Four key areas stood out for us:

1. China: Near-term challenges but increasingly attractive over the longer run

Whilst the near-term environment on the ground in Bud APAC’s core market of China still remains quite challenging given the country’s Covid policy, it looks like restrictions are now loosening gradually. The medium-term opportunity in the super premium (SP) beer segment now appears to be even more attractive than we had originally believed, thanks to the structural growth in middle-income households in China and growing demand for higher-value beer brands. SP beer, according to Bud APAC’s management, has become an even more profitable segment over time relative to the core and value beer segments. We believe Bud APAC has the right to win in this segment given the strength of its SP brand portfolio.

2. Korea: Solid recovery with profit margins seen bouncing back to pre-Covid levels

Bud APAC is seeing a solid recovery in Korea and expects profit margins to rebound to pre-Covid levels, supported by annual price increases, continued premiumisation and a structural shift in channel mix towards in-home consumption, coupled with operational efficiency initiatives and an easing of commodity-related and currency headwinds.

3. India: Big potential given brisk growth and majority share in premium beer segment

Bud APAC unveiled operating data for this market for the first time. India now contributes about 5% of group sales and is growing fast. It is likely to be a huge opportunity given the scale of the market and with Bud APAC already well positioned there with majority market share in the premium and SP segments. India is already the fifth-largest market for Budweiser globally.

4. ESG: Solid track record of a rating upgrade every year since 2019 listing

Bud APAC has been equally impressive on the ESG front. It has achieved a rating upgrade from MSCI every year since listing three years ago and is now rated AA. We have been pleased with this result, which in part reflects our continuous engagement with Bud APAC over the past few years on these issues, particularly around matters of water stress mitigation and water efficiency.

Bud APAC’s China story in charts:

Source: Budweiser APAC, 1 December 2022

1. China's middle class will continue to grow. The number of households earning more than US$35,000 a year is expected to almost triple by 2030 going from 13% of households (62 million) to 32% (173 million). By 2030, China will have double the number of middle class households versus the US.

2. This will drive huge demand for premium and super premium beer. These categories are the highest margin and most profitable segments, so the growth in China’s middle class over the next several years is expected to see these two segments drive more than 80% of the growth in industry profits.

3. Premium beer commands six times the gross profit margin (GPM) of core and value beers, whilst SP beer commands 11-12.5 times the GPM of core and value beer, so Bud APAC estimates that the profit pool in SP beer will soon exceed the already very large profit pool in premium beer.

4. Bud APAC is uniquely positioned to capture this opportunity with two thirds of its revenues already coming from premium and SP beer segments and by having by far the widest portfolio of brands in the market in the SP beer segment including Corona, Hoegaarden and Blue Girl which already command significant brand power in China.

In summary, we believe Bud APAC is a high quality business with a bright future that is not yet fully reflected in the value of its shares.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

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