Premium beer sets up Tsingtao for heady gain

Tsingtao Brewery is expected to post strong interim results on Thursday as beer sales across the mainland rise. The trend is likely to continue in the second half, helping many of the nation's big breweries, but consumer prices are not expected to rise sharply because of stiff competition.

The 106-year-old Tsingtao estimated last month that its net profit for the first half would jump 60 to 70 per cent from 381.13 million yuan (HK$432.35 million) a year earlier, thanks to effective cost controls and a better product mix.

Shares of Tsingtao have advanced 61.4 per cent since then. Analyst say the stock might not rise sharply when the interim results are announced because the market has already digested the good news.

Likewise, Shenzhen-listed Beijing Yanjing Brewery, the mainland's third-largest brewer, said last week that first-half net profit rose 25.05 per cent to 318.42 million yuan on better sales and stringent cost controls.

Turnover climbed 18.98 per cent year on year to 4.89 billion yuan, while sales volume increased 14 per cent to 2.21 million kilolitres.

Tsingtao told analysts its beer sales volume grew 15 per cent in the second quarter after a 6 per cent rise in the first quarter. This translates into a better than expected 10 per cent gain in the first half, against China's overall beer market growth of 9.4 per cent.

Sales volume of Tsingtao beer grew 25 per cent in the first half, making up 50 per cent of its total sales.

Nomura International (HK) analyst Christine Peng said in a recent research report that sales of the core brand Tsingtao had been accelerating since April, outperforming its expectation of a 15 per cent gain, thanks to effective marketing, distribution strength and a pick-up in restaurant spending by Chinese consumers.

'The consumption of premium beer, such as Tsingtao, is geared towards restaurants and bars, which are highly associated with economic activity,' the report said.

Standard and premium lager, which sells for more than seven yuan per litre, made up only 10 per cent of the total sales volume on the mainland but generated about 50 per cent of total profits last year, according to marketing research agency Euromonitor International.

This type of beer is viewed as the growth driver, and new product launches and promotion activities have been largely focused on them. The segment is still largely dominated by foreign brands such as Budweiser, Heineken, Carlsberg and Bud Ice. The only domestic beer in this segment is a high-end line sold by Tsingtao, which is increasing efforts to launch high-end new products.

Market leader China Resources Snow Breweries as well as Yanjing, Harbin Brewery and Tsingtao sell popular economy lagers in bottles and costing no more than seven yuan a litre.

Another reason Tsingtao could post strong interim results is lower raw material costs, which push up margins.

Barley accounted for 1.36 per cent of the cost of goods sold. Barley prices plummeted 45 per cent year on year in April and rebounded only slightly in June. A Citigroup research report said the price of barley is down 42 per cent year on year.

Citi analyst Cici Lam said Tsingtao had been able to lock in an average barley procurement price 8 per cent lower than the current level of US$250 per tonne until at least the third quarter. The price of barley was US$420 in the same period last year.

'The lower-cost structure should alleviate selling, general and administrative costs and cushion the discount to distributors,' Ms Lam said.

Macquarie Securities analyst Leah Jiang noted that growth driven by windfall barley cost savings was harder to sustain, saying it was unlikely barley prices would continue to fall substantially so the reduced input cost would not drive margin and earnings growth again next year.