Can Zibo Barbecue Boost the Soaring of Qingdao Beer?

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After the Hong Kong stock market closed on April 24th Beijing time, Qingdao Beer Co., Ltd./Qingdao Beer (0168.HK/600600.SH) released its financial report for the first quarter of 2023. Overall, the company's first-quarter revenue exceeded market expectations (by more than 300 million yuan, 3%), and net profit attributable to mother also exceeded market expectations (by more than 150 million yuan, 11%). Achieved historical highs in product sales, revenue, and profit for a single quarter.

In 2023, Qingdao Beer had a good start. While keeping up with the pace of revenue, profit also looks good, mainly due to the improvement in cost bringing about an increase in gross margin and net profit margin. Although the increase in gross margin was 1.4% lower than market expectations, the shrinking of other costs and the addition of interest income caused the final net profit margin to be 1.1% higher than market expectations.

The company's efforts to control costs were evident in the fourth quarter of last year. What is better in this period's financial report is that the improvement in profit margin benefits from the improvement in gross margin, rather than purely from cost reduction. This quarter can be regarded as a turning point.

Key points are as follows:

1. Record-high sales, slowdown in high-end but increase in average unit price: Continuing the trend of the fourth quarter of last year, the total sales growth rate of the Qingdao brand in the first quarter of this year was only 7.4%, which is slower than the growth rate of other brands at 16.6%. However, it is gratifying that the overall average unit price exceeded 4,500 yuan/kiloliter, and the increase in the average unit price was close to 5%.

On the basis of a slight decrease in the proportion of high-end structure, the increase in unit price also shows that the current implementation of price increases is very effective, which is consistent with our judgment in the previous financial report.

2. Cost reduction becoming increasingly evident: Dolphin thinks that the most encouraging aspect of this quarter's financial report is that the gross margin has indeed improved, although it is only 0.5%, which is 1.4% less than market expectations. However, it doesn't matter. Change is gradual, as long as the trend is improving.

In the comment of the last financial report, Dolphin said that except for barley, downward pressure on raw materials such as packaging materials should gradually settle down. Even if they offset the rise in barley, they will bring some positive impact on gross profit margin. Regarding the current gross margin and net profit margin levels of the company, changes in gross margin may bring greater profit elasticity than changes in sales volume. Therefore, gross margin has been the most concerning item since the last quarter's financial report, but fortunately, it has not let us down.

3. Continuous improvement in cost control and core profitability: In the fourth quarter of last year, Qingdao Beer's profit was mainly reliant on saving costs. In the first quarter of this year, this trend continued, with a reduction of 1.2% in main cost items (sales, management & research and development). Coupled with the 0.5% increase in gross margin, it greatly helped the profitability.

At the same time, the increase in on-sale cash provided the company with more interest income, so the performance in terms of profit is far better than that of revenue. However, looking solely at core profits (gross profit - sales expenses), the growth rate was slightly faster than revenue, albeit slower than before.

Dolphin's overall perspective:

Overall, the first quarter's performance is indeed satisfactory. Sales, revenue, and profits have all reached historic highs. The main logic for beer this year is to improve gross profit margins by slowing down cost pressures and raising prices, while appropriately compressing or keeping cost ratios unchanged, which can be reflected in the profit end with good elasticity.

Unlike the excess profits saved in the fourth quarter of last year, this Q1 has both defense (cost savings) and offense (sales improvement), and the most important key point (gross profit margin), showing improvement in Dolphin's opinion. Of course, this magnitude still has some distance from Dolphin's expectations, the best situation is to confirm the trend through 1-2 quarters. Recently, "Zibo barbecue" frequently appears on the hot search, Shandong, as the main battlefield of Qingdao Beer, believes it can fully benefit from the industry.

However, from the perspective of valuation, because beer consumption is relatively stable and has always been recognized by investors, the valuation has never been cheap and the stock price rarely retreats. Dolphin's suggestion is that since the current price of the company is close to the target price, intervene at most when there is systematic risk, and don't chase high due to various good news.

If you are interested in the financial report conference call management exchange, Dolphin will share the minutes of the conference call through the Changqiao App community platform or investment research group later. Interested users are welcome to add the small assistant's WeChat account "dolphinR123" to join the Changqiao Dolphin Investment Research Group and get it first-hand.

The following is a detailed interpretation of the financial report:

1. Ideal performance in all areas, setting a new record

Marginally, Q1 revenue of 10.7 billion yuan, an increase of 16.3%, net profit attributable to mothers was 1.5 billion yuan, and the growth rate far exceeded the revenue growth rate. Q1 achieved a good start for the whole year.

Against the background of high revenue, the gross profit margin has also improved to some extent, and cost control has been added, which has led to a fairly obvious increase in net profit margin.

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If it is only viewed from the gross sales gap, there is also a certain degree of improvement, an increase of 0.8pct, continuing the trend of the fourth quarter of last year. Dolphin values not the unusual improvement of a single quarter, but the sustained and gradual improvement. Qingdao Beer has obviously been on the right track.

