Despite the boost from sports events such as the European Cup, Americas Cup, and the Olympics, the performance of the beer sector in the first half of the year was not as hot as expected. Not only did many leading enterprises experience a decline in sales volume, but the industry's production growth rate in the first half of the year also fell short of expectations.

According to data from the National Bureau of Statistics, from January to June 2024, the cumulative beer production of large-scale enterprises in China was 19.088 million kiloliters, only a slight increase of 0.1%. Since March, there has been a continuous decline, with year-on-year decreases of 6.5%, 9.1%, and 4.5%. Among the top 5 beer companies, 3 experienced a decline in sales volume in the first half of the year, with Tsingtao Brewery (00168) seeing a 7.8% year-on-year decrease, becoming the fastest declining.

Behind the "cooling" beer market are not only objective factors such as extreme weather and high base effect but also reflect that changes in population structure, lifestyle, and economic environment are constantly reducing the consumption power of the beer market: the development of internet technology has shifted more social activities online, gradually reducing offline drinking scenes. The increase in car ownership and the enhancement of health concepts have further weakened the consumption habits of drinking during gatherings.

At the same time, the sales growth of craft beer and short shelf-life beer, catering to the consumption preferences of the younger generation, indicates that there are still many incremental opportunities in the industry. Although China's high-end beer market is still in its early stages, with the advancement of industry diversification, youthfulness, and quality trends, the beer industry is also expected to usher in new opportunities for structural upgrades.

Revenue and sales volume are generally under pressure, while the downward cost trend is helping improve profits.

From the perspective of beer industry production and sales volume in the first half of the year, the sales of leading beer companies generally declined. Among the top 5 companies, only Chongqing Brewery (600132.SH) and Beijing Yanjing Brewery (000729.SZ) at the end of the market share rankings saw an increase in sales in the first half of the year. Chongqing Brewery benefited from the booming tourist consumption in the base market and continuous channel expansion, with a year-on-year sales growth of 3.3%, performing better than the overall beer industry; Yanjing Brewery relied on its large single-product volume to show a certain growth resilience, with a year-on-year sales growth of 0.65%.

However, looking at the overall performance, the beer sector achieved a total revenue of 40.423 billion yuan in the first half of 2024, a year-on-year decrease of 1.3%. Among them, the first quarter achieved an operating income of 19.332 billion yuan, a year-on-year decrease of 0.8%; and the beer sector achieved an operating income of 21.091 billion yuan in the second quarter, a year-on-year decrease of 1.9%.

The industry as a whole is under pressure, affected by both the high production base from the previous year's recovery of production post-epidemic and extreme weather conditions. It is understood that in the first half of the year, regions such as South China and the West experienced more rainy weather, with poor sales performance in various beer on-trade channels. For example, Bud APAC (01876) China area's second-quarter performance was dragged down by the core regional markets of Fujian and Guangdong, with a 10.3% decrease in quarterly sales, a 15.2% decrease in revenue, and a 5.4% decrease in revenue per hectoliter.

At the same time, the off-trade channels performed relatively well. For example, Beijing Yanjing Brewery saw a 26.6% year-on-year growth in e-commerce channel revenue in the first half of the year; Guangzhou Zhujiang Brewery (002461.SZ) saw a 36.7% year-on-year growth in superstore channel revenue and a 13.2% growth in e-commerce channel revenue, both faster than the overall beer business revenue growth.

The industry's transformation towards high-end and optimization of product structure, combined with cost reduction, has driven an overall increase in the sector's gross margin. Data shows that the beer sector's gross margin for the first half of the year was 44.0%, an increase of 2.2 percentage points year-on-year. The gross margin for the sector in the first quarter was 41.4%, up 2 percentage points year-on-year, and in the second quarter, it was 46.4%, up 2.3 percentage points year-on-year.

It is understood that in 2024, the average price of barley purchases has significantly decreased, and packaging material prices such as glass and cardboard have also experienced declines. Moreover, at the beginning of the year, beer companies took corresponding price-locking measures for aluminum price fluctuations to reduce the impact of aluminum market price fluctuations on the cost side, leading to an overall decrease in costs for the beer sector.

The overall expenses of the industry have remained stable, with some enterprises achieving significant cost reduction and efficiency improvement results. In the first half of the year, the sector's sales expense ratio increased by 0.1 percentage points year-on-year, while the management expense ratio remained flat year-on-year, and the research and development expense ratio and financial expense ratio both decreased by 0.1 and 0.2 percentage points year-on-year.

In the first half of the year, Tsingtao Brewery's cost of goods sold was 11.719 billion yuan, a decrease of 10.72% year-on-year; sales expenses were 2.169 billion yuan, a decrease of 9.16% year-on-year. The significant reduction in these two major expenses has helped Tsingtao Brewery achieve net profit growth to some extent while its revenue and sales volume decline.

