Bernstein: Eastroc’s functional drinks decline in the third quarter; Bernstein expects margin pressure next year

Where did growth slow in the third quarter?

Total revenue in the third quarter of 2026 was 6.153 billion yuan, up 0.8% year on year and below Bernstein’s forecast and market consensus by 16.4% and 12.2%, respectively.
Energy drink revenue fell 8.6% year on year to 3.843 billion yuan, the category’s first quarterly year-on-year decline. Electrolyte drink revenue grew just 0.5% to 1.361 billion yuan. Other drinks grew 72.7% to 945 million yuan, partly offsetting the decline in energy drinks.
Channel performance also diverged markedly: third-quarter beverage revenue from distributors fell 4.9% year on year, while revenue from key accounts and online channels rose 17.7% and 82.4%, respectively.

Third-quarter operating profit rose 6.2% year on year to 1.692 billion yuan, and the operating margin increased to 27.5%, up 142 basis points year on year. Selling expenses fell 11.4% year on year, and their share of revenue declined by about 184 basis points, supporting the quarter’s margin.
Net profit, however, fell 7.8% year on year to 1.278 billion yuan, also 20.3% below market consensus. Other pre-tax income and other items weakened from a year earlier, and the effective tax rate rose from 22.0% to 23.7%.

Bernstein believes the decline in energy drinks reflects both short-term external factors and a consumer shift toward sugar-free products. The company needs to move from growth driven by expanding its distributor network to increasing the pace of sales at retail outlets.
At the same time, the company must build new categories and brands from scratch and coordinate shelf allocation, sales staff performance assessments and multi-category production. Bernstein expects these operational issues to take years rather than months to resolve.
The firm expects weakness in energy drinks to ease somewhat in the fourth quarter, but functional drinks will remain subdued amid the Mbappé controversy and reduced promotional spending.

Bernstein forecasts 15.0% year-on-year revenue growth in 2027, but only 6.4% growth in operating profit. It expects the operating margin to fall from 25.7% in 2026 to 23.8%, a decline of 190 basis points.
The firm attributes the pressure to a margin-dilutive product mix and increased marketing spending. The company’s wait-and-see approach to oil prices also makes PET packaging raw material costs a significant variable for 2027.
Bernstein’s 2027 earnings-per-share forecast is 7.20 yuan, below market consensus of 7.62 yuan. The firm says its revenue forecast is broadly in line with the market and the difference lies mainly in margins.

Bernstein cut its earnings-per-share forecasts for 2026 through 2028 by 4%, 8% and 11%, respectively, and lowered its target valuation multiple while maintaining its market-perform rating.
The A-share target price was cut from 133 yuan to 115 yuan, and the H-share target price from 131 Hong Kong dollars to 115 Hong Kong dollars. Earnings could exceed the firm’s forecast if non-energy drinks achieve economies of scale more quickly, reducing margin dilution, or if revenue per distributor in lagging regions improves substantially.