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China's Tsingtao Brewery, the leader in the world's largest beer market, reported on April 1 a 10 % gain in 2003 net profit as sales growth offset higher costs for barley and rice. Tsingtao, which has roughly 13 % of the China beer market, is boosting its share of the fragmented but consolidating industry, which has seen a flood of investment from foreign giants, including Tsingtao's 10 % stakeholder Anheuser Busch, under the Reuters’ reports.

More expensive raw materials and higher distribution and electricity costs have put Tsingtao's already narrow margins under pressure. With limited scope to raise prices, it needs to increase sales and wring efficiencies out of a sprawling operation built through the purchase of dozens of breweries, many of them still loss-making. Still, analysts expect Tsingtao's profits to increase by nearly 40 % this year and next.

While state-backed Tsingtao said it faces increasing competition from foreign-invested foes, on top of rising costs, it nonetheless struck a bullish tone on April 1. "Tsingtao Brewery is confident to overcome all these difficulties and maintain growth," the firm said in a statement. Full-year net profit rose to 245 million yuan (US$29.6 million), from 222.55 million in 2002. Heavy promotions in the third quarter helped Tsingtao recover from the SARS outbreak earlier in 2003. The fourth quarter is typically a slow season.

The results slightly lagged the median earnings forecast of 249.5 million yuan from 16 analysts polled by Reuters Research. Sales rose eight percent during the year to 6.7 billion yuan, lagging forecasts fpr 6.945 billion yuan. It said it will spend 130 million yuan this year to build a new plant in Hunan province with a capacity of 100,000 tonnes.

Tsingtao, which in 1993 was the first state-run Chinese firm to list in Hong Kong, remains plagued by years of government control in a brutally tough sector. "This company is still relatively poorly run ... There is still a lot of potential to turn around, cut costs," said UBS analyst Joe Zhang, who has covered Tsingtao since its IPO. On Thursday, he raised his stock rating to "buy," citing potential efficiencies and the increasing influence of Anheuser-Busch.

Tsingtao, which was founded in 1903 by German investors in the port city of Qingdao, has been the toast of investors keen to take advantage of rising wealth and consumption in China. But its prolonged rally made it expensive, industry watchers said. Tsingtao shares have fallen from HK$10.25 in early January, but are still up 64 percent over 52 weeks. The stock fell 1.68 percent on Thursday to HK$8.55 ahead of the results. Its price/earnings ratio is 38 times forecast profit, compared with 31 times at rival Harbin Brewery.

China's 237 million hectolitre beer market is growing at 5 to 8% a year. Yearly consumption in the country is just 18 litres per person, compared with 50 litres in Japan and 84 in the United States.

On top of higher raw material costs, Tsingtao and its rivals must pay more to get their beer to market now that China strictly enforces rules banning overloaded trucks, JP Morgan said in a note, lowering its profit forecasts. Number four Chinese beer maker Harbin Brewery, nearly 30 % held by the world's second-largest brewer SABMiller Plc, raised prices by about 10 % in parts of the northeast where it holds a dominant position, JP Morgan said. Tsingtao is seen as having less room to pass on higher costs to buyers in China, where a bottle of beer costs as little as 18 cents, because it does not dominate regions the way some rivals do.

JP Morgan expects Tsingtao to generate net margins this year of roughly 3.5 %, compared with an expected 15.3 percent for Anheuser-Busch. The world's largest brewer has a deal to boost its Tsingtao stake to 27 percent by 2010. Foreign beer makers, which had a rough time when they invested in China during the mid-1990s, have returned to the market in droves through investments in local players.

Last week, Lanzhou Huanghe Enterprise Co Ltd said it had struck a $60 million beer-making joint venture with the world's sixth-largest brewer, Carlsberg Breweries. In January, global number-three Heineken paid $71 million for a 21 percent stake in China's 12th-largest player, Guangdong Brewery.



02 April, 2004