Bud APAC reported 6.2% YoY decrease in normalised EBITDA on 7.8% YoY decrease in revenue in 2Q24 in local currency terms. This is below our expectation mainly due to even weaker performance in China as a result of macro headwinds, soft industry cycle and adverse weather. We expect such situation to improve from 3Q24. Meanwhile, South Korea and India segments have shown good momentum of development. We are still optimistic about profitability improvement trajectory. Reiterate BUY rating post selloff.
　　Key Factors for Rating
　　1H24 revenue and net profit missed. In 1H24, Bud APAC’s reported revenue and shareholders’ profit fell 7.3% and 5.9% YoY to US$3,399m and US$541m, respectively. During 2Q24, in local $ terms, total beer sales value fell 7.8% YoY, as a result of YoY decrease of 7.3% and 0.5% in volume and ASP, respectively; normalised EBITDA fell 6.2% YoY, with YoY change of +69.6% and -16.3% in APAC East and APAC West, respectively. In 1H24, GPM rose 0.6 ppt YoY to 51.5% as 1.5% YoY ASP decline was absorbed by 2.7% YoY cost per hl saving. Looking ahead to 2H24, management expects to continue to see cost tailwinds, and at the same time, S&D expenses ratio is likely to remain stable.
　　China segment was dragged by macroeconomic headwinds, soft industry cycle and adverse weather (esp. in Fujian and Guangdong) in 2Q24. Premiumisation trend slowed down. In China, in terms of RMB, Bud’s revenue and normalised EBITDA saw YoY decrease of 15.2% and 17.2%, respectively, in 2Q24, missing expectations. Looking ahead into 2H24, management reaffirms a commitment to drive recovery in China, primarily looking for a well-rounded product strategy ranging from P&SP to Core+, Core and Value brands, simultaneously with tailor- made A&P activities (e.g. Harbin’s partnership with NBA for the Playoffs in June, ongoing summer campaign for Budweiser, etc.). In 2Q24, the cooperation with Swire Coca-Cola Beverages led to synergy in distribution channels and therefore stronger market presence in Anhui and Hubei. We think that such practice could be replicated across other regions in the future. Given a change of consumption pattern, in-home channels will continue to expand and likely to play as a more vital role in beer premiumisation. On the digitalisation front, the Company’s BEES has covered up to 300 cities, which will further boost commercialisation as well as operating efficiency.
　　South Korea segment saw robust market share consolidation in on-premise and in-home channels for key brands (Cass, HANMAC and Stella Artois) in 2Q24; mid-teen% YoY increase in ASP was attributed to continuous mix upgrade and sales management initiatives post price hike. In 1H24, revenue from APAC East accelerated to 13.5% YoY. Going forward, we stay optimistic about Bud’s sales momentum and further margin expansion in 3Q24. India segment continued to achieve double-digit% YoY growth in P&SP sales in 2Q24, outperforming the industry. Given still low per capita consumption level, we think Bud may replicate success from other emerging markets, in particular by leveraging its dominance in P&SP classes.
　　Key Risks for Rating
　　Risks: 1) weaker-than-expected demand recovery, esp. in premium channels in China (e.g. restaurants, nightlife venues); 2) intensified market competition; 3) input cost inflation; and 4) forex rate fluctuations.
　　Valuation
　　We have revised down our shareholders’ profit and normalised EBITDA forecasts by 4%/6%/6% and 2%/4%/5% in 2024/25/26E, on 4% cut in revenue forecasts for each year and fine-tuning of GPM and operating expenses ratio. Our new TP is HK$11.70, based on an unchanged 20.0x 2024E P/E, with a BUY rating.