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Peggy Sito

THE RACE IS on to capture China's vast and thirsty beer market, with many domestic and foreign brewers launching multi-brand strategies to grab a big proportion of the drinkers.

Harbin Brewery Group is taking a different approach. The brewer, the mainland's fourth largest, is building a single mega-brand to quench the nation's thirst for beer.

And Harbin brand, the leading beer in Northeast China, is the label the group is pushing.

'The objective is to establish Harbin as one of the leading beer brands in China, a market which is projected to be the largest in the world,' chief executive Peter Lo said.

'We picked Harbin among other brands we own because it is the oldest beer in China and it is highly recognised, particularly in Northeast China,' said Mr Lo, who is obviously enthusiastic about the beer business.

Based in Hong Kong, he has been doing business with the mainland for 10 years, knows Harbin's history and where it is going.

Harbin beer was founded in 1900 by a Russian businessman, Ulubulevskij, who set up a 300-tonne a year brewery.

At one time it was under Japanese control before being taken over by the Soviet Red Army in 1946.

The brewery became a state-owned enterprise in 1950 when the Soviets returned it to the mainland government, which nationalised the brewery operations under Harbin Brewery Factory in its namesake city, which is capital of Heilongjiang province.

After operating as a state-owned enterprise for about 45 years, the company underwent a reorganisation in 1995 which transformed it into a Sino-foreign joint venture. In the same year Mr Lo joined Harbin to design a strategy plan.

Listed on Hong Kong's main board in June, Harbin Brewery is now 31.9 per cent owned by the Harbin Municipal Government and 37.6 per cent by investment firm CEDF (Brewery) Holdings.

'China should be big enough for a number of nationwide brands,' Mr Lo said.

Harbin's strategy is in direct contrast to those of other brewers including the mainland's largest beer maker Tsingtao Brewery, which has aggressively acquired smaller regional breweries and used their existing brands to cater for regional consumers.

Mr Lo said Harbin Brewery preferred a prudent strategy.

'We will acquire breweries in a region when there is a demand for Harbin beer,' he said.

Harbin's chief market focus is on the mainland's top three beer-producing provinces - Heilongjiang, Liaoning and Jilin - as the beer is well-recognised in these north-eastern provinces.

The region's beer consumption averaged 35 litres per person last year, almost double the national average of 17 litres.

The high demand for beer partly helped the company report a 40 per cent year-on-year rise in net profit to HK$54.3 million in the first half of this year.

To develop a bigger share of the vast but highly fragmented mainland beer market, Harbin thinks there is an urgent need for expansion.

China's beer production last year was 22.74 million tonnes, up from 22.31 million in 2000.

Tsingtao Brewery-Anheuser-Busch, China Resources-South African Breweries and Yanjing Brewery are the three biggest breweries in China. Their combined production capacity accounts for nearly 30 per cent of the market.

The rest is shared by more than 400 players, including Harbin Brewery.

Harbin has 11 plants with annual output of about 1.26 million tonnes of beer, with the bulk - nearly 1.2 million tonnes - produced in northern China, mostly under the Harbin brand.

'We hope within 18 months to boost annual production capacity by 50 per cent - to more than 1.8 million tonnes,' Mr Lo said.

With such capacity, the group's share in the northern mainland market will be boosted to between 40 and 50 per cent from the existing 30 per cent - making it the largest brewer in the region, Mr Lo said.

The expansion will rely on acquisitions and improved natural growth.

'We may acquire breweries with production capacities of 200,000 tonnes, and then improve their operating efficiency to boost total capacities to 600,000 tonnes,' Mr Lo said.

The firm's latest acquisition was in August when it bought 100 per cent of Ballantine Management, a holding firm controlling three breweries, in Liaoning, Heilongjiang and Hebei provinces.

Mr Lo said the three breweries were losing money but he expected them to be operating profitably next year.

'We only buy plants which we can turn to the black within 18 months. That is our acquisition criterion,' he said.

The company's future merger and acquisition strategy will primarily focus on the north-east to leverage on Harbin's long-established brand franchise in the region.

Analysts have also given management a vote of confidence after taking into account the solid turnaround of the two Heilongjiang plants and one Jilin plant acquired last year.

In the first half of this year, these three plants attained a net profit of HK$8 million, up from net loss of HK$7 million in the same period last year.

Their gross margin broadened to 33 per cent during the period, up from 20 per cent in the first half of last year and 29 per cent in the second half.

'We are looking for a similar upturn in the three breweries Harbin Brewery acquired in August,' said Nomura Asian Equity Research, which has recommended the company's stock as a good buy.

However, it is not all beer and cheers.

Analysts delivered a warning on the company's financial strength.

'Harbin Brewery's financial position has tightened considerably, with gearing reaching 258.9 per cent in the financial year of 2001, from 70.1 per cent in 2000,' Nomura wrote in a research report.

Competition among the leading players had intensified following aggressive cross-regional acquisition sprees by such firms as Tsingtao, Nomura said.

In the face of the growing competition, domestic rivals are rushing to enter strategic equity ventures with giant global brewers to enhance financial strength and competitiveness.

However, Harbin Brewery is not hurrying to follow this lead.

'We should think about the synergy of co-operating with foreign firms before a decision is made,' Mr Lo said.

He said no co-operation plan had been finalised despite market speculation that it would form alliances with Heineken or Carlsberg.

Considering the growing competition in the brewery industry following China's World Trade Organisation accession, Mr Lo said: 'Operating in the mainland's beer market is just like running a marathon race.

'Some competitors at present lag behind and some have been forced out of the market. But we have only finished the first five miles of the race so far.

'It is still too early to say who will eventually be the winner.'

Graphic: harb15gbz



Harbin puts its faith in a single brand