SAN Miguel Brewery Hong Kong is a stock some analysts love to hate. Since paying out a bumper dividends on the sale of its old brewery site at Sham Tseng for $3.5 billion, the stock, in price terms, appeared to fall off a cliff. Management categorically refuses to see analysts. This has led many brokerages to stop covering the company and investors appear to have concluded the stock deserves to trade at a big discount to the market because of the poor disclosure. Add to this the overall decline in beer sales as a proportion of all beverages being drunk by the Hong Kong population and you get a very poor performing stock. Over five years the company's shares have fallen in price terms by 3.9 per cent, against a rise in the Hang Seng Index of 251 per cent. Taking in the exceptional dividends, the stock over five years has returned the investor 107 per cent, still behind the blue chip index. Over six months, the stock is down 22 per cent against a rise in the index of 25 per cent. Dividends hardly make a dent to investor return this time with a return of minus 20.5 per cent. On the year-to-date San Miguel has fared a little better rising 8 per cent against a rise on the index of 13.8 per cent. Yet there is a relatively good investment story at San Miguel in Hong Kong focusing on beer sales in southern China, where the brewer has a track record and is established. This should put it in good stead to face the increasing competition also coming into this growing market. Guangdong is the fastest growing beer market in the world and San Miguel has just opened a million hectolitres of capacity at Shunde, adding to the established 1.5 million hectolitres at Guangzhou. At Shunde the plant can triple capacity without another massive capital expenditure burden to the group. The new commissioned capacity has come on-line where demand for beer is outstripping supply. Beer sales in China are going to drive profits in the future. Profit attributable for 1995, to December 31, was heavily down at $165.9 million, compared to the $3.03 billion in 1994, after accounting for a $2.9 billion exceptional on the brewery site sale. The profit this year is expected to rise to $220 million, up 34 per cent, with earnings per share at 58.9 cents and a dividend of roughly eight cents. On yesterday's $3.55 close this places the stock on a prospective price earnings ratio of less than six times and a prospective yield of about 2 per cent. In Hong Kong on the sales front, San Miguel is facing increasing competition from overseas imports. This follows a government duty change, which has significantly reduced the cost of importing beer into the territory. The Hong Kong beer drinker has also become more sophisticated. Although San Miguel remains number one in the beer market it is losing market share to new premium lagers, with fancy bottle tops and labels. In addition drinkers are moving off beer and are looking for other things to drink. Wine is a big growth sector as are certain types of spirits. Anecdotally, it is suggested the market share held by San Miguel is stabilising. With all this change in the market place the management has not sat on its hands. In fact there have been significant changes to the management with some key members being replaced after five years in which questionable strategic decisions were made. While brewing capacity in Guangdong has doubled, in Hong Kong it is being cut in half. The company made a poor decision in the past, building a huge plant at Sham Tseng as it never really ever got to capacity. The new plant at Yuen Long will be producing beer at a lower unit cost as the plant will be able to operate at an optimal level, which cannot be said of the old plant. This will make the Hong Kong operation more efficient and this ought to help the already squeezed margins. According to hearsay the management is expecting to get a lot of the changes it needs to make by the end of the year. There is even loose talk that the parent in the Philippines might be keen to see the San Miguel operation in Hong Kong privatised. Analysts say the brewer has been restricted from expanding into the Asia-Pacific and Northern China, as the Philippines parent, San Miguel Corporation, has ambitions of its own in these areas. This leaves Guangdong Province to the Hong Kong operation, however, where an increasing number of the more than 70 million people living in this developing economy are drinking beer. Returns from the stock are not expected to be star spangled. But the benefits of the present management's work and the additional capacity will come through over the next two years.