China: Tsingtao Brewery Co. Ltd. to expand sales volumes by 7-10% in the coming years

Tsingtao Brewery Co. Ltd., China's largest beer maker, forecast strong growth in the second half as a focus on premium brands and cutting expenses offsets rising raw materials costs and intensifying competition, Reuters said September 07.

Executive Director Liu Yingdi also said at the Reuters China Century Summit that he hoped to expand the firm's sales volumes by 7 to 10 percent annually in coming years - keeping pace with economic growth of about 10 percent annually that is fattening incomes.

Volume sales rose 10.5 percent to 23 million hl in the first half - lagging the overall market's 14 percent growth. But Tsingtao's sales of more profitable premium brands jumped 24 percent, with its six top brands making up three-quarters of sales volume.

The firm, which embarked on a rapid buying spree in the late 1990s to stay ahead of homegrown rival Yanjing Brewery Co. Ltd., is now focusing inward to protect its 14 percent market share.

It's trying to shore up profitability by boosting productivity through technology and supply chain management, Liu said.

"We're now in a consolidation phase and will expand from within," Liu said, adding he is pinpointing provincial cities for growth.

"For acquisitions you need to be selective. The number of appropriate targets is dwindling and the conditions for acquisitions are also worsening."

The price InBev paid for Fujian Sedrin earlier this year was US$103 per hectolitre of sales, almost double the price Anheuser-Busch paid for Harbin Brewery in 2004.

Although Tsingtao has been firmly domestically focused, its beer is sold across the globe, and Liu said he would not rule out eventually venturing abroad - setting up an overseas plant to shave shipping costs, for instance - if the market dictated it.

"We will go where the market is," Liu said, pointing to the enormous potential in China's huge rural areas as one example.

"Income in the rural areas is improving gradually and the consumption of beer is also rising," said Liu.

Tsingtao, arguably China's most recognizable global brand, posted a 22.5 percent rise in first-half net profit as surging sales and lucrative exports helped offset rising electricity, transport and raw material costs.

Profit margins are thin in the Chinese beer market, where a 0.6 liter bottle of beer can sell for 25 U.S. cents or less.

"There's too much capacity in the market, raw material costs just keep rising, and we can't raise prices" because of heavy competition, Liu said.

But Liu said he was "very optimistic" about profit growth because of cost controls, strong exports and premium brand growth. Exports have an operating margin of 28 percent - compared with Tsingtao's overall 6.5 percent margin - but make up just 3 percent of overall sales.

"We're very confident on the second half," Liu said, adding the company should be able to maintain or surpass the 22.5 percent growth seen in the first six months.

Analysts are expecting Tsingtao to post a 25 percent increase in annual net, according to Reuters Estimates.

Liu estimates that the Chinese beer market, the world's largest by volume, is growing at about 6 to 7 percent annually, on average. Nationwide volumes leapt 14 percent in the first half of 2006, a pace Liu reckons is not sustainable.

Tsingtao, founded more than a century ago by German investors in the coastal city of Qingdao and now 27 percent-owned by top U.S. beer maker Anheuser-Busch Cos. Inc. (BUD.N: Quote, Profile, Research), is relying on its eponymous flagship brand to shore up margins.

China's beer market is attracting a flood of investment from global players such as SABMiller, Heineken and Carlsberg.

But Chinese drink about 25 litres of the brew per person a year on average, lagging by far the 78 litres that Americans imbibe and more than 120 litres that Germans gulp down annually.

(US$=CHY7.96)

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