Budweiser China's growth rate in the first half of the year is weaker than that of the industry, and its leading position has fluctuated in recent years. 22H1's Asia-Pacific Western region sales volume is-2.5% year-on-year, including-5.5% year-on-year in China; the pace of high-end development is slowing, with year-on-year tonnage prices in Asia-Pacific West region + 0.9% and 18H1-21H1CAGRH 3.8%; cost pressure continues to show, with H1 ton costs increasing by 9.2% and Q1 by 6.0%. The performance of China News is weaker than that of China's beer industry as a whole, and this backwardness also occurred in 2020. We believe that Budweiser China's lead is being challenged and the following dilemmas may arise:
First, the overall sales decline, high-end growth lags behind. Beer sales in China have fluctuated since they peaked in 2013, with CAGR of-4.3 per cent in 2013-2021. Budweiser China's sales in 2015-2020 fell 15.6% year-on-year; high-end market share fell from 49.1% in 2015 to 41.9% in 2020, according to Euromonitor. Budweiser China accounted for 81 per cent of Budweiser Brewing Company APAC Limited's sales in 2021. The strategic goal of the company tends to profit and high-end products, weakening medium-and low-end products. On the other hand, domestic competitors have strength in high, sub-high and middle range, which may lead to the overall sales and high-end market share of Budweiser China continue to decline.
Second, the tonnage price rose and decelerated, taking the lead in reaching the inflection point. Budweiser, as a foreign beer giant with deep layout in China, was the first to enjoy the high-end dividend of domestic beer. In 2021, the tonnage price of Budweiser's western Asia-Pacific region (undisclosed China) is 4914 yuan, which is 26.5% higher than the domestic average price of 3884 yuan. But Budweiser China's lead is shrinking after domestic beer entered the track of accelerated upgrading in 2016. In the past three years, the CAGR of the western Asia-Pacific region was 4.7%, which was lower than 4.8% of the domestic average price CAGR. We expect that there will be a deceleration inflection point in the upgrading of beer consumption in the next five years, and Budweiser China, as an industry leader, may be the first to reach this inflection point.
Third, it is difficult to cut costs, and even forced to rise. Budweiser Brewing Company APAC Limited's sales expense rate has fluctuated and declined in recent years, from 31.4% in 2017 to 28.5% in 2021, confirming the company's emphasis on profits. But major competitors have risen steadily, such as China Resources Beer rising from 16.9% in 2017 to 202% in 2021 and Chongqing Beer from 14.7% to 16.9%. The company's response strategy is to focus on night shows and A, B restaurants and other key channels, while products focus on Budweiser's main brand, Corona and Fujia have a big gap. In the face of fierce competition and diversification of demand and scenarios, the rate of sales expenses is difficult to continue to decline.
Fourth, cost optimization comes first, and the room for improvement is limited. The company closed 11 factories from 2018 to 2021, leading the industry in capacity utilization; the per capita income was 1.67 million yuan in 2021, the second in China, with a per capita profit of 230000 yuan, the first in China; and the management expense rate was maintained in the range of 5.8-7.1% for many years, 6.6% in 2021, while the industry average was 8.8%. Therefore, the measures taken by most domestic enterprises to optimize production capacity, reduce costs and increase efficiency are close to or have encountered bottlenecks for companies, so it is difficult to obtain more room for improvement.
Investment advice and profit forecast. As mentioned above, we believe that the early advantages established by Budweiser China are being caught up and eroded, and the difficulties in terms of sales volume, ton price, cost and cost may lead to weaker growth than the industry as a whole. We estimate that the company's EPS for 2022-2024 is HK $0.58,0.63 and HK $0.70 respectively (previous values are HK $0.62, HK $0.67 and HK $0.68, US $1 = HK $7.85). Based on the valuation of the comparable company, it was given 33 times PE in 2023 (the previous value was 34 times PE in 2022), maintaining the target price of HK $21 and downgrading to "below market" rating.
Risk tips: rising raw material prices, weakening high-end profits, and macroeconomic deceleration.