Slow Earnings Growth but Attractive Discount to A-Shares

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1 : Tsingtao Brewery (00168 HK) Sunny Kwok 郭日升公司报告 : 青岛啤酒 (00168 HK) sunny.kwok@gtjas.com.hk Slow Earnings Growth but Attractive Discount to A-Shares 盈利低速增长但与 A 股折让较大 GTJA Research 国泰君安研究 Beer industry s production volume in China decreased by 4.3% during Jan.-May 2015, while revenue and profit before tax growth of beer manufacturers in China were 1.3% and 60.2%, respectively, during Jan.-Apr Tsingtao s sales volume, revenue and core net profit growth in 1Q15 were -5., -3.1% and -2.1%, respectively, which all underperformed industry averages and major peers. Tsingtao targets to gain market share and aims to achieve sales volume growth which is at least 2 ppt above industry average. We believe Tsingtao has the ability to achieve such results but given weakening demand for beer, the Company s sales growth is expected to remain slow. All beer manufacturers are targeting to improve their sales mix for profitability improvement but Tsingtao is sacrificing its low-end products sales volume. To conclude, we trim previous reported EPS forecast for by 3.7% and 0.8%, respectively. Tsingtao s reported EPS is expected to reach RMB1.593, RMB1.701 and RMB1.783 in , respectively. Rating: 评级 : Neutral Maintained 中性 ( 维持 ) 6-18m TP 目标价 : HK$50.00 Revised from 原目标价 : HK$49.00 Share price 股价 : Stock performance 股价表现 % of return HK$ Tsingtao s H-shares are now trading at roughly 22. discount to its A-shares but H-share valuation is just fair. CAGR of Tsingtao s sales during was 10. but core operating profit CAGR for the same period was only 2.4%. Therefore, we still maintain Neutral on Tsingtao and slightly revise up TP to HK$50.00 on roll over. The TP represents 24.9x 2015 PER, 23.3x 2016 PER and 22.3x 2017 PER 年 1-5 月国内啤酒产量按年减少 4.3%, 而国内啤酒行业收入及利润总额于 2015 年 1-4 月的增速分别为 1.3% 及 60.2% 青岛啤酒销量营业额及核心净利于 2015 年第 1 季的增速分别为 % 及 -2.1%, 均跑输行业及主要竞争对手青岛啤酒希望争取更高市场份额, 销量的增长目标为高于行业增速 2 个百分点我们认为青岛啤酒有能力达成目标但由于国内啤酒需求转弱, 公司销售增速预期将维持较慢增长国内所有啤酒生产厂均希望改善现有的产品组合去提升盈利能力, 但青岛啤酒低端产品的销量增长受到负面影响综合而言, 我们分别下调公司于年每股报告净利 3.7% 及 0.8% 青岛啤酒年每股报告净利预期将分别达到人民币元人民币元及人民币元 (5.0) (10.0) (15.0) (20.0) (25.0) Jun-15 Change in Share Price 股价变动 HSI Tsingtao Brewery 1 M 1 个月 3 M 3 个月 1 Y 1 年 Abs. % 绝对变动 % (2.0) 0.0 (17.7) Rel. % to HS index 相对恒指变动 % 1.2 (10.7) (32.8) Avg. share price(hk$) 平均股价 ( 港元 ) Source: Bloomberg, Guotai Junan International. H 股较 A 股折让大约 22., 但 H 股估值仅为合理年青岛啤酒收入的复合年均增长率为 10., 但同期核心经营溢利的复合年均增长率只有 2.4% 因此, 我们重申公司的投资评级为中性, 目标价因时间推移轻微上调至港元该目标价相当于公司年市盈率分别为及 22.3 倍 Year End 年结 Turnover 收入 Profit 股东净利 EPS 每股净利 EPS 每股净利变动 PER 市盈率 BPS 每股净资产 PBR 市净率 DPS 每股股息 Yield 股息率 ROE 净资产收益率 12/31 (RMB m) (RMB m) (RMB) ( %) (x) (RMB) (x) (RMB) (%) (%) FY13A 28,291 1, FY14A 29,049 1, FY15F 30,200 2, FY16F 32,069 2, FY17F 33,407 2, Shares in issue (m) 总股数 (m) 1,351.0 Major shareholder 大股东 Tsingtao Group 30.6% Market cap. (HK$ m) 市值 (HK$ m) 65,995.5 Free float (%) 自由流通比率 (%) month average vol. 3 个月平均成交股数 ( 000) 2,507.5 FY15 gearing (%) 15 年净负债 / 股东资金 (%) 52 Weeks high/low (HK$) 52 周高 / 低 / FY15 Est. NAV (HK$) 15 年每股估值 ( 港元 ) 50.0 Source: the Company, Guotai Junan International. See the last page for disclaimer Page 1 of 7

