CHINA RESOURCES BEVERAGE(2460.HK):A KEY LEADER IN CHINA'S RTD BEVERAGE INDUSTRY;INITIATE WITH BUY

Amid a competitive environment, we expect CR Beverage to fortify its market share driven by distribution network penetration and non-water beverage product development, in pace with its capacity expansion plan. Assuming no further escalation of packaged drinking water price war in China, we forecast a CAGR of 10% and 23%, in terms of revenue and net profit from 2023 to 2026, respectively. We think that pessimism so far has mostly been priced in.

Key Factors for Rating

The Company has taken a growth trajectory similar to that of prominent global RTD soft beverage players, expanding from a core product category with market leading position to other categories. Its core competitive advantages include: 1) solid brand recognition; 2) diversified product line with 13 brands and 59 SKUs in total; 3) extensive sales & distribution network; 4) improving nationwide capacity layout; and 5) management leadership and supports from shareholders.

In 2023, CR Beverage ranked the fifth in the overall RTD soft beverage market, the second in the packaged drinking water market and the first in the purified drinking water market in China. However, intensified market competition could continue to lead to the fragility of the pricing system since Nongfu Spring entered the purified drinking water segment with predatory pricing strategy from April 2024. In the longer term, market share is likely to concentrate towards top-tier players (incl. CR Beverage, Nongfu Spring), esp. on channel dominance.

Key Risks for Rating

1) Shifting competitive landscape; 2) slower-than-expected non-water beverage sales growth; 3) rise in raw and packaging material prices; and 4) weaker-than- expected household income or consumer confidence.

Valuation

We forecast CR Beverage's revenue to be RMB14.45bn and RMB16.10bn, up 6.9% and 11.4% YoY in 2024-25, respectively. GPM expansion is mainly driven by 1) optimised capacity layout & production steps and 2) cost tailwinds, partially offset by softened ASP. There is also room for lowering S&D expenses ratio in 2025 and beyond. We forecast its net profit to be RMB1.67bn, RMB2.13bn and RMB2.50bn, up 25%, 28% and 18% YoY, in 2024-26, respectively.

After performing both absolute valuation & relative valuation approach, we derive our TP at HK$18.22 based on 19.0x 25E P/E, which is 1) at a 7% premium over the Peers Group's average 25E P/E, 2) at a 19% discount to Nongfu Spring's 25E P/E, and 3) at a 3% discount to the mid-point value from our DCF simulation.

In our view, CR Beverage's business resilience, as well as its long-term growth potential, has been underestimated. Initiate with BUY.