The stock price of China Resources Brewery has dropped sharply by about 25% over the past 40 days. The weak market sentiment is mainly due to market concerns (1) that weak catering channels and rainy weather across the country may put pressure on beer sales, and (2) Maotai's recent sharp drop in price prices has increased uncertainty about the development prospects of China Resources Liquor's business. However, according to our research, China Resources Brewery's sales volume remained stable under a high base, the product structure continued to improve, and management remained optimistic about the annual performance outlook. All of this makes us believe that the company's short-term stock price has clearly fallen above the mark. China Resources's current stock price is only trading at less than 15x 2024 P/E and less than 10x 2024 EV/EBITDA. It is at the bottom of history, and the valuation is relatively cost-effective. As the peak season begins, the base figure falls, and the weather clears and heats up in most parts of the country, we expect market sentiment to improve in the short term, helping China Resources Brewery's valuation to recover. We expect China Resources's stock price to rebound significantly within the next 30 days.

Sales performance in the first half of the year is expected to be better than that of major competitors: despite a weak consumer environment, high base, and poor weather (low temperature and heavy rain) in the first five months of 2024, according to our research, China Resources Brewery's sales declined by only a single digit in the first five months of 2024, better than major competitors (including Tsing Beer and Budweiser). Although it was still raining in South China after entering June, the sales base was drastically lower than in April-May. We judge that the rainy weather in June will not have much impact on 1H24's overall sales. Once the weather gradually improves, the lower base is expected to support a return to positive sales growth during the July-August peak season and promote an improvement in market sentiment.

There is still high certainty about profit growth throughout the year: despite overall sales pressure, we predict that Heineken 1H24 will still record high year-on-year sales growth, helping to increase the price per ton (ASP), thereby offsetting the decline in overall sales. The company is still maintaining Heineken's sales growth of 20%-30% for the full year of 2024, and the goal of double-digit growth in pure sales volume (however, 1 million kiloliters is expected to be difficult). Since prices for raw materials such as barley were locked at the beginning of the year, prices for packaging materials such as glass and aluminum were locked in January and April. The company currently predicts that the cost of a single ton will drop 3% year-on-year in 2024, driving a 1.5ppt year-on-year increase in gross margin for the whole year. The company plans to continue to increase market investment during the peak season to ensure the continuous improvement of brand power and channel power, and the sales expenses rate is expected to remain flat year-on-year throughout the year.

Changes in industry demand have limited impact on China Resources Liquor's business: We believe that China Resources's liquor business is in the early stages of development, is relatively small, and there is plenty of room for improvement in fundamentals and profitability, so it is limited by changes in overall market demand. We expect the revenue of China Resources Liquor's business to record significant growth after the launch of new products during the Mid-Autumn Festival season.

Management is still maintaining the same revenue and profit targets for the liquor business at the beginning of the year.

Investment risks: 1) The increase in raw material prices was higher than expected; 2) the growth rate of sub-high-end products was slower than expected; 3) market competition intensified; 4) the overall economy deteriorated.