Hong Kong: China's Tsingtao Brewery, the biggest player in the world's largest and fiercely competitive beer market, posted 6.9 % higher first-quarter net profit on April 30, reined in by surging marketing and sales costs. Shares in Tsingtao, in which the world's biggest beer maker, U.S.-based Anheuser Busch, now has a 10 % stake, skidded over 9% to HK$6.00 after the results, Reuters revealed. "It's a bit disappointing. Selling expenses were higher than expected... The competition remains very severe," said Merrill Lynch analyst Grace Mak, who has a 'sell' rating on the stock.

China has seen a flood of foreign investment from global beer giants like Heineken, Scottish & Newcastle and Carlsberg, making the industry even more competitive. At the same time, higher costs for barley, electricity and transport are squeezing margins in a country where a bottle of beer can cost as little as 18 U.S. cents.

Tsingtao, which has around 13 % of the China market, said net profit was 63.8 million yuan (US$7.7 million) for the three months to March 31, against 59.7 million yuan a year earlier, according to Chinese accounting standards. Its total January-March beer output and sales volume rose 14 % to 7.05 million hectolitres. Turnover rose nearly 11 percent to 1.8 billion yuan. Selling costs jumped around 28 percent, which Merrill Lynch's Mak said was due to marketing a new logo and intensified competition from rivals with foreign investors.

DBS analyst Alice Hui said Tsingtao would not be able to pass on all its higher costs to consumers through higher product prices, given the level of competition in China's regionally fragmented beer market. "They should be able to increase some product prices in the regions where they are very strong," she said.

Shares in Tsingtao, which had rallied on investor enthusiasm for rising purchasing power in China, have now slumped 34 percent this year as investors dump China shares amid concern Beijing will clamp down to cool soaring economic growth. With Tsingtao's Hong Kong-listed shares trading at 22 times forecast earnings, some analysts still regard them as expensive. (US$=8.28 yuan)

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