China: Tsingtao�s third-quarter earnings miss analysts� estimates

Narrow-moat Tsingtao Brewery�s third-quarter earnings missed analysts� estimates on revenue and net profit. Sales declined year on year but gross and net profit still grew modestly, as margins benefited from positive mix and cost control, the Morningstar reported on October 31.

The Morningstar analysts fractionally reduced their 2023 revenue and net income forecasts as a result. They also lower their fair value estimate to HKD 78 per H-share (CNY 73 per A-share) from HKD 80/CNY 74 due to currency headwinds. Tsingtao�s share price has rebounded from a selloff last week following a viral video showing product sabotage that reflects safety issues. Based on company disclosure, the Morningstar experts do not think the event should significantly affect Tsingtao�s sales, with the company expected to address safety lapses. Tsingtao�s H-shares are relatively attractive at the current price.

Major Chinese beer brewers under Morningstar analysts� coverage are trading at a notable discount versus historical multiples, likely due to soft consumer sentiment that appears likely to persist through the fourth quarter. The experts continue to prefer Tsingtao over Budweiser APAC and China Resources Beer, as they think Tsingtao can more efficiently leverage its distribution strength in core regions to drive mix growth. The company�s beer products are also priced at a more affordable price range versus international premium beer offerings.

Third-quarter sales fell 4.6% year on year (versus the analysts� estimate of 5.0% growth), cycling a high base. Weaker sales drove net income below estimates despite stronger-than-expected margins. The primary drag was the Laoshan brand, where volume fell 17.7% year on year. Although the core Tsingtao brand recorded a mid-single-digit volume decline, midrange or above volume increased by 3.3%. The Morningstar analysts believe volume growth is driven by its Pure Draft and Weissbier lineups in core regions. As a result, gross and net margins finished above the analysts� forecasts by 190 and 80 basis points. Average selling price and gross profit per ton also rose 7.5% and 15.8% year on year, respectively.

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