Unfavourable weather conditions and thereby weaker offline traffic esp. in on-trade channels weighed on beer consumption sentiment in 2Q24 in China. Looking ahead, we expect Bud APAC’s sales volume to pick up in 2H24, given an easier comparable base and potential recovery of consumer confidence. Bud APAC’s share price dropped over 15% in the past 30 trading days, and in our view, pessimism so far has been mostly priced in. Given its dominance in premium beer market as well as solid growth outlook in 2024 and onwards, Bud APAC’s current valuation (i.e. 15.6x FY24E P/E) seems attractive. Set BUY.
　　Key Factors for Rating
　　China business outlook. We estimate that Budweiser APAC’s (“Bud APAC” or the “Company”) should experience a volume decline in 1H24 due to the high base impact from the cycling of on-premise channels reopening from 1H23, together with rainy weather conditions, esp. in Fujian and Guangdong. Looking ahead to 2H24, we are optimistic on both consumption volume and ASP growth, given the easing base comps, along with potential recovery of on-trade channels. For FY24, we forecast Bud APAC’s sales in China to see LSD%-to-MSD% YoY growth, backed by rising ASP, as well as positive volume growth during 2H24.
　　Expecting market share consolidation in China’s premium beer market.
　　Despite a high base, Bud APAC’s premium & super-premium products continued to grow, with volume weight up 2.5ppts YoY in 1Q24. By region, expansion cities maintained strong growth momentum, where Bud APAC may further accelerate channel penetration (as retail PoS coverage is still quite low) to capture in-home consumption growth opportunities. Based on our channel check, despite relatively sluggish recovery of nightlife scenarios in China, leading brands’ (e.g. Budweiser) commitment to gaining market share remains unyielding. Moreover, we believe that the cooperation with Swire Coca-Cola Beverages in Anhui and Hubei was a good try, driven by synergy in distribution channels, and such practice could be replicated across other regions likely in the future. Also, management looks for a variety of tailor-made A&P events for Budweiser 0.0, Blue Girl, Corona, Harbin (Harbin Icy), etc. during 2024.
　　1Q24 results review. Bud APAC’s reported revenue and shareholders’ profit declined 3.5% and 3.4% to US$1,643m and US$287m in 1Q24, respectively. In local currency terms, total beer sales value remained roughly flat YoY, as a result of 4.8% YoY volume decrease (due to softening consumption sentiment in China and South Korea) and 4.6% YoY ASP increase (due to ongoing premiumisation and price hikes); normalised EBITDA grew 4.2% YoY, with YoY growth of 18.7% and 2.0% in APAC East and APAC West, respectively, and in China, normalised EBITDA margin improved 145bps YoY, driven by a higher GPM, partially offset by higher operating expenses ratio. 2Q24 results preview. We estimate that the Company should experience YoY change of -MSD%, +LSD% and +MSD% in total volume, ASP and normalised EBITDA, respectively, in local $ terms, for 2Q24.
　　South Korea segment saw market share increases in on-premise and in-home channels for all brands (Cass, HANMAC, Stella Artois) in 1Q24; HSD% YoY increase of ASP was attributed to price hikes in 4Q23, as well as continuous mix upgrade.
　　We are optimistic about margin expansion in the coming quarters in South Korea, as gross profit per hl is expected to further improve, assuming that excise tax will not be set to rise again. India segment experienced DD% YoY growth in volume and value terms in 1Q24, outperforming the industry. India is now the 4th largest market globally for Budweiser. Given still significantly low per capita consumption in India, the Company aims to replicate success from other emerging markets. In India, we believe that Bud APAC will embrace a steep growth curve in the coming years (by leveraging its dominance esp. in the premium & super-premium classes) and contribute >10% of its total revenue likely by 2026.
　　Key Risks for Rating
　　Risks: 1) unfavourable weather conditions; 2) intensified competition; 3) weaker- than-expected recovery of premium channels (e.g. restaurants, nightlife venues); 4) input cost inflation; and 5) forex rate fluctuations.
　　Valuation
　　We forecast the Company’s total revenue and EBITDA to deliver a 3-year CAGR of 3.7% and 6.3% from 2023 to 2026, respectively. Our 2024-2026 EPS forecasts are US$7.82/8.62/9.40 cents. Set TP for Bud APAC at HK$12.20, based on 20.0x 2024E P/E, with a BUY rating.