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China Resources Beer:Rights issue to be EPS-dilutive

发布时间:2016-07-06    研究机构:麦格理证券

Event.

We cut our TP from HK$13.1 to HK$12.7 (implying 24% downside), based onan unchanged target EV/EBITDA of 9x, following the announcement of itsrights issue. We trim FY16-FY18E EPS forecasts by 10-16%, as we nowassume 75% equity financing for the JV buyback (vs 100% debt financingpreviously) and expect the enlarged share cap to be partially offset bypotential interest cost saving. Moreover, we see margin pressures in Q2/Q3,given: (1) stagnant sales volume due to cool rainy weather; and (2) potentialhike in marketing expenses with some major sports events (ie. UEFA Euroand Rio Olympics 2016) taking place this summer. Last but not least,valuation seems demanding to us at a PER of 29x and EV/EBITDA of 11x onFY17E, a 10% premium to the historical average. We retain Underperform.

Impact.

Rights issue to be EPS-dilutive. The company announced a 1-for-3shares rights issue at HK$11.73/sh, or c30% discount to the current shareprice (note link), to finance the CR Snow JV buyback. We had previouslyassumed 100% debt financing for the JV buyback, but now assume 75%equity financing. HK$9.5bn will be raised from the rights issue (JV buybackconsideration totals cHK$12.5bn), thus, we consider further debt financing ofcHK$3bn is possible. As a result, we estimate the gearing ratio will be 17% inFY17 (vs 108% assuming 100% debt financing). Despite c.HK$280mn painterest saving from FY17 onwards, FY17 EPS will be diluted by 15%, given33% expansion in the weighted avg share cap.

Margin pressured. According to CRB, beer industry sales volumedecreased c4% in 1H16 and management sees a worse Q2 than Q1, due to:(1) weak macro conditions; and (2) cool rainy weather. CRB recorded flat YoYsales volume in 1Q16 and outperformed the industry in 2Q16, according tothe management. Having said that, the company expects to incur higher A&Pexpenses in FY16 than the previous year, due to major sports events takingplace. Thus, we remain cautious on the sustainability of the company's costsavinginitiatives in 1Q16.

Bearish on China’s beer sector. We maintain our bearish view on China’sbeer sector and see the market as saturated in volume terms, as wedemonstrated in our China alcoholic beverage sector report .

Earnings and target price revision.

We lower our FY16-FY18E EPS forecast by 10-16%. Our TP of HK$12.7(previous: HK$13.1) is based on 9x FY17E EV/EBITDA (no change), implying22x FY17E PER.

Price catalyst.

12-month price target: HK$12.70 based on an EV/EBITDA methodology.

Catalyst: Slower-than-expected sales volume in Q2/Q3.

Action and recommendation.

Maintain Underperform. We prefer baijiu to beer in China alcobev universe.

Moutai is our top pick and CRB is our top sell.

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