Bud APAC saw 4.5% YoY decrease in normalised EBITDA on 3.9% YoY decrease in revenue in 2Q25 in local dollar terms. In China, soft industry cycle still weighed on beer sales turnover (but YoY decrease so far has narrowed); in 2Q25, Bud China underperformed its major rivals due to strategic and operational adjustments. South Korea segment recorded HSD% YoY volume decrease owing to early shipment, while its growth trajectory in India remained strong in 2Q25. We cut our TP to HK$8.50, based on 20.0x avg. 25-26E P/E. Downgrade to HOLD.
　　Key Factors for Rating
　　Reported sales and net profit declined 7.7% and 24.4% YoY in 1H25. In 2Q25, in local currency terms, Bud APAC’s total beer sales fell 3.9% YoY (ASP: +2.4% YoY; volume: -6.2% YoY); normalised ETBIDA declined 4.5% YoY (APAC West: +1.4% YoY; APAC East: -26.5% YoY). Quarterly GPM rose 0.3ppt YoY to 51.8%, as 1.1% YoY increase in cost per hl was absorbed by 1.7% YoY increase in ASP as a whole.
　　China segment continues to struggle amid soft industry cycle. In terms of RMB, YoY decrease of Bud China’s sales and normalised ETBIDA narrowed to 6.4% and 4.0% in 2Q25, from 12.7% and 17.1% in 1Q25, respectively. Looking ahead, management reaffirms its commitment to drive recovery through Bud’s mega brands and mega platforms, with improving A&P execution. For example, Budweiser brand launched FIFA Club World Cup campaign during the summer peak season across all channels and topped social media engagement rankings. Harbin brand is poised to attract Gen Z legal drinking age consumers, focusing on “sports & hip-hop” via a comprehensive “Next-Gen of Harbin” transformation programme. Channel wise, in-home areas continue to play an essential role, and in 1H25, the sales volume and value proportions of Premium & Super Premium mix within the in-home channels exceeded the respective proportions within its Chinese restaurant channels for the first time. In our view, there is still big room for Bud China to expand retail PoS coverage and off-trade sales.
　　South Korea segment saw HSD% YoY decrease in sales volume in 2Q25 as a result of early shipment, while ASP increased LSD% YoY due to ongoing revenue management initiatives. Such operational deleveraging impacted profitability in 2Q25. Product wise, new SKUs rolled out in 2Q25 include Cass Lemon Squeeze 7.0, Cass Fresh ICE (limited summer edition), and HANMAC Extra Creamy Draft Can. For India segment, its sales and normalised EBITDA maintained robust growth momentum, fueled by DD% YoY volume (value) growth of the Premium & Super Premium mix.
　　Key Risks for Rating
　　Downside risks: 1) market share risk in a competitive environment, 2) input cost inflation, 3) weaker-than-expected sales turnover, esp. in Chinese restaurant & bar channels, and 4) unfavourable shift in drinking habits or preferences.
　　Upside risks: 1) accelerated beer premiumisation, e.g. in in-home channels, 2) successful new product development, and 3) price hikes.
　　Valuation
　　We revised down our top-line forecasts by 4-6% for 2025-27, mainly reflecting a relatively conservative tune on near-term industry outlook in China, as well as softening sales volume in South Korea from 2Q25. We modestly revised up our GPM forecasts for 2025-27, due to 1) stabilised ASP & 2) ongoing cost tailwinds. However, we still revised down our normalised EBITDA margin & NPM forecasts for 2025-27, primarily due to higher operating expenses ratio assumptions as a result of deleveraging.
　　It is fair to trade Bud APAC at a higher valuation multiplier, vs. other beer giants in China, given 1) stronger brand recognition and product line, esp. in the high- end beer market and 2) greater business scale and profitability. However, beer industry faces some uncertainties, given 1) that recent policy tightening hinders alcohol consumption in restaurants in mainland China, and this impact may last longer than expected, 2) that freshly-made beverages are growing fast in China, and would be ideal substitutes for beer, esp. among young consumers, in many on-premise scenarios. To sum up, we think that Bud APAC’s upside potential is limited. Based on 20.0x avg. 25-26E P/E (previous: 20x 25E P/E), we derive our new TP at HK$8.50. Downgrade to HOLD.