1Q24's performance was relatively weak. The decline in sales was higher than our expectations, and the growth rate of the price of tonnes fell short of expectations... However, 1Q24 profit margins continued to expand, thanks to the increase in tonnes of alcohol prices and falling costs.
Industry's first choice; reconfirmed the “buy” rating and lowered the target price to HK$81.00 (12 times 2024 EV/EBITDA).
Tsingtao Brewery's 1Q24 net revenue fell 5.3% year on year, and adjusted net profit increased 12.3% year on year, all slightly lower than our forecast. We think the main reason for the decline in revenue was the high 1Q23 base. During the 1Q24 period, Tsingtao Brewery's sales volume decreased by 7.6% year on year, while the price of alcohol per ton increased by 2.4% (compared to the same period last year, the price of alcohol per ton increased by 11.1%/5.1% year on year, respectively). Since 2Q24, we have noticed a low sales growth base (2Q23/ 3Q23/ 4Q23 sales growth rates were +2.7%/-11.3%/-10.1%, respectively), so we expect sales growth to improve during the rest of this year; we forecast 2Q24/ 2H24 sales growth rates of -0.8%/+12.1%, respectively.
The asymmetric decline in sales behind the increase in the price of tonnes of alcohol is not an ideal situation. 1Q24 Tsingtao Brewery's price per ton increased 2.4% year over year. This is still largely driven by the product mix, but we don't think this approach is ideal. By brand, sales of the Qingdao brand decreased 5.6% year over year, while sales of other brands fell 10.4% year over year. According to product classification, sales of mid-range and high-end products fell 2.4% year over year, while sales of other products fell 11.2% year over year. As sales of high-end products from other brewers have all achieved year-over-year growth, this situation may seem worrying, but we believe that the decline in Tsingtao Brewery's sales volume is also partly due to its high base in 1Q23. We expect Tsingtao Brewery's high-end beer sales to resume positive growth in 3Q24 when the base effect weakens.
The price advantage of raw materials is beginning to show. In 1Q24, the sales cost of a ton of Tsingtao Brewery decreased by 1% year-on-year, which we think was mainly due to the drop in raw material prices. Combined with a 2.4% increase in the price of alcohol per ton, Tsingtao Brewery's gross margin increased 2.1 percentage points year-on-year to 36.6%. At the same time, Tsingtao Brewery's operating expenses (sales and distribution expenses, administrative and R&D expenses) as a percentage of revenue also fell from 18.0% in 1Q23 to 17.4% in 1Q24, with sales and distribution expenses falling sharply by 1.1 percentage points. We believe this indicates that market competition is easing. We believe that improved sales costs and a better competitive environment will continue to drive the net profit margin to increase 1.6 percentage points to 13.6% in 2024.
Reiterating the “Buy” rating, the target price was lowered to HK$81.00: we slightly lowered our 2024-26 revenue forecast to reflect that 1Q24 performance fell short of expectations, and we lowered our 2024 adjusted net profit forecast to reflect the weakening of operating leverage. We are now using 12 times the 2024 adjusted EV/EBITDA (previously 15 times) to value Tsingtao Brewer-H shares, which is high in the current trading multiples range of its peers. After we adjusted our forecast, our target price was lowered from HK$101.00 to HK$81.00. Since the current trading price of Tsingtao Brewer-H shares corresponds to 15.6 times the 2024 P/E, and considering the good prospects for consumption and capital control, we think the current stock price is attractive. Risk warning: changes in consumer behavior or loss of market share; food safety incidents; increased raw material/labor costs; adverse new product launches.