Tough Quarters Ahead, Downgrade to Reduce

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1 : Tsingtao Brewery (00168 HK) Sunny Kwok 郭日升公司报告 : 青岛啤酒 (00168 HK) [email protected] Tough Quarters Ahead, Downgrade to Reduce 未来数季情况更严峻, 下调至减持 GTJA Research 国泰君安研究 Beer industry production volume in China decreased by 6.3% during Jan.-Apr. 16 (Apr. 16: down 8.6% YoY), while major players including CRB, Tsingtao, AB InBev and Yanjing also reported 2.3% YoY decline in beer sales volume in 1Q16. Tsingtao s sales volume and revenue in 1Q16 decreased by 5.3% and 4.4% YoY, respectively, which underperformed against major peers. Concentration ratio of the four largest players (CR4) in 1Q16 was 74.1%, down 0.5 ppt YoY but up 5.3 ppt QoQ. Rating: 评级 : Reduce Downgraded 减持 ( 下调 ) 6-18m TP 目标价 : HK$25.00 Revised from 原目标价 : HK$36.30 We do not observe a clear correlation between beer sales in China and major sports events that occur on even-numbered years. On the other hand, adverse weather in China in 2Q16 seems to be unfavourable for beer sales due to high precipitation. Beer demand is still expected to be weak in China in 16 and Tsingtao faces intensifying competition against major peers. Therefore, we lower our previous reported EPS forecast for by 7.9% and 16.1%, respectively. Share price 股价 : Stock performance 股价表现 % of return HK$ Tsingtao s earnings quality was lower than its peers as government grants accounted for roughly 2 of the Company s reported earnings in and 15. Tsingtao s financials are healthy but we are cautious on the Company s earnings as per capita consumption of beer in China is not low and Tsingtao has only established base markets in Shandong and Shaanxi. Due to lowered earnings forecasts, we cut the Company s TP to HK$25.00 and downgrade the investment rating to Reduce. The new TP represents 18.9x 16 PER, 19.4x 17 PER and.0x 18 PER. 16 年首 4 个月中国啤酒产量按年减少 6.3%(16 年 4 月同比下降 8.6%), 而国内主要啤酒企业包括华润青岛百威及燕京于 16 年第 1 季的啤酒销量也按年下跌 2.3% 青岛啤酒 16 年第 1 季销量及收入分别同比减少 5.3% 及 4.4%, 表现差于同业中国最大的四家啤酒企业于 16 年第 1 季的市场份额合共为 74.1%, 按年下跌 0.5 个百分点但环比上升 5.3 个百分点我们没有观察到历史上中国啤酒销售会受惠于国际大型运动赛事的举行另一方面, 中国 16 年第 2 季天气降雨较多, 或对啤酒销售有不利影响我们预期中国啤酒需求于 16 年仍然疲弱, 而青岛面对竞品的挑战会加剧因此, 我们分别下调公司于年每股报告净利 7.9% 及 16.1% (10.0) (.0) (30.0) (.0) (50.0) Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Change in Share Price 股价变动 HSI Tsingtao Brewery 1 M 1 个月 3 M 3 个月 1 Y 1 年 Abs. % 绝对变动 % (3.0) (8.1) (45.1) Rel. % to HS index 相对恒指变动 % (6.4) (7.9) (19.8) Avg. share price(hk$) 平均股价 ( 港元 ) Source: Bloomberg, Guotai Junan International. 青岛啤酒的盈利质量较低, 因政府补贴于年及 15 年占公司报告净利约 2 青岛财务良好但我们担心中国人均啤酒消费量已经见顶及公司仅于山东及陕西建立基地市场会影响盈利由于下调了盈利预测, 我们调低了公司目标价至港元, 投资评级也下调至减持新目标价相当于公司年市盈率分别为及.0 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) (%) (%) FY14A 29,049 1, FY15A 27,635 1, (13.9) FY16F 26,513 1, (11.3) FY17F 27,319 1, (2.4) FY18F 28,153 1, (3.3) Shares in issue (m) 总股数 (m) 1,351.0 Major shareholder 大股东 Tsingtao Group 30.8% Market cap. (HK$ m) 市值 (HK$ m) 37,354.7 Free float (%) 自由流通比率 (%) month average vol. 3 个月平均成交股数 ( 000) 1,396.3 FY16 gearing (%) 16 年净负债 / 股东资金 (%) 52 Weeks high/low (HK$) 52 周高 / 低 / FY16 Est. NAV (HK$) 16 年每股估值 ( 港元 ) 25.0 Source: the Company, Guotai Junan International. See the last page for disclaimer Page 1 of 7

