E-Malt.com News article: 2979

Hong Kong: China's leading Tsingtao Brewery and Anheuser-Busch are seeking to rewrite a strategic “hands-off'' agreement after Anheuser's acquisition of Harbin Brewery. Tsingtao chairman Li Guirong says the agreement stated that Tsingtao would not co-operate with another foreign brewer in China, nor would Anheuser-Busch partner with another local brewer, The Standard announced on July 20.

Li told Hong Kong reporters at the company's headquarters in Qingdao on Friday that Anheuser-Busch's takeover of Harbin, China's fourth-largest brewer, broke an agreement signed two years ago. At stake is a leading position in the world's largest beer market, which analysts say is poised to grow at 5-8 per cent a year over the medium to long term after torrid growth of 10-20 per cent annually in the 1980s.

The Chinese consumed 254 million hectolitres of beer in 2003, compared to 238.7 million hectolitres in 2002. Li said when Anheuser-Busch, which has a 9.9 per cent stake in Tsingtao, notified Tsingtao about its interest in taking control of Harbin, Tsingtao supported the decision. Li said the two brewers recognised that was an acquisition opportunity when SABMiller and Harbin seemed to have met some obstacles in their venture - SABMiller acquired a 29.4 per cent stake in Harbin last July.

Now that the American giant brewer has acquired 99.66 per cent of Harbin after winning the mainland's first foreign hostile takeover with its arch-rival SABMiller, and announced its intention to privatise Harbin, Li said Tsingtao and Anheuser-Busch would have to iron out some terms in their exclusive agreement. “We have a strategic partnership agreement with Anheuser-Busch that is exclusive and obvious,” Li said. “Now that Anheuser-Busch has acquired Harbin, it should return to discuss the exclusive agreement.” Li refused to elaborate further on what exactly the two brewers will discuss.

“How we are going to proceed is still under discussion,'' he said, without giving a timeframe. “It will definitely be in the best interests of our shareholders.” Li said there are also questions on how Tsingtao could use Harbin to distribute Tsingtao beer in the highly lucrative northeast market. The northeast market accounts for about 30 per cent of China's beer consumption, with Harbin taking about 30 per cent. Yuan Lu, secretary to the board of directors at Tsingtao, said Tsingtao's market share in the northeast market is still small, with only about 200,000 of their 3.26 million tonnes of beer produced last year sold in that region.

Tsingtao's beer production grew 13.4 per cent year on year in the first half this year, to 1.87 million tonnes.

Anheuser-Busch's hefty price for Harbin - 49 times Harbin's 2003 earnings and about five times its price-to-book value - is not the highest on record, Li said, but conceded that it is still high. He said he expects the pace of acquisition to intensify as well as further consolidation in the mainland brewery industry. Li said Tsingtao's cost of production has risen by about 5 per cent this year although the company is seeking to cut costs to offset the impact.

Measures taken include cost adjustment and some structural adjustments, though he did not elaborate.

Earlier this year, Tsingtao said the countermeasures to offset rising costs include increasing the proportion of high-margin products in the sales mix, improving efficiency, modifying the product range and controlling expenses. However, the company might still have to raise its prices marginally in a few markets.

Li said Tsingtao has recently resorted to selective price increases. For example, the cost of a carton of 24 bottles of Tsingtao beer was increased by 4 yuan (HK$3.70) recently in the Qingdao region.


Derun Xiao, deputy director at the China Brewing Industry Association in Beijing, said China has become the largest beer producer in the world but its consumption still lags other developed markets, giving rise to huge growth potential, especially in the northwest.


21 July, 2004