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Chinese breweries suffer sales drought in first half, but turnaround may be nigh, analysts say

Severe rainstorms in southern China impacted beer sales, but improved earnings are forecast for the second half, according to analysts

PUBLISHED : Thursday, 22 September, 2016, 12:03pm
UPDATED : Thursday, 22 September, 2016, 10:51pm

Beer consumption in China contracted in the first half as rainy weather dampened the summer spirit, but better days may lie ahead for the sector, analysts said.

Much of southern China experienced unseasonably heavy rains in the spring and summer months, resulting in severe weather disruptions, including flooding in major cities. Beer sales by volume fell

6 per cent in the first half from a year earlier, according to JP Morgan.

China’s biggest beer maker China Resources Beer (CRB) reported first half sales of 15.21 billion yuan, compared to 15.50 billion yuan last year.

Industry wide beer sales declined 3 per cent in the first quarter on year, and 10 per cent in the second quarter on year.

Anheuser-Busch InBev China saw sales decline in the second quarter compared with the first, but the pace of the decline was less than the industry average.

Meanwhile, China’s No 2 brewery Tsingtao saw its sales plummet further than the industry as a whole.

Regional brewer Yanjing, which has operations in Beijing, Guangxi and Inner Mongolia, also underperformed.

“We believe Yanjing, as a regional player, will feel more pressure amid continuing market consolidation as national market leaders are expanding their presence into Yanjing’s strong markets,” JP Morgan analysts led by Ebru Sener Kurumlu said a research report.

“We believe Tsingtao continues to remain under pressure given that it is losing market share to international brands at the premium segment and domestic brands are giving it a hard time at the mid-market.”

CRB’s efforts over the last 10 years to bolster its market share could lead to better bargaining power with distributors and retailers, and increased margins, Kurumlu said.

China’s beer prices, along with the profit margins of brewers, are well below the global average. Meanwhile, the mainland beer market is relatively fragmented compared with other markets, which translates into low bargaining power, she said.

For instance, CRB’s earnings before interest, taxes, depreciation and amortisation are about 50 per cent below the global average for brewers.

Currently, at least 80 per cent of the China beer market is comprised of mass market consumption, so continued moves towards premium products will help expand margins.

“While near-term volume weakness is an issue, for the longer term we believe growth in the China beer sector will be characterised by an average selling price increase as well as margin improvement,” Kurumlu said.

Beer production rose 4.2 per cent in August on year, but it was too early to say that sales had returned to positive year-on-year growth, Daiwa Capital Markets’ chartered financial analyst Anson Chan said in a note.

Chan cited growing competition from other alcoholic drinks as a reason he was cautious towards the sector, forecasting further downside ahead for both brewers. He has a 12-month share price target of HK$15.6 for CRB, down from its close on Wednesday of $16.86, and HK$25.6 for Tsingtao, down from its Wednesday close of $31.20.

But Kurumlu said she believes better times lay ahead for CRB, with an expected 24 per cent earnings growth expected this year from 2015. Tsingtao, meanwhile, is expected to report flat sales in the second half, while Yanjing is expected to post a sales decline.

CRB plans to close its acquisition deal in October of SABMiller’s remaining stake in China Resources Snow Breweries Co, maker of Snow, the world’s best-selling beer.

“We believe the company will continue to execute and deliver better-than-industry performance,” she said.

Among risks, Kurumlu said increased competition could squeeze CRB’s profit margins and drag on earnings.

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