2 Underperformed Peers in 1Q15. YTD (Jan.-May 2015) production volume growth of beer in China decreased by 4.3% YoY, while revenue and profit before tax growth of beer manufacturers in China for the first 4 months in 2015 were 1.3% and 60.2%, respectively. Sales growth of beer manufacturers in China was slower than other kinds of wineries during Jan.-May Tsingtao, the second largest beer manufacturer in terms of sales volume in China, reported weak 1Q15 results and underperformed its major peers. Although 1Q is still a slack season for beer, sluggish demand for beer and intensifying competition from peers could continue to post threat to Tsingtao in the coming quarters. In addition, the Company s sales mix trade up was at the expense of sales volume growth, which is slightly disappointing. The Company aims to achieve sales volume growth outperforming the industry average by 2 ppt in 2015 and we believe this should be achievable given continuous industry consolidation driving small players out of the market. Beer production volume growth in China is expected to speed up on expected normalized hot summer in 2015, compared to relatively cool and wet summer in However, we only expect Tsingtao s sales volume to increase by 2. YoY in Without further M&A, we do not expect the Company to be able to sell 100 million hl beer in Figure-1: Production Volume Growth of Beer in China Figure-2: YTD Growth of Catering Revenue in China 2 YoY Growth YTD Growth Jan&Feb-14 Jan&Feb-15 May-15 Jan-Feb-14 Catering Revenue Jan-Feb-15 Revenue of Catering Enterprises above Designated Size Revenue of Catering Enterprises below Designated Size May-15 Source: National Bureau of Statistics of China. Figure-3: Beer Industry: Revenue YoY & YTD Growth 2 Adjusted YoY Growth YTD Growth Figure-4: Beer Industry: YTD Profit Before Tax Growth Jan-Feb-14 Jan-Feb-15 Jan-Feb-14 Jan-Feb-15 See the last page for disclaimer Page 2 of 7

3 Table-1: Peers Operating Results Comparison (1Q15) Tsingtao Brewery CRE * ABInBev ** Yanjing Beer RMB million HK HK ABI BB CH Sales Volume (mn hl) YoY Growth % % ASP (RMB / kl) 3,485 2,583 3,703 2,593 YoY Growth % % Revenue 7,178 6,842 6,218 3,146 YoY Growth -3.1% % Gross Margin 32.2% n.a. n.a. 21.4% YoY Growth -0.8 ppt n.a. n.a ppt EBITDA n.a ,615 n.a. YoY Growth n.a % n.a. Profit n.a. 53 YoY Growth % n.a. 5.2% Reported Margin 7.3% 1.2% n.a. 1.7% YoY Growth -0.6 ppt 1.0 ppt n.a. SAME Source: the Companies, Bloomberg, Guotai Junan International. * Assume 10 Equity. ** China Operation Only. Industry Consolidation Has Not Come to an End but is Expected to Slow. Annual beer production per capita in China was 36.0 litres in 2014, down 1. YoY. As Japan s annual beer consumption per capita was only 43.1 litres in 2013, we remain cautious on the long term growth of beer consumption in China and we expect long term growth will remain sluggish as compared to other F&B markets in China. The annual beer consumption growth in China is expected to be slower than that of GDP growth in the long run. The concentration ratio of the 4 largest beer manufacturers in China in 2014 and 1Q15 reached 68. and 72.2%, up 2.2 and 2.0 ppt YoY. There are still rooms for these big players to increase their market shares but pace of industry consolidation is expected to slow. In addition, we do not expect these beer manufacturers to directly increase their products ASP before 2016 but product mix upgrade