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I ndustry consolidation is accelerating
China’s total annual beer consumption is the highest in the world
Beer consumption in China reached 29 litres per capita in 2007, exceeding the
global average. The Chinese brewery industry’s ROA rose from 1.33% in 1999 to
4.75% in 2007 on an improvement in profit margins and asset turnover.
Gross margins are likely to rise due to increasing selling prices
We think rapid growth in raw material costs will trim the gross margins of Chinese
breweries in 2008. However, we expect a rebound in 2009 and beyond because: (1)
Chinese breweries’ average selling prices (ASP) are much lower than those of their
global peers, therefore we think their ASPs are likely to rise; (2) we believe raw
material costs could fall as China is growing more malting barley; and (3) we
expect changes in product mix.
EBIT margins are also rising on further industry consolidation
The top four companies—Tsingtao Brewery (Tsingtao), China Resources Snow
Breweries (CR Snow), Beijing Yanjing Brewery (Yanjing), and InBev—had a
combined 49% market share in China in 2007. We believe the EBIT margins of
large breweries in China will increase, as most second-tier breweries have
experienced growth difficulties and we expect them to be acquired by the four
biggest groups in the next few years. Moreover, we believe Tsingtao and Yanjing’s
promotion and advertisement expenses will fall after the Olympic Games.
Key ratings
We initiate coverage of Tsingtao’s H shares with a Buy rating and a price target of
HK$29.30, and of Tsingtao’s A shares with a Neutral rating and a price target of
Rmb30.30. We initiate coverage of Yanjing with a Neutral rating and a price target
of Rmb22.60. We use DCF methodology to value all three stocks.
Contents page
Summary and investment case 3
Industry analysis 5
— Potential consumption growth ..............................................................................5
— Profitability improving ...........................................................................................7
— China brewery sector consolidating....................................................................15
— Many breweries facing barley shortages ............................................................19
— Comparing the three major listed breweries .......................................................20
Industry risks 24
Valuation and comparables 25
— Buy rating for Tsingtao Brewery H......................................................................25
— Neutral rating for Tsingtao Brewery A.................................................................26
— Neutral rating for Beijing Yanjing Brewery ..........................................................27
Company pages 29
— Tsingtao Brewery ...............................................................................................30
— Investment case...........................................................................................31
— Company risks .............................................................................................41
— Financials ....................................................................................................42
— Price target derivation ..................................................................................46
— Company background..................................................................................47
— Beijing Yanjing Brewery .....................................................................................50
— Investment case...........................................................................................51
— Company risks .............................................................................................60
— Financials ....................................................................................................61
— Price target derivation ..................................................................................65
— Company background..................................................................................66
— Tsingtao Brewery - A..........................................................................................69
— Investment case...........................................................................................70
— Company risks .............................................................................................80
— Financials ....................................................................................................81
— Price target derivation ..................................................................................85
— Company background..................................................................................86
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