OT/Tsingtao Brewery [HK.168, OTC: TSGTY]: Brewing the Right Concoction
By Elaine Chan - StockHouse News Desk
Tuesday, February 9, 2001
Elaine Chan is the StockHouse Shanghai Bureau Chief. She will report on mainland-based corporations, Chinese macroeconomic developments and industry trends. StockHouse is the first foreign online media organisation to receive the approval of the Chinese Government to establish a news bureau in the country.
Shanghai, February 9 /SHfn/
There is growing evidence that Tsingtao Brewery Co [168], China's biggest beer maker, is on its way to becoming a truly modern Chinese enterprise of international standards.
Over the past three years of aggressively gulping down smaller, unprofitable foreign-invested and domestic brewers, the Company seems to have almost gotten the right concoction for what it takes to solidify its domestic position and achieve economies of scale. Its assets have risen nearly 14 percent in value to RMB5.3b ($5.0b), while an enlarged distribution network now covers most major Chinese cities.
With its current 33 plants across the country, Tsingtao Brewery has a yet-to-be-rivaled annual production capacity of 2.1m tonnes, or 10 percent of the mainland's total production capacity. Even though FY2000 saw actual output of only 1.86m tonnes, it was still ahead of the country's second biggest brewer. Beijing Yanjing, controlled by Beijing Enterprises Holdings [392] has an annual capacity of 1.3m tonnes. The expansion drive has allowed Tsingtao Brewery, which until now has focused on the middle and high-end markets, to cater to the massive low-end sector where a bottle of beer costs RMB3.00 ($2.83). Management has pledged to raise annual capacity to 2.7m tonnes in the coming months, as more funds will be poured into the acquired breweries. With its current 33 plants across the country, Tsingtao Brewery has a yet-to-be-rivaled annual production capacity of 2.1m tonnes, or 10 percent of the mainland's total production capacity.
Although the Company's latest financial figures were somewhat unimpressive, with particular concerns regarding its cashflow position, analysts believe this is a short-term trend. In the first half of FY2000, Tsingtao Brewery earned net profit of RMB62.9m ($59.3m), up 6.4 percent YoY. The aggressive buying spree resulted in an increase in inventories, accounts receivables and management costs. As at the end of the first half, the Company's gearing level stood at 54 percent compared with 51 percent one year earlier.
But Tsingtao Brewery received some help last December that helped to improve its finances. Its parent agreed to pay RMB29.8m ($28.1m), an amount equal to the book value of its outstanding account receivables. The Company's financial burden will also be reduced again this month from the estimated RMB800m ($754.7m) raised in the sale of an additional 100m domestic A shares. The sale will reduce the Government's holding of Tsingtao Brewery to 40 percent from 44 percent. The net proceeds will be used to finance further acquisitions, where positive returns may not be seen for three to five years.
"Tsingtao Brewery's acquisition spree will allow it to tap economies of scale in marketing, distribution and administration, which could make a lot of difference to its bottom line," says Foo Choy Peng, China analyst at Worldsec International in Hong Kong. "I think if it can keep costs, including interest expenses, under control, it should emerge a winner in the next five years."
Among China's estimated 500 Chinese brewers, the majority are money losers. Tsingtao Brewery has the largest share - currently 6.6 percent - in a market that has plenty of room for growth. Regardless of the mainland's slower income growth and a nearly saturated beer market, at a per capita consumption of 16 litres a day, there is a wide gap with the world average of 21.5 litres. The potential of the vast Chinese market has lured a flurry of international big names - Foster's, Carlsberg and Heineken to name a few. This trend peaked in 1995 but unfortunately; most have been elbowed out of the competition for selling at prices too high for the Chinese consumer. Fallouts with Chinese partners have been another problem. Tsingtao Brewery officials say it plans to acquire more breweries this year, as long as market conditions are right.
Tsingtao Brewery officials say it plans to acquire more breweries this year, as long as market conditions are right. For FY2001, the Company is aiming to produce 2.1m tonnes of beer. Based on less stringent Chinese accounting standards, it has forecast a net profit of RMB170.5m ($160.8m), up nearly 75 percent from an estimated FY2000 net profit of RMB97.5m ($91.9m). Sales are expected to reach RMB5.9b ($5.6b) in FY2001 compared with an estimated RMB3.9b ($3.7b) last year.
The Company expects production output to hit 3m tonnes in FY2003, and 5m tonnes in FY2005. By then, it would not only hold 12-to 15-percent of the domestic market but also have also turned China's most famous brand into a stronger one in the global marketplace.
Tsingtao Brewery's H shares have been trading at a huge discount to the domestic A shares. The Hong Kong-listed stock closed Thursday trading at $1.67, while the A share finished at RMB9.51 ($8.89).
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