Maintaining Budweiser's Asia Pacific beer industry's first choice: one-time tariff claims (US$66 million) made 4Q23 net profit lower than expected, but Budweiser Asia Pacific's 4Q23 sales unit price increased significantly, driving endogenous normal EBITDA to increase 31.3% year over year. Looking ahead to 2024, we predict that (1) the company's product structure will continue to be high-end in China, (2) South Korea's price increase will continue to help profit margins, (3) pressure on raw material costs will be drastically reduced, and (4) continued cost reduction and efficiency will maintain a stable overall cost ratio. Based on the above, we believe that the company's profit margin is expected to expand significantly in 2024. Considering the company's stronger brand matrix at the top and above and the current valuation level below that of its peers, we believe that Budweiser Asia Pacific's 2024 performance and stock price performance is expected to be better than other Chinese beer players. Maintains the “buy” rating and the industry's first choice.
It continues to benefit from the trend of consumption upgrades in China's high-end beer market: Budweiser Asia Pacific's 4Q23 domestic sales unit price increased sharply by 14.7% year on year, which is estimated to be far higher than other Chinese beer players (the 4Q23 sales unit price of heavy beer fell by a high number of units year over year). Management emphasized that the demand for high-end and ultra-high-end beer products is still strong among high-income people in China, but low- and middle-income people are becoming more cautious in their beer consumption, which is in line with our observation and judgment. We believe that Budweiser Asia Pacific's strong brand matrix in the high-end and above price bands will continue to benefit from the trend of consumption upgrades in the Chinese high-end beer market in 2024, while its relatively low share of mass products (core and below products account for less than 60% of sales) makes it relatively limited by the downgrade in mass price band consumption.
There is still uncertainty in Korea, but the overall trend is improving: the company experienced a sharp rebound in EBITDA in Korea in 4Q23 (normal EBITDA for endogenous students in the Asia-Pacific region surged 23.2% year over year). This is mainly due to the company's price increase strategy in Korea. Although 2024 still faces certain uncertainties (including: failure of the tariff appeal may affect Korea's gross margin of no more than 50 bps, and the possibility that the Korean government will continue to raise the consumption tax is not ruled out), considering (1) the marginal impact of the return of Japanese brands on Budweiser's high-end product sales in Asia Pacific is expected to gradually decrease, (2) the price increase in October last year will continue to be released in 1Q24-3Q24, and (3) last year's low EBITDA base, we predict that South Korea's 2024 EBITDA margin is more likely to record the same ratio Significant expansion.
The valuation is more cost-effective than peers: Based on our current forecast, Budweiser Asia Pacific currently has an EV/EBITDA of only 8.2x in 2024, which is lower than the industry level. If we use the average level of Chinese beer players to value Asia Pacific West (9.6x 2024 EV/EBITDA), then Asia Pacific East's current valuation level is less than 4.0x 2024 EV/EBITDA, which is clearly undervalued. As the certainty of the company's performance continues to increase, we believe that the rebound in the company's valuation will be greater than that of its peers.
Investment risks: (1) industry demand is slowing; (2) ultra-high-end growth rate is less than expected; (3) high-end market share is being encroached upon; (4) raw material prices have risen higher than expected.