Continuously upgrading to be the best

Minutes of the conference call on China Resources Beer's H1 2022 Results. For the financial report interpretation, please refer to "China Resources: The Solitary Hero Who Bravely Forges ahead and Reaches for the Stars" (https://longbridgeapp.com/topics/3334889?channel=t3334889&invite-code=2IKBO5).

H1 2022 performance review: 1) revenue of CNY 21.1 billion, a 7% increase; 2) mainly through product improvement + price adjustment, to cope with the pressure of material cost, gross margin remained stable; 3) H1's EBIT reached CNY 5.16 billion, a decrease of 13% YoY, but there was no special expenses in H1 of this year, while there was a loss of CNY 295 million from plant impairment in the same period last year. After being deducted, the actual growth rate was 17% YoY; 4) post-non-GAAP net profit increased by 20%.

Q&A with Dolphin Analyst:

Q: High-end development

A: In the past few years, factors such as national economic development, consumption upgrade, and the Z generation have all pushed forward the high-end development, and the overall high-end development process has entered a fast track. There are two impacts this year:

Epidemic: High-end development was somewhat hindered in 2020, 2021, and 2022, with low night store opening rates (60-70%). Many cities have restrictions on restaurant dining and the number of diners. In March-April this year, the degree of inhibition of high-end development was the highest, and the growth rate of high-end development from January to June was 2/3 of the normal level;
Consumption: The second obstacle of high-end development is weak consumption elasticity and weak consumption ability. The economic impact in the first half of this year was the greatest;
Under the dual pressure of H1 2022, the high-end market still has single-digit growth. As the two factors are gradually removed, the overall growth rate of high-end development will increase, and it is highly confident (China's high-end beer market will maintain a 20% growth rate in the next 5 years and achieve a doubling of scale). Fujian, Zhejiang, Shanghai, and Jiangsu are the main high-end areas, but the high-end upgrade under the closure of East China is also very rapid.
The company is upgrading at all levels, without any downgrade. Since the non-current drinking level has not yet reached the current drinking level, the non-current high-end growth rate this year is extremely fast, providing opportunities for the development of high-end beer. It seems that it has slowed down. Snow beer's "3+3+3" still overwhelmingly surpasses its competitors in advertising and sales expenses, and adopted a cautious investment strategy this year (the total amount does not exceed last year) due to the epidemic and the rise in raw materials.

Q: Expense ratio outlook

A: In the last three years, the advertising expenses in 2020-2022 will definitely decrease, and the advertising expenses in the last three years will be lower than those in the previous three years. Snow beer has a lot of room for streamlining in the industry, and only in the third year will it begin to push harder.

Q: Sales outlook for the second half of the year

A: China's epidemic prevention and control has become more scientific, and it needs to prevent the epidemic while developing the economy. The rapid solution to omicron through nucleic acid testing is very mature. Under this circumstance, the strategy of high-end development has not changed, and Budweiser and Snow Pure will be further promoted for rapid growth. This is a very important strategy. The company will increase its investment in Old Snow in the second half of the year, and precision investment in artisanal craftsmanship and facials. Q: Cost situation

A: It's not a big deal even if the cost is at its highest. We hold optimistic views on the cost reduction.

Q: Development plan of high-end liquor market

The high-end strategy of Snow Beer is nationwide, focusing on development from rural areas to cities. The overall strategy is aimed at developing uniformly and focusing on the development in markets with large capacities, branded liquors, and good consumption bases such as Fujian, Zhejiang, Guangdong, and Shanghai. We hope to achieve sales figures and scales in these markets through rapid growth and curb the growth of our competitors. The goal has been achieved in Zhejiang, Fujian, Shanghai, and Jiangsu, but not yet in Guangdong.
The second type of market is where high-end liquor is developing; it includes Sichuan, Anhui, Liaoning, and Beijing. We actively promote development in these markets by seizing the market rapidly. Development in these markets is relatively fast, such as Sichuan and Liaoning, and Snow Beer aims to be the first to gain a foothold and has confidence in its prospects.
The third type is where high-end liquor does not develop, and the market for medium to high-end liquors is relatively large. We plan to adopt a first-launch strategy to establish a basic position for the high-end liquor and brand launch.

Q: Channels and Key Accounts

A: Not much attention has been paid to key accounts. This year, there were more than 20 new key accounts, accounting for over 10% of high-end wine sales, particularly for the good development of key accounts in Fujian, Zhejiang, Jiangsu, Liaoning, Guizhou, and Shanghai. Part of Guangdong's development is also good.

Q: Market Recovery Status from July to August

1) The temperature is high in East China and the Yangtze River Delta. Sichuan, Chongqing, Hunan, and other areas have high temperatures, which will bring great motivation for beer sales growth. The company's sales growth in July and August is ideal. In August, the growth rate was in the high double digits. Sales volume will have a good positive growth in the second half of the year. It is estimated that low single-digit growth can be achieved in the second half of the year and a 2-3% growth rate for the full year is very hopeful.

2) If there is no epidemic or other major incident in the second half of the year, we should be able to achieve the three growths of sales volume, income, and profit for the whole year.

