade in the second half of 22, we should expect sales to pick up in the second half of 22, especially in view of the hot weather so far this summer.

Cost pressure is expected to improve by the fourth quarter of 22.

In the first half of 2002, gross profit margin fell 3.3 percentage points year-on-year to 50.7%, due to rising prices of raw materials and adverse changes in the sales structure. Management pointed out that the trend in spot prices of raw materials indicates that profit margin pressure will peak in the third quarter of 22. Nonetheless, management expects raw material costs to fluctuate into fiscal 23, but may not be as dramatic as they have been in the past 12 months. With the expected recovery in sales of high-end and ultra-high-end products, we expect profit margins to pick up in the second half of 22.

Price increases usually take place in December

Although management did not confirm the possibility of a price increase in the second half of 22, it was mentioned that Budweiser Brewing Company APAC Limited's core / affordable products usually increase prices in April (before summer), while Budweiser and Core + products increase prices in December (before the Spring Festival). Even so, any price increase is unlikely to completely offset the rise in raw material prices, and Budweiser Brewing Company APAC Limited will usually rely on high-end products to improve average prices and profit margins.

Maintain the overweight rating and target price of HK $27.9

We maintain our earnings per share forecast and target price of HK $27.9. In view of China's economic recovery expectations and high-end trend, we maintain the overweight rating.

Main catalysts: high-end faster than expected; price increase; profit margin better than expected

Main risks: China increases and extends COVID-19 epidemic control measures; raw material costs rise faster than expected.