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CSCI-Food & Beverages-China Resources Beer (291 HK)：Product upgrades to boost prices - 20171220

Product upgrades to boost prices

• Our channel checks shows that CR Beer’s rebranding of its mid to high end beer with the launch of “Concept Series” (槪念系列) since the “Double-11 day” in Nov this year, suggests rooms for an indirect retail price hike of >30% compared to August this year (see Figure 1).
• We also observed price hikes by other local beer brands on their mid-high end series. On the contrary, foreign beer brands, except Japan’s brands have experienced a reduction in prices. 
• CR Beer is undergoing more aggressive production rationalization with greater number of plant closures in FY17E, which will increase its impairment charges but positive for ROIC improvement in the long-run. Hence, we adjusted our EPS estimates by -18.2%/+12.6%/+26.8% due to changes in our margin assumptions (see Figure 7). We revised up our PT to HKD30.0 (prev. HKD24.3), based on 16.5x EV/EBITDA (prev. 15.0x) after rolling over to FY18E.

Rebranding and product upgrades, which aims to increase its appeal to the younger generation. CR Beer has been adopting the previous Chinese logo since 2007. The rebranded logo incorporates modernity with aesthetic elements (see Figure 3 and 4), together with the launch of the “Concept Series” in Nov for its mid to high-end beer categories including “Brave the World (勇闖天涯)”, “Draft Beer(純生)” and “Opera Mask(臉譜)” series. The Brave the World and Draft Beer series are selling at c.33-37% premium to their respective standard version, while prices for the Opera Mask series are the same (see Figure 1).

Prices hikes by other local beer brands. According to our channel checks, local brands Harbin Brewery and Tsingtao Brewery have raised price for their mid to high-end series. We believe this was partly due to rising raw material costs and premiumisation trend. However, competition for the low-end market remains as Laoshan saw c.13% price reduction. For foreign brands, Asahi raised prices aggressively whereas almost all other foreign brands saw price cut.

Production rationalization. CR Beer closed 2 plants in FY16 with only 0.2mn kl annual production capacity. The closure resulted in an impairment charge of RMB464mn, around one-third came from direct plant closures and the remaining from the elimination of outdated machines. In FY17, CR Beer undertook a more aggressive production rationalization, with an estimated of 3-5 plant closures. Hence, we expect impairment charges to rise to c.RMB708mn level. Nevertheless, we believe this is positive for ROIC improvement in the long-run.

Valuation. We adjusted our EPS estimates by -18.2%/+12.6%/+26.8% mainly due to changes in our margin assumptions (see Figure 7). We revised up our PT to HKD30.0 (prev. HKD24.3), based on 16.5x EV/EBITDA (prev. 15.0x) after rolling over to FY18E.