WHAT THE BROKER SAYS
Core Pacific-Yamaichi has maintained its 'sell'' recommendation on the mainland's largest brewer, Tsingtao, after the company announced disappointing results for the first quarter and its operating risks increased.
Net profit for the first three months of 2004 increased by only 7 per cent year on year to 64 million yuan, a weak showing in view of the low comparison base in 2003 due to the Sars outbreak. This was mainly the result of keen competition, illustrated by a 28 per cent year-on-year increase in selling expenses.
Since Tsingtao's alliance with the AB group in 2002, other international breweries have entered the market by collaborating with Chinese players.
The broker expects sales figures to surge in the summer peak season, compared with the period last year. To partly offset rising costs, Tsingtao may try to increase prices. An average increase of 3 per cent is expected for both 2004 and 2005. However, if the company is unable to raise prices, the broker may cut its earnings forecasts.
The counter has dropped about 25 per cent during the consolidation in the H-share market, but still trades at a price/earnings ratio of 21.8 times 2004 earnings forecasts and 17.4 times 2005 forecasts, unattractive in view of rising operating risks, says Core Pacific-Yamaichi. The stock closed at HK$6.50 on Friday.