Attack of Tsingtao Beer: Price Hike is the Only Way

Qingdao Beer (600600.SH) released its interim report for 2022 after the trading hours on August 25th Beijing time. The core points of the financial report are as follows:

1. Revenue performance better than expected: Dolphin Analyst had thought that due to the impact of the high base last year and the epidemic in the first half of this year, Qingdao Beer's performance would decline. However, the actual report card is quite good and exceeded expectations. The revenue reached RMB 19.273 billion, a year-on-year increase of 5.37%. The main reasons are: 1) the lack of consumption scenarios caused by the epidemic, but home consumption has made up for it, and the majority of mid-to-high-end products in online and community group buying channels has promoted the sales of mid-to-high-end products to a large extent; 2) the dividend from the price increase in the second half of 21 was concentrated in the first half of this year, achieving an increase in operating income per thousand liters of beer; 3) severely affected by the epidemic in March and April, but sales quickly recovered since May.

2. Net profit attributable to the parent company exceeded expectations: Qingdao Beer's sales expenses decreased by 1.36% year-on-year, and management expenses decreased by 0.74% year-on-year. Finally, the net profit attributable to the parent company benefited from cost control and reached RMB 2.852 billion, an increase of 18.07% year-on-year.

3. The year-on-year sales volume decreased by only 1.03% in the first half of the year, better than expected: The sales situation in January and February this year was normal and in line with expectations, but since March, the epidemic has fluctuated in Shandong, Beijing, Shanghai, Guangdong and Shenzhen and other regions, affecting sales. Especially in April, Qingdao Beer's core areas, Shandong, Shanghai, and Northeast China, were severely affected by the epidemic, resulting in a significant decline in sales. However, since May, sales have recovered rapidly. The sales volume in the first half of the year achieved 4.72 million kiloliters, a year-on-year decrease of only 1.03%. The main reason is that the sales volume of mid-to-high-end and above products was 1.66 million kiloliters, an increase of 6.6% year-on-year, which to a certain extent made up for the decrease in sales volume of low-end products.

4. The operating income per thousand liters of beer continues to rise: Under the epidemic, basically everyone bought goods online or in community group buying channels, and mid-to-high-end products account for the majority of these channels. Therefore, the epidemic is actually good for mid-to-high-end products. On the other hand, Qingdao Beer upgraded the Qingdao Pure Draft in the first half of the year, raised the price of Qingdao Classic and Laoshan Classic, and also launched new products, Laoshan Bafu. Therefore, the operating income per thousand liters of beer reached RMB 4083.19, a year-on-year increase of 6.46%.

Dolphin Analyst's overall opinion:

Under the epidemic in the first half of the year, especially when Qingdao, the headquarters of Qingdao Beer, was hit hard by the epidemic, the sales volume of beer did not show a significant decline. Relying on the sales of mid-to-high-end products and the shrinking of expenses, Qingdao Beer has forcefully withstood the impact of the epidemic. This is very impressive compared to many consumer stocks, not only digesting the pressure of raw material price increases, but also achieving good cost control, and realizing rapid growth in net profit attributable to the parent company. Looking ahead to the second half of the year, with the heatwave and the upcoming World Cup, sales are expected to see good growth, and there are plans to raise prices for mid-to-high-end products in the second half of the year, which could lead to better-than-expected revenue. On the cost side, packaging prices are expected to continue to decline, and sales expenses are not expected to be too high in this economic environment, so profits are also expected to perform well.

A) Strong sales performance since June: Since June, terminal sales have been significantly better than in previous periods, and Tsingtao beer sales in July achieved a year-on-year increase of about 15%, bringing about 100,000 tons of incremental sales. In fact, July sales already surpassed the same period in 2019. The main reasons are: 1) hot weather; 2) stockpiling for Mid-Autumn Festival; 3) the low base in July 2021; 4) improvement in the pandemic situation, driving the recovery of catering, so overall, from January to July, there has been positive growth compared to last year.

B) Plans to raise prices for mid-to-high-end products in the second half of the year: In the second half of the year, there are plans to raise prices for mid-to-high-end products such as "Aogute" and "Yipin Chunsheng", so there is high certainty for revenue in the second half of the year, with the possibility of better-than-expected performance.

