China intoxicates brewing giants

SHENZHEN - The scent of beer fills the air as green bottles of Kingway lager clatter across Guangdong Brewery conveyor belts at the rate of 38,000 an hour.

But it is the smell of money that intoxicates the world's beermaking giants as they scramble to invest in China, where the average person drinks just 19 litres of beer a year, compared with about 50 in Japan and 84 in the United States.

Such potential has drawn top two global brewers SABMiller and Anheuser-Busch into a showdown for control of Harbin Brewery, China's fourth-largest.

"Nobody's willing to be left behind," said ING Financial Markets analyst Lilian Leung.

Deals are flowing despite the hangover of loss-making years when foreign firms had a tough time selling global brands in a country where a 640ml bottle costs as little as 18USc.

"In the late 80s and early 90s, foreign brewers entered the China market with a view that economic reforms brought business opportunities," said Ye Xuquan, chairman of Guangdong Brewery, which makes the popular Kingway brand.

Price cuts have since stabilised and Chinese brewers are growing profitable, but margins are tight by global standards.

Now, foreign players are investing for the longer-haul, with the expectation that rising incomes and ongoing consolidation will ultimately bring pricing power and better profitability.

"Foreign firms are eyeing the future of China, not the market they see now," said Ye.

His firm aims to jump from 12th place with 2 per cent of the market into the top five in five years. It recently sold a 21 per cent stake to Dutch giant Heineken for US$71 million ($113 million).

China's beer industry is crowded with 400 brewery firms, and consolidation is expected to continue for several years.

Shen Changbao, vice-president of Shandong province-based Jinan Beer Group, predicted that seven or eight players would eventually dominate the market. Jinan is courting investors and said it recently hosted an Anheuser-Busch executive.

"The potential of China's beer market is huge, given rising disposable income and consumption," Shen said.

Foreign funds sloshing around China make breweries expensive.

Anheuser-Busch, which already plans to expand its 10 per cent stake in market leader Tsingtao Brewery to 27 per cent, triggered the battle for Harbin when it struck a deal to buy 29 per cent of the firm for US$139 million, or HK$3.70 (75c) a share.

Last year, SABMiller paid just HK$2.29 a share for a similar stake in Harbin. Its US$553 million bid for the firm is priced at HK$4.30 per share, a hefty four times Harbin's book value.

But SABMiller also owns 49 per cent of number-two producer China Resources Breweries. Together, CRB and Harbin control 60 to 65 per cent of the market in northeast China, which would give SABMiller the sort of pricing power that has eluded the sector.

A Harbin buyout might be less compelling for Anheuser-Busch.

"If A-B pays HK$5 [a share] ... they've overpaid," said Leung.

Other recent investors include Carlsberg Breweries of Denmark and Britain-based Scottish & Newcastle. Belgium's Interbrew has also inked a deal with its China partner Zhujiang to distribute its premium Beck's brand.

Bolstered by foreign interest in the sector, Guangdong Brewery's stock price has more than doubled over the past year, trading at 16 times forecast earnings. Harbin and Tsingtao trade at a steep 31 and 25 times forecast 2004 profits, respectively.

Not every brewer is drunk with the prospects of China.

Lion Nathan, Australia's second-largest brewer, has lost money in its nine years in China and said recently that the six big brewers, including itself, that share 51 per cent of the Yangtze delta market would probably merge or form alliances.

"Clearly, that relatively overcrowded market can't continue," chief executive Gordon Cairns said, prompting analysts to suggest the firm, 46 per cent-owned by Japan's Kirin Brewery, may take advantage of high China valuations to sell.

Lion Nathan is considering teaming up with Heineken to save Lion Nathan's unprofitable $116 million operation in China, Cairns said.

"We've been having talks with Heineken beyond just Australia," Cairns said. "As probably the most international brewer in the world, they're obviously ambitious to do something in China."

- REUTERS

THIRSTY WORK

Foreign brewers with interests in China

* SAB Miller, UK

* Anheuser-Busch, US

* Heineken, Netherlands

* Carlsberg Breweries, Denmark

* Scottish & Newcastle, UK

* Interbrew, Belgium

* Lion Nathan, Australia