Tsingtao's earnings likely largely flat in 3Q12: CIMB

China's beer output increased by only 0.7% yoy in Sept.

CIMB cuts Tsingtao’s FY12-14 earnings by 3.1-3.5% to reflect a lower-thanexpected gross margin due to cost pressure and discounts given to
distributors in its quest for market share.

"We are looking for 12% yoy volume growth when it announces 3Q12 results on 31 October. Management believes that the next three years will be the key period for consolidation of China’s beer industry and has made market share its priority. We roll forward our DCF-based target price from FY13, leading to a slightly higher target of HK$44.9. We remain Neutral as its valuations are rich, leaving little room for outperformance," it said.

Here's more from CIMB:

We estimate that Tsingtao achieved 12.2% yoy sales volume growth in 3Q12, with 11.5% growth for its main brands and 13.0% growth for sub brands. With market share being its priority, management has been giving distributors discounts to drive up volume growth.

We estimate a 0.8% pt yoy contraction in gross margin to 33.0% in 3Q12 due to higher labour and depreciation expenses. After staying flat qoq in 2Q12, international barley price surged more than 20% qoq in 3Q12.

Considering Tsingtao’s three-month barley inventory, we expect cost pressure to remain high in 4Q12.

According to China National Statistics Bureau, beer output increased only 0.7% yoy in September and 3.3% yoy in 9M12. 

As management said that it undertook more advertising and marketing activities in 3Q12 to gain market share, we estimate that the distribution expenses over sales ratio rose by 0.7% pts yoy to 18.0% in 3Q12, leading to a 1.3% pt yoy slippage in operating margin to 11.1% in 3Q12.