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Quick review of Tsingtao's high-end strategy before the main text:

Tsingtao Beer was one of the earliest domestic beer brands to go high-end, and compared to Huaren Beer, Chongqing Beer, and Budweiser, it achieved high-end branding by leveraging international well-known brands. Tsingtao Beer's high-end strategy mainly relies on the Tsingtao main brand. However, most people think that using one brand to cover everything from the mass market to the high-end, even the ultra-high-end, will weaken the image and brand power of Tsingtao's main brand, which could hinder high-end branding and pricing. Specific examples may include Tsingtao Beer not being able to meet the demand in consumption scenarios such as nightclubs and high-end clubs.

However, Dolphin believes that under Tsingtao's main brand, successful high-end branding can be achieved through operational product lines. Different products can be promoted for different channels and scenarios, for example, pure draft beer for catering, white beer for nightclubs and Qingdao classic for circulation, giving more importance to how a particular product is presented in the terminal, instead of emphasizing brand presentation like Huaren. For example, Tsingtao beer's presentation in catering and nightclubs should be different, unlike Budweiser, which has no significant difference in presentation between catering and nightclubs. This strategy will enable Tsingtao beer to more easily achieve high-end branding.

The beer industry has now moved into a stage where capacity is difficult to increase and prices must be raised. This is the era of branding and price competition, instead of capacity competition. Therefore, raising the average price will push core profits, and Dolphin will focus on the high-end strategy to break down Tsingtao beer's 2022 mid-term report.

The following is the main text: I. High-end product sales rapidly increase, making up for the shortfall in low-end product sales

The outbreak in the first half of the year had a significant impact on the current drinking channels, with the loss of in-store consumption. However, it did not hinder the process of high-endization, mainly because e-commerce and community group buying channels focused on medium to high-end products during the epidemic. Moreover, people's sensitivity to price reduction reduced during the home stay period. Therefore, the sales of medium and high-end beer did not show a decline but increased instead (comparing high-end and above product growth rates 41.40%). Among them, the sales growth rate of wheat beer was the fastest, and Tsingtao pure draft maintained relatively rapid growth, offsetting the sales of some low-end products.

A) Damaged sales in March: Sales maintained year-on-year positive growth in January and February, but in March, they were affected by the outbreak in Shandong, Shanghai, Beijing, and Northeast China, with sales decreasing by over 15% year on year. Overall, the sales volume of Tsingtao's main brand in the first three months was 1.304 million tons, a year-on-year increase of 5.1%. However, the sales volume of Laoshan brand was approximately 830,000 tons, a year-on-year decrease of 12.6%.

B) April was the worst, but sales recovered quickly in May: In the first half of the year, sales continued to decline by over 15% year on year in April due to the impact of the epidemic, but in May, as the epidemic gradually improved, Tsingtao beer's sales rebounded rapidly, achieving high single-digit growth. The main reasons were: 1) More than 50% of Tsingtao beer's production came from Shandong, and production logistics in March and April were more severely impacted by the epidemic, resulting in a large demand for inventory replenishment after the lift of restrictions in May; 2) The epidemic situation in the north improved better than that in the East China region, which is the main base of Tsingtao beer.

Here, the Dolphin Analyst would like to elaborate briefly on the reasons for the success of wheat beer:

Wheat beer is a successful product in recent years for Tsingtao Beer, which stands out among many wheat beer brands with fast sales growth. It has the potential to become a big single item in Tsingtao Beer's high-end product line. Therefore, the Dolphin Analyst would like to briefly elaborate on the reasons for the success of wheat beer: 1) Benefiting from the production process, Tsingtao's wheat beer flavor is better, with a refreshing floral and fruity aroma, easy to be favored by women's tastes, and conforms to the trend of women's alcohol consumption; 2) Conducting staggered competition, 1664 and Fujia's wheat beer positioning is at the super high-end, while Tsingtao wheat beer is positioned as high-end; 3) Enhancing operations, in 2021, Tsingtao Beer began to focus on operating wheat beer, providing sufficient resources and setting specific sales growth targets for wheat beer in various regions.

