A-shares Warrant Further Growth

Under the guidance of ultra-strong economic policies, after a rocket pierced the Pacific Ocean, the long-depressed A-shares and Chinese assets in the global market finally gained momentum in late September 2024!

After seven consecutive trading days of gains, on September 26, A-shares reclaimed the 3000-point mark. The consumer goods sector, led by Moutai, contributed key momentum to this.

Among them, Qingdao Beer, Chongqing Beer, and Yanjing Beer successively hit their daily limit up or closed near the limit. China Resources Beer in Hong Kong even surged 15 points in a single day.

It can truly be said that on the day A-shares indulged in beer, the bull market must not forget to inform the ancestors.

But how many people care: do you know how Qingdao, China Resources, and Yanjing beers have been getting by in the past three years?

Memories are all bitter - the beer sector has been following the overall market and has been sluggish for more than three years.

Before this week, Chongqing Beer has retreated more than 70% from its high point, China Resources Beer has plummeted 65%, and Qingdao Beer has plummeted 50%. Yanjing Beer and Pearl River Beer have smaller declines, around 30%, and they are also the only two beer leaders who have recorded gains against the trend this year.

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In the past three years, the beer industry has encountered adversity, and the overall valuation has declined significantly, but the performance of the six leaders has been different, some have emerged against the trend, and more have fallen into difficulties with the overall market.

Looking to the future, can the bubbles come back?

01 Basic Plate of Chinese Beer

Starting in 2023, many industries began to show consumer stratification phenomena, including marinated goods, pickled vegetables, snacks, projectors, cars, etc. The beer industry seems to be unaffected by the impact.

In 2023, the average ton price of major beer leaders was 4,182 yuan, a year-on-year increase of 4%. The main logic is the release of mid-to-high-end beers, such as the good performance of China Resources' Heineken and Yanjing's U8. In the first half of this year, Yanjing Beer's ton price increased by 8% year-on-year, Pearl River Beer increased by 6%, and the ton price growth of China Resources Beer, Budweiser Asia Pacific, and Chongqing Beer was relatively limited. Although the overall ton price increase of the beer industry has shifted downward, it is still growing and has not decreased in price. The main reasons are twofold.

Firstly, the beer industry has completed the monopoly market pattern, and manufacturers no longer have the driving force to reduce prices to compete in the market. In 2023, China Resources' market share was 31.4%, Tsingtao's was 22.5%, Budweiser's was 18.3%, Yanjing's was 11.1%, and Chongqing's was 8.4%. Each beer manufacturer occupies its advantageous territory and has long passed the stage of fighting price wars to seize shares from others.

Secondly, the price of beer itself is very low. For example, the mainstream canned 350ML is only about 4 yuan, and the bottled 630ML is only about 5 yuan, far lower than the average price of beer in mainstream overseas countries.

The overall consumer environment seems to have no impact on the beer industry, but upon closer examination, it still exerts influence by hindering high-end upgrades and sales volume.

In the first half of this year, Budweiser China, Tsingtao Beer, and China Resources Beer's sales volumes declined by 8.5%, 7.8%, and 3.4%, respectively. Among them, Budweiser is the company with the highest share in China's high-end beer market, with the largest decline in sales and revenue. Chongqing Beer's sales volume increased by 3.3% year-on-year and only increased by 1.5% in the second quarter.

Next, the high-end upgrade of beer has significantly slowed down. For example, Chongqing Beer is the leader that has achieved the fastest increase in ton price through structural upgrades in the past few years. In the second quarter of this year, the revenue of the lowest-end economic products performed the best, with a year-on-year increase of 10.7%, while the mainstream products increased by 5.1% year-on-year, and high-end products decreased by 1.9% year-on-year.

Moreover, Chongqing Beer also reclassified the grades of beer in 2023, with above 8 yuan as high-end, 4-8 yuan as mid-range, and below 4 yuan as low-end, while previously they were 10 yuan, 6-10 yuan, and below 6 yuan, respectively.

From the operational data and classification measures of Chongqing Beer, it can be seen that there is also a trend of consumer downgrade in beer, breaking the continuous trend of consumption upgrade in the past few years, and most other beers also have similar operational performances.

02 An Unexpected Dark Horse

In the past few years, Yanjing Beer has been the beer leader with the best stock price and valuation performance. Why?

From the perspective of actual performance, Yanjing's performance is significantly better than the industry and other competitors. In the first half of this year, the revenue was 8.046 billion yuan, a year-on-year increase of 5.5%, and the net profit attributable to the parent company was 758 million yuan, a year-on-year increase of 47.5%, while the profit increase in the previous 2022-2023 was 54.5% and 83%, respectively.

Looking at profitability, as of the end of the second quarter of 2024, the gross margin was 43.36%, setting a new high since 2000. The net profit margin was 10.84%, a significant increase of 8.23% compared to 2020, setting a new high since 2002.

Before 2020, Yanjing Beer was considered a laggard among the six leaders, with long-term lukewarm stock performance. However, after 2020, there was a noticeable change in operations.

At the end of 2019, Yanjing Beer launched a major single product U8, starting the high-end upgrade. Under the operation of the new management team, the Beijing-based North China base market achieved good results. From 2021 to 2023, U8's sales were 260,000 tons, 390,000 tons, and 530,000 tons, respectively.

