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China beer market: The world's beermaking giants scramble to invest in China, where the average person drinks just 19 litres of beer a year, compared with about 50 in Japan and 84 in the United States. Such potential has drawn top two global brewers SABMiller and Anheuser-Busch into a showdown for control of Harbin Brewery, China's fourth largest. "Nobody's willing to be left behind," said ING Financial Markets analyst Lilian Leung.

Deals are flowing despite the hangover of loss-making years when foreign firms had a tough time selling global brands in a country where a 640 ml bottle costs as little as 18 U.S. cents. "In the late '80s and early '90s, foreign brewers entered the China market with a view that economic reforms brought business opportunities: 'I'll sell my beer here and earn money,'" said Ye Xuquan, chairman of Guangdong Brewery, which makes the Kingway brand that is popular in this southern boomtown.

Price cuts have since stabilised and Chinese brewers are growing profitable, but margins are tight by global standards. Now, foreign players are investing for the longer-haul, with the expectation that rising incomes and ongoing consolidation will ultimately bring pricing power and better profitability. "Foreign firms are eyeing the future of China, not the market they see now," said Ye in an interview at company headquarters. His firm aims to jump from 12th place with two percent of the market into the top five in five years. It recently sold a 21 percent stake to Dutch giant Heineken for $71 million.

China's beer industry is crowded with some 400 brewery firms, and consolidation is expected to continue for several years. Shen Changbao, vice president of Shandong province-based Jinan Beer Group Co Ltd, predicted that seven or eight players would eventually dominate the market. Jinan is courting investors and said it recently hosted an Anheuser-Busch executive.

"The potential of China's beer market is huge, given rising disposable income and consumption," Shen said. Foreign funds sloshing around China make breweries expensive.

Anheuser-Busch, which already plans to expand its 10 % stake in market leader Tsingtao Brewery to 27 %, triggered the battle for Harbin when it struck a deal to buy 29 % of the firm for US$139 million, or HK$3.70 a share.

Last year, SABMiller paid just HK$2.29 a share for a similar stake in Harbin. Its US$553 million bid for the firm is priced at HK$4.30 per share, a hefty four times Harbin's book value. But SABMiller also owns 49 % of number-two producer China Resources Breweries (CRB). Together, CRB and Harbin control 60-65 percent of the market in northeast China, which would give SABMiller the sort of pricing power that has eluded the industry.

A Harbin buyout might be less compelling for Anheuser-Busch. "If A-B pays HK$5 (a share) ... they've overpaid," said ING's Leung. "The northeast market would become more competitive."

Other recent investors in China include Carlsberg Breweries of Denmark and UK-based Scottish & Newcastle. Last week, Belgium's Interbrew inked a deal with its China partner Zhujiang to distribute its premium Beck's brand.

Bolstered by foreign interest in the sector, Guangdong Brewery's stock price has more than doubled over the past year, trading at 16 times forecast earnings. Harbin and Tsingtao trade at a steep 31 and 25 times forecast 2004 profits, respectively.

Lion Nathan Ltd, Australia's second-largest brewer, has lost money in its nine years in China and said recently that the six big brewers, including itself, that share 51 % of the Yangtze delta market would probably merge or form alliances.

"Clearly, that relatively overcrowded market can't continue," Chief Executive Gordon Cairns said, prompting analysts to suggest the firm, 46 percent-owned by Japan's Kirin Brewery Co, may take advantage of high China valuations to sell.

Lion Nathan is considering teaming up with Heineken NV to save Lion Nathan's unprofitable operation in China, Cairns said on Sunday. "We've been having talks with Heineken beyond just Australia," Cairns said on Australian television. "As probably the most international brewer in the world, they're obviously ambitious to do something in China."

Cairns said sorting out the group's nine-year-old China business, valued on its books at around A$100 million ($70 million), would be a top priority for the company before and after he retires in September.

"What I'd like to do is close that chapter of the book and get us into an A-team in China where we're not just relying on being on our own," he said on Channel Nine's Business Sunday programme. "But I think the timeframe's about 12 months." Heineken "would be an A-team candidate -- much bigger, deeper pockets than us."


26 May, 2004