OT/Tsingtao (168) Takes a Break to Digest Acquisitions
Feb 19, 2001 - 12:43:54 HKT
QuamResearch
After receiving an enthusiastic response of 12 times over-subscription on its 100 million "A" shares issue from mainland investors, the mainland's largest beer maker, Tsingtao Brewery (HKSE:0168) said that it will slow the pace of its expansion-through-acquisition strategy this year. It is the first time since 1999 that the company responded to investor concern of over-expansion and announced a break in its expansion race to 2.5 million tonnes production capacity, or 10% of the domestic market share. However, the company's sudden halt before touching its target, though sensible, may hint at something unfavorable.
It is a bit of a surprise that the company showed no intention of slowing-down when it released a prosperous forecast just a month ago. But it is now oddly attentive to investor concern and has responded quickly by giving a promise to slow down its pace of expansion.
According to Ms Yuan Lu, the company secretary, Tsingtao's beer output was 1.8 million tonnes last year and could reach 2.4 million tonnes this year and approach the 2.5 million tonne target but it remains to be seen if Tsingtao can gain 10% of the mainland's market share even though it currently holds 8.34% of the domestic market. Ms Yuan also said that Tsingtao would instead focus on consolidating the operations of recent acquisitions in Beijing and Shanghai. This may indicate that market conditions are a bit tougher than the company expected and that competition is fiercer than the company originally thought, especially in Beijing and Shanghai.
As we discussed before, expansion by acquisition can be a dangerous strategy and companies need time to swallow the new inputs as observed in the case of VTech (HKSE:0303) and QPL (HKSE:0243), where their bottom lines were once seriously damaged by the bulky injections. Even if investors trust Tsingtao's expertise in the brewery business, they might still worry about the large amounts of capital expenditures needed both before and after the acquisitions.
Since 1999, Tsingtao's acquisition engine has been roaring with 15 local breweries both that year and 6 in 2000 with additional stakes in Jiangsu Xuzhou Huifu Brewery and Hebei Langfeng Brewery in the first half and Carlsbrew Brewery (Shanghai) Limited, Beijing Asia Shuang He Sheng Five Star Beer Co. Ltd., Beijing Three Ring Asia Pacific Co., and Qingdao Lao Shan Brewery Factory in the second half.
Though Tsingtao successfully raised RMB800 million from the A share issuance to fund its recent acquisitions, which amounted to RMB340 million, as well as six technological transformation projects for Tsingtao Brewery Center, which need RMB470 million investment, the company has net borrowings of RMB1,135.9 million as of 31 December, 1999. The gearing ratio (total borrowings/equity) was 0.49, a rather high level. The company said on 30 January, 2001 that it would have financial costs of RMB108.2 million in 2000 compared to RMB54.1 million in 1999 and that this would further rise to RMB124.2 million in 2001 as working capital requirements increased upon the increase in the scale of subsidiaries. This could deters investor's enthusiasm somewhat.
Looking at Tsingtao's results in 1999 and the first half of 2000, the company has been successful in boosting the top line but has so far failed to push up the bottom line as a result of the on-going acquisitions. However, it may disappoint investors if the company's bottom line remains stagnant for the third consecutive year. We are glad to hear the company will stop eating and concentrate on digesting, but we are worried about the reasons behind the company's pause. Nevertheless, the answer will be out soon in the full year results.
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