The retail price of the Yanjing U8 terminal is generally above 6 yuan, significantly higher than the single price of other Yanjing beer brands. After volume expansion, it drives the overall ton price up, from 2,817 yuan in 2019 to 3,322 yuan in 2023. This way, it enhances the company's profitability, drives profit growth significantly faster than revenue growth. 

Yanjing Brewery has achieved a turnaround in its situation, with the main logic being that its flagship product U8 has achieved a high-end comeback. 

Next, Yanjing Beer will also face some tests. One of them is that the previous U8 volume expansion was mainly focused on the Beijing market with high consumption levels, while the markets in Guangxi, Fujian, and Jiangxi replicated the past success but still have a high degree of uncertainty. From the current situation, the challenges are quite large. In Yanjing's markets outside of Beijing, local brands such as Liquan Beer and Huiquan Beer are mainly in charge, and the awareness of U8 is not high. 

Secondly, will Yanjing Brewery continue to step up efforts to optimize its operational efficiency? This year's first half saw Yanjing's management expenses ratio reach a high of 12.5%, while the other five breweries' ratios were between 3% and 7%. This shows that there is still considerable room for improvement in the company's internal management and operations, including staff optimization and asset depreciation and amortization.

03 The Largest Leader Was Abandoned

Yanjing Beer, with a relatively small business scale, has achieved a turnaround in difficulties, but the largest beer leader, China Resources, has fallen into a quagmire of deceleration.

In the first half of this year, China Resources' revenue was 24.4 billion yuan, a year-on-year decrease of 0.06%, and the net profit was 4.7 billion yuan, a year-on-year increase of 1.2%. The revenue is the first half-yearly negative growth in more than 20 years except for 2020. Before that, from 2019 to 2023, the compound growth rate of revenue and profit was 4.4% and 40.8%, respectively, indicating a significant deceleration in performance this year.

Looking at the sales structure, in the first half of this year, the proportion of mid-range and above beer sales exceeded 50% for the first time. The ton price was 3,555 yuan, a year-on-year increase of 2%, lower than Tsingtao Beer's 4,283 yuan and Chongqing Beer's 4,834 yuan in the same period, but slightly higher than Yanjing's 3,205 yuan.

However, China Resources Beer's profitability has reached a historical new high again. The latest gross margin is 46.9%, an increase of 5.55% compared to the end of 2023, and the net profit margin is 19.4%, an increase of 6.4% compared to the end of 2023, which is a significant increase.

This is not driven by a significant increase in ton price, but rather a rapid decline in packaging costs. For example, the main futures contract for glass has dropped from 1,900 yuan at the beginning of the year to the current 1,000 yuan, a drop of nearly 50%, returning to the level of early 2016. In addition, the price of imported barley has dropped from $410 per ton at the beginning of 2023 to $258.6 per ton in August, a drop of 37%.

From a fundamental perspective, the decline in China Resources Beer's valuation is inevitable. However, with the lowest valuation in the industry, there is also a logic on the capital side.

China Resources Beer is listed in Hong Kong, and the liquidity of the Hong Kong stock market is particularly poor, giving a lower valuation than the beer leaders listed on the A-share market. For example, Tsingtao Beer's valuation in the A-share market is 17.5 times, while the H-share valuation is 11.76 times, which is even lower than China Resources Beer. It can be seen that due to the overall poor liquidity of the Hong Kong stock market, the valuation discount is more obvious.

In addition, the market's short-selling strength on China Resources Beer is also strong. As of the display, as of September 20, the number of unsettled short-selling shares was 95.62 million shares, once again setting a historical new high, a significant increase from more than 47 million shares at the beginning of July.

However, China Resources Beer's PE has reached a new low since 2011, and the room for a further significant decline in valuation should also be limited.

04 A-shares' Bubbles Deserve More

At present, the overall A-share market and the extreme optimism in February 2021 are two sides of a mirror. The market has fully priced in the bearish factors such as macro pressure through a significant decline, even a bit excessive.

Next, the driving force of profit will gradually emerge. Firstly, the Federal Reserve has already started a 50BP rate cut in September and will continue to cut rates subsequently. As the central bank of global central banks, the Federal Reserve has a significant impact on domestic asset prices. Its substantial shift to easing will drive the rise of A-share asset prices from a medium-term perspective.

Secondly, the Federal Reserve's rate cut, it also opens up room for the People's Bank of China to cut rates (previously constrained by exchange rate and other pressures), and the economic fundamentals are also expected to gradually bottom out and warm up. This ultra-strong economic policy combination has been launched promptly, with the right timing, place, and people all in place.

Coupled with the overall valuation of A-shares reaching a new low in 10 years, the upward inflection point of the economy based on liquidity has already appeared. Based on its macroeconomic judgment, the beer track, and all value-type asset tracks, should not be too pessimistic. At present, ordinary investors should pay more attention to opportunities rather than risks, especially the leaders who can maintain stock resilience during the significant market decline in the past three years, and there may be surprises in the future.

Of course, it's not just about beer, but all core Chinese assets, under the upward inflection point of liquidity, are worth actively and fully embracing.