2 Disappointing Volume Growth in 1Q16 and Underperformed against Peers. Tsingtao reported a 5.3% YoY decline in beer sales volume in 1Q16, the lowest among its peers for the same corresponding period. The beer industry in China benefitted from low input costs and Tsingtao controlled its 1Q16 operating expenses well. Thus, the Company achieved both reported and core net profit growth in 1Q16, the first time since 3Q14. YTD (Jan.-May) retail sales growth of tobacco and liquor in China was 8.8% but YTD (Jan.-Apr.) production volume growth of beer in China dropped by 6.3% YoY, with production volume declining 8.6% in April. We remain cautious on beer sales growth in China in 16. Figure-1: Production Volume Growth of Beer in China Figure-2: Retail Sales of Tobacco and Liquor in China YoY Growth YTD Growth 2 YoY Growth YTD Growth Jan&Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan&Feb-16 Mar-16 Apr-16 Jan&Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan&Feb-16 Mar-16 Apr-16 May-16 Source: National Bureau of Statistics of China. Source: National Bureau of Statistics of China. Table-1: Peers Operating Results Comparison (1Q16) Tsingtao Brewery CRB * AB InBev ** Yanjing Beer RMB million HK HK ABI BB CH Sales Volume (mn hl) YoY Growth -5.3% 0.4% % ASP (RMB / kl) 3,519 2,533 3,790 2,685 YoY Growth % 2.4% 3. Revenue 6,862 6,734 6,303 3,108 YoY Growth -4.4% -1.7% 1.4% -1.2% Gross Margin 34. n.a. n.a. 23.2% YoY Growth 1.8 ppt n.a. n.a. 1.8 ppt Profit n.a. 47 YoY Growth n.a % Reported Margin 7.8% 6.6% n.a. 1. YoY Growth 0.5 ppt 5.4 ppt n.a ppt Source: the Companies, Bloomberg, Guotai Junan International. * Assume 10 Equity. ** China Operation Only. More Small Beer Manufacturers are Expected to be Driven Out of the Market. Annual beer production per capita in China was 34.3 litres in 15, down 4.7% YoY. As Japan s annual beer consumption per capita was only 42.5 litres in, we remain cautious on the long term growth of beer consumption in China and we expect that 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 15 and 1Q16 reached 68.8% and 74.1%, up 1.5 ppt and down 0.5 ppt YoY, respectively. Small beer manufacturers are expected to face huge pressure as the cost of idle capacity is expected to increase on sluggish beer demand. There is still room for these big players to increase their market share but the pace of industry consolidation is expected to slow. In addition, we do not expect these beer manufacturers to directly increase their product ASP before 17, but product mix upgrades help. See the last page for disclaimer Page 2 of 7

3 Figure-3: Market Share by Beer Production Volume % 16.6% Q16 CRB Tsingtao AB InBev Yanjing Source: National Bureau of Statistics of China, the Companies, Guotai Junan International. YTD Weather in Shandong and Shaanxi is Not Favourable for Beer Demand. The average temperature of Shandong and Shaanxi was approximately 17.7 o C and 16.3 o C in 2Q16, which was even lower than the average in 2Q15 at 18.1 o C and 17.3 o C, respectively. In addition, there was heavy rain in areas such as Shanghai, Beijing, Zhejiang and Jiangsu in 2Q16, more so than in 2Q15, which could also negatively affect beer demand in China. Figure-4: Mean Temperature in Shandong Figure-5: Mean Temperature in Shaanxi Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: CustomWeather. Source: CustomWeather. Beer Demand Was Not Boosted by Major Sports Events. UEFA Euro 16 has kicked off and the Olympics will follow. However, we do not observe a close correlation between beer demand and major sports events (World Cup, Euro Cup and Olympics), which are always held on even-numbered years. For the past 14 years, it seems that beer production volume growth in China and Tsingtao beer sales growth sped up in 04 and slowed in 05 but no obvious observation of existence of such relationship in other years. Thus, we do not expect beer demand to speed up in 2Q16 and 3Q16. Figure-6: Beer Production Volume Growth in China 2 Figure-7: Tsingtao Beer Production Volume Growth Source: National Bureau of Statistics of China Source: the Company See the last page for disclaimer Page 3 of 7

