Former white horse, when will China Resources Beer stop falling?

The entire beer industry has been in a downturn for more than three years. As we enter 2024, from the trend of stock prices, most beer companies' stock prices have temporarily stopped falling, but the leading company China Resources Beer seems to still be in a downward trend. It's almost back to the level of January 2018. In 2023, China Resources Beer ranked first in the domestic industry in terms of business sales volume, revenue, and net profit attributable to the parent company. However, this does not seem to reflect in its stock price. 1. Leading Beer Company China Resources Beer is the largest beer manufacturer in China, with well-known beer brands such as "Snow" and "Blue Ribbon" under its umbrella. Its predecessor was Shenyang Brewery. In 1993, China Resources took over Shenyang Brewery, based in the northeast, and then expanded nationwide. Just established Shenyang Snowflake in 1993, and in 1994, it introduced the world-renowned beer company SABMiller, with 51% equity held by itself and 49% by the other party, letting professionals handle it. However, in 2016, due to antitrust requirements related to Anheuser-Busch InBev's acquisition of SABMiller, SABMiller divested its 49% stake in Snowflake. China Resources bought it back, achieving full control of the group. Before beer sales peaked in China, the beer industry was relatively simple and extensive, continuously expanding through mergers and acquisitions, promoting their own brands, advertising, and channel development. During the period of consumption nurturing and rapid expansion, mergers and acquisitions were the main theme. China Resources Beer relied on the strong capital support of China Resources Group to deploy production capacity and channels nationwide, expanding everywhere. After quickly increasing production, it used cost advantages to increase regional market share, then replaced regional brands with "Snow" to achieve national channel/brand localization. In 2006, China Resources Beer's total sales surpassed Tsingtao Brewery, becoming the top-selling beer in the Chinese market. In 2008, Snowflake beer became the world's highest-selling beer brand. After the industry's sales peaked, the market unanimously began to move towards the high-end market. China Resources Beer was no exception. Although sales were high before, profits were low. Moving towards the high-end market could compensate for potential scale losses in sales under existing competition and increase profits. China Resources successfully incubated and upgraded brands such as Snowflake Pure Draft and SuperX, smoothly transitioning to the high-end route. Moreover, money can still solve problems. In 2018, China Resources Beer reached a long-term strategic cooperation with Heineken, the world's second-largest beer company, acquiring Heineken's China business. The transaction was officially completed in 2019 Since the cooperation between Heineken and China Resources Beer, Heineken products have shown strong performance. Currently, China Resources' high-end portfolio consists of four major Chinese brands: YongChuangTianYa Super X, Mars Green, Craftsmanship Creation, and Face Series, while Heineken, Suer, Red Baron, and Tiger brands make up the four major international brands, basically covering the market above the sub-high end. In terms of performance, Heineken, Pure Draft, and Super X are the three core brands, performing well. China Resources has not only rapidly expanded the scale of products above the sub-high end, accounting for over 20% of the market share, but also successfully increased the tonnage price gradually. After the high-end transformation, China Resources' gross profit margin increased from 33.7% in 2017 to 40.2% in 2023. The net profit margin has also significantly increased, with much credit given to cost reduction efforts. Since 2018, China Resources' high-end transformation can be said to be continuously strengthening. However, unexpectedly, the stock price has returned to the level of the previous high-end transformation five or six years later, and in 2023, China Resources Beer's non-GAAP net profit is more than five times that of 2018. Is the market not recognizing China Resources Beer's high-end transformation? II. Obstacles to the High-End Transformation of the Beer Industry From a broader perspective, the current consumption slump and poor performance of the beer industry, coupled with negative expectations, have affected major manufacturers. The previously excessively high valuation levels have also been corrected during the industry downturn. Past performance and expectations do not represent the future. The domestic beer industry's high-end transformation is the consensus after the market peaked in sales in 2013. **What to do when demand falls? Everyone in this industry still needs to make a living, so the only options are competition or price increases **As a result, in the following years of overcapacity, it first intensified the competition. Leading companies closed outdated production capacity while increasing channel investment to seize the market, gradually squeezing out small and medium-sized breweries. Carlsberg took the lead in closing excess capacity and streamlining personnel domestically, followed by industry leaders such as China Resources Beer and Tsingtao Brewery. Until a few industry giants were left, realizing that no one could overpower the other, it was not cost-effective to engage in cutthroat competition. By 2018, the beer industry demand began to stabilize, the pressure of overcapacity eased, beer production remained at around 38 million tons, and after industry reshuffling, the situation gradually stabilized. Channel investments decreased year by year, and the competitive situation eased. The entire beer industry also tended towards maturity. **Unable to overpower the opponent and still wanting to grow, raising prices is a good direction.**However, beer itself is a fast-moving consumer good, leaning towards daily basic consumption. If prices increase too directly and significantly, the market may react negatively, affecting both sales and brand. Therefore, it is necessary to open up a new battlefield through high-end products to gradually push the price center upwards.**High-end transformation has become the main driving force in the current beer industry.