Incident: The company announced its 2024 interim results, achieving operating income of 23.744 billion yuan, -0.5% year over year, and profit attributable to shareholders of 4.705 billion yuan, +1.2% year over year.

Comment:

2024H1 beer sales are under pressure, and revenue per ton of alcohol has increased steadily. In terms of beer business, 2024H1 China Resources Beer achieved revenue of 22.566 billion yuan, or -1.4% year over year; of these, sales volume was 6.348 million kiloliters, or -3.4% year over year, which we believe was mainly due to the high base for the same period. Looking at the product structure, in a situation where the consumption environment is relatively weak, the company's high-end production is progressing steadily. Under the challenging macro environment, sales of the next high-end and above still achieved single-digit growth. Among them, sales volume through e-commerce channels was about +60%, sales of premium and above beer increased by more than 10% year on year, sales of products such as Heineken, Lao Xue, and Hongjue increased by more than 20% year on year. Sales of pure snow also achieved positive growth. 2024H1 Looking at the subregions, 2024H1 achieved revenue of 10.958 billion yuan, or -2.1% year on year; Central region 6.49 billion yuan, -1.8% year over year; and 6.038 billion yuan, or 2.6% year over year.

2024H1 gross margin was +0.9 pct year-on-year, and the cost improved a lot. The gross margin of the 2024H1 company was 46.9%, +0.9 pct year on year. The main reason was that the cost of beer decreased by 0.312 billion yuan year on year, the cost of 1,000 liters of wine was only +0.94% year on year, and the gross margin of the beer business was +0.6 pct to 45.8% year over year. In the first half of the year, the company adopted a number of cost reduction and efficiency measures to control operating expenses, and beer operating expenses were basically the same as compared to the same period last year. Overall, the 2024H1 beer business achieved profit before interest and tax of 6.365 billion yuan, +2.6% year over year, and profit margin before interest and tax +1.1 pct to 28.2% year over year. In addition, the company continued to promote production capacity optimization in the first half of the year, confirming the relevant fixed asset impairment losses and one-time employee compensation and placement expenses of 19 million yuan (94 million yuan in the same period last year). If one-time effects were excluded, the profit margin before interest and tax for the company's beer business was +10pct year-on-year to 28.3%, a record high.

Actively promote the integration of liquor and create a “beer+liquor” dual empowerment model. 2024H1's liquor business achieved 1.178 billion yuan, +20.6% year over year, driving gross margin +2.1pct year over year to 67.6%. In terms of products, the sales volume of national high-end single product summaries increased by more than 50% year-on-year, contributing about 70% of the turnover of the liquor business. In terms of profitability, EBITDA reached 0.413 billion yuan, the same as the previous year. After completing the settlement of Guizhou Sands, the company actively promoted post-investment integration, empowerment and upgrading of the liquor business. On the product side, the company continues to promote product innovation and upgrading, and launched “Abstract 3.0”, “Abstract Song Lyrics”, “Sands Classic” and light bottle series to attract different consumers. On the business side, the company focuses on “adhering to big products, adhering to the core market, doing real business, price control, inventory control, quality improvement, consumer cultivation, manufacturer relationship building, and digital construction” to serve consumer trends and cross the industry cycle. Looking ahead, we believe that the liquor business is expected to maintain good growth after the complete restructuring of Guizhou Sands.

Profit forecast and investment rating: In the face of a severe macro environment, the company responded positively. Despite sales pressure in the beer business, the tonnage price and profit before interest and tax continued to grow. Under a steady increase in cash flow, the company actively gave back to shareholders and paid 0.373 yuan/share in the medium term, +29.97% year over year. The dividend rate was 25.72%, +5.65pct year on year. Considering the steady progress of the beer+liquor business, we expect EPS for 2024-2026 to be $1.69, 1.88, and 2.15, respectively, corresponding to the price-earnings ratio of 13, 12, and 10 times the closing price (22.08 yuan/share, HK$24) on August 19, 2024, maintaining a “buy” rating.

Risk factors: Fluctuations in raw material prices, tonnes of wine revenue or sales volume of sub-high-end products falling short of expectations, liquor business improvement falling short of expectations