Strategic shift from scale to profitability

Deutsche Bank Markets Research Rating Buy Asia China Consumer Company China Resources Beer Date 2 March 2017 Coverage Change Strategic shift from scale to profitability From scalability to profitability – Initiate with BUY Reuters Bloomberg Exchange Ticker 0291.HK 291 HK HSI 0291 ADR Ticker ISIN CRHKY US16940R1095 Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E Sales (CNYm) 27,394.7 28,679.7 28,966.5 31,330.1 33,560.9 EBITDA (CNYm) 3,440.0 3,610.0 4,124.8 4,605.5 5,269.1 Reported NPAT (CNYm) 580.0 684.4 893.5 2,224.3 2,701.8 Reported EPS FD(CNY) 0.24 0.28 0.28 0.69 0.83 DB EPS FD(CNY) 0.24 0.28 0.28 0.69 0.83 OLD DB EPS FD(CNY) 0.30 – – – – DB EPS growth (%) -61.7 17.2 -2.3 149.0 21.5 DPS (net) (CNY) 0.21 10.13 0.00 0.14 0.17 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close Long-term winner in Chinese beer industry ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Price at 1 Mar 2017 (HKD) 17.70 Price target - 12mth (HKD) 21.05 52-week range (HKD) 18.20 - 14.30 HANG SENG INDEX 23,741 Charlie Chen Research Analyst (+852 ) 2203 6178 charlie.chen@db.com Price/price relative 812162024283/159/153/169/16China Resources BeerHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute 13.5 6.8 38.5 HANG SENG INDEX 1.8 3.8 22.3 Source: Deutsche Bank With the Chinese beer market set to recover in 2017, we suggest investors to buy China Resources Beer (CRB) – the most promising brewer in China with strong upside potential for margin expansion and M&A capability, in our view. The Chinese beer market is entering a new era where major players turn their attention to profitability vs. low-quality price promotion. With national scale and proven execution capability, we expect CRB to continue to gain market share and benefit from this trend, driving 2016-19 net profit CAGR of 22%. Net margin to almost double in four years We expect CRB to have substantial margin improvement in the next three years. GP margin is likely to expand half a percentage point per year, driven by product mix change. Gradual utilization optimization and efficiency improvement through capacity disposal and upgrading should further lower operating expense ratios. Strong cash flow should reduce the interest burden after the proposed acquisition of a 49% stake in Snow Beer. We expect CRB’s net margin to improve from 4.8% in 2015 to 8.9% in 2019. Together with 7.1% revenue CAGR, we estimate 22% net profit CAGR in the next three years. Potential M&A likely to be a bonus Our current model has not built in any M&A, but we believe taking a controlling shareholding in one of the top five brewers in China is of great interest to CRB. Historically, CRB has rarely overpaid and it has a track record of successful integration of Snow Beer into the distribution network post acquisition. We believe that if CRB attempts any M&A in the future, this is likely to substantially strengthen its market position and bring good returns to shareholders. Resuming coverage with Buy and target price of HKD21.05 We use a DCF model to derive a target price of HKD21.05, implying 27x FY17E PE and 15.4x FY17E EV/EBITDA, both at a premium to peers. We believe CRB’s higher earnings growth and good corporate governance justify the premium valuation. The key downside risk is an increase in raw material prices. Distributed on: 01/03/2017 23:55:06 GMT 2 March 2017 Consumer China Resources Beer Page 2 Deutsche Bank AG/Hong Kong Model updated:28 February 2017 Running the numbers Asia China Retail / Wholesale Trade China Resources Beer Reuters: 0291.HK Bloomberg: 291 HK Buy Price (1 Mar 17) HKD 17.70 Target Price HKD 21.05 52 Week range HKD 14.30 - 18.20 Market Cap (m) HKDm 57,421 USDm 7,397 Company Profile China Resources Beer owns 51% of China Resources Snow, which is China's largest beer brand/producer by volume. Price Performance 81216202428Mar 15Jun 15Sep 15Dec 15Mar 16Jun 16Sep 16Dec 16China Resources BeerHANG SENG INDEX (Rebased) Margin Trends 048121613141516E17E18EEBITDA MarginEBIT Margin Growth & Profitability 02468101214-100-80-60-40-200201314151