Tsingtao's Q3 Result Broadly in Line, but Near-Term Profit Outlook Weakens; Lowering FVE to HKD 69

Narrow-moat Tsingtao Brewery reported third-quarter results with revenue in line but net profit slightly trailing PitchBook consensus estimates. Earnings showed a temporary recovery in demand during peak summer season, though trading down occurred and faster growth in mass-market beer weighed on growth. As a result, the company struggled to increase gross profits at a pace comparable with the top line. But Tsingtao was able to control selling expenses to achieve year-on-year improvement in net profit margin. We have left our 2022 net profit estimates broadly unchanged, but potential on-trade disruptions weaken our 2023 outlook. We see lockdowns as a key overhang for the company over the next few quarters, as volume growth and price/mix of the Tsingtao brand lineup could be adversely affected. Assuming a softer profit outlook, we have lowered our fair value estimate to HKD 69 per share from HKD 72. Our fair value estimate implies 12 times 2023 enterprise value/EBITDA, slightly below the company’s 10-year historical average of 14 times, and 25 times 2023 forward price/earnings. We think higher visibility on the growth outlook for the core Tsingtao brand would be a key catalyst for the share price.