Click to read the original article for details. Editor's Note: In the volatile market of 2019, consumer stocks saw a spring in their share prices. Moutai, the king of baijiu, approached a historic market cap of nearly 1.3 trillion yuan in early July. Budweiser, the king of beer, is also about to list in Hong Kong. Will it be a good opportunity?

Moutai, the king of baijiu, closed above 1,000 yuan on July 1st, having risen over 9 times in less than 6 years. Investors who missed out on Moutai need not regret, as investing in "Snow Beer" could also yield decent returns. This refers to China Resources Beer, which owns the Snow brand on the Hong Kong Stock Exchange. In less than 5 years, its stock has risen an impressive 4 times. If you missed both "Moutai" and "Snow," then pay attention: Budweiser, the beer king, is about to land in Hong Kong.

The Beer King with Profits 10 Times That of China Resources Beer

According to media reports, Anheuser-Busch InBev, the global beer leader, will launch its Asian business IPO in Hong Kong on July 5th, expecting to raise between HK$65.2 billion and HK$76.6 billion. If Budweiser APAC successfully lists, it will be the largest IPO in Hong Kong in 2019 so far. For beer lovers, Budweiser is certainly a familiar brand. Born in 1876, this American beer brand has spanned three centuries and achieved the feat of dominating the global beer industry.

Budweiser not only reigns globally but is also the undisputed leader in the Asia-Pacific region. Let's first look at the data comparison between Budweiser and China's two major beer leaders, China Resources Beer and Tsingtao Beer.

Data source: Huasheng Securities

Since Budweiser's prospectus financial data is in US dollars, I have converted it at an exchange rate of 6.86. From the chart, we can see that Budweiser APAC's 2017 revenue was 53.4 billion yuan, 79% and 103% higher than China Resources and Tsingtao, respectively. By 2018, Budweiser APAC was 82.4% and 118% higher than China Resources and Tsingtao. In terms of scale, Budweiser APAC's revenue is more than double that of Tsingtao Beer, and the growth rate is expanding.

Data source: Huasheng Securities

If the revenue gap between Budweiser and China Resources and Tsingtao is not large enough, the net profit gap is very significant. From 2018 data, Budweiser APAC achieved a net profit of 9.666 billion yuan, a year-on-year increase of over 30%. Compared to China Resources Beer's 977 million, Budweiser APAC is 9.89 times that; compared to Tsingtao Beer, Budweiser is 6.8 times.

Data source: Huasheng Securities

Gross profit, the difference between revenue and relative costs, is the foundation of net profit. The gross margin directly reflects the profitability of a company's products or services and is a frequently used financial indicator by institutions and investors when analyzing companies. From the chart, we can see that Budweiser APAC's gross margin has remained stable at around 55% from 2017 to Q1 2019, while Tsingtao Beer is around 40%, and China Resources Beer is lower at 35%.

In the same industry, how can Budweiser APAC achieve larger scale than its competitors and maintain stronger profitability over the long term?

This reminds me of Warren Buffett's "moat theory": Buffett vividly compared a company's core competitiveness, such as brand, customer loyalty, sales model innovation, and cost control, to a moat. So, does Budweiser have one?

How Was the Beer King Forged?

1. Budweiser has a corporate culture that values quality

In 1970, the US beer industry was in a very prosperous phase. That year, total US beer production was 122 million barrels, with Budweiser holding about 18-20% share. Such a high share for the leader naturally attracted the envy of competitors. At that time, the second-largest player in the US market was Schlitz. To catch up with Budweiser, Schlitz used multiple means to reduce costs, such as using cheaper ingredients like hop extracts instead of fresh hops, adding corn starch instead of malt, and shortening the brewing cycle.

Budweiser Museum in St. Louis, USA

When it rains, it pours. In 1973, during the most intense competition between the two, raw material prices kept rising, with barley, hops, and rice prices increasing by 34%; energy prices also rose after the OPEC oil embargo and its lifting. Budweiser maintained its original brewing process, and sales hit a record high that year, but due to significantly higher costs than Schlitz, its stock price fell by more than half. Schlitz, on the other hand, saw its stock price rise steadily. However, the story's ending followed the pattern: Schlitz suffered a sharp decline in sales due to multiple quality scandals. Budweiser's market share further increased to 24%.

From this historical story, quality is one of Budweiser's moats. It is rumored that Budweiser's beer bottles, caps, rubber gaskets, etc., are all custom-made by expensive foreign companies. Moreover, to enforce these stringent standards, Budweiser once discarded over 5 million beer bottles that failed internal pressure tests and poured out tens of thousands of liters of beer due to insufficient carbon dioxide purity. These defects, by domestic Chinese standards, would not affect the product's quality rate. Considering its corporate culture and my product experience, I can feel this.

2. Excellent brand building

Budweiser's ability to achieve the highest profitability in the industry is closely related to its excellent brand building.

There was once an interesting test: consumers were asked to taste Coca-Cola and Pepsi, and everyone thought Coca-Cola tasted better. Then the testers swapped the drinks in the bottles, and consumers thought the cola in the Coca-Cola bottle tasted better. At a beer conference in the US, the organizers removed labels from 30 beers and had brewery owners taste them one by one; no one could correctly identify their own beer. This shows that product taste and quality are part of competitiveness, but the emotional value and spiritual sustenance of consumer goods are also very important for market competition.

2018 World Cup: Award presenter gives Budweiser trophy to best player

Budweiser, like other beer brands, often sponsors sports events. However, matching its status as a top global beer manufacturer, Budweiser chooses more globally watched events such as the Olympics, the FIFA World Cup, and NBA basketball games. For example, sponsoring the 2008 Beijing Olympics and the 2018 World Cup brought significant market success.

To maintain its high-end image, Budweiser always maintains strict price management, prohibiting distributors from unauthorized price cuts and cross-regional sales. To achieve this, Budweiser has deployed the strongest sales system, precise down to each bottle of beer and even the makeup of promotional girls. Compared to the rough management of domestic beer brands, this may be one of the secrets to Budweiser's perennial championship in high-end beer sales.

Conclusion: Only after Budweiser APAC's subsequent offering price and fundraising amount are determined can we know its specific valuation. If, as media estimates, the fundraising amount is between HK$310 billion and HK$390 billion, Budweiser's P/E ratio is expected to be between 28 and 35.

In contrast, China Resources Beer and Tsingtao Beer, which have shown strong stock performance, have P/E ratios of 65 and 40, respectively. From this perspective, Budweiser's valuation is relatively low. Additionally, consumer stocks tend to have a premium effect for leading companies. After missing out on Moutai and China Tobacco International (HK), investors should pay close attention to this beer leader.

Source: Hong Kong Stock Intelligence Bureau (ID: gmgqbj)