Hong Kong: Kingway Brewery sees break-even at new plants in 2008

Kingway Brewery Holdings Ltd. , Heineken's partner in China, expects three of its newest plants to break even by end-2008, a key step on the way to expanding beyond the country's affluent south, Reuters reported June 7.

But the firm warned that gross margins would slide this year because of rising malt prices and cut-throat competition with the likes of SABMiller Plc. in the world's largest market for beer consumption.

Kingway, about a fifth owned by Heineken via a joint venture, already commands over 50 percent of the market in China's southern city of Shenzhen. It has opened plants in Tianjin, Chengdu and Xian in the past 12 months to try and build a nationwide brand.

"The focus going forward is still going to be Guangdong province; that will remain our core market," director and chief financial officer Anna Liang told Reuters on Thursday. "Tsingtao, CR Snow, and others have done very well outside of Guangdong, but that market is still big enough to accommodate another brand."

Each of the new plants cost roughly 400 million yuan ($52 million) and has the capacity to produce 200,000 tonnes a year out of Kingway's current 1.5 million tonne capacity.

Kingway now hopes to strengthen its position nationwide and battle Tsingtao and CR Snow, a venture between SABMiller and beverage-to-retail giant China Resources Enterprise Ltd. .

China's beer market, where a 640 millilitre bottle can cost just 12 U.S. cents, is the world's largest by volume and grew nearly 15 percent to 351.5 million hectolitres in 2006, the third consecutive year of double-digit volume growth.

Global competitors such as InBev , Anheuser-Busch Cos. Inc. and Carlsberg are busily expanding to try and claim a slice of the market.

Last year, Chairman Ye Xuquan told Reuters the firm aimed to sell over 1 million tonnes of beer in 2007. But gross margins are threatened by malt prices, which rose 30 percent in the past few months alone, according to DBS Vickers. "With expansion, our sales volume will increase, but the margins could suffer this year," Liang said. In 2006, the firm's gross margin slipped 3.6 percentage points to 40.6 percent.

Still Guangdong-focused

Despite the expansion, Kingway's brands, including Kingway Classic, Kingway Draft, Kingway Gold, are mainly sold in southern Guangdong province. Kingway will still draw over half its sales from that wealthy province for at least the next two years, Liang said.

In May, the firm, which has a market cap of roughly HK$4.6 billion (US$598.7 million), unveiled a plan to raise up to HK$767 million in a rights issue to fund construction of brewery plants and repay a bank loan.

Part of the money is funding a new plant in Foshan, Guangdong, bringing the total to eight plants, Liang said.

Shares in Kingway closed up 0.3 percent on Thursday, beating a 0.9 percent loss on Hong Kong's benchmark Hang Seng Index. They have gained 9 percent in the past three months. ($1=7.641 Yuan, $1= HK$7.8)

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