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Hands Down, Bottles Up

We see reasons for optimism in the China beer sector following a year of de-rating.  We believe the secular premiumisation trend should support a solid profit outlook, while potential upside surprises in 2022 could stem from price hikes and normalised input costs.

Leading brewers' strong pricing power supports recent price hikes. Significant input cost inflation in 2021 has propelled leading brewers to implement ex-factory price hikes. Our analysis points to beer’s strong pricing power among F&B categories in China, given high industry concentration and substantial channel/retail mark-up. We review price hikes of major brands and their potential to generate the larger EPS in 2022.

Competition has become more rational amid a shift in brewers’ priorities towards premiumisation and profitability. Leading brewers’ reported results indicated incremental gross profit from premium beer should be sufficient to cover additional S&D expenses. Unlike in the past, when brewers competed on price to gain market share, nowadays competition has become more rational amid a shift in their strategic priorities towards premiumisation and profitability. In addition, as consumer demand turns more diversified, leading brewers now rely on a comprehensive product portfolio spanning multiple price segments to capture consumer mind share, thus reducing head-to-head competition.

Our proprietary by-region analysis suggests brewers’ lead in their core markets largely strengthened in P12M. We identify the largest share gainer, and who has ceded the most share. We see concentration of share in beer-consumption-heavy regions and consider who might be best-positioned to successfully implement price hikes, and hence offering the highest visibility in realising related earnings accretion in 2022.

Our optimism is furthered by new categories expansion that could lead to 3x potential volume upside. Our cross-country comparison analysis suggests at least 3x potential volume upside for new beer categories in China. Apart from pursuing a premiumisation strategy to generate more profit, leading brewers are also turning to new categories for growth. Among those, dark/wheat beer, stout and cider/perry appear to have demonstrated the most promising growth outlook. Among leading brewers in China, we review the brewers who appear to have the widest exposure to new beer categories and the competitors who command leading positions in dark/wheat beer and cider/perry verticals.

@Ting Wang