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China F&B balances defensiveness,
growth and gearing. Expect secular F&B
consumption growth to remain intact
Sector sell-off is overdone. Tsingtao
has healthy balance sheet and offers
2007-10e EPS CAGR of 29%
We initiate on Tsingtao H and A shares
with Neutral (V) ratings using DCF
targets of HKD15.7 and RMB18.3
The world’s largest beer market is maturing. We forecast
a mild volume growth rate for the Chinese beer market of
7.5% for 2007-2010e vs 11% CAGR for 1987-2007.
Ongoing consolidation stimulated by global brewers brings
catalysts for leading domestic brewers.
Tsingtao Brewery is market leader and consolidator. We
forecast a beer volume CAGR of 8.6% and ASP CAGR of
5.2% for 2007-2010e – which we regard as prudent.
Improvements in product mix, system integration and market
consolidation should bring margin expansion - net margin to
rise from 4% in 2007 to 5.8% in 2010e.
We rate Tsingtao Brewery Neutral based on its stable cash
flow, relatively faster growth than peers, low gearing and
position as market leader and consolidator. DCF-based target
prices of HKD15.7 for H shares and RMB18.3 for A shares
imply 14.4% and 14.2% total return. A study of 10 years of
trading history suggests trough prices of HKD8.1 for H
shares and RMB16.5 for A shares.
Healthy balance sheet should ease liquidity concerns.
Tsingtao has stable cash flows and was net cash in 2005-
2007. We expect net gearing to trend down from 24% in
2008e to 12.7% in 2009e and interest coverage to stay at
high levels: 41.5x in 08e, 20.8x in 09e and 25.7x in 10e.
New angles: A/H premium analysis, ceiling vs. trough
sensitivity analysis; replacement value analysis.
Near-term catalysts: M&A and share buyback from the
state and key risks: economic recession; repayment of
preferential taxation.
目录
Investment summary 4
Our view on China F&B 4
Our view on China brewing 4
Initiate on Tsingtao Brewery A and H shares 5
F&B sector analysis 8
Consumer spending 8
F&B sectors: global comparison 11
Views on the recent sell-off 13
China’s brewing industry 15
The largest beer market globally 15
Recent growth lukewarm 15
Rural reforms vs industrial outlook 17
Market consolidation 17
Global comparison 19
Pricing mechanism 19
Branding 19
Geographical distribution 20
Tsingtao Brewery (0168.HK,
600600.SH) 21
Business strategy 22
Earnings forecast 22
Rich cash and healthy balance sheet 24
Target prices and ratings 25
Ceiling vs trough sensitivity analysis 32
Valuation 32
Stock performance and trading range 34
Catalysts 36
Risks 36
Company profile 36
Appendices 37
Appendix 1. Tsingtao Brewery’s profit and loss model
Appendix 2. Tsingtao Brewery’s balance sheet
Appendix 3. Tsingtao Brewery’s cash flow
Appendix 4. Global beer brands – key data
Disclosure appendix 44
Disclaimer 47
Investment summary
We believe growth in China’s beer industry has stabilised and
project a mild CAGR of 7.5% for 2007-10e
We see China’s F&B sector as defensive, given its resilient growth
and low gearing. Recent sell-off seems overdone
Our DCF-based targets for Tsingtao H and A shares are HKD15.7
and RMB18.3. We rate both share classes Neutral
Our view on China F&B
Most defensive consumer sub-sector
We believe F&B is the most defensive consumer
sub-sector and do not expect large contractions in
consumption of daily basic necessities even in a
time of economic slowdown. Secular F&B
consumption growth in China should stay intact.
Expect it to continue to outperform
global peers
On a global comparison, F&B sectors in Asia and
China have outshone peers in the Americas and
Europe in terms of returns over the past few years
and we expect the trend to continue in 2009.
Recent sell-off seems overdone
We emphasise the China F&B sector’s
defensiveness, balance between growth and
gearing, and intact secular consumption growth.
We believe the average 2008-2010e EPS CAGR
of 22% for the China F&B sector, about 35%
higher than that of MSCI China, is feasible
following analysts’ massive earnings cuts for
dairy firms. Moreover, the F&B sector enjoys low
gearing (11% for beverages, net cash average for
the rest in 2009e) which could somewhat ease
investors’ concerns about liquidity.