Q: How did the company achieve good results for the premiumization of East China and Tsingtao while adjusting in Southern China?

The development of the high-end market in East China is very good. Firstly, it aims to develop Tsingtao Beer to a greater extent and not let it go. Secondly, it develops Tsingtao Beer, SuperX, and Pure Draft beer as a combination, which has a faster momentum and trend. Thirdly, it fine-tunes the management of terminal sales under the layout of key customers and focuses on operating at large stores. In a digital way, it uses terminal scanning codes to achieve consumer promotion and terminal support.
The large cans and bottles of Tsingtao Beer have significant momentum, being 20% higher in price than Budweiser, having better taste and stronger brand image.
The main problem in South China is the customer development lacking focus on Tsingtao Beer. The price, promotion, and terminal management are too rough in the business promotion, and customers still use traditional sales methods, failing to transform into the mode that Snow Beer has strived to create in recent years. Before the end of last year, Snow Beer did not carry out customer reform and adjustment in South China, but since then, it has begun to adjust. If there is no transformation, it is impossible to defeat Budweiser;
South China hopes to transform before the end of this year. The customer sales method changes to the terminal as the main focus, making big stores, and making Tsingtao beer. Management of the business team must be in large stores, and Tsingtao beer must be done.

Q: What effect will the company's production and sales separation and organizational restructuring have on the financial statements?

The three-level management transmission distance of Snowflake beer is too far, the chain is too long, the transmission efficiency is low, and the cost is high. The production and sales of Snowflake beer are provincial and regional. There is still an island effect without opening the production boundary and factory. The company's transformation hopes to completely open up production and sales, and then make sales more precise and lean.
Hope to use sharing to solve financial, human resources, and sales business management after transformation, improve organizational agility, and realize digital means;
After Snowflake hopes to break through, the organization is more convenient and can better respond to market reactions and break business boundaries. The plan is now available, the pilot areas have been used, and the two pilots have begun. They will be tested in three steps for one year. The first batch of pilots will end around 2023, and the second batch will be launched. In 24 low, most areas will become business units, achieving secondary transformation. Optimize and improve in 25 years.

Q: Sales growth of different products in the second and above market segments

Tsingtao beer has grown by more than 30% (70% for classics, 30% for Xingyin), most of which come from the growth of catering. The company promotes the development of Tsingtao beer in Fujian (mainly promoted in nightclubs, and is greatly affected by the epidemic in the first half of the year). The large cans of classic Tsingtao in Shanghai and Jiangsu have been promoted very quickly (mainly classic Tsingtao in non-current drinks);
Judging from the situation in July and August, the growth rate of Snowflake Pure Draft is very fast, basically the same as that of the second and high-end segments. Snowflake Pure Draft had a low unit growth rate in the first half of the year, and its coverage in non-current drinks is increasing;
The SuperX had a low unit number in the first half of the year, and 80% of them were current drinks, and the growth rate increased in the second half of the year;
Mars Green has grown very fast, and there is still a shortage of pure draft beer nationwide. Mars Green still has some production capacity.

Q: The company had a very different expectation for the whole year in June, what is the outlook for this year?

A: When the company is very smooth, it will have good performance, but it is difficult to predict due to the epidemic. Judging from August, double-digit growth in profit for the whole year is certain, and we hope to do better. The burden in the second half of this year has not passed, and the situation in the second half of this year is much better than that of last year. The growth of sales revenue will not have much change, and the growth of sales volume may reach 2%-3%.

Q: Development plan of non-beer products

The company has a dual-drive strategy, hoping that beer and non-beer will drive each other, and non-beer has just begun. It has practiced through small projects, and the company is also looking for targets for development;
There are many rumors in the market, nothing can be told to everyone, non-beer development speed up a little, but we still have to pursue stable business development and return on investment. Now is a good time for investment. Q: Views and strategies for the ultra-high-end market

The high-end market includes premium, sub-premium, and ultra-premium. The core of the company's strategy is to establish the first sub-premium, the second and third premium, and overall, the company hopes to achieve the goal of being the number one beer company in the high-end market, with ultra-premium and sub-premium being strong, and premium not weak;
Sub-premium brands such as Tsingtao, Malts Green, and Craftsmanship are all priced at 12 yuan or more, including Laixue and Black Lion, all above sub-premium, with a volume of more than 1.5 million tons. This segment was close to being the number one last year, and is expected to achieve that next year.

Q: Planning and progress of production-sales separation

Partial production-sales separation has been achieved, and there are management methods for production-sales separation already, but some regions still need to improve, resulting in only 50% of the national production-sales separation being achieved. Next is to achieve 100%.
Production and operation are unified and managed nationwide, with logistics undergoing transformation.

Q: Capacity planning and next steps in Shandong

Shandong has seen double-digit growth in the past five years, and the process of high-end development has accelerated since last year. The development of products such as Snow Beer, Super X, Craftsmanship and Tsingtao has been particularly good, with Laixue also doing well. All high-end products are very good.
Shandong is short of beer every year, with a bigger shortage this year. We hope to achieve capacity planning as soon as possible and then see how to develop going forward.

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