二、Price and Quantity Rise Together

The first quarter has achieved a better growth trend. The rise in both price and quantity can't be underestimated. In the fourth quarter of last year, there was a small problem with single-quarter sales volume, which did not continue the previous growth trend, but fortunately it adjusted in the first quarter of this year. Qingdao's main brand and other brands have achieved good growth in terms of quantity, but the growth of Qingdao's main brand is slightly slower.

However, as in the previous quarter, the proportion of high-end products is slightly decreasing at present. Dolphin thinks this is not a big problem. It does not mean that the trend of high-end products will end here. As summer approaches and the current drinking market recovers, high-end products will bring more significant benefits.

In addition, popular restaurants like "Zibo Barbecue" have become frequent internet celebrities, which also provides a good environment for beer consumption in summer this year.

According to recent industry data, the beer production growth rate in March reached 20%, and the cumulative production growth rate in the first quarter also reached 5%. At the same time, among various segmented projects of social retail, the restoration situation of catering is the most significant.

Three, Gross Margin Improves

The change of cost is still the most concerned issue of Dolphin. Previously, it was because the increase in sales volume may not be obvious (but now the sales volume has been significantly improved). If the growth is driven only by average price, especially when the cost changes occur in 2023, the improvement of gross profit margin has greater impact on profit elasticity (in the situation of low profit margin level).

In the financial data breakdown of the fourth quarter last year, we can see that the gross profit margin has already had very small changes (because of the problem of freight collection in the figure). This change has continued and strengthened in the first quarter of this year (from 37.8% to 38.3%).

Four, Cost Control Continues

Due to the significant impairment and asset disposal gains and losses in previous periods, the operating profit cannot really represent the company's actual profit-making ability. However, non-operating projects have gradually stabilized at present.

Looking at the change in core profits (considering only cost and sales, management and R&D expenses), the company's actual profitability has continued to grow due to the convergence of sales expense rates and management expense rates. Earn more, spend less, and therefore give the profit side a good growth potential.

Overall, both quantity and price performed well in the first quarter, with costs and expenses showing a good trend. The road to improvement of Tsingtao Brewery is already very clear. If the trend can be maintained in the second and third quarters, with the switching of valuations to the next year, the company still has some room for growth.

However, there are some difficulties in achieving this scenario. Part of the demand was digested due to the lag in grid management in some regions in the second quarter of last year, and the weather was quite hot in summer last year, resulting in a higher base for beer consumption. Therefore, the performance base in the second quarter of last year was relatively high. It is indeed a bit difficult to achieve the growth similar to that of the first quarter on this basis.

In the past, due to the company's sustained stable performance and high market expectations, the current time point may not be the best opportunity. The idea of Dolphin is that based on the fact that the company's stock price is relatively close to the target price, if there is an occasional systematic risk, or the performance may not be satisfactory in a certain quarter due to the base effect, it may be a good time to intervene.

Dolphin's Historical Articles on Tsingtao Brewery:

Financial Report Season

March 23, 2022 Financial Report Review "Tsingtao Brewery: Being Frugal is Also an Attitude"

October 27, 2022 Financial Report Review "Tsingtao Beer Caught Fire with "Weather", but The Fourth Quarter May Not Be So Bad Without "Weather""

August 31, 2022 Conference Call "Tsingtao Beer: Continuous High-end Development"

August 26, 2022 Financial Report Review "The Rising Price of Tsingtao Beer Leads to Kingly Road"

April 28, 222 Financial Report Review "Tsingtao Beer: Ton Price Continues to Rise, Cost Pressure Eases"

2021 Q3 Financial Report Review of Qingdao Beer: Slowdown in Sales Is a Fact, High-end Market Needs More Efforts

Brief

This report reviews Qingdao Beer's Q3 2021 financial report based on the recent development of the company, its current business strategy, and market performance.

Analysis

According to the report, despite the challenges brought by the pandemic and increasing competition, Qingdao Beer's sales revenue has remained stable compared to the same period last year. However, the growth rate of sales volume has slowed down, which indicates that the company is facing challenges in expanding its market share.

Qingdao Beer's business strategy is to continue diversifying its product lines and invest in strengthening its high-end market presence. Through expanding its product mix and marketing efforts on high-end products, the company aims to attract more consumers and expand its market share in the premium beer segment.

Conclusion

With the current market situation and intense competition in the beer industry, Qingdao Beer needs to put more effort into its strategy to consolidate its position in the high-end market segment, and be more responsive to market changes and consumer preferences.

References

• Qingdao Beer: Slowdown in Sales Is a Fact, High-end Market Needs More Efforts, October 28, 2021.
• Qingdao Beer (Part 2): How to Evaluate Qingdao Beer's Valuation After Fosun's Stake Reduction?, February 10, 2022.
• Qingdao Beer (Part 1): The Unlocking of High-end Products - Is the "Moutai-ization" of beer a trend or a doomed fate?, January 25, 2022.

Risk Disclosure

Disclaimer: Dolphin Disclaimer and General Disclosure.