Financial Report 2024 | Sales of high-end liquor increased by 60%, CHINA RES BEER claims no impact from consumption downgrade

The leader in the beer industry does not seem to believe that the industry's high-end process is affected by consumption downgrading.

On March 18, CHINA RES BEER (0291.HK) released its 2023 financial report, with annual revenue of 38.932 billion yuan, a year-on-year increase of 10.4%; achieving a net profit of 5.153 billion yuan, a year-on-year increase of 18.62%.

Thanks to the 19% year-on-year growth in sales of mid-range products (priced at 5 yuan and above), with the sales of the high-end brand Heineken increasing significantly by 60%, CHINA RES BEER's beer business gross profit margin increased by 1.7 percentage points to 40.2% year-on-year, and the overall gross profit margin increased by 2.9 percentage points to 41.36%, reaching a historical high.

During the performance briefing, the management of CHINA RES BEER stated that by reducing the packaging size to increase the selling price, they were able to improve the gross profit margin without raising prices overall. They expect Heineken's gross profit margin to reach 40% in 2024.

In fact, since the third quarter of last year, the beer consumption market has been facing overall sluggish demand.

Tsingtao Brewery (600600.SH) experienced negative revenue growth in the third quarter of last year, with a sharp drop in quarterly net profit growth to 4.11%, a decrease of 14.36 percentage points year-on-year; while CBC (600132.SH) saw its high-end products (priced at 10 yuan and above) record the lowest growth rate in three years in the first half of 2023, at only 1.74%, and even a 1% year-on-year decrease in revenue in the third quarter.

Analyst Zhang Yuguang from Kaiyuan Securities believes that the growth of CBC's high-end products in the third quarter was hindered by factors such as insufficient consumer purchasing power and weak demand in the catering industry.

Lin Wenjia, an analyst at Pu Yin International, pointed out that beer production in November and December 2023 continued to decline by double digits compared to the same period in 2019 for three consecutive months. He is concerned that the original trend of consumption upgrading in the beer industry will further evolve into consumption stratification, where only a small number of high-end consumers continue to pursue higher-end and higher-quality beer products, while the majority of mass consumers pay more attention to the cost-effectiveness of beer products.

However, CHINA RES BEER's financial report shows a different trend from the two mentioned above - high-end products are selling better than mid-to-low-end products.

According to Lu Haojiang, an analyst at CICC, in the second half of 2023, sales of CHINA RES BEER's mid-range and above products increased by 10% year-on-year, while sales of mid-to-low-end products accelerated their decline, dropping by 8% year-on-year.

During the performance briefing, CHINA RES BEER's Chairman of the Board, Hou Xiaohai, stated: "Although the economic situation in 2023 is not optimistic, we have not observed a significant impact on the beer market. Even after the end of the epidemic, there are concerns about a trend of consumption downgrading in the market, but this is not significantly reflected in the beer industry. While consumer groups are affected by changes in scenarios, few people are shifting from high-end beer to lower-end products." "We believe that for inexpensive beer, this kind of consumption downgrade is not significant."

Lü Haojiang stated that the management of CHINA RES BEER expects that by 2024, sales of mid-to-high-end products will still grow by 15%-20% year-on-year.

Regarding the current promotions of high-end beer, Hou Xiaohai explicitly stated that CHINA RES BEER has no intention of lowering prices, engaging in promotional battles, or price wars. Maintaining the continuous growth of tonnage prices is a more certain trend.

In terms of CHINA RES BEER's liquor business, since 2023, the formal inclusion of the acquired Jinsha Liquor Industry has attracted significant attention from the public.

In 2023, Jinsha Liquor Industry contributed revenue of 2.067 billion yuan to CHINA RES BEER and a pre-tax profit of 130 million yuan. Excluding the impact of the amortization of intangible assets due to the acquisition of Jinsha Liquor Industry, Jinsha Liquor Industry achieved a pre-tax profit of 797 million yuan.

At the performance briefing, Wei Qiang, Vice President of CHINA RES BEER, Executive Director and General Manager of China Resources Liquor Holdings Co., Ltd., and also Chairman of Jinsha Liquor Industry, stated that during the sales peak season in the first two months of 2024, Jinsha Liquor Industry grew by 50% year-on-year, the mid-to-high-end product "Summary Treasure" grew by 16% year-on-year, and the uncorking rate increased by 10 percentage points to 24%.

Summary Treasure is a new product launched by Jinsha Liquor Industry for government and enterprise group customers in 2023, priced at 498 yuan per bottle.

Regarding the pricing, industry insiders told TradeWind01 that this pricing is to meet the 500 yuan procurement red line for state-owned enterprise purchases.

Regarding the sales performance of Summary Treasure, a private equity investor in the East China region told TradeWind01 that a 24% uncorking rate is considered relatively high.

As a comparison, the uncorking rate of Luzhou Laojiao's high-end flagship product Guojiao 1573 was above 25% last year.

Wei Qiang mentioned that CHINA RES BEER will increase its investment in Jinsha Liquor Industry and expand production capacity. Since the brewing cycle of the sauce-flavored liquor produced by Jinsha Liquor Industry is five years, sufficient storage is a prerequisite for increasing production capacity.

TradeWind01 learned from sources close to CHINA RES BEER that CHINA RES BEER plans to invest 1.8 billion yuan in capital expenditures over the next 2-3 years to expand Jinsha Liquor Industry's storage capacity to 60,000 tons to support achieving annual sales of 8-10 billion yuan.

CHINA RES BEER's 2023 financial report shows that Jinsha Liquor Industry currently has a production capacity of only 15,000 tons, which is significantly lower than the 300,000 tons of production capacity corresponding to the 60,000 tons of storage capacity.

It is worth noting that after the acquisition of Jinsha Liquor Industry, CHINA RES BEER's cash reserves are not as ample as before As of the end of 2023, CHINA RES BEER had cash and cash equivalents of 5.52 billion yuan, a year-on-year decrease of 57.32%, with capital expenditures of 1.8 billion yuan accounting for approximately 32.6% of its cash and cash equivalents.

At the same time, the necessity of large capital expenditures for expanding liquor production by CHINA RES BEER is questionable.

On one hand, Jinsha Liquor's "Yuánqì" has not yet recovered, with last year's full-year revenue of 2.067 billion yuan still far below the 3.641 billion yuan in 2021; on the other hand, the turning point of the destocking cycle in the industry has not been seen, and the risk of counter-cyclical expansion is correspondingly greater.

In the current downturn of the mid-to-high-end liquor sector, CHINA RES BEER's aggressive expansion actions may face even more challenges