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Polarisation
We visited three red wine and two beer companies recently in Beijing and
Shandong province. Our conclusion is that alcoholic beverage
consumption in China was polarized during the financial crisis. The luxury
Chinese spirits are not affected as Moutai just reported solid earnings.
Beer, as the most affordable alcoholic drink, saw resilient growth in 1H09.
However, the red wine sector was hit due to its niche focus. The 3Q09
earnings outlook remains bright for brewers but bleak for wineries. We
prefer Tsingtao Brewery and Changyu Wines.
Spirit sector –resilient with high margins
􀂉 Moutai showed 20% top line growth and 25% bottom line growth thanks to product
and price upgrades and better cost control.
􀂉 Wuliangye saw solid bottom line growth of 24% through acquisitions.
􀂉 Spirit drinkers in China are more sticky and unlikely to quickly trade down to red
wine or beer due to the pursuit of quick ethanol effect (getting drunk faster).
Red wine –hurt by export recession most
􀂉 Red wine consumption is mostly in coastal cities and by middle class/elites and
hence was hit harder by the recession in the export sector during 1H09.
􀂉 Both China Foods(Great Wall) and Dynasty are expected to see weak results in
1H09 due to sluggish top line growth and higher promotion expenses.
􀂉 Changyu stood out with growth in 1H09 volume and better cost control.
Brewery – stable demand with accelerating industry consolidation
􀂉 We see accelerating industry consolidation as large breweries afford to invest in
channels to gain market share through scale advantages.
􀂉 Tsingtao and Yanjing both reported double-digit volume growth versus 6% for the
industry in 1H09.
􀂉 The breweries will also report better 3Q09 results on good volume growth and
lower barley/packaging/fuel costs.
Tsingtao Brewery and Changyu wines stand out
􀂉 Beer demand is resilient thanks to a deeper and broader market and consumer
penetration while red wine consumers are niche and sensitive to economic change
􀂉 We prefer Tsingtao Brewery, Yanjing Brewery (not covered) as successful winners
amid accelerating industry consolidation.
􀂉 We are cautious on the red wine sector but prefer Changyu among three wineries.
Wine on industry Trip to meet red wine/brewery companies
We visited three wine companies – Dynasty Wine, China Foods (Great Wall
Wine) and Changyu Wines recently and also met the management of Yanjing
Brewery and Tsingtao Brewery last week. It seemed that in the Chinese
alcoholic beverage sector, the most premium products (spirits) and the most
affordable products (beer) are doing better than the middle end products (red
wine).
The two major Chinese spirit companies have reported their 1H09 results,
with both Moutai and Wuliangye booking solid profit growth in 1H09 of 25%
and 24%, respectively. Moutai which dominated in the premium segment did
better than Wuliangye which is more popular in the mid-low end likely due to
higher brand loyalty. Although spirit products are expensive based on selling
price per bottle, it is the cheapest option if the consumers are looking for a
quick ethanol impact (i.e. getting drunk faster). In fact, Changyu also
reported solid growth in their brandy products in 1H09. Changyu’s brandy
products have ex-factory prices at Rmb7/bottle and retail price at
Rmb30/bottle are very popular and affordable for farmers.
Except for CRE (Snow Beer) which will report on 4th September, the two other
leading local breweries, Tsingtao Brewery and Yanjing Brewery have reported
fabulous earnings in 1H09 with Tsingtao’s net profit up 68% YoY and Yanjing’s
net profit up 25.1% YoY. In fact, the beer industry volume growth remained
sluggish at 6% YoY increase for 1H09. The strong results from the leading
Chinese breweries are partly driven by industry consolidation as both Tsingtao
and Yanjing reported high teen growth in top line and also driven by margin
expansion thanks to better cost control.
The strong beer consumption was evident in 2Q09, and our visits to local
breweries confirmed the strength in beer demand continued into 3Q09. In
addition, as barley prices have corrected by 17% from last crop season
(Sep07) to the current crop season (Sep08), the brewery companies expect
to see more cost relief in 2H09 as the higher cost barley and hop inventory to
be fully consumed in 1H09. In addition, the transportation cost will be lower
thanks to the price reduction on local gas price this year and stable cost on
the glass bottles.
In particular, Tsingtao Brewery has surprised us by growing its Tsingtao brand
beer product by 29% in 2Q09. According to the management, it has focused
in building capacity for Tsingtao brand beer compared to sourcing Tsingtao
brand beer from the breweries Qingdao and Shenzhen in the past. Instead of
keeping the saving in cost of production and transportation, Tsingtao has
reinvested into the sales channels and promotion/marketing. As a result, the
localization of Tsingtao beer production drove top line growth rather than
margin expansion. Tsingtao Brewery will continue to follow this strategy to
gain market share.
However, for the red wine sector, the industry outlook is bleaker in 2009.
Yantai Changyu is the only red wine company that has reported its 1H09
results with revenue up 8.1% and net profit up 14.2%. China Foods (Great
Wall Wine) and Dynasty Wines have guided a tough 1H09 business
environment. Dynasty has seen sign of slight improvement in 2Q09, however,
China Foods saw its 2Q09 worse than 1Q09 and still not witnessed any
improvement in July and August. Red Wine companies enjoy very high gross
margin given the premium prices and hence will not be benefited much for
deflation this year given any specific cost items will account for small
percentage of its production costs.
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