We initiate coverage of China beer and white wine sectors with Outperform rating. Premiumization and production efficiency improvement are key growth drivers of beer sector. We prefer CR Beer to Tsingtao Brewery because we expect CR Beer to deliver stronger adj. EPS CAGR through the partnership with Heineken. High-end white wine segment has a favorable competitive landscape. Its limited supply has supported price appreciation. We prefer Moutai to Wuliangye because we expect Moutai to raise ex-factory price earlier than Wuliangye.
- Premiumization and production efficiency improvement are key growth drivers of beer sector. (1) Premiumization: China’s market share of the premium and super premium categories was 16.4% by volume in 2018, which was significantly lower than the US/Korea (42.1%/25%). Value of premium and super premium categories is estimated to increase by 8.5% CAGR from 2018 to 2023E. (2) Production efficiency: Plant closures, optimization of capacity and sales mix increase of canned beer and bottled beer with returnable bottles concept can enhance efficiency. (3) Industry consolidation: We expect sector leaders to lower SG&A expenses ratio suggested by US market history.
- High-end segment is preferred in white wine sector. There is oversupply in low to mid-end as consumers prefer quality to quantity. High quality white wine, which is an extremely scarce resource (<1% of total prod. vol.), has been appreciating. High-end segment has a favorable competitive landscape. Moutai is the unrivalled leader and Moutai and Wuliangye take 80-85% market share in China. Demand of high-end is more resilient than sub high-end amid economic downturn. We expect Moutai/Wuliangye could achieve 16%/16% revenue CAGR in FY19-22E through increases of both volume and ASP.
- Prefer Moutai (600519 CH, Buy) to Wuliangye (000858 CH, Buy). We think Moutai could lift ex-factory price by 24% to RMB1,199 in 1Q21E given that price spread earned by distributor is much greater than the Company and, historically, price hike usually happened in first year of FYP and 1Q. We believe the article written by Central Commission for Discipline Inspection on 22 Sep could not block price hike. We saw Moutai raised price in Jan 2018 though the Commission posted an article in Jul 2017 to alert government officials’ consumption of high-end wine. Our TP of RMB2,153.30 for Moutai represents 46.8x FY21E P/E, at 15% premium on other A-share consumer segment leaders’ average of 40.7x.
- Prefer CR Beer (291 HK, Buy) to Tsingtao Brewery (168 HK, Buy). We forecast CR Beer to deliver stronger EPS CAGR than Tsingtao Brewery (19% vs 14%) in FY19-22E. The partnership with Heineken is a combination of both companies’ strength (Heineken’s international product portfolio + CR Beer’s nationwide distribution network), which should accelerate CR Beer’s premiumization. Heineken brand recorded outstanding double-digit volume growth in 1H20 amid epidemic. We estimate Heineken China’s utilization rate was low at ~28% in 2018. The strong sales growth post partnership should notably improve GPM and profitability. Our TP of CR Beer at HK$61.90 is based on 46.0x FY21E adj. P/E, at the high-end of historical P/E band.