4 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 and intensifying competition against CRB and AB Inbev. rate cuts in China are also expected to negatively affect the Company s net finance income. Therefore, we revise down Tsingtao s reported net profit by 7.9% and 16.1% in 16-17, respectively. Tsingtao s reported EPS for is expected to be RMB1.124, RMB1.097 and RMB1.061, down 11.3%, 2.4% and 3.3% in 16-18, respectively. In addition, earnings quality for Tsingtao is not high as government grants accounted for roughly 2 of the Company s reported net profit in and 15. Table-2: Earnings Estimate Revisions RMB million NEW OLD CHANGE 16F 17F 18F 16F 17F 16F 17F Sales Volume (mn hl) % -8.6% Revenue 26,513 27,319 28,153 28,418 29, % -7.1% Gross Profit 8,6 8,544 8,609 8,621 8, % Core Operating Profit 1,115 1,195 1,191 1,573 1, % -34.3% Reported Profit 1,519 1,482 1,433 1,649 1, % -16.1% Core Profit * 1,219 1,1 1,170 1,391 1, % -.9% Reported EPS (RMB) % -16.1% Core EPS (RMB) % -.9% Gross Margin 31.7% 31.3% 30.6% 30.3% ppt 0.8 ppt Core Operating Margin 4.2% 4.4% 4.2% % -1.3 ppt -1.8 ppt Reported Margin 5.7% 5.4% 5.1% 5.8% ppt -0.6 ppt Core Margin 4.6% 4.4% 4.2% 4.9% 5.2% -0.3 ppt -0.8 ppt Source: Guotai Junan International. * Excludes government grants and other non-core items. Downgrade to Reduce and Cut TP to HK$ Tsingtao s core operating profit (07: RMB1,067 mn; 15: RMB1,095 mn) did not grow in line with revenue growth (CAGR of 9.2% during 07-15). Tsingtao s earnings are highly sensitive to ASP hikes but we see limited possibility of an ASP hike before 17. 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-shares are traded at average discounts of 19.7% and 6.3% to A-shares during and 06-15, respectively, but are traded at a 3.6% premium to A-shares during Currently H-shares are trading at 19.6% discount to A-shares but valuation is just fair as the Company is trading at.9x 16 PER and we expect earnings growth to be very slow on weak sales volume growth expectation. In addition, Tsingtao s market cap is higher than CRB but is unjustified as CRB business is growing in profitability and beer sales volume growth is outperforming Tsingtao s. Our DCF-based TP is HK$25.00, which represents 18.9x 16 PER, 19.4x 17 PER and.0x 18 PER and our investment rating on Tsingtao is downgraded to Reduce. 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) F Source: the Company, Bloomberg, Guotai Junan International F Source: the Company, Bloomberg, Guotai Junan International. See the last page for disclaimer Page 4 of 7

5 Table-3: Peers Valuation Comparison Company Ticker $ Share Price Market Cap (HK$ mn) PER (x) PBR (x) ROE (%) Gross Margin (%) Operating Margin (%) FY15A FY16F FY17F FY16F FY16F FY16F FY16F Tsingtao Brewery HK HK$ , China Resources Beer HK HK$ ,585 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: 1Q16 Quarterly Results Review Statement RMB million 1Q15 1Q16 YoY Revenue 7,178 6, % COGS (4,346) (4,041) -7. Tax expenses (518) (486) -6.2% Gross Profit 2,314 2, % Distribution exp. (1,363) (1,336) -2. Administrative exp. (3) (305) -4.7% Core Operating Profit % Investment income (17) (9) -47.4% Finance income, net % Core