II. Revenue per 1000 liters of beer continues to increase, reaching 4083.19 yuan

In the second half of 2021, Tsingtao Beer had raised prices for its primary products such as pure draft and classic by approximately 5%-10%, and the effect of the price increase was reflected this year. In the first half of this year, the company also raised the prices of pure draft and wheat beer to ensure an increase in revenue per 1000 liters of beer.

In addition, Qingdao beer has plans to increase the prices of its mid-to-high-end products in the second half of the year. It is expected that the upgrade will be achieved with the help of the World Cup, which will take place after mid-autumn festival.

3. Relief of the suppression of gross profit margin caused by material costs

Qingdao beer has continued to upgrade to a high-end-product brand, with price increases often exceeding 5%. However, it has not had a very optimistic effect on its gross profit margin, as it has been eaten up by costs. Since the beginning of the year, barley, glass, and aluminum prices have maintained an upward trend. However, Qingdao beer completed its lock-in pricing for barley in the first quarter of the year and aluminum, glass, and corrugated paper began to drop in March. Finally, under the influence of sustained upgrades to its products, the gross profit margin increased by 0.21%, reaching 38.10%. Here, it can also be seen that the suppression of gross profit by material costs has shown some relief.

4. Good cost control leads to a rise in profits

In terms of operating expenses, the sales and management expenses of Qingdao Beer account for the largest share, while research and development and financial expenses have a smaller share and do not change much in absolute terms. In the first half of the year, cost control mainly refers to the contraction of sales and management costs, among which the sales expenses decreased by 1.36% YoY, accounting for 11.03%. This was mainly due to the cancellation of many large outdoor events caused by the epidemic and reduced advertising expenditure in such an economic environment. Furthermore, management expenses decreased by 0.74% YoY, accounting for 3.66%.

5. Higher revenue certainty in the second half of the year leads to higher profitability

In Q3 of 2021, due to the impact of the epidemic and weather, sales volume decreased by 9%, so the sales growth pressure of 2022Q3 is low. Moreover, this summer was extremely hot, with many regions experiencing record-high temperatures, which was favorable for beer sales. In addition to the long vacation during the National Day holiday in October, there is also the World Cup competition in Q4, which is very beneficial for beer sales. In light of Qingdao beer's plans to increase the prices of its mid-to-high-end products in the second half of the year, it is expected that revenue certainty will be higher in the second half of the year.

At the beginning of this year, Qingdao beer locked-in barley prices in response to their rising prices. Therefore, the uncertainty on the cost side mainly came from packaging materials such as aluminum, glass bottles, and corrugated paper. Packaging prices have been steadily decreasing since March, and the factors that have suppressed gross profit margin in the first half of the year are gradually being resolved, which is favorable for the release of profits.

There may be greater uncertainty from sales expenses and plant closures on profits. After all, there is the World Cup in the second half of this year. In the past, a lot of advertising was definitely needed for promotion. However, the situation is special this year. On the one hand, it is because of the epidemic, and on the other hand, the economy is really not good. Will advertising be tightened a bit? This needs to be tracked and monitored later.

In addition, the impairment losses of assets and personnel resettlement costs caused by factory closures will also erode profits. Therefore, it is necessary to see whether Tsingtao Beer will open a crazy plant closure mode. At present, it is still at a controllable and stable pace. Closing two small factories every year will not have a major impact on profits overall (2018: Yangpu and Wuhu factories were closed. In 2019, Taizhou and Chongqing factories were closed, and in 2021, Tengzhou and Xuecheng factories were closed).

Dolphin Analyst's historical articles on "Tsingtao Beer":

Earnings Season:

April 28, 2022 "Tsingtao Beer: Prices continue to rise and cost pressures ease"

March 28, 2022 "Tsingtao Beer: Slowing sales growth does not change high-end breakthrough strategy"

October 28, 2021 "Tsingtao Beer: Slow sales growth has become a trend, and high-end breakthrough still needs to be worked on"

In-Depth Analysis:

February 10, 2022 "Tsingtao Beer (Part II): After Fosun reduced its holdings, how to view Tsingtao's current valuation?"

January 25, 2022 "Tsingtao Beer (Part I): Unlocking ultra-high-end, is the beer's "Maotai-ization" a flash in the pan or a destiny of the final outcome?" This article's risk disclosure and statement: Dolphin Research's Disclaimer and General Disclosure