• Tue
  • Sep 16, 2014
  • Updated: 5:47pm

Kingway, China Resources set to uncap frothy earnings

PUBLISHED : Monday, 31 August, 2009, 12:00am
UPDATED : Monday, 31 August, 2009, 12:00am

Breweries across the border have turned their taps on once again as the resurgent mainland economy rekindles consumers' thirst for beer. And the pints should continue to flow this year as demand returns amid a slump in wheat and barley prices.

Leading beer makers Kingway Brewery Holdings and China Resources Enterprise are both scheduled to announce their interim results this week.

The market is expecting further signs of improvement in the beverage sector after heavyweights Tsingtao Brewery and Shenzhen-listed Beijing Yanjing Brewery already reported substantial first-half profit increases.

'The retail business in China is likely to [continue] going up because of the increasing wealth of Chinese citizens and the central government encouraging people to spend,' said Patrick Yiu Ho-yin, a managing director at CASH Asset Management.

'This is a positive factor for the consumption sector.'

The mainland retail industry has rebounded as Beijing's four trillion yuan (HK$4.54 trillion) stimulus plan and record levels of bank lending start to filter through the financial system. And after bottoming out at a three-year low in February, retail sales growth has held above 15 per cent in each of the past three months.

Improvements in the industry have already translated into positive results for some of the heavyweight brewers.

Tsingtao announced earlier this month that its interim profits surged 67.87 per cent to 639.78 million yuan from the same period last year. Xinhua reported last month that Yanjing also posted strong earnings growth of 25.05 per cent to 318.42 million yuan.

The beer makers managed to boost their sales volume by 13 and 14 per cent, respectively, against the backdrop of a 6 per cent increase in the national beer industry. And Tsingtao forecast that beer consumption would improve amid a recovery in the economy.

The 106-year-old beer maker announced last week that it had entered into a strategic co-operation agreement with Japan's Asahi Breweries in an attempt to strengthen its position in the mainland beverage market.

Nomura analyst Christine Peng maintained a 'buy' rating on Tsingtao's H shares, as the company's interim earnings beat market expectations. However, Ms Peng identified a slowdown in mainland economic growth and a sharp increase in the cost of barley as potential profit risks.

Brewers have capitalised this year on a slump in the cost of wheat and barley, which are used to make beer. A JP Morgan report earlier this month said average barley prices were 28 per cent below last year's level.

Less expensive ingredients have allowed breweries to pad their margins amid the slowdown in demand. 'Gross margin expansion seen in the second quarter 2009 is the start of the expansion for this year,' wrote Ebru Sener Kurumlu, an analyst at JP Morgan. 'And [Tsingtao] should continue to benefit from lower raw material costs for the rest of this year.'

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