WHAT THE BROKER SAYS

PUBLISHED : Sunday, 24 July, 2005, 12:00am
UPDATED : Sunday, 24 July, 2005, 12:00am
 

Morgan Stanley has upgraded its recommendation on Tsingtao Brewery, China's biggest brewer, to 'equal weight', meaning the stock's return is expected to be in line with the industry average over the next 12 to 18 months. Its price target moves to $8.70.


The broker says Tsingtao's strong scorecard from Morgan Stanley's China consumer survey gives greater confidence in the company's growth potential through its strong brand name.


The survey of 2,100 Chinese consumers, including 500 beer drinkers, shows that Tsingtao comes out on top in awareness, penetration, perception of quality and taste. No other national brands come close in these key areas.


Cash-flow generation continues to improve due to a slowdown in capital expenditure in the next two years. Thanks to its early investment in setting up a national network, Tsingtao needs to spend less to capture growth.


It rich price/earnings valuation belies its superior cash flow and improving balance sheet. A forecast of at least 9 per cent free cash flow yield should help limit the downside.


The broker says growth prospects for consumption in the China food and beverage industry remain good but limited pricing power could result in margin pressure. The counter closed on Friday at $8.70.


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