EUR 850.00 For Business Accounts Only

Morningstar | We Expect CR Beer's 1H18 Revenue to Grow at Double-Digit Pace, but Shares Remain Unattractive. See Updated Analyst Note from 30 Jul 2018

We raise our fair value estimate for no-moat China Resources Beer, or CR Beer's, to HKD 23 per share from HKD 22.50 after forecasting higher 2018 sales growth and higher gross margins, largely offset by the depreciation of the Chinese yuan against the Hong Kong dollar. The current share price looks demanding to us, trading at a 44.5 times 2018 forward price/earnings ratio and 18.3 times of EV/EBITDA.

The company's beer production grew at only 1.2% year over year to 20.64 million kiloliters in the first six months. While the official data painted a picture of weak volume demand, we believe CR Beer's first-half 2018 revenue increased faster than we had previously anticipated, driven by higher price hikes and better product mix, amid the accelerating premiumization trend in the industry. We lift our 2018 revenue growth forecast to 10.8% from 7.5% previously on the back of a 10% increase in average selling price (6%-7% from price hikes and 2%-3% from the mix) and a flattish 0.8% volume growth.

We also expect the company's gross margin to expand further from last year, given the contribution from the higher-end product increases and the pressure from raising raw material costs was limited. Accordingly, we revise up the gross margin to 35.5%, from 34.2% previously. However, we expect CR Beer to lose its market share slightly, given its most aggressive price hikes in the first half, compared with its major competitors, Tsingtao and AB InBev. We expect to see higher impairment costs in 2018 as the company plans to shut down more factories to enhance its utilization rate. In our view, CR Beer still needs three to five years to see significant improvement in its efficiency, given its current utilization rate remains low at around 55%.