helps. Figure-5: Market Share by Beer Production Volume % 19.6% 15.9% Q15 CRE Tsingtao AB InBev Yanjing Source: National Bureau of Statistics of China, the Companies. Production Cost to Remain Stable in Malt price stayed low while packaging cost and rice price are not expected to post huge pressure to beer manufacturers. Sales mix improvement is expected to offset negative impact from rising labour costs. As we do not expect direct ASP hike to be seen, Tsingtao s gross margin is expected to stay at similar level in 2015 as compared to that in See the last page for disclaimer Page 3 of 7

4 Figure-6: Foreign Malt Price Figure-7: Domestic Rice Price US$ / ton 325 Imported Malt Price - LHS RMB / kg 6.3 YoY Growth - RHS YTD Growth - RHS % 3% % % 250 Jan-14 Feb-14 Jan-15 Feb Jan-14 Feb-14 Jan-15 Feb-15 May-15 Jun-15 Domestic Rice Price - LHS YoY Growth - RHS YTD Growth - RHS Source: China Customs, NYSE Liffe, Guotai Junan International. Earnings Forecast Assumptions and Revisions: Earnings Cut on Lower Sales Volume and Finance. We lower Tsingtao s sales volume expectation as demand for beer in China remains weak on slowing economic growth. rate cut in China is also expected to negatively affect the Company s net finance income. Therefore, we revise down Tsingtao s reported net profit by 3.7% and 0.8% in , respectively. Tsingtao s reported EPS for are expected to be RMB1.593, RMB1.701 and RMB1.783, up 8.2%, 6.8% and 4.8% in , respectively. Table-2: Earnings Estimate Revisions RMB million NEW OLD CHANGE 2015F 2016F 2017F 2015F 2016F 2015F 2016F Sales Volume (mn hl) % -3.6% Revenue 30,200 32,069 33,407 31,295 32, % Gross Profit 9,304 9,879 10,259 9,644 10, % Core Operating Profit 2,297 2,519 2,676 2,336 2, % 0.8% Reported Profit 2,153 2,299 2,409 2,235 2, % -0.8% Core Profit * 1,916 2,085 2,203 2,007 2, % Reported EPS (RMB) % -0.8% Core EPS (RMB) % Gross Margin 30.8% 30.8% 30.7% 30.8% 30.7% SAME 0.1 ppt Core Operating Margin 7.6% 7.9% % 0.1 ppt 0.2 ppt Reported Margin 7.1% 7.2% 7.2% 7.1% 7.1% SAME 0.1 ppt Core Margin 6.3% % 6.4% ppt SAME Source: Guotai Junan International. * Exclude government grants and other non-core items. Maintain Neutral and Raise TP to HK$ Although we do expect Tsingtao s market share to grow, slowing beer consumption growth in China is expected to negatively affect the Company s earnings growth. Tsingtao s core operating profit (2009: RMB1,711 mn; 2014: RMB1,922 mn) did not grow in line with revenue growth (CAGR of 10. during ). Tsingtao s earnings are highly sensitive to ASP hike but we see limited possibility of ASP hike in 2015 as well as in On the other hand, Tsingtao s financials and cash flow are extremely healthy and we expect the Company s dividend payout ratio to keep growing in the future. H-share is traded at average discounts of 20. and 6. to A-share during and but is traded at a 5.1% premium to A-share during Currently H-share is trading at roughly 22. discount to A-share but valuation is just fair as the Company is trading at 24.4x 2015 PER and earnings growth is expected to be very slow on weak sales volume growth expectation. Our DCF-based TP is HK$50.00, which represents 24.9x 2015 PER, 23.3x 2016 PER and 22.3x 2017 PER. Our rating is maintained at Neutral. See the last page for disclaimer Page 4 of 7

