3Q24 results fell short of our expectations

The company announced 3Q24 results: revenue/sales/ASP/EBITDA (the following text are endogenous growth rates) of -9.4/-11.4/+2.2/ -16.6%, respectively. Asia Pacific West revenue/sales/ASP/EBITDA was -15.1/-13.5/-1.9/ -25.9%, respectively; of these, China's revenue/sales/ASP/EBITDA was -16.4/-14.2/-2.1/ -21.1%, respectively; and in the Asia-Pacific East, +15.7/+3.9/+11.4/ +33.3% year over year. The performance fell short of our expectations, mainly due to sales volume in China being more affected by the consumer environment than expected.

Development trends

Asia Pacific West: Volume and price in China continue to be under pressure. Volume: 3Q24 sales fell 13.5%, mainly due to the high share of the company's catering channel, which was more affected than the industry. Price: Core & Value products have been upgraded upward, and the overall structure of the company has been maintained. High-end and above products account for more than 2/3 of revenue, but due to factors such as poor restaurant performance and weather, the ASP is under pressure. The Indian market maintained relatively rapid year-on-year growth, and the revenue of high-end and ultra-high-end products, which account for more than 2/3 of the company's regional revenue in India, maintained double-digit year-on-year growth. In addition, the 3Q24 digital project was launched in India, and additional costs affected performance.

Asia Pacific East: The Korean market is still enjoying the dividends of price increases, and volume growth is weakening month-on-month. 3Q24's sales volume/ASP in Korea achieved year-on-year unit increase/medium double-digit growth respectively. Kaishi helped the company achieve a share increase, and product structure upgrades and cost reductions led to high year-on-year profit growth.

The decline in costs was offset by weakening scale effects, putting pressure on profits. The 3Q24 company's tonnage cost was +0.7% year on year. The company's internal management efficiency improved and external bulk raw material costs decreased, but this was offset by fixed costs and other operating costs, so gross margin within 3Q24 was basically the same year on year. In 3Q24, due to intensive competition activities, the company's market investment increased, offsetting some cost savings, leading to a 16.6% year-on-year decline in EBITDA, which was mainly dragged down by the Chinese market, and one-time expenses in the Indian market were also affected.

4Q24 outlook: Pressure remains, but the company is actively promoting the upgrading of non-ready-to-drink channels. 1) On the revenue side, 4Q24 may still be affected by a weak external environment, but the company actively promoted the Core++ price band upgrade, and the household channel achieved rapid expansion in Guangdong and other places to make up for the decline in revenue from the catering channel. 2) On the cost & cost side, we expect that the decline in the prices of raw materials such as barley will continue to be realized, and expenses will shrink in the 4Q24 off-season. Considering the impact of non-recurring expenses in 3Q24, we expect 4Q24 profit to improve.

Profit forecasting and valuation

Taking into account weak demand in China, the 2024/25 EBITDA was lowered by 12%/14% to 1.763/1.887 billion US dollars. Based on the SOTP valuation method, considering the profit forecast adjustment and the valuation adjustment of the Chinese beer sector, we lowered the target price by 12% to HK$9.80, corresponding to 8.0/7.4x EV/EBITDA in 2024/25. The current stock price corresponds to 6.3/5.5 times EV/EBITDA. The target price has 22% upside compared to the current stock price.

Considering the company's rich high-end brands, it is expected that nationalization will continue to support profit growth and maintain an industry performance rating.

risks

The recovery of the Chinese market fell short of expectations, high-end development fell short of expectations, competition intensified, costs rose, and price increases were poor.