The Zhitong Finance App learned that Dongwu Securities released a research report saying that the 2024Q1 beer sector's performance exceeding expectations is a positive sign. Judging from the business pace, the 2023 beer sales base was high and low, corresponding to the 2024 business pace. The trend of improvement is clear month by month. Looking ahead to this year, the strategic focus of various wine companies is mainly on improving the structure and securing profits. Benefit cost dividends are expected to continue to expand during the peak season, there is still room for price increases & fee reduction for some products in strong markets, and the corporate tendency to control spending in competitors' strong markets to improve the cost-efficiency ratio. The company's profitability is expected to continue to improve, and profit growth and fulfillment are high. Currently, high-quality targets with performance support in the sector are historically low in valuation, and there is plenty of room for improvement.

Recommended targets: Tsingtao Brewery (600600.SH,00168), Chongqing Beer (600132.SH), China Resources Beer (00291), Yanjing Beer (000729.SZ).

The main views of Dongwu Securities are as follows:

Beer sector 2023 report and 2024Q1 business summary: volume and price increase, profit margins continue to rise

1) Revenue & volume/price split: In 2023, beer represents the total revenue of listed companies of 115.885 billion yuan (yoy +7.4%), and the total revenue for 2024Q1 was 19.279 billion yuan (yoy -0.7%), mainly due to disturbances in the base for the same period last year. The consumption environment was under pressure in 2023, indicating that the structural upgrading of wine companies continued. Among them, leading green beer and dry beer continued to sell high-end products, and their tonnage prices increased 6.3% and 4.0% year-on-year respectively. Heavy beer sales growth was leading the industry, and tonnage prices were stable. Both Yanjing and Pearl River achieved low-to-medium single-digit growth in volume and price growth. Since 2024Q1, the trend of structural upgrading has continued. Low-grade products have been iterated at an accelerated pace, and the prices of green beer and heavy beer have also increased by 2.5% and 1.3%.

2) Costs & Expenses: In 2023, leading wine companies hedged upward cost pressure through product upgrades, local strong regions/product price increases, etc., and gross margins increased year-on-year. Since 2024, the gross margins of green beer and heavy beer have been 40.4% and 47.9% respectively, up 2.1 and 2.7 pcts year-on-year, with impressive performance. In 2023, the sales expense ratio of various wine companies increased year on year. Among them, China Resources Beer's sales expenses rate increased 1.6 pct to 20.1% year on year, which is at a high level in the industry. The year-on-year increase in sales expense ratios for Tsing Beer/Heavy Beer/Zhujiang/Huiquan in 2023 was less than 0.8 pct.

Sales expenses were divided due to differences in the pace of new products and marketing of wine companies in Q1 2024. We expect that in 2024, each wine company will pay more attention to the base market layout, and the sales expense ratio will remain stable. In 2023, the management expenses rate of most listed beer companies declined for 2 consecutive years, and the results of cost reduction and efficiency were remarkable.

3) Net profit & profit margin: The total net profit of listed beer companies in 2023 was 12.926 billion yuan (yoy +15.2%). Yanjing Brewery's net profit CAGR for 2021-2023 was 68.2%, benefiting from the release of U8 volume and reform dividends. The net profit of liquor companies in 2024Q1 all achieved double-digit year-on-year growth. Among them, Tsing Beer's net profit margin for the Q1 quarter reached 15.7%, an increase of 2.2 pct year-on-year, the highest in history. Chongqing Beer's net profit to mother grew 17% year on year, showing impressive performance.

2024 outlook: declining costs & structural upgrades to deliver results, effective allocation of high dividend strategies

1) The downward cost dividend is expected to be realized at an accelerated pace during the 2024 peak beer season: the performance of heavy beer and green beer exceeded expectations in 2024Q1 mainly due to the 3.3% and 1.0% year-on-year declines in the cost of a ton of wine, respectively. We believe that as sales continue to grow as the Q2 peak season approaches, prices of major raw materials such as wheat and glass have declined, and profit elasticity may continue to expand.

2) Product structure optimization is gradual, and there is still plenty of room for the medium to long term: China's beer companies' continuous product upgrades drive an upward trend in gross sales, and the tonnage price of mainstream wine companies in 2024Q1 will still increase year-on-year, and demand is quite rigid. With the continued release of major core products, we remain optimistic about the annual increase in tonnage prices for representative wine companies. In 2022, China's high-end beer sales account for 35% (43% in Japan and 79% in the US); the overall unit price of beer is 2.5 US dollars/liter (45% in Japan and 52% in the US, respectively). The average price of medium- to long-term beer still has great potential to increase. Leading brands are resilient and are expected to continue to benefit.

3) Low valuations, high dividends confirm the margin of safety and increase attractiveness: the competitive pattern in the beer industry is stable, the company's cash flow is abundant, and capital expenses are gradually reduced along with the shutdown and transfer of wineries and production capacity optimization. 2023 represents an increase in the dividend rate of wine companies. Looking forward to 2024, wine companies will place more emphasis on shareholder returns. Currently, the valuation of individual beer stocks is low. On the basis that performance continues to grow and there is still room for improvement in dividend rates, the appeal of dividend rates will increase.

Risk warning: The recovery of the ready-to-drink scene falls short of the expected risks; competition among brewers intensifies; the risk of iterative consumer demand and policy restrictions.