THE worst is not yet over for Tsingtao Brewery, which will continue to be plagued by squeezed profit margins and cut-throat competition this year. '1995 could be worse for the company than 1994,' said Xue Lan, an analyst at SBCI's Shanghai office. She expected Tsingtao Brewery to post a slight drop in profit this year from last year. To most investors' disappointment, Tsingtao Brewery, renowned as China's most reputable brewery, has just announced a 42 per cent slump in 1994 net profit to 108.16 million yuan. The company blamed China's soaring inflation as the cost of raw materials such as rice, malt and packaging rose by an average of 20 per cent. Analysts believed Tsingtao's earnings growth was virtually capped by its revised expansion plan, which aims to build a large-scale brewery of international standard instead of expanding existing small plants. 'The new plan is not something bad for the company's long-term prospects, but it will restrain its earnings growth in 1995 and 1996 due to limited increase in production capacity, Ms Xue said. 'In China, the only way you can increase profits is to boost production capacity because competition is fierce and it is not easy to raise product price.' Tsingtao increased prices by about 15 per cent last year, but this fell short of compensating for the higher raw materials costs. The original expansion plan would have given Tsingtao a production capacity of 700,000 tonnes by the end of this year. But it now expects 360,000 tonnes, up 16 per cent from last year's 310,000 tonnes. In the first six months of last year, Tsingtao produced 170,719 tonnes. In other words, it produced only about 140,000 tonnes of beer in the second half of the year, implying a slowdown in sales volume even in the peak season in July and August. Last year, Tsingtao's domestic sales inched up two per cent. 'If you take a look at Tsingtao's increasing inventory, it does indicate that the company has problems with selling the beer locally and the sales volume is definitely below market forecast,' an analyst said. The annual result showed that Tsingtao's final balance of inventory soared 111.42 million yuan (about HK$101.39 million), or 53 per cent, to 320.22 million yuan, an increase of 55 million yuan in finished goods. Compared with its first half profit of 102 million yuan, Tsingtao made a profit of only six million yuan in the second half. James Capel analyst Cathy Chang said Tsingtao's leading position in China would be challenged. 'At the end of this year, it won't be the largest brewery in China. It will be replaced by Shenyang Snow Brewery with a production capacity reaching 400,000 tonnes,' Ms Chang said. While China's domestic beer market was growing 13 to 14 per cent every year, Ms Xue said Tsingtao's domestic market share would be eroded with its small production capacity growth. A public relations spokesman for Anheuser Busch refused to comment on whether the United States brewing giant would agree with Tsingtao on the investment in the new factory by the end of this month, which could result in an issue of additional H shares by the Chinese company. 'Discussions of expansion of partnership are continuing,' he said. But Ms Xue said even if the joint venture were finalised, it would not contribute to the company's profits over next two years and the share issue would dilute earnings.