China: Morgan Stanley has issued an "underweight" rating for Tsingtao Brewery Co Ltd due to the company's lower-than-expected 2004 net profits, Xinhua Financial Network News-ASIA posted on April 12. China's largest brewery posted a net profit of 285 mln yuan for 2004. "Given net profit of 287 mln yuan for nine months in 2004, the full-year implies that the company continued to have difficulty generating a profit in the slow fourth quarter," Morgan Stanley said in a research note.

While domestic consumption of Tsingtao's beer appears strong, the brokerage expects "competition and cost pressure to remain intense."

Anheuser-Busch Cos Inc, which currently holds a 10 pct stake in the Chinese brewery, will convert all its outstanding mandatory convertible bond into H-shares at an average conversion price of 4.57 hkd per share, increasing their stake in Tsingtao to 27 pct. "We had expected the conversion to be done (gradually) to minimize the EPS dilution," Morgan Stanley said, adding that the conversion will result in a 23.4 pct share dilution for the brewery. However, the conversion will allow Anheuser-Busch to consolidate Tsingtao's earnings into its accounts.

Following the conversion, Anheuser-Busch will only hold 20 pct voting rights in the brewery, with the Qingdao city government remaining the largest shareholder with a 30.6 pct economic stake and 37.6 voting rights.

Tsingtao has a targeted beer volume of 41 mln in the first half of 2005, an 11 pct increase from 37.1 mln in the first half of 2004, according to the report. The brewery is trading at 2004 price to earnings of 41 times, according to Morgan Stanley. The brokerage has a price target of 8.10 hkd for Tsingtao. Tsingtao's stock recently traded at 8.45 hkd.

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