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PUBLISHED : Wednesday, 06 February, 2013, 12:44pm
UPDATED : Wednesday, 06 February, 2013, 12:44pm

SABMiller thirsts for China market

Foreign spirits makers are likely to make bids for some mid-tier baijiu makers in the next two years as the market consolidates

BIO

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young’s China Business Blog (www.youngchinabiz.com), commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, “The Party Line: How the Media Dictates Public Opinion in Modern China.”
 

Western alcoholic beverage giant SABMiller (London: SAB) is making headlines for its newly announced deal to buy a major Chinese beer maker, raising the interesting possibility that other foreign firms could soon make bids for makers of traditional baijiu liquor. For those who don't follow the China liquor market too closely, baijiu makers have been under pressure since the beginning of the year, when media first began reporting that their products contained unsafe levels of plasticisers. The ongoing crisis could provide some interesting buying opportunities for foreign alcoholic beverage makers like SABMiller and Diageo (London: DGE), which are eying a bigger share of China's massive market for alcoholic beverages.

Let's start by taking a look at the latest news, which has a joint venture between SABMiller and domestic conglomerate Citic Group agreeing to acquire Kingway (0124.HK), a strong regional player in south China's Guangdong province, for 5.38 billion yuan, or about US$863 million. The SABMiller-Citic joint venture, CR Snow, will see its capacity rise by 8.5 per cent with the purchase, which includes seven breweries that Kingway put up for sale about a year ago. Kingway's decision to sell its brewing assets underscores the big competition in China's alcoholic beverage industry, which has been consolidating for much of the last decade as smaller regional players struggle under stiff competition from bigger national names like Tsingtao (Shanghai: 600600).

But while the big foreign names have developed a strong presence in the domestic beer market, they have yet to develop a strong presence in the market for traditional baijius, which typically contain 40 per cent alcohol and higher. While such spirits aren't very popular among younger consumers in major cities like Shanghai and Beijing, they still retain a big audience in smaller cities and among China's older generation, many of whom grew up drinking such liquors.

Britain's Diageo cast a spotlight on the market's potential in 2011, when it announced its purchase of a mid-tier baijiu maker named Suijingfang. Since then, we've heard little or no news about similar purchases of baijiu makers by western firms, mostly because the market remains largely fragmented and has limited growth potential.

But a new series of developments in the baijiu arena have hit shares and valuations of many players, providing an interesting buying opportunity that could see some western players make bids similar to Diageo's to get a slice of the market. Many baijiu shares have been hammered over the last month, following a series of media reports that showed many of the liquors contained unsafe amounts of plasticisers. those plasticisers were believed to enter the biajius through plastic containers used in the brewing process, and most brewers have said they are taking steps to eliminate the problem.

But shares of many companies have plummeted 10 per cent and more since the scandal erupted, with even big names like Moutai (Shanghai: 600519) and Wuliangye (Shenzhen: 000858) being affected. Adding to their woes, many big-name liquors are seeing their sales plummet as Beijing implements a ban on expensive liquor at government banquets in a bid to clean up corruption and excessive spending.

All this means the longer-term prospects for baijiu makers look cloudy, potentially presenting some interesting buying opportunities for foreign firms. I doubt we'll see any bids for expensive, famous names like Moutai or Wuliangye in the near term, as such bids would be both expensive and sensitive. But bids for less well-known, mid-tier names Suijingfang could look much more attractive, and I would expect to see two or three such offers coming in the next couple of years as foreign companies look to tap into this particular traditional segment of China's beverage market.

Bottom line: Foreign spirits makers are likely to make bids for some mid-tier baijiu makers in the next two years as the market consolidates.

To read more commentaries from Doug Young, visit youngchinabiz.com

 

 

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