Budweiser Asia Pacific reported a 0.4% year-on-year decline in endogenous revenue in 1Q24 (4.4% increase in the price of tonnes partially offset the 4.8% drop in sales), slightly lower than our expectations.
The impact of the high base is likely to continue until 2Q24, especially in the Chinese market, and profit margins in the Korean market should continue to improve.
The “Buy” rating was reaffirmed, and the target price was lowered to HK$16.52 (corresponding to 28.2 times 2024 P/E).
Revenue growth in 1Q24 was slow due to high base figures and unfavorable weather conditions. From an endogenous perspective, Budweiser Asia Pacific's 1Q24 sales fell 4.8% year on year. Among them, sales volume in the Chinese market fell 6.2% year on year, and the number of units falling in the Korean market was mainly affected by the high 1Q23 base and torrential rain in South China. Continued product high-end production in the Asia-Pacific region and price increases in the Korean market in 4Q23 spurred Budweiser Asia Pacific to increase 4.6% year over year, largely offsetting the negative impact of declining sales and keeping revenue basically flat at US$1,643 billion year over year. Incorporating the adverse effects of exchange rates (particularly RMB against the US dollar), Budweiser Asia Pacific 1Q24's reported revenue for 1Q24 decreased by 3.5% year-on-year.
Profit margins continue to expand along with high-end products and reduced pressure on production costs. As the product structure shifts to higher-cost high-end products, the production cost of Budweiser Asia Pacific single-ton beer increased slightly by 0.4% year-on-year. However, we noticed that the company's 4.6% year-on-year increase in alcohol prices was fully able to absorb the slight increase in production costs and the 0.8 percentage point increase in operating expenses ratio (as a share of revenue). Budweiser Asia Pacific's 1Q24 normalized EBITDA increased 4.2% year over year, and profit margin increased 153 percentage points to 34.8%.
The impact of the high base will continue until 2Q24, and the recovery of the Korean market is expected to precede that of the Chinese market. We believe that Budweiser Asia Pacific's 2Q24 China market will continue to be affected by the high base, while the Korean market base is relatively small during the same period, and the pressure it faces is gradually easing (2Q23 sales growth decreased by a number of units year-on-year, compared to 1Q23, a double-digit year-on-year increase). The favorable tonne price base in the Korean market (partly due to last year's price war) will continue until 3Q24. In this regard, we predict that the company's 1H24 normalized EBITDA in the eastern Asia-Pacific region will increase by about 30% year-on-year, while the year-on-year endogenous growth rate of normalized EBITDA in the western Asia Pacific region may only improve marginally and remain at a low unit level.
The “Buy” rating was reconfirmed, and the target price was lowered to HK$16.52. We've updated our 2024-26 revenue and adjusted net profit forecast to reflect that the overall growth of the Chinese beer industry fell short of expectations, particularly the price of alcohol per ton. We gave the company a valuation of 28.2 times the 2024 P/E (previously 3.01 times), which is still one standard deviation lower than the average one-year dynamic P/E for the past three years, and obtained our new target price of HK$16.52 (previously HK$18.90).
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.