Hard times to take froth off brewers' earnings

Earnings of mainland brewers are expected to lose their froth this year, with industry players worst hit by falling sales and rising costs likely to report losses, warn analysts.

Citing rising raw materials and transport costs, stiff competition and a string of natural disasters, Du Lujun, a deputy general-secretary at the China Alcoholic Drinks Industry Association, forecast a tough year ahead for mainland beer makers.

'All industry players are feeling the pain, especially those targeting the low-end and mass-market segments, where competition is so keen that nobody can afford to raise selling prices for fear of losing market share,' said Ms Du.

A poor start to the year turned worse after natural disasters including snowstorms in southern and central China, the earthquake in Sichuan province, and flooding in Guangdong province recently that aggravated a declining trend in beer sales, Ms Du said in an interview with the South China Morning Post.

Her comments are supported by the latest data from the China Light Industry Bureau which show that beer consumption volume grew 1.8 per cent year on year in April and 8.45 per cent for the first four months of the year, against 16 per cent and 17.6 per cent respectively a year earlier.

CEIC Data shows per capita consumption in food services in the mainland's 36 big cities rose 10 per cent year on year in the first quarter, but this was in nominal terms. Adjusted for inflation, consumption growth was up by just 2 per cent in real terms.

The price of barley, a key raw material in brewing, was up 32 per cent in US dollar terms, and that of hops had doubled. With oil prices hovering near US$145 a barrel, the spectre of further cost rises looms, particularly for transport-dependent industries such as brewers.

Mainland market leader Snow, jointly run by China Resources Enterprise and South Africa's SABMiller, reported an 8.6 per cent drop in first-quarter profit. It said earlier business in Sichuan, Anhui and Zhejiang provinces was seriously affected by the snowfalls.

Ms Du said Snow would also suffer from the effects of the Sichuan earthquake on consumption, as its sales volume in the province accounted for nearly 20 per cent of its total revenue.

The earnings outlook for Tsingtao Brewery, the mainland's No2 brewer, is not optimistic either. In recent reports, Merrill Lynch and Lehman Brothers voiced their concerns. 'Despite the Olympics, the company sees 2008 as a very difficult year given the natural disasters against a backdrop of continued macro tightening,' Merrill Lynch said.

Sam Miguel Brewery, which makes and sells beer in Hong Kong and Guangdong, said sales volume fell in the first two months this year in its Guangdong market because of the snowstorms and longer winter.

Earlier last month, Guangdong's Kingway Brewery, which reported a loss last year, issued a profit warning over its first-half performance.

'The deterioration in the company's results was due to several factors: a drop in sales and an increase in production costs due to the increase in material prices and unit fixed costs,' the company said in a filing with the Hong Kong stock exchange.

Kingway shares traded up by 4 HK cents or 3.9 per cent to close at HK$1.08 on Friday, against a year's high of HK$2.71 on January 7. Tsingtao shares ended at HK$17.22, against a year's high of HK$36.25 on January 9. San Miguel continued to buck the trend, closing unchanged at HK$1.75 against a year's opening of HK$1.57.

Competition at the low-end segment has become fiercer this year, mainly because exports have slowed from the coastal area and high food inflation has significantly shrunk demand from low-income consumers, Lehman Brothers said.

The beer market is dominated by the low-end and middle segments, with the high-end market estimated to make up less than 20 per cent.

In Guangdong, total beer consumption in the first quarter rose less than 3 per cent, but profitability dived 40 per cent because of bad weather and a surge in operating costs, Guo Yingxin, the chairman of Guangdong Alcoholic Drinks Industry Association, was quoted by the newspaper Information Times as saying.

And in the first five months, about 80 per cent of brewers in Zhejiang recorded losses, the Zhejiang Alcoholic Drinks Industry Association said.