Profit before tax Other gains, net % Profit before tax tax (211) (253).1% Profit after tax % Minority interests (2) 2 n.a. Reported Profit Core Profit * % Gross Margin 32.2% ppt Core Operating Margin 8.8% 10.1% 1.3 ppt Reported Margin 7.3% 7.8% 0.5 ppt Core Margin 6.6% 7.3% 0.7 ppt Source: the Company. * Excludes 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) FY14A FY15A FY16F FY17F FY18F As at Dec 31 (RMB m) FY14A FY15A FY16F FY17F FY18F Sales 29,049 27,635 26,513 27,319 28,153 PPE & CIP 10,171 10,184 10,596 10,981 11,344 yoy growth 2.7% -4.9% -4.1% % Intangible assets & Goodwill 4,088 4,014 4,003 3,987 3,967 COGS (17,899) (17,192) (16,191) (16,810) (17,527) Others 2,393 2,415 2,398 2,392 2,391 Tax expenses (2,183) (2,030) (1,915) (1,965) (2,017) Non-current assets 16,652 16,613 16,996 17,360 17,702 Gross Profit 8,967 8,412 8,6 8,544 8,609 yoy growth % -0.1% 1.6% 0.8% Inventories 2,487 2,182 2,0 2,125 2,197 Distribution expenses (5,683) (5,905) (5,833) (5,874) (5,912) Trade receivables Administrative expenses (1,362) (1,412) (1,458) (1,475) (1,506) Other receivables Core Operating Profit 1,922 1,095 1,115 1,195 1,191 and cash equivalents 6,389 8,2 9,187 9,926 10,771 yoy growth 2.7% % 7.1% -0.3% Others ,082 Share of JVs & Associates Current assets 10,352 11,887 12,601 13,607 14,630 Finance income, net Core Profit before tax 2,281 1,857 1,425 1,535 1,560 Trade payables 2,494 2,591 2,496 2,570 2,616 Other gains, net Other payables 5,512 5,350 5,228 5,510 5,807 Profit before tax 2,683 2,275 1,825 1,910 1,911 Borrowings tax (663) (663) (456) (477) (478) Others 789 1, Profit after tax 2,0 1,612 1,369 1,432 1,433 Current liabilities 9,228 9,753 9,435 9,790 10,134 Minority interests (29) Reported Profit 1,990 1,713 1,519 1,482 1,433 Borrowings yoy growth 0.8% -13.9% -11.3% -2.4% -3.3% Others 2,486 2,580 2,627 2,683 2,744 Core Profit * 1,671 1,053 1,219 1,1 1,170 Non-current liabilities 2,488 2,582 2,627 2,683 2,744 yoy growth 0.9% % -1.4% -2.6% Minority interests (100) (292) (442) (492) (492) Reported EPS (RMB) Core EPS (RMB) Shareholders' equity 15,388 16,458 17,977 18,987 19,947 DPS (RMB) BPS (RMB) Flow Statement Financial Ratio Year end Dec (RMB m) FY14A FY15A FY16F FY17F FY18F FY14A FY15A FY16F FY17F FY18F Profit after tax 2,0 1,612 1,369 1,432 1,433 Gross Margin (%) Depreciation Core Operating Margin (%) Amortisation Reported Margin (%) Others (1,251) 12 (351) (41) 14 Core Margin (%) Operating Flow 1,691 2,575 2,017 2,422 2,504 ROE (%) ROA (%) CAPEX (2,371) (2,626) (1,500) (1,500) (1,500) Others 997 2, Inventory turnover days Investing Flow (1,374) (533) (1,182) (1,160) (1,134) Account receivable days Account payable days Change in bank borrowings (1,477) 357 (3) 0 0 conversion cycle (0.1) (2.8) (8.5) (8.4) (7.4) Dividends paid (608) (608) 0 (473) (473) Others (369) 2 (48) (49) (53) Current ratio (x) Financing Flow (2,455) (31) (50) (522) (525) Quick ratio (x) Change in cash (2,138) 2, gearing (%) Foreign exchange effect (5) interest cover (x) balance at year end 6,389 8,2 9,187 9,926 10,771 Payout ratio (%) Source: the Company, Guotai Junan International. * Excludes 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 SMI Holdings Group Limited (00198 HK), China All Access (Holdings) Limited (00633 HK), Guotai Junan International Holdings Limited (01788 HK), Binhai Investment Company Limited (02886 HK) and Link Holdings Limited (08237 HK), 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. 16 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