It is worth mentioning that as the industry enters an era of intensified competition, some regional leading companies are in an embarrassing situation of 'unsellable goods'. For example, Lanzhou Huanghe Enterprise, once known as the 'Beer King of Northwest China' (000929.SZ), achieved a revenue of 0.115 billion yuan in the first half of the year, a 13.14% year-on-year decline; the net profit attributable to the parent was -8.1997 million yuan, a sharp 146.76% year-on-year drop; the non-net profit was -15.9654 million yuan, a decrease of 52.72% year-on-year; as of the end of June this year, the company's net cash flow from operating activities was -4.9885 million yuan, a significant 134.49% year-on-year decrease.

The beer industry has a distinct regional characteristic, where major competitors like Snow Beer and Tsingtao Brewery have products distributed across multiple provinces, while Lanzhou Huanghe's main market is limited to Gansu and Qinghai. Influenced by their geographical locations, the local beer sales season is relatively short during peak times, with weaker consumer purchasing power. Lanzhou Huanghe's efforts to move towards the high-end market will be more challenging than its counterparts, and the migration of young people to major cities from the region will further constrain the frequency and quantity of local beer consumption.

Overall, in the first half of the year, the beer sector faced significant sales pressure. Despite the boost from sports events and peak sales seasons, the performance was still below expectations. However, supported by the decrease in raw material costs and good expense control, most companies still achieved positive growth in net income.

Slowing down of the high-end process, exploring new volume space in multiple product categories

After years of collective industrial upgrade towards high-end, the beer industry has now entered a new phase of shifting from volume growth to value growth. Data shows that in the first half of 2024, the average selling price of most beer companies has increased, but leading companies have limited increases in price per ton. Only Beijing Yanjing Brewery and Guangzhou Zhujiang Brewery achieved significant increases in price per ton, with sales prices increasing by 6.7% and 4.0% year-on-year respectively, mainly due to the strong demand-led increase in high-end single products.

Quarterly, due to factors such as the lack of immediate consumption scenes and weak consumer power, the industry's high-end development slowed down in the second quarter, and the sales average price of beer enterprises generally grew slower year-on-year than in the first quarter. Among the leading enterprises, Bud APAC (China), Tsingtao Brewery, and Chongqing Brewery all saw a year-on-year decline in sales average price in the second quarter.

In terms of the high-end development of various brands, China Res Beer's sales volume of mid-range and above beers accounted for more than 50% in the first half of the year for the first time, with low double-digit growth in sales volume of mid-high range and above beers compared to the same period last year. Sales volume of high-end and above beers grew by over 10% year-on-year, especially for products like Heineken NV Sponsored ADR, Snow Beer, and Red Jubilation, which all saw sales growth of over 20% compared to the same period last year;

The main brand sales volume of Tsingtao Brewery was 2.61 million kiloliters, with sales volume of mid-to-high-end and above products reaching 1.896 million kiloliters, driving a 1% year-on-year growth in kiloliters of alcohol revenue for the company, but comparing with the data of the same period last year, there were varying degrees of decline;

Beijing Yanjing Brewery and Guangzhou Zhujiang Brewery started their high-end development process relatively late, with the high growth mainly affected by the low base effect of the same period last year. Between 2020 and 2023, Beijing Yanjing Brewery's high-end flagship product U8 saw rapid growth in sales, with sales proportion increasing from 3.3% to 13.5%, driving rapid performance improvement.

The 2024 semi-annual report shows that high-end products of Beijing Yanjing Brewery achieved revenue of about 5.064 billion yuan, a year-on-year growth of 10.6%, accounting for 68.54% of the main business revenue; Guangzhou Zhujiang Brewery is also competitive, with revenue from high-end products in the first half of the year at 2.04 billion yuan, a year-on-year growth of 17.19%, accounting for 70.95% of the main business revenue.

According to the WiseNews Financial APP, over the past decade, the market concentration of China's beer industry has continued to increase, the industry structure is becoming more stable, and leading companies are competing to expand new consumption scenarios and explore new niche markets.

For example, in the niche category of craft beer, Chongqing Brewery acquired the well-known craft beer brand "Jing A" last year, Beijing Yanjing Brewery launched the exclusive brand of Lion King craft beer, and plans to establish new craft beer production bases.

Tsingtao Brewery, on the other hand, has taken a different approach by launching a series of fresh beer that is not pasteurized at high temperatures, using cold chain transportation to quickly seize the high-end fresh product market.

In terms of innovation in consumer scenarios, Chongqing Brewery's Wusu brand has launched joint activities and products with well-known brands such as Chow Tai Fook, KFC, and Benesong. They also released a replica product 'My Altay Style Big Wusu' on the occasion of the 40th anniversary of Wusu's establishment, exploring more social attributes of beer.

Looking ahead, the industry trends of premiumization, youthfulness, and diversification have become apparent. The beer market is transitioning from low value-added, price-oriented industrial light beers to craft beers, original wort beers, wheat beers, stout beers, and other multi-category directions characterized by style and taste. Low-sugar, non-alcoholic beers, which focus on health, also have growth potential in the niche market.

From a market perspective, as cost pressures ease further and mid-to-high-end products drive stable growth in ton price, the solid fundamentals of high-quality beer industry leaders continue to be strongly supported. Considering that the current valuation of the beer sector is at a historically low level, industry leaders with high dividend advantages possess more medium-to-long-term allocation value.