1Q22 results in line with our forecast
　　Tsingtao Brewery announced 1Q22 results: Revenue rose 3.14% YoY to Rmb9.21bn, attributable net profit grew 10.2% YoY, and attributable net profit margin rose 0.78ppt YoY to 12.23%. The firm’s profit slightly beat expectations, thanks to effective cost control and faster-than-expected structural upgrades.
　　Trends to watch
　　1Q22 sales volume falls due to COVID-19 resurgence; GM stable due to structural upgrades and cost control. The firm announced its sales volume, revenue and profit all grew in January and February. However, sales volume fell sharply in March due to tightening containment measures amid COVID-19 resurgences in major markets such as Qingdao and Shanghai. As a result, the firm’s 1Q22 sales volume dropped 2.79%. But the firm benefited substantially from the premiumization of the beer market in northern China, and its structural upgrades proceeded rapidly, with 1Q22 ASP reaching Rmb4,325/t, up 6.1% YoY. The firm’s cost per tonne rose 6.9% in 1Q22, and 1Q22 gross margin fell slightly 0.47% YoY under cost pressure. We think the firm’s cost pressures are controllable overall, and that GM remains relatively stable. Our research shows the firm has locked in prices of major raw materials such as barley (at least until 3Q22, covering peak season). We expect GM will remain stable.
　　Continues to enhance expense control, partly offsetting cost pressure; profit margin stable. The firm has steadily improved control of expenses, and reduced its 1Q22 sales expense ratio by 1.25ppt while carrying out online and offline promotional activities to build and strengthen the brand. Meanwhile, the firm’s G&A expense ratio remained in a reasonable range, rising 0.06ppt. Overall, the firm’s effective control of expenses stabilized GM, and attributable net profit increased 0.78% YoY in 1Q22.
　　Price increases likely under pressure of costs, but may be delayed due to COVID-19 resurgence. We believe the firm may continue to raise prices due to elevated prices of raw materials on the cost side. But we think containment measures amid COVID-19 resurgence may affect many cities in 2Q22, and demand in Eastern China, one of the firm’s major markets, may be weakened. Moreover, restaurant channels in Shandong have not yet fully recovered. Therefore, we think the large-scale price increases may not be well-received in the end-market. We suggest watching the implementation of any price increases.
　　Financials and valuation
　　We maintain earnings forecasts for 2022 of Rmb3.14bn and for 2023 of Rmb3.8bn, implying a YoY growth of -0.6% and 21.0%. 2022 and 2023 net profit may grow 15.9% and 21%, excluding income from land sales in 2021. We maintain our TP for A-shares of Rmb97.30, implying 42.3x 2022e and 35.0x 2023e P/E with 17.4% upside. A-shares are trading at 36.0x 2022e and 29.8x 2023e P/E. For H-shares, we maintain our TP of HK$75, implying 28.1x 2022e and 23.2x 2023e P/E with 21.5% upside. H-shares are trading at 23.1x 2022e and 19.1x 2023e P/E. Maintain OUTPERFORM.
　　Risks
　　Tighter-than-expected COVID-19 containment; disappointment in bars and restaurants; difficulties in price increases; intensifying competition; food safety.