\u3000\u3 Jointo Energy Investment Co.Ltd.Hebei(000600) 132 Chongqing Brewery Co.Ltd(600132) )
Relatively optimistic outlook for 1q22: according to our market research, the sales volume of heavy beer recovered to a relatively rapid growth from January to February this year. This also dispelled some of the market’s concerns about the terminal demand for heavy beer. Although China’s beer industry as a whole was greatly impacted by the epidemic in March, the sales volume of heavy beer did not fall sharply and performed better than most competitors. The management said that the channel inventory is currently at a healthy level, indicating that the strong sales growth of 1q22 is driven by the market terminal demand, rather than the pressure of goods. With the advent of the peak season, the company is confident that 2q22 has better sales performance. We believe that in the face of the development of the epidemic and the pressure of rising raw material prices, heavy beer is more defensive than its competitors and will show stronger resilience in terms of sales volume and profit margin (see below). Considering the impact of the epidemic and the international situation on market sentiment, we lowered the target price, but heavy beer is still one of our first choices in China’s beer industry.
Less affected by the rise in raw material prices: as one of the few Chinese beer enterprises with continuous growth in sales, the management predicts that the cost of raw materials (including brewing materials and packaging materials) will rise by about 10% year-on-year in 2022. It can be seen that the rise in raw material prices has a relatively small impact on heavy beer. We believe that this is mainly due to: (1) the company has locked the price of brewing materials in 2022 at the beginning of the year; (2) At present, the canning rate of the company is less than 20% (lower than the industry average), which makes the company less affected by the recent rise in aluminum price. Although the rise in oil prices will increase the company’s transportation costs, the overall impact is controllable. Therefore, although there is no further price increase plan at present, we believe that the company’s gross profit margin in 2022 is expected to continue to increase with the help of structural upgrading.
The impact of the recent epidemic is relatively limited: it is well known that the sales of heavy beer mainly come from the central and Western markets, while the recent epidemic is mainly concentrated in the first tier cities and their surrounding areas. This also makes heavy beer relatively limited by the impact of this round of epidemic. At the same time, the control of the western market (especially Xinjiang) is gradually liberalized compared with 2021. In terms of channels, catering accounts for a large proportion, but night channels account for a relatively small proportion. In 2021, the company strengthened the layout of non current drinking channels and e-commerce to make up for the impact of the epidemic on current drinking channels. In the future, the company will adhere to the national and high-end route, and continue to promote its high-end products to different markets with different combinations.
Target price and Valuation: we cut the income of 22 / 23 by 3% respectively to reflect the potential impact of the epidemic. However, considering the defensive nature of heavy beer to the high price of raw materials, we raised the net profit of 22 / 23 by 6% respectively to reflect our more optimistic expectation of profit margin than before. Based on 15x2023ev / EBITDA, we lowered the target price to HK $150.
Investment risk: 1) the price increase of raw materials is higher than expected; 2) Heineken’s growth rate was slower than expected; 3) The epidemic continues to affect the current drinking channels; 4) Market competition intensifies.
