China Resources Beer: Industry leader, high-end rise. Established in 1993, China Resources Brewery is a rising star in the beer industry, but it is developing rapidly. In 2023, it sold 11.151 million kiloliters of beer, and has now become the largest selling beer company in China. 1) The path to the rise of retrading leaders: Overall, it can be divided into five stages: start-up period, expansion period, leap period, adjustment period, and decisive victory period. 2) Leading change: Since 2017, the company has officially started the high-end process around the “3+3+3” strategy, and is committed to reducing costs and increasing efficiency and upgrading the product structure. Currently, the high-end effect is remarkable, and the rise in tonnage prices has effectively driven the increase in gross margin. 3) Diversified development: Starting in 2021, we have successively invested in liquor companies, and officially entered the “beer+white” dual-track development path in 2023. The beer white business is empowered in both directions and has complementary advantages to help the company draw up and complete the wine industry dominance map.

In 2023, the company's revenue reached 38.93 billion yuan, up 10.4% year on year, with beer/liquor revenue of 36.86/2.07 billion yuan respectively.

Beer industry: stable volume and price increase, high-end market in the second half. In terms of volume, beer production peaked in 2013 and stabilized after 2018. It is expected that future production will stabilize under the aging trend. In terms of price, the high-end process is over half, and there is still plenty of room for upgrading. We think 6-10 yuan may be the price range with the biggest room for expansion in recent years. In terms of channels, the beer channel is scattered across multiple terminals, and enterprise terminals have strong control. Future ready-to-drink recovery will boost high-end performance. In terms of the competitive landscape, we estimate that the CR5 of the industry will reach 92% in 2023. Most provinces show an oligopolistic pattern. In the future, high-end new products will be promoted, channels will be concentrated, or the way to break the game.

Brand leadership, comprehensive products, channel adaptation, outstanding high-end advantages. On the brand side, in 2020, the company officially teamed up with Heineken to create a “4+4" high-end brand matrix of “Chinese Brand+International Brand” to accurately target different consumer groups. In 2023, it will officially enter the liquor industry. Liquor and beer will empower each other, and the brand power is expected to further improve. On the product side, covering the full price range, the four major international brands help the four major local brands, and are committed to high-end intensive cultivation. Under the big product strategy, the classic big single product, Xuehua Chunsheng, and the young big product Heineken and Tianya SuperX continue to work hard. On the channel side, under the high-ranking model, a major customer platform was built to seize high-end channel resources; cost reduction and efficiency continued, and nationalization continued to be cultivated.

Investment advice: Leaders are the first to benefit from recovery spurred by policies, and high-end technology continues to gain strength. The overall base for beer in the off-season is low. Under policy stimulation, procyclical sectors related to the catering supply chain will be the first to benefit. As the industry leader, the “3+3+3” strategy will enter the final battle of 3 years next year. The company's overall morale is high, and overall demand is expected to be boosted; barley costs have dropped significantly throughout the year, and gross margin can be expected to increase. The company's continued cost reduction and efficiency are expected to unleash profit elasticity. We expect the company to achieve net profit of 5.28/5.87/6.38 billion yuan in 2024-2026, +2.4%/8.5% year-on-year, and EPS 1.63/1.81/1.96 yuan/share respectively. As an industry leader, the company will be the first to benefit from sector recovery and give a “buy” rating for the first time.

Risk warning: Consumption recovery falls short of expectations, industry competition intensifies, food safety issues, and possible risks.