Earnings preannounced to rise 43% YoY
Tsingtao Brewery preannounced that 2021 attributable net profit may rise 43% YoY to Rmb3.15bn; excluding income of Rmb436mn from land transfer, attributable net profit could grow 23.3% YoY to Rmb2.71bn. Its 2021 recurring attributable net profit may increase 21% YoY to Rmb2.19bn, and 4Q21 attributable net profit may be -Rmb461mn. The preannouncement is in line with our expectation.
Trends to watch
COVID-19 conditions weighing on full-year sales volume to some extent; premiumization well on track. We believe full-year sales volume will see low-single-digit growth in 2021, as COVID-19 conditions may hurt beer consumption and the firm is strong in restaurant channels, which were affected by the pandemic. We foresee a sharp decline in low-end products, while high-end products may continue to book double-digit growth and its structural upgrading continued.
Amid a cost up-cycle, we expect the firm the gradually raise product prices to offset cost pressure. The firm’s price hike has been seamless and should have limited impact on slack-season sales volume, in our view. The cost of packaging materials has started falling sequentially, and the prices of corrugated papers declined 4.8% MoM in December 2021. However, the costs of barley and labor have continued to rise. The price of imported barley rose mildly MoM in November, and we expect overall costs to rise by mid-single digits YoY in 2022. CR Beer and Budweiser started raising product prices for a large number of products at end-2021. We expect the firm to follow suit based on market conditions. If the firm raises product prices as well, we expect benefits from the price hike to emerge in the peak season in 2022.
Gradually enhancing profits through improving operating efficiency and expense efficiency. We see mild downside potential in sales expense ratio and G&A expense ratio.
Valuation and recommendation
Considering land transfer income and rising raw material costs in 2021, we raise our 2021 attributable net profit forecast 13.6% to Rmb3.15bn, and lower our 2022 forecast 1.9% to Rmb3.27bn; we introduce our 2023 forecast at Rmb3.93bn. We maintain OUTPERFORM ratings for the A-shares and H-shares, and target prices for the A-shares at Rmb110 (46x and 38x 2022-2023e P/E with 23% upside), and for the H-shares at HK$80 (28x and 23x 2022-2023e P/E with 19.4% upside). For 2022-2023e, the A-shares are trading at 37x and 31x P/E, and the H-shares at 24x and 20x P/E.
Risks
COVID-19 resurgence; intensifying competition in high-end market; fluctuations in raw material prices; food safety.