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I continue to award a Hold investment rating to China Resources Beer (Holdings) Company Limited (OTCPK:CRHKY) (OTCPK:CRHKF) [291:HK]. The company is finding it tough to execute on its premiumization growth strategy in a weak Chinese economy. On the flip side, China Resources Beer increased its interim dividend for 1H 2024, and there are positive expectations that its dividend ratio will rise going forward.
I previously wrote about China Resources Beer’s 1H 2020 results and its 2H 2020 outlook in my October 6, 2020 write-up.
Readers should be aware that China Resources Beer’s shares can be bought or sold on the Hong Kong equity market and the Over-The-Counter market. China Resources Beer’s Hong Kong-listed shares are very liquid with a three-month average daily trading value of roughly $35 million according to S&P Capital IQ data. On the other hand, the trading liquidity of the company’s OTC shares is low. Investors have the choice of investing in China Resources Beer’s liquid Hong Kong shares with US brokers like Interactive Brokers.
Premiumization Growth Strategy Is Not Working Well
It becomes more difficult for China Resources Beer to execute on its premiumization growth strategy when China’s economy is struggling.
In my prior October 6, 2020 article, I noted that “the beer market in China is relatively mature” and stressed that “premiumization is the most important growth driver for Chinese beer companies, including China Resources Beer.”
As a Hong Kong-listed company, China Resources Beer discloses financial and operating metrics on a semi-annual basis. There are indicators suggesting that the company’s premiumization strategy isn’t working that well in 2024 thus far.
One metric to note is Average Selling Price or ASP changes. The company’s overall ASP increased modestly by +2.0% YoY in 1H 2024 as disclosed in its 2024 interim results presentation slides. In contrast, China Resources Beer managed to achieve a relatively more impressive +4.0% ASP growth last year, according to the company’s FY 2023 earnings presentation slides.
Another metric worthy of attention is China Resources Beer’s sales volume for its sub-premium and above beer segment, which refers to its beer products serving the “high-end market.” The company saw the sub-premium and above beer segment’s sales volume expansion moderate meaningfully from +18.9% in full-year FY 2023 to a “single-digit” percentage (exact number wasn’t revealed) for 1H 2024.
According to Singapore research firm UOB Kay Hian’s August 20, 2024 report (not publicly available) titled “Trim Sales Volume And Profit Targets”, CRHKY changed its “2024 earnings guidance” from a “double-digit growth previously” to “positive growth” without offering specific numbers. The company’s current consensus FY 2024 normalized EPS growth forecast is an unexciting +4.7% based on S&P Capital IQ, which is way lower than China Resources Beer’s prior “double-digit” percentage bottom line expansion guidance.
China Resources Beer is currently trading at a consensus next twelve months’ normalized P/E of 11 times, according to S&P Capital IQ data. Assuming a fair valuation for the stock is 1 times PEG (Price-to-Earnings Growth), a 11 times P/E implies that the market is expecting CRHKY to grow its future earnings by around +11%. As such, China Resources Beer will likely disappoint the market if it does expand its FY 2024 bottom line by a mere single-digit percentage as per the current consensus forecasts.
As per a September 13, 2024 South China Morning Post news report, China’s president had “subtly toned down China’s focus on achieving its annual economic growth goals” based on the economists’ interpretation of his recent comments. Earlier, China’s Q2 2024 GDP growth rate missed the consensus projection by -0.4 percentage points. It is understandable that Chinese consumers in general will be less willing to pay up for high-end beer products, when the country’s economy isn’t growing as fast as expected.
As China Resources Beer’s ASP growth slows and the key sub-premium and above beer segment expands at a more modest pace, it is inevitable that the company’s near-term financial performance will take a hit.
Higher Dividend Payout And Maiden Buybacks Are Potential Catalysts
There could be potential re-rating catalysts for China Resources Beer in the area of shareholder capital return.
China Resources Beer raised the company’s interim dividend per share by a substantial +30% from RMB 0.287 in the first half of 2023 to RMB 0.373 for 1H 2024. This also implies that the company’s dividend payout ratio was increased significantly by +6 percentage points from 20% in 1H 2023 to 26% in the most recent interim period.
The company has shown a willingness to return more excess capital to its shareholders, as evidenced by its 1H 2024 dividend hike. But China Resources Beer could certainly do even more, which means that positive surprises could emerge from its future shareholder capital return moves.
UBS recently published a report (not publicly available) on September 10, 2024 titled “NDR Takeaways: Potential Dividend Payout Increase From 2025” detailing takeaways from the Non Deal Roadshow or NDR it hosted for China Resources Beer’s investors. As the title of this report suggests, China Resources Beer’s management has mentioned at the recent early-September investor meeting the possibility of raising the company’s full-year payout ratio next year.
The full-year FY 2023 dividend payout ratio (excluding special dividends) for China Resources Beer was 40%, and that was unchanged from FY 2022. But if special dividends of RMB 0.30 per share for the prior fiscal year were included, the company’s adjusted FY 2023 dividend payout ratio would have been way better at 59%. This gives an indication of the potential dividend payout ratio improvement that China Resources Beer might deliver for full-year FY 2024 or FY 2025.
Earlier, Chinese financial news portal AAStocks published an article on August 19, 2024 citing China Resources Beer’s 1H 2024 earnings call comments with regard to “exploring various feasible ways to reward its shareholders” which include “share buybacks.”
Notably, China Resources Beer has never done any share repurchases since its public listing on the Stock Exchange of Hong Kong in 1973. If the company does carry out its maiden share buybacks in the near future, this will send a loud and clear message about the attractiveness of the stock’s current valuations. As per S&P Capital IQ data, China Resources Beer is now valued by the market at 11 times consensus next twelve months’ normalized P/E or a third of the stock’s historical five-year mean P/E multiple of 33 times
China Resources Beer currently offers a trailing dividend yield (excluding special dividends) of 5%. If the company does increase its dividend payout and announce an ambitious share buyback plan, this could possibly boost the stock’s shareholder yield to a high-single digit percentage yield or even better. These could be the potential catalysts needed to bring about a positive re-rating of China Resources Beer’s valuations.
Bottom Line
China Resources Beer’s current P/E represents a significant discount to its historical average, as the market has factored in the headwinds associated with its premiumization growth strategy for 2024. There are also potential catalysts pertaining to an improvement in shareholder capital return. A Hold rating for the stock is fair in my opinion.
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.
