Pearl River Brewery disclosed its 2024 quarterly report. In 1Q24, the company achieved revenue of 1.11 billion yuan, +7.0% year over year, and realized net profit attributable to mother/net profit excluding net profit of 120/10 million yuan, +39.4%/+45.8% year-on-year. The company's 1Q24 sales growth rate slowed, and the tonnage price increased high. Gross margin has been rising steadily, asset impairment losses have been reduced, and net profit margin to mother has increased significantly. Looking forward to the future, the company's main beer business is expected to continue its sharp rise in volume and price, and the collaborative development with the cultural industry is worth paying attention to.

The company's EPS for 24-26 is expected to be 0.33, 0.37, and 0.42 yuan, maintaining an increase in holdings rating.

Key points to support ratings

1Q24 sales growth slowed, and tonnage prices rose high. 1Q24 achieved revenue of 1.11 billion yuan, +7.0% year on year, and sales volume/ton price +0.8%/+6.2% year over year, respectively, to 264,000 kiloliters/4,201 yuan. Under the high base, the company's 1Q24 sales growth slowed down. Among them, sales of premium beer products were +15.1% year-on-year. As high-end products replaced low-end products, the company achieved a high increase in 1Q24 tonnage prices.

Gross margin has been rising steadily, asset impairment losses have been reduced, and net profit margin to mother has increased significantly. 1) On the cost side, the company is still facing some pressure. The cost of 1Q24 tons was 2,431 yuan, +3.8% over the same period last year, or due to the high cost inventory of some products in 2023. However, driven by the continuous upgrading of the product structure, the company's 1Q24 gross margin increased steadily by 1.3 pct to 42.1% year over year. 2) On the cost side, 1Q24's sales/management/finance/R&D expenses ratio was +1.3/-0.4/-0.3pct year-on-year to 16.6%/8.0%/3.1%, respectively. We expect the company to step up its 1Q24 marketing activities and increase the sales expense ratio. Management and R&D expenses gradually declined as revenue increased. In terms of financial expenses, as interest income stabilized, the company's 1Q24 financial expenses fell slightly by 0.04 million yuan year on year to -40 million yuan. 3) At the profit level, due to reduced inventory price reduction preparations, the company's 1Q24 asset impairment losses decreased by 13 million yuan year-on-year. Driven by structural upgrades and reduced asset impairment losses, the company's 1Q24 net profit margin increased 2.5 pct year over year to 10.9%.

The main beer industry is expected to continue the sharp rise in volume and price, and focus on the collaborative development of beer sales and the cultural industry. We believe that the beer industry's structural upgrading trend is essentially unchanged. Driven by marketing reforms, the company continues to deepen the “3+N” brand strategy and accelerate the penetration of innovative channels, and the main beer industry is expected to continue to grow at a relatively rapid rate. At the same time, with the abolition of both anti-tax anti-taxes between Australia and Macau, the pressure on raw material costs faced by the company is expected to improve significantly in 2024.

In the long run, the company has sufficient cash reserves. If it can do a good job in the collaborative development of the beer culture industry with beer sales, it will help improve the efficiency of the use of assets, and it is worth paying attention to.

valuations

We maintain our previous profit forecast. We expect the company's 2024-2026 EPS to be 0.33, 0.37, 0.42 yuan, +16.2%, +14.0%, and +12.3%, corresponding to the 2024-2026 PE valuation of 25.4/22.3/19.8 times, maintaining an increase rating.

The main risks faced by ratings

Channel inventories exceed expectations, and raw material costs fluctuate.