China: Xinhua Far East Upgrades Tsingtao Brewery Co. Ltd to BBB+ Issuer Rating

Xinhua Far East China Ratings upgraded on February 24 Tsingtao Brewery Co. (Nachrichten) Ltd ("Tsingtao Brewery" or "the Company"; SH A 600600; HK0168) from BBB- to BBB+ domestic currency issuer credit rating. Its rating outlook remains stable.

The upgrade was based on Xinhua Far East's positive view about Tsingtao Brewery's change in business focus from external acquisition to internal consolidation, as well as its equity relationship and strategic incorporation with Anheuser-Busch ("AB"), its improved cash flow and its lower debt burden since 2002. On the other hand, Xinhua Far East recognizes that there are risks of further profitability erosion due to intensified competition as a result of the ever-increasing beer capacity surplus in China, especially in lucrative regions, and due to the company's aggressive marketing strategy.

Tsingtao Brewery's debt repayment ability has significantly improved since 2002. This, Xinhua Far East believes, has mainly been due to constraints on capital expenditure and new shares issued to AB. Its gross debt/ total capital fell to 18.8% in the third quarter of 2005 from 43.2% in 2001. EBIT interest coverage increased to 6.4(X) in the first half of 2005 from 1.6(X) in 2001, while net debt/ EBITDA changed to net cash status in 2005 from 2.8 in 2001.

Xinhua Far East notes that since 2002 Tsingtao Brewery started to slow down the pace of acquisition and its investment in new capacity as it shifted its focus from capacity expansion to synergy improvement. In Xinhua Far East's view, the Company is unlikely to resume its large-scale capital expenditure because it has almost finished its nationwide capacity allocation and secured its position as one of the big two in the domestic beer market. At the same time, Xinhua Far East expects that the constraints on investment will continue to benefit its cash position in the coming years. Its cash flow from operation (CFO) began to surpass cash outflow from investment (CFI) in 2002. The surplus between CFO and CFI recorded RMB467 million, RMB604 million, RMB1001 million and RMB1178 million from 2002 to the third quarter of 2005.

Xinhua Far East also acknowledges the contribution from AB to the Company's rating profile. Tsingtao Brewery approved AB to execute conversion options on accumulatively HKD1.42 billion in convertible bonds in July 2003 and April 2005 successively; this accounted for about 50% gross debt at the end of 2002.

On the other hand, Xinhua Far East notes that there are factors that cloud Tsingtao Brewery's future and prevent it from obtaining a high rating:

Although Tsingtao Brewery's EBIT margin rose to 7.2% in the third quarter of 2005 from 4.6% in 2001, its profitability remained weak compared to its major competitors. Xinhua Far East attributes its margin improvement to synergies gained from internal consolidation and the introduction of a higher- end product mix, but expects these two drivers might not help to the same degree in the future.

Firstly, Xinhua Far East believes the low-median-end products will continue to dominate the Chinese beer market. The narrow high-end niche, which comprises less than 10% and is slow-growing, is set to become too crowded in the near future, with more and more foreign giants entering into China's market and focusing first on regional and high-end markets. Secondly, the geographic diversity of acquired targets, management discrepancies and the residual stakes held by local governments push further synergy improvements a longer way into the future than expected.

As competition heats up nationwide, the Company faces greater pressures in regions where it used to have dominant power and lucrative profits. Since the profit from Guangdong Province contributes considerably to the aggregate profit of Tsingtao Brewery, Xinhua Far East believes that the Company's profit margins could deteriorate once a price war is initiated in Guangdong Province as regional supply is estimated to double the size of demand in 2007.

Xinhua Far East also believes there are somewhat higher liquidity risks for Tsingtao Brewery as the short-term borrowing accounted for 87.7% of gross debt in the third quarter of 2005.

The rating outlook for Tsingtao Brewery remains stable.

Tsingtao Brewery is current the largest beermaker in China. As of year- end 2004, the Company recorded 37.1 million hls in beer sales and reported turnover and EBIT of RMB7.7 billion and RMB558 million respectively. The Company has the most extensive nationwide capacity allocation among the native players and enjoys overwhelmingly high market share in the Qingdao region. Sales in that region and Guangdong Province accounted for 31.5% and 29.5% total sales respectively in the first half of 2005. Its brand "Tsingtao" is among the most widely recognized in China. Being the second largest shareholder, Anheuser-Busch Group holds a 27% stake in Tsingtao Brewery and enjoys 20% voting rights in the Company.

Tsingdao Beer (SH A 600600) is a constituent of the Xinhua/ FTSE China A50 Indices. As of market close on February 23, 2006, its total market capitalization and investible capitalization were RMB 6.27 billion and RMB 1.88 billion respectively.

About Xinhua FTSE China A50 Index

The Xinhua FTSE China A50 Index is a real-time tradable index comprising the largest 50 A Share companies by full market capitalization. Designed to meet the needs of QFIIs, it can be used as a basis for both on-exchange and OTC derivative products, mutual funds and ETFs. For daily data and further information, see http://www.xinhuaftse.com/ . For daily data and further information, see http://www.xinhuaftse.com/.

About Xinhua Far East China Ratings

Xinhua Far East China Ratings (Xinhua Far East) is a pioneering venture in China that aims to rank credit risks among corporations in China. It is a strategic alliance between Xinhua Finance (TSE Mothers: 9399), and Shanghai Far East Credit Rating Co., Ltd. Shanghai Far East became a Xinhua Finance partner company in 2003 and the first China member of The Association of Credit Rating Agencies in Asia in December 2003.

Capitalizing on the synergy between Xinhua Finance and Shanghai Far East, Xinhua Far East's rating methodology and process blend unique local market knowledge with international rating standards. Xinhua Far East is committed to provide investors with independent, objective, timely and forward-looking credit opinions on Chinese companies. It aims to help investors differentiate the credit risks among the corporations in China, thereby, cultivating their awareness and promoting information disclosures and transparency in China market. For more information, see http://www.xfn.com/creditrating .

About Xinhua Finance Limited

Xinhua Finance Limited is China's unchallenged leader in financial information and media, and is listed on the Mothers board of the Tokyo Stock Exchange (symbol: 9399) (OTC ADRs: XHFNY). Bridging China's financial markets and the world, Xinhua Finance serves financial institutions, corporations and re-distributors through four focused and complementary service lines: Indices, Ratings, Financial News and Investor Relations. Founded in November 1999, the Company is headquartered in Shanghai with 21 news bureaus and offices in 18 locations across Asia, Australia, North America and Europe. For more information, please visit
http://www.xinhuafinance.com/

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