**Over the years, the expansion of mid-to-high-end beers priced above 6 yuan has continued, with the mainstream price range extending from the previous 5-6 yuan to the 8-10 yuan mid-range, and the high-end range extending to 12 yuan or more. Compared to some American beer companies, the logic of high-end transformation seems very smooth, and with expectations rising, so does valuation. **However, just a few years into high-end transformation, it encountered the current situation of economic downturn, weak consumption, and poor expectations.**Especially since the outbreak of the epidemic, the demand for dining consumption has been weak. During economic downturns, the demand for dining out decreases, leading to the closure of many dining terminals. Beer's current consumption channels are mainly in dining, and the sluggish dining industry affects the main consumption scene of beer, leading to continued weakness in the demand for high-end beer. Even when not drinking in restaurants, under the current circumstances, when people buy beer individually, they will also seek more cost-effective options, affecting high-end transformation as well.China Resources Beer continues to increase sales expenses without any relaxation, as others have not given up on seizing the high-end market. The little profit earned from high-end transformation is used to subsidize sales expenses, which is a cost-saving effort, but cost reduction cannot be endless.**The market has soberly realized that high-end transformation is not so easy when the economy is not doing well.**When high-end transformation becomes difficult, diversification will emerge. Revision of the Japanese Liquor Tax Law in 1994 had a significant impact on the traditional beer market, leading to the rise of sparkling wine and third-category beer. These products quickly gained market share with lower tax rates and price advantages due to the economic recession in Japan. While premium products like Asahi's Super Dry continued to succeed, the foundation for success was laid before the recession. More low-end products became popular again during the economic downturn, with brands like Suntory's Kinmugi experiencing increased sales during the crisis, becoming a best-selling product in the Japanese market. Japanese beer companies introduced various new types of alcohol, such as low-alcohol, health-oriented beers, diversified their businesses through expanding overseas markets and craft beers, and ventured into other industries like beverages and food. Premiumization in the beer industry continues, but during unfavorable times, it is easy to misjudge market demand. China Resources Beer also diversified, moving beyond beer to enter the Baijiu (Chinese white liquor) sector. At the end of 2020, China Resources Beer established a wholly-owned subsidiary, China Resources Liquor, to officially enter the Baijiu sector. On August 26, 2021, China Resources Beer reached a cooperation agreement with Shandong Jingzhi Baijiu Co., Ltd., with China Resources Liquor Holdings Limited holding 40% of Jingzhi Baijiu's shares. In October 2022, China Resources Beer acquired 55.19% of Jinsha Liquor Industry's shares through capital increase and share purchase by China Resources Liquor, with a total consideration of 12.3 billion RMB, laying out its strategy in the soy sauce wine sector. In early 2023, China Resources Beer underwent a structural adjustment, establishing two business units, China Resources Snowflake and China Resources Liquor, responsible for managing and operating the beer and non-beer alcohol business sectors, officially entering the beer + Baijiu dual-line development. China Resources Beer aims to quickly develop the Baijiu market by leveraging its brand, channel, and market management experience in the beer business. China Resources Group is the second largest shareholder of Fenjiu, successfully revitalizing the brand. Therefore, it may not be a big issue for China Resources Beer to diversify into Baijiu. In the short term, China Resources Beer plans to achieve a billion RMB target in the Baijiu business by 2025, contributing 2-3 billion RMB in profit increment to the company. However, the current outlook seems overly optimistic. Many brands in the Baijiu industry still have high inventory levels to clear, and it remains uncertain whether China Resources Beer's 12.3 billion RMB investment is worthwhile. According to its 2023 annual report, the company's Baijiu business revenue and profit before interest and tax were 2.067 billion RMB and 0.13 billion RMB, respectively, excluding the impact of intangible asset amortization from acquisitions, contributing a profit before tax of 0.797 billion RMB. Currently, only Jinsha Liquor's performance is consolidated. According to China Resources Beer's acquisition announcement, Jinsha Liquor's revenue from 2019 to the first half of 2022 was 0.878 billion RMB, 1.767 billion RMB, 3.641 billion RMB, and 2.001 billion RMB, with profits and comprehensive income totaling 0.156 billion RMB during the period. The revenue in 2023 is 6.15 billion yuan, 13.15 billion yuan, and 6.7 billion yuan. In other words, the revenue of Jinsha Liquor in 2023 is only equivalent to the first half of 2022. It is estimated that a lot of effort was put into clearing inventory. When Jinsha Liquor was acquired, the valuation was 17 times, which China Resources Beer believed to be reasonable. However, a year after the acquisition, this valuation level has increased significantly. If they can streamline and regain growth in the future, the loss may not be too great. Conclusion: Continuous spending has kept China Resources Beer's capital expenditure high, and in the current environment, investors are more interested in stable and certain returns. It might be wise to be more cautious about spending. If the money can be used to increase dividends or buy back shares, the stock price could stabilize. China Resources Beer's dividend payout is not high, and the company has not provided any expectations for increasing dividends in the future. Last year, a special dividend was issued for the 30th anniversary of the group. Excluding the special dividend, the dividend payout ratio is only 40%, maintaining the level since 2016, which also makes its dividend yield less competitive in the market.

Although China Resources Beer's valuation is currently not high, industry expectations are weak. Compared to other industries, the intense competition in the beer industry requires continuous sales expenses. Faced with high-end liquor companies that have lowered their valuations and successfully achieved high-end positioning, both certainty and cost-effectiveness are lacking. It may need to rely on an economic shift