Our view on China brewing
Largest beer market globally yet
recent growth lukewarm
China is the largest beer market globally in
volume terms. The China brewing industry
achieved remarkable growth in the past three
decades, mainly driven by the fast-growing
economy, favourable demographics as well as
preferential industrial policies in the 1990s.
Nonetheless, we believe the industry’s growth has
stabilized and thus forecast a mild growth rate of
7.5% for 2007-2010e vs a 17% CAGR for 1977-
2007. To be specific, we project consumption
volume of 42.4 billion litres in 2008e, 45.7 billion
litres in 2009e and 48.9 billion litres in 2010e.
Consolidation stimulated by global
brewers brings catalysts for leading
domestic brewers
The current era has seen unprecedented global
consolidation and strategic alliances led by global
giants from advanced economies. Mega mergers
across regions have reshuffled the competitive
landscape of the brewing industry. The Chinese
brewing industry is undergoing fast consolidation
stimulated by leading global brewers and led by
ambitious indigenous brewers like China
Resources Snow Breweries (291.HK), Tsingtao
Brewery (168.HK) and Beijing Yanjing Brewery
(729.SZ). We expect a wide array of catalysts in
the process of quick consolidation.
Lower returns on global comparison
A matrix of profitability vs. Herfindahl-
Hirschman index suggests that the profitability of
the Chinese beer market is lower than that of other
major beer markets. The main reasons in our view
are rooted in scale economies, a key factor
determining brewers’ competitive advantages,
product mix, branding strategies as well as
consumer affordability.
Initiate coverage on Tsingtao
Brewery A and H shares
Business model and growth strategy
Tsingtao Brewery is a leading indigenous brewer
with ownership of flagship brand, Tsingtao Beer.
The company pursued an expansion strategy in
the late 1990s which has considerably enhanced
its market leadership; and has been focusing on
system integration in recent years.
Earnings forecasts
We project net profits of RMB773.6 million,
RMB905.1 million and RMB1,161 million for
2008-10e, driven by moderate capacity expansion
and ASP rise. We prudently forecast beer volume
CAGR of 8.6% and ASP CAGR of 5.2% for the
same period. We expect continuous improvement
in product mix, amongst other endeavours, to
bring margin expansion. We forecast net margin
to rise from 4.0% in 2007 to 5.8% in 2010e.
Healthy balance sheet
Tsingtao delivers stable cash flow. We expect net
gearing to trend down from 24% in 2008e to
12.7% in 2009e and interest coverage to stay at
high levels – 41.5x in 2008e and 20.8x in 2009e
and 25.7x in 2010e.
Target prices of HKD15.7 for H
shares and RMB18.3 for A shares
Our 12-month DCF-based target prices are
HKD15.7 for the H shares and RMB18.3 for the
A shares. A sanity check based on a 26% A/H
spread since 2006 suggests a reference price of
RMB17.5 for A shares.
In the current turbulent market environment, we
think it is necessary to conduct a ceiling vs. trough
sensitivity analysis. If 10 years of trading history
does shed light on the present and the near future, we
believe the near-term buffer for H shares could be
HKD14.8 and trough prices could be HKD8.1 for H
shares and RMB16.5 for A shares.
Valuations look full; we rate both
share classes Neutral (V)
Tsingtao’s H shares are trading at a 15% discount to
domestic beverage peers and 10% discount to Asian
beverages peers on 2009e P/E. Tsingtao’s A shares
are trading at a 20% premium to domestic peers and
26% premium to Asian beverage peers. However,
should we compare them with domestic and global
F&B sectors, valuations look uncompelling. Due to
the company’s stable cash flow, relatively faster
growth, higher dividend yield, low gearing, as well
as market leadership position, we think our Neutral
(V) ratings on both A and H shares are justifiable.
Near-term catalysts and risks
Catalysts include M&As and share buyback from
parent company, Qingdao State Asset
Administrative Office. Near-term key risks are
potential repayment of accumulated preferential
income taxation and economic recession.
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