E-Malt.com News article: China: Carlsberg’s Chongqing Brewery sees stock plunge because of non-beer assets

For a while it looked as if Carlsberg was going to get an unexpected Christmas bonus from its investment in China’s Chongqing Brewery, whose shares had risen nearly 60 per cent this year by the end of November.

But a notice to the Shanghai Stock Exchange on December, 5 revealed that it was all froth. The Chinese beer maker issued a long-awaited update on its research into the development of a new vaccine against Hepatitis B and it said, basically, that the 12-year-old project was not getting anywhere, The Financial Times reported.

The news sent the stock plunging by the exchange’s 10 per cent daily limit every day since trading resumed on December 9, wiping Rmb4bn off the value of Carlsberg’s 29.7 per cent controlling stake. Until November 25, the Danish company had a Rmb4bn paper gain compared with the stock price at the beginning of the year.

Chongqing Brewery’s unlikely foray into biotech happened years before Carlsberg entered the picture. The Chinese company bought a controlling stake in a local pharmaceutical start-up for Rmb14.4m in 1997 and continued to support the business over the years, including an Rmb87.1m injection in 1999.

Carlsberg inherited a 20 per cent stake in Chongqing Brewery when it bought part of Scottish & Newcastle in 2008. It raised that to nearly 30 per cent by investing an additional US$379 mln last year at an average cost of Rmb40.22 a share. The reason for its investment was quite simply that China’s premium beer market was growing at a phenomenal rate, Carlsberg had said, without mentioning the biotech side business.

However, Chongqing’s vaccine research had attracted the attention of Chinese fund managers who were pricing it into their estimates of the stock’s value on the assumption that, after 12 years, the project should be close to delivering results. As the date of the research update approached, funds piled into the stock, sending it up 18 per cent in the week before December, 5.

It’s not as odd as it seems for a beer maker to get into this business. Commonly used Hepatitis B vaccines are yeast-based – so there is a common raw material, at least. And Hepatitis B is a huge problem in China, with some studies suggesting that nearly 10 per cent of the population is infected. Unsurprisingly, the company has attracted criticism in cyberspace for selling one product that damages the liver while pursuing new profits from a cure for a liver disease.

Still, it turns out Chonqing Brewery is struggling to develop the necessary expertise. Last week’s update said clinical studies had showed little difference in efficacy between its vaccine and placebos.

Where does that leave Carlsberg? Chinese market watchers are saying that the stock will fall to a level comparable with other Chinese brewers – that is, at a price-to-earnings ratio of around 30 to 40 times, instead of over 150 times. That could see the share price settle at around Rmb23-24. Which would mean a 40-per-cent paper loss for Carlsberg.

Carlsberg's shares have already fallen significantly through the course of 2011, reflecting concerns over the brewer's business in Russia. The brewer's global net profits fell by 15.5% for the nine months to the end of September, mainly due to a weaker-than-expected performance in Russia in the first-half.

Meanwhlie, late last month, Carlsberg announced that it would cut jobs in Europe in order to respond to tough beer market conditions.


14 December, 2011