Guotai Haitong Securities released a research report stating that evolving beer demand is fostering a historical opportunity for category innovation, with the domestic craft beer segment holding vast potential, from which leading brewers are poised to benefit. Channel transformations led by new retail models are expected to help regional brewers break into weaker markets and elevate the ceiling for individual products. In the short term, industry sentiment is under pressure; investors should focus on incremental opportunities arising from category innovation and channel changes. The report advises increasing holdings in strong alpha regional brewers, which are gaining market share driven by blockbuster products and possess robust earnings elasticity, as well as industry leaders that are continuing their premiumization strategies, demonstrating stable performance, and offering attractive dividend yields. The main viewpoints from Guotai Haitong Securities are as follows: The beer market may have entered a new normal of stock competition; focus on structural opportunities from category and channel transformations. Since 2023, China's beer sales volume has been declining gradually and, following overseas trends, may enter a long-term downtrend phase aligned with demographic shifts. Regarding pricing, in 2024, due to slower-than-expected demand recovery and falling inflation, the average selling price growth for leading companies slowed to 0.4%. In terms of market concentration, based on the firm's calculations, the industry's CR5 by sales volume decreased by approximately 3.5 percentage points year-over-year to around 75% in 2024. Concurrently, category innovations, exemplified by craft beer, and channel transformations, represented by instant retail, are gaining momentum and are likely to become core drivers for the industry's next phase of development. The rise of craft beer: Shifting demand creates opportunities, with leading brewers set to reap the benefits. Generational changes in consumers often herald historically significant opportunities for category innovation, and China's beer industry may be approaching a similar inflection point. Craft beer represents a core category trend; the firm estimates the current penetration rate of broadly defined craft beer in China is about 3%, still significantly lagging behind the 5-15% levels seen in developed European/American/Australian markets. Currently, China does not have a clear distinction between craft and non-craft beer; 'craft' primarily serves as a label supporting narratives of premiumization and differentiation, with giants, small producers, channels, and chain formats all competing in the same arena. Looking ahead, the firm believes: 1) In the medium term, the craft beer landscape may experience limited consolidation. Supply chains and the mass market will accelerate concentration towards leaders, while flavor innovation and niche scenarios will likely remain dominated by small and medium brands, where uniqueness and specialization act as moats. 2) Leading breweries are expected to fully capitalize on the category's红利. Unlike Europe and America, China has not imposed requirements on the scale or independence of craft breweries, allowing major beer manufacturers to compete in the craft segment; considering their brand influence and scale advantages, large manufacturers may possess a late-mover advantage. Channel transformation: New retail accelerates channel democratization, but medium and large brewers still retain moats. In recent years, new retail channels for beer have grown rapidly, driven by increasing consumer prioritization of convenience, rationality, and differentiation. For instance, instant retail offers 'immediacy' and 'differentiation,' while warehouse membership stores cater to middle-class demands for value through curated selections and cost reductions achieved via economies of scale. The firm estimates current beer sales through new retail channels are approximately RMB 30 billion, representing a 6% industry penetration rate with an annual growth rate of about 20%. The firm believes the most direct industry impact of new retail is the acceleration of channel democratization, which weakens the traditional channel advantages of leading brewers, making it easier for regional brewers to scale volume in weaker markets, while also providing small and medium breweries with OEM opportunities to utilize excess capacity. Secondly, through case analysis, the firm illustrates that even within new channels, the brand recognition, quality control, and scale advantages of large manufacturers, particularly in the mid-to-high-end beer segment, remain significant competitive strengths; if they actively embrace and respond agilely to changes, they can still increase their market share. Finally, the firm cautions against linearly extrapolating channel trends, citing the rapid decline of community group buying post-pandemic. Should future economic conditions and inflation levels undergo trend changes, the high-growth trajectory of new retail channels and the off-trade segment may not necessarily persist. Risk factors include economic slowdown, intensified industry competition, rising raw material costs, and food safety issues.
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