20160819-杰富瑞-华润啤酒-00291.HK-1H_Results_Strong_but_Margins_Unsustainable__Maintain_Hold_13页_532kb

China Resources Beer (291 HK) Summary

Core Content

China Resources Beer (CRB) reported its first-half (1H16) results, showing a 2% decline in beer volume compared to the previous year, which was better than the industry decline of 4.3%. Despite the volume drop, net profits surged by 45.1% to HKD605m, driven by lower selling and administrative expenses and reduced raw material costs. However, the analysts believe the high margins observed in 1H16 are unsustainable.

The revenue for 1H16 dropped by 1.8% to RMB15.2bn, with the gross profit margin expanding by 0.1ppt to 33.7% and the operating profit rising by 40.2% to RMB1.7bn, with an operating margin increase of 3.3ppt to 10.9%. The net profit margin expanded by 1.3ppt to 4%, though this was partially offset by higher net finance costs, taxation, and minority interest expenses.

CRB did not declare an interim dividend in 1H16. The company reduced marketing and promotion spending due to unfavourable weather and likely increased spending in Jul-Aug.2016 as weather improved. Management also mentioned efforts to improve tax efficiency and targeting an effective tax rate of 25–28%.

CRB is expected to seek M&A among leading players in China to consolidate its market share. Analysts have revised their forecasts to RMB, adjusting assumptions based on updated presentation currency and operating cost trends. They lowered 2016e sales by 1.9% to RMB28.2bn and raised net profit by 6% to RMB834m. For 2017e, sales are projected to decrease by 0.6% to RMB29.6bn, while net profit is raised by 2.6% to RMB1.6bn.

Key Financials

Valuation and Investment Recommendation

• Price Target: HKD14.50 (maintained)
• Current Price: HKD15.68
• Valuation Methods:
  • Blended DCF: Based on 7.6% WACC, resulting in HKD17.8
  • 19x 17e PE: HKD11.2
• Current Trading P/E (17e): 27x, higher than the Tsingtao-H (168 HK) P/E of 18x.
• Total Return: -6.0% in the past one month, underperforming HSCEI by 6%.
• Dividend Yield (17e): 1.6%
• Investment Recommendation: Hold

Key Risks and Catalysts

• Risks:
  • Raw material cost hike
  • Fierce competition
• Catalysts:
  • Raw material cost pullback
  • Successful M&A activity

Industry and Market Context

• China Beer Production (6M16): 22.5bn litres, down 4.3% yoy
• Expected Industry Growth:
  • -5% in 2016e
  • Flattish to low single-digit growth in 2017e and 2018e
• Barley Prices (Australia, Jul.16): AUD211/ton, down 16.1% mom and 22.7% yoy
• USDA Forecast (2016/17e): Stock-to-use ratio at 15.7%, lower than the 4-year average of 16.8%

Analysts

• Jessie Guo, PhD – Equity Analyst
• Kevin Chee, CFA – Equity Analyst
• Ani Tu – Equity Associate

All analysts certify that their views reflect their personal opinions and that their compensation is not directly tied to the report's recommendations.

Financial Highlights

• Book Value per Share: RMB4.13
• Net Debt: RMB2,690m
• Return on Avg. Equity: 3.0%
• Minority Interest: RMB9,264m
• Net Debt/Capital: 10.8%
• Long-Term Debt: RMB3,839m
• Cash & ST Invest.: RMB2,927m

Summary of Earnings Revision

• 2016e Sales: Lowered by 1.9% to RMB28.2bn
• 2016e Net Profit: Raised by 6% to RMB834m (+23.8% yoy)
• 2017e Sales: Lowered by 0.6% to RMB29.6bn (+4.8% yoy)
• 2017e Net Profit: Raised by 2.6% to RMB1.6bn (without minority interest)

Investment Recommendation Overview

• Buy: Expected total return of 15% or more
• Hold: Expected total return of +15% or -10%
• Underperform: Expected total return of -10% or less

CRB's current price is HKD15.68, which is above the price target of HKD14.50, suggesting a potential downside of 7.6%.