Facing industry fluctuations, we have shown resilience and are steadily advancing the “Beer and White Empowerment” strategy. 24H1 achieved revenue/net profit to mother of 23.74/4.7 billion yuan, -0.5%/+1.2% YoY. Due to the high base and negative effects of the weather, the beer business achieved revenue of 22.57 billion yuan, -1.4% YoY, and -3.4%/+2.0% YoY in sales/tonnage. The volume and price performance were superior to the industry average. Benefiting from the improved product structure and reduced costs of some packaging materials, the gross margin of the beer business increased by 0.6 pct to 45.8%. In terms of liquor, through measures such as summary renewal, price reduction, and organizational restructuring, the liquor business achieved revenue of 1.18 billion yuan in the first half of the year, +20.6% over the same period, driving a 2.1 pct increase in gross margin to 67.6%. Net cash inflows from operating activities increased 25.6% year-on-year during the reporting period. The company paid an interim dividend of 0.373 yuan/share, an increase of 30% over the previous year, and the semi-annual dividend rate increased from 20.1% to 25.7%.

Long-term fundamentalism+high-quality development solidifies the foundation, improving management efficiency+controlling expenses to promote dividends. The company insists on promoting high-end development and brand building. In terms of beer, 24H1's sales of mid-grade and above beer accounted for more than 50% for the first time. Sales of high-end and above/sub-premium beer and above recorded a year-on-year increase of double digits/units, and sales of products such as Heineken, Laoxue, and Red Jue also increased by more than 20%. In terms of liquor, the sales volume of national high-end single product summaries also increased by more than 50%, contributing about 70% to the turnover of the liquor business. Although the increase in the sales expense ratio of 1.2 pct to 17.6% offset the increase in overall gross margin, the net margin increased slightly by 0.3 pct due to lean management efficiency improvements. At the same time, the company said it will step up efforts to control capital expenses and strive to steadily increase dividend amounts and dividend payout rates.

A combination of macroeconomic policies boosted domestic demand, and consumer valuations of essential choices rose at the bottom. Since the Politburo meeting was held on September 26, macroeconomic policy packages have been introduced one after another. As subsequent policies to promote consumption and expand domestic demand gradually gain strength, domestic consumption may usher in an accelerated recovery. According to our statistics, as of the end of October, the historical PE quartile of the H share essential consumer sector was 1% (15.1x) since 2011, of which the PE fraction for alcoholic beverages was 2% (16.6x) since 2011. We believe that improved domestic economic expectations and improved liquidity brought about by the US dollar interest rate cut cycle will further increase the valuation of H shares. China Resources Beer, as the leader in the beer industry and the only “beer+liquor” two-wheel drive target, is expected to be the first to benefit from the sector's valuation repair.

Profit forecasting and investment advice. The company ranked first in the country in beer sales, revenue and profit in 2023. Although industry demand continued to be under pressure in the second and third quarter of this year, the company's volume and price resilience and high-end pace were superior to the industry average, reflecting a solid brand foundation and strong operational capabilities. The fourth quarter base was low. The National Day holiday dining data sent a signal that fresh drinking channels were stabilizing, and the decline in costs also brought certainty to performance. In terms of liquor, the company has completed the first phase of “exploration” and entered the second stage of “development”. It is expected that the next two years will usher in rapid growth. Based on analysis from various perspectives such as performance, valuation, and dividends, the company's stock price already has a high margin of safety. We expect the company's 24-26 EPS to be $1.64/1.83/1.96 (previous value was $1.87/2.14/2.42), giving 24x PE (unchanged). The target price will be lowered from 56 to HK$48, maintaining the “superior to market” rating.

Risk warning: The recovery of consumer spending power falls short of expectations, the soy wine boom is declining, and the progress of target integration falls short of expectations