Beer giant buys up local competitor for 1.87 billion yuan to expand market share

Hong Kong-listed Tsingtao Brewery Co Ltd, one of China's best known beer brands, said it is spending 1.87 billion yuan to acquire another Shandong-based brewery in order to expand its market share in the province.

Tsingtao will buy competitor Shandong Xin Immense Brewery Co, the company said in a filing to the Hong Kong bourse Tuesday.

The acquisition is consistent with the company's strategy to strengthen its market position, Tsingtao said in a statement.

Its stock surged 5 percent to close at HK$42.95 in Hong Kong trading Tuesday - its highest level since August 30 - compared with the 0.82 percent gain of the Hang Seng Index. Tsingtao shares had lost 5 percent of its market value this year through Monday.

"It is a reasonable purchase price and a good move for the company to cement its market leading position in the beer market," Xia Ping, a Shanghai-based analyst with Core Pacific-Yamaichi told China Daily.

More merger and acquisitions are expected as the battle for increased market share in the brewery segment heats up, Xia added.

Tsingtao, the largest Chinese beer maker by output, said in October that its net profit grew 21.5 percent year-on-year to 1.52 billion yuan in the first three quarters of the year, due to expanded production capacity and the launch of new premium beer products.

Since the beginning of the year, it has committed itself to expansion moves in order to counter stiff competition from both domestic and global rivals. This included boosting the annual production capacity of its plants in Fuzhou and Shijiazhuang by 400,000 kiloliters, as well as plans to boost output at its plant in Zhuhai by 600,000 liters per year.

However, the mounting costs of barley resulted in a decline in Tsingtao's gross margin in the third quarter. From July-September, the domestic barley wholesale price climbed 12 percent while major futures contracts of Australian barley soared 26 percent from a year earlier.

"Tsingtao is likely to absorb barley-price inflation through internal cost controls since its gross profit margin is still sound at above 35 percent," said Xia. "But if the raw material price hikes continue next year, Tsingtao is likely to lift beer prices since it still possesses the pricing power in the market."

Alvin Chung, associate director at Prudential Brokerage, said that although shares of Tsingtao failed to catch up with the main index this year, its performance in recent months is noteworthy due to the upcoming Christmas holiday season and the market anticipating the brewery acquisition.

"I believe cost inflation won't hurt breweries like Tsingtao for long since the Central Government has determined it will maintain the stability of the nation's food prices," said Chung.

China Daily

(HK Edition 12/08/2010 page3)