The decline in sales and sales volume in the first quarter of 2024 fell short of expectations, but average price growth drove profit margin expansion better than expected: endogenous revenue growth remained flat in the first quarter of 2024 (-0.4% year over year, slightly lower than the agreed forecast of +0.5%).
The decline in overall sales volume (higher base due to the restart in the first quarter of 2023) was offset by an increase in average sales price (driven by high-end sales, revenue per 100 litres increased 4.6% year over year). As the average price increase exceeded the flat cost per 100 litre (+0.4%), gross margin expanded 206 basis points (endogenous) to 51.5%, and flat operating expenses drove the EBITDA margin to increase 153 basis points to 34.8%. Normalized EBITDA grew 4.2%, and earnings per share remained flat. Sales in the Asia Pacific East/West region all declined (4.0% and 4.9%, respectively), but high-end sales continued to increase (up 9.6% and 3.6% year over year, respectively), driving EBITDA growth in East/West Asia Pacific by 18.7% and 2.0% respectively, and EBITDA profit margins also increased (up 3.2/0.3 percentage points year on year to 27.8% and 36.4%, respectively). We note that this is the first time that the company has disclosed quarterly EBITDA profit margins by region.
Sales in the Chinese market fell 6% in the first quarter, and the high base is likely to continue into the second quarter: in Budweiser's largest market, sales fell 2.7% year on year in the first quarter of 2024, similar to that of peers (Qingdao/Chongqing/Yanjing Huiquan -5%/+7%/+3%), but profit growth (EBITDA +1.0%) lags behind peers (Qingdao/Chongqing/Yanjing Huiquan net profit growth +12%/+824%). Due to the high base figure brought about by the restart (which will continue next quarter) and the bad weather in March, Budweiser's sales volume fell 6.2% year on year, but the average price (revenue per 100 liters) continued to grow steadily, up 3.7% year over year, driving the EBITDA profit margin by 145 basis points.
The company reaffirmed its strategy of geographical expansion (by the end of the year, the number of cities covered by Budweis/ultra-high-end brands will increase from 220 per 63 to 235 per 70, respectively), and the number of cities covered by its B2B management platform BEES has also increased from 260 at the end of 2023 to 265 by the end of the first quarter.
South Korea's strong EBITDA margin expansion was a highlight. Sales volume fell 4% year over year, but was completely offset by an average price increase of 9.6%, driving sales up 5.2% year over year. EBITDA increased 18.7% year over year, and EBITDA profit margin increased 334 basis points year over year to 27.8% year over year. In a market with a similar competitive price range, Budweiser, as the only brewery with a full portfolio of high-end brands, is using its advantages to expand the higher price range with differentiated products and services, such as using the famous Holy Grail to pour Stella Artois.
Repurchase, target price of HK$15.6: We expect the second quarter of 2024 to continue to be affected by the high base, but there should be improvements in the second half of 2024. Reiterating the purchase, the target price is HK$15.6, based on an average price-earnings ratio of 22.0 times for 2024-25, corresponding to 1.3 times PEG and a compound annual growth rate of 17% in earnings per share.