I continue to rate Tsingtao Brewery Company Limited’s (OTCPK:TSGTF) (OTCPK:TSGTY) [168:HK] shares as a Hold. The company’s near-term financial prospects are unfavorable, as evidenced by its Q2 2024 results miss. But Tsingtao Brewery still has a bright future for the long run, as the company is a key beneficiary of the premiumization trend in the Chinese beer market for the long run.

The spotlight is on Tsingtao Brewery’s latest 1H 2024 financial disclosures with this latest article. My earlier update published on March 21, 2024 previewed TSGTF’s results for the previous fiscal year or FY 2023.

Readers should be aware that they can deal in Tsingtao Brewery’s shares on the Over-The-Counter market and the Stock Exchange of Hong Kong. The company’s OTC shares have low trading liquidity, but the three-month mean daily trading value for its Hong Kong-listed shares was pretty high at $20 million according to S&P Capital IQ data. Tsingtao Brewery’s Hong Kong shares can be traded with US brokerage firms such as Interactive Brokers or Hong Kong brokers like Boom Securities.

Second Quarter Results Missed Expectations

Last Friday, Tsingtao Brewery published a results announcement revealing its financial performance for the second quarter and the first half of 2024.

The company’s actual Q2 2024 revenue of RMB 9,918 million came in -8% below the consensus estimate of RMB 10,792 million according to data sourced from S&P Capital IQ. Tsingtao Brewery’s top line dropped by -9% YoY in Q2 2024, which was worse than its -3% YoY and -5% YoY revenue contraction for Q4 2023 and Q1 2024, respectively.

In its results announcement, Tsingtao Brewery highlighted that the Mainland Chinese “beer market witnessed a sluggish recovery in consumption.”

TSTGF’s peer Budweiser Brewing Company APAC (OTCPK:BDWBF) (OTCPK:BDWBY) [1876:HK] mentioned at its 2024 interim results call (transcript sourced from S&P Capital IQ) that its China business’ 1H performance was negatively affected by “soft consumer confidence.” Separately, an August 16, 2024 Yicai Global news report indicated that Mainland China’s overall “beer output fell 4.5 percent in April (2024) from March and has continued falling since.”

It is no surprise that Tsingtao Brewery’s Q2 2024 sales have declined, as the beer industry in China as a whole is weak.

TSTGF’s net income attributable to shareholders rose modestly by +3% YoY to RMB 2,044 million for the most recent quarter. But the company’s Q 2024 bottom line turned out to be -12% lower than the consensus forecast of RMB 2,316 million as per S&P Capital IQ data.

Tsingtao Brewery was able to deliver positive earnings growth despite lower revenue for Q2 2024 because of lower raw material costs that boosted its gross margin. The company’s gross margin expanded by +270 basis points to 42.8% in the second quarter of this year. An earlier July 14, 2024 CNBC news article cited a report from Chinese research firm CGS International suggesting that the “average imported barley price” will trend downwards for 2024. This helps to explain why TSTGF’s gross margin improved in the latest quarter.

But the improvement in gross profitability was insufficient to offset negative operating leverage effects resulting from top-line contraction for the recent quarter. As such, Tsingtao Brewery still suffered from a significant -12% bottom-line miss in Q2 2024.

Looking forward, Tsingtao Brewery is unlikely to witness a significant turnaround in subsequent quarters or the second half of the year.

At its 1H 2024 analyst call on August 1, Budweiser Brewing Company APAC noted that “consumer confidence” in China “continues to remain soft” based on its observations “in the last number of months.” Tsingtao Brewery also guided at its Q2 results briefing Q&A session (translated using Google) on August 30 that “the domestic consumer market will remain weak in the second half of the year, posing a great challenge to beer companies.”

Based on consensus data taken from S&P Capital IQ, TSTGF’s top line is projected to increase modestly by +1% YoY in 2H 2024. This is aligned with the dim outlook for the Chinese economy. The consensus 2024 GDP growth forecast for China was lowered from 4.9% last month to 4.8% in early September or 40 basis points lower than the country’s 2023 GDP growth according to a recent September 4, 2024 Financial Times article.

To sum things up, Tsingtao Brewery disappointed the market with its Q2 2024 results and the company’s performance for the latter half of the year is expected to be subdued.

But Long-Term Premiumization Trend Is Intact

The Mainland Chinese beer market has meaningful growth potential in the medium to long term. There is significant room for the mid-to-high end or premium segment of the Chinese beer sector to grow in the future.

A February 2024 research report published by Nomura indicated that the premium segment only boasted a low-teens percentage share of China’s overall beer industry.

Also, IWSR, a research firm focused on the beverage sector, has forecasted that China’s alcoholic beverages market could possibly expand by +$41.7 billion in the 2022-2027 time frame driven by the “premiumization trend” in its September 2023 article. A key positive factor is that China’s “Gen Z legal drinking age population has the lowest proportion of abstainers (15%) amongst 15 key markets” according to IWSR’s research. This implies that the vast majority of young Chinese consumers with the willingness to spend are still keen on drinking alcoholic beverages, and this bodes well for the Mainland China beer market’s prospects.

At its second quarter earnings briefing Q&A session, Tsingtao Brewery stressed that “the company’s mid-to-high-end products continue to grow.” TSTGF also shared in the company’s Q2 2024 results announcement that it is “witnessing a continuous increase in the market share and competitiveness of mid-end and high-end products.”

There are company-specific metrics taken from its results announcement indicating that Tsingtao Brewery is still doing fine in terms of its product premiumization efforts. The company’s average selling price still increased by +1% YoY to RMB 4,283 per kiloliter in 1H 2024 despite the challenging industry environment. Also, the proportion of sales volume contributed by Tsingtao Brewery’s mid-to-high end brands as a percentage of total sales volume rose by +100 basis points to 38% for Q2 2024.

Tsingtao Brewery is “China’s second-largest brewery” according to Nikkei Asia, so TSTGF is a key proxy for the premiumization growth trend in China’s beer industry notwithstanding near-term headwinds.

Conclusion

Tsingtao Brewery’s valuations are fair and deserving of a Hold rating.

The stock trades at 11 times consensus next twelve months’ normalized P/E, which is much lower than its three-year mean forward P/E multiple of 21 times as per S&P Capital IQ. This is reflective of the near-term challenges for the Chinese beer industry and the company.

Tsingtao Brewery’s forward P/E of 11 times is pretty close to its Chinese peer China Resources Beer’s Limited (OTCPK:CRHKY) (OTCPK:CRHKF) [291:HK] 12 times forward P/E. Budweiser Brewing Company APAC is not a good valuation peer comparable for Tsingtao Brewery, as the former owns other non-China Asian beer operations.

The company’s negative short-term prospects and favorable long-term outlook justify a Neutral view for the stock.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.