5 Figure-8: Tsingtao (H-Share) Current Year PER Band Figure-9: Tsingtao (A-Share) Current Year PER Band x High PER (H-SHARE) Mean PER (H-SHARE) Low PER (H-SHARE) x High PER (A-SHARE) Mean PER (A-SHARE) Low PER (A-SHARE) Source: the Company, Bloomberg, Guotai Junan International Source: the Company, Bloomberg, Guotai Junan International. Table-3: Peers Valuation Comparison Company Ticker $ Share Price Market Cap (HK$ mn) PER (x) PBR (x) ROE (%) Gross Margin (%) Operating Margin (%) FY14A FY15F FY16F FY15F FY15F FY15F FY15F Tsingtao Brewery HK HK$ , China Resources Enterprise HK HK$ ,471 n.a Beijing Yanjing Brewery CH RMB , Anheuser-Busch Inbev ABI BB EUR ,528, Simple Average Weighted Average Source: Bloomberg, Guotai Junan International. Appendix: Table-4: 1Q15 Quarterly Results Review Statement RMB million 1Q14 1Q15 YoY Revenue 7,408 7, % COGS (4,425) (4,346) -1.8% Tax expenses (538) (518) -3.7% Gross Profit 2,445 2, % Distribution exp. (1,574) (1,363) -13.4% Administrative exp. (292) (320) 9.4% Core Operating Profit Investment income (9) (17) 81.8% Finance income, net % Core Profit before tax % Other gains, net % Profit before tax % tax (207) (211) 1.9% Profit after tax % Minority interests 4 (2) n.a. Reported Profit Core Profit * % Gross Margin % -0.8 ppt Core Operating Margin 7.8% 8.8% 1.0 ppt Reported Margin 7.9% 7.3% -0.6 ppt Core Margin % 0.1 ppt Source: the Company. * Exclude government grants and other non-core items. See the last page for disclaimer Page 5 of 7

6 Financial Statements and Ratios Statement Balance Sheet Year end Dec (RMB m) FY13A FY14A FY15F FY16F FY17F As at Dec 31 (RMB m) FY13A FY14A FY15F FY16F FY17F Sales 28,291 29,049 30,200 32,069 33,407 PPE & CIP 9,247 10,171 10,546 10,881 11,184 yoy growth 9.7% 2.7% % 4.2% Intangible assets & Goodwill 3,613 4,088 4,080 4,071 4,060 COGS (17,008) (17,899) (18,657) (19,850) (20,741) Others 2,231 2,393 2,403 2,403 2,407 Tax expenses (2,228) (2,183) (2,240) (2,340) (2,407) Non-current assets 15,090 16,652 17,029 17,354 17,650 Gross Profit 9,055 8,967 9,304 9,879 10,259 yoy growth 11.2% % 6.2% 3.8% Inventories 2,535 2,487 2,676 2,748 2,935 Distribution expenses (5,611) (5,683) (5,587) (5,853) (6,013) Trade receivables Administrative expenses (1,573) (1,362) (1,419) (1,507) (1,570) Other receivables Core Operating Profit 1,872 1,922 2,297 2,519 2,676 and cash equivalents 8,532 6,389 7,674 9,231 10,544 yoy growth -3.8% 2.7% % 6.2% Others ,060 1,166 1,283 Share of JVs & Associates Current assets 12,274 10,352 11,933 13,713 15,374 Finance income, net Core Profit before tax 2,353 2,281 2,621 2,880 3,071 Trade payables 2,707 2,494 2,617 2,806 2,876 Other gains, net Other payables 5,528 5,512 5,750 6,043 6,350 Profit before tax 2,667 2,683 2,937 3,165 3,345 Borrowings tax (692) (663) (734) (791) (836) Others 2, Profit after tax 1,975 2,020 2,203 2,374 2,509 Current liabilities 11,114 9,228 9,517 9,949 10,226 Minority interests (2) (29) (50) (75) (100) Reported Profit 1,973 1,990 2,153 2,299 2,409 Borrowings yoy growth 12.2% 0.8% 8.2% 6.8% 4.8% Others 2,373 2,486 2,567 2,615 2,668 Core Profit * 1,656 1,671 1,916 2,085 2,203 Non-current liabilities 2,378 2,488 2,567 2,615 2,668 yoy growth 12.6% 0.9% 14.6% 8.8% 5.7% Minority interests (147) (100) (50) Reported EPS (RMB) Core EPS (RMB) Shareholders' equity 14,021 15,388 16,928 18,479 20,005 DPS (RMB) BPS (RMB) Flow Statement Financial Ratio Year end Dec (RMB m) FY13A FY14A FY15F FY16F FY17F FY13A FY14A FY15F FY16F FY17F Profit after tax 1,975 2,020 2,203 2,374 2,509 Gross Margin (%) Depreciation Core Operating Margin (%) Amortisation Reported Margin (%) Others 547 (1,251) (51) 110 (202) Core Margin (%) Operating Flow 3,401 1,691 3,221 3,600 3,464 ROE (%) ROA (%) CAPEX (2,036) (2,371) (1,500) (1,500) (1,500) Others Inventory turnover days Investing Flow (1,208) (1,374) (1,133) (1,150) (1,122) Account receivable days Account payable days Change in bank borrowings (160) (1,477) (137) (100) (100) conversion cycle 3.6 (0.1) Dividends paid (540) (608) (608) (743) (878) Others (78) (369) (57) (51) (50) Current ratio (x) Financing Flow (778) (2,455) (802) (894) (1,028) Quick ratio (x) Change in cash 1,415 (2,138) 1,286 1,556 1,313 gearing (%) Foreign exchange effect (2) (5) interest cover (x) balance at year end 8,532 6,389 7,674 9,231 10,544 Payout ratio (%) Source: the Company, Guotai Junan International. * Exclude government grants, bargain purchase as well as other non-recurring items. See the last page for disclaimer Page 6 of 7

7 Company Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Buy Relative Performance >1; or the fundamental outlook of the company or sector is favorable. Accumulate Relative Performance is to 1; or the fundamental outlook of the company or sector is favorable. Neutral Relative Performance is - to ; or the fundamental outlook of the company or sector is neutral. Reduce Relative Performance is - to -1; or the fundamental outlook of the company or sector is unfavorable. Sell Relative Performance <-1; or the fundamental outlook of the company or sector is unfavorable. Sector Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Outperform Relative Performance >; or the fundamental outlook of the sector is favorable. Neutral Relative Performance is - to ; or the fundamental outlook of the sector is neutral. Underperform Relative Performance <-; or the fundamental outlook of the sector is unfavorable. DISCLOSURE OF INTERESTS (1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report. (2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (3) Except for Guangshen Railway Company Limited-H shares (00525), China All Access (Holdings) Limited (00633), Guotai Junan International Holdings Limited (01788) and Binhai Investment Company Limited (02886), Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer mentioned in this Research Report. (4) Guotai Junan and its group companies have not had investment banking relationships with the issuer mentioned in this Research Report within the preceding 12 months. DISCLAIMER This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services and etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily). Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan. Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. This Research Report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Guotai Junan and its group companies to any registration or licensing requirement within such jurisdiction Guotai Junan Securities (Hong Kong) Limited. All Rights Reserved. 27/F., Low Block, Grand Millennium Plaza, 181 Queen s Road Central, Hong Kong. Tel.: (852) Fax: (852) Website: See the last page for disclaimer Page 7 of 7