1Q23 The high sales base in the Chinese and Korean markets may drag down Budweiser Asia Pacific's 1H24 sales performance.
Management anticipates that the high single-digit increase in the average sales price in 1Q24 will drive further expansion of gross margin and maintain the normalized profit margin before interest and tax unchanged year over year.
Reiterating the “Buy” rating, the target price remains unchanged at HK$18.90 (corresponding to 30.1 times 2024 P/E).
Product upgrades continue, but the high base may hinder Budweiser Asia Pacific's 1H24 performance. We recently had a business update conference call with Budweiser Asia Pacific management. Management reiterated that its product upgrade strategy will not be affected, but we note that in the first half of this year, the company may face a number of potential adverse factors due to the high sales base and other revenue fluctuations in the 1H23 Chinese market. However, given that we expect net profit growth to accelerate in the second half of 2024, we have maintained our full-year earnings forecast for 2024.
Both the Chinese and Korean markets had a high sales base in 1Q23. Budweiser Asia Pacific announced a 7.4% year-on-year increase in sales in the China/Korea market in 1Q23, thanks to China's reopening after the pandemic and healthy competition in the Korean market. However, we noticed that after suppressed demand was met, China's economic recovery slowed in the second half of 2023; local players in South Korea launched a new round of price wars in the second quarter of 2023, and the negative effects of the two have continued until now. Management said that the Chinese market accounted for more than 80% of Budweiser Asia Pacific's total sales in 2023, and weather was a key influencing factor in sales. Given the relatively cold weather in March 2024 (March usually accounts for 40% of sales in the first quarter), we forecast that Budweiser Asia Pacific 1Q24 sales will drop 3% year over year, with the eastern Asia Pacific region falling 4.4% year over year and the western Asia Pacific region falling 2.9% year over year.
Gross margin expansion driven by average sales prices was unaffected, offsetting the decline in other revenue. Although the decline in 1Q24 sales may increase average production costs, we still predict that Budweiser Asia Pacific's 1Q24 gross margin will increase 0.9 percentage points year over year, driven by an organic 6.2% increase in expected average sales prices. Other revenue for Budweiser Asia Pacific 1Q24 is also likely to decline due to lower confirmed earnings due to distributors' paid recycling of beer bottles while sales of low- to mid-range products declined.
Despite this, we believe that the negative effects of other revenue declines should be completely offset by Budweiser Asia Pacific's gross margin expansion, and that the 1Q24 normalized profit margin before interest and tax should remain flat year over year.
The “Buy” rating was reaffirmed, and the target price of HK$18.90 remained unchanged. We keep our forecast unchanged because we believe that the adverse factors faced by Budweiser Asia Pacific due to the base effect will be mitigated in the second half of 2024 and will not structurally change the company's investment theme. We still gave Budweiser Asia Pacific 30.1 times the 2024 P/E, which is still 1 standard deviation below the stock's average one-year forward P/E over the past three years.
Risk warning: Increased competition; China's economic recovery is slower than expected; rising raw material costs; brand and operational dependency on parent companies; exchange rate fluctuations.