Lion out to turn fortunes in China

By DITA DE BONI

Lion Nathan plans to sell its Chinese assets or find a partner to help finance the loss-making operation.

Lion's result for the year to August - post-tax earnings up 6 per cent to $A130.2 million - included higher pre-tax profits from both Australia and New Zealand.

But the Chinese operation continued to drag on profitability, losing $A24.3 million over the 12 months.

That was slightly better than last year's $A27.2 million loss, but still disappointing and unacceptable, says chief executive Gordon Cairns.

"We can't see a way of making money in China," he said from Sydney. "We cannot see a way of earning more than our weighted average cost of capital there."

Lion has not yet booked a profit from China, which it entered in 1995.

In the past 12 months Lion Nathan increased its shareholding in its Wuxi brewery to 90 per cent, but is now canvassing potential partners to carry the cost of assets in the face of volumes that have fallen 30 per cent over the year.

Mr Cairns would not elaborate further on the outlook for China. He said Lion was "in discussions" with unspecified parties.

In the meantime, the company says it will take a more "focused and lower-cost approach" to the Shanghai market, with particular emphasis on supermarkets, as well as continuing to drive higher-margin premium brands across the country.

In Australia, NZ and China combined, Lion Nathan's revenue was up by 6.2 per cent to $1.5 billion, and earnings per share up 8 per cent, to 24.2Ac.

A dividend will not be announced until November, when the company's 13-month result will be published to coincide with results from majority shareholder Kirin of Japan.

The NZ operation gave Lion the most heartening story, with local pre-tax earnings jumping 13.5 per cent on the back of substantial premium segment growth after two years of profit falls in the local market.

Sales of Stella Artois - now brewed in NZ - grew 50 per cent, and Steinlager achieved a 15 per cent growth spurt from its branding link with the America's Cup.

Costs also fell, with local staff cut by 80 and overheads driven down to $33.3 million in the period. The company's market share against major rival DB dropped slightly to 60.7 per cent, and sales of mainstream beers such as Lion Red dipped over the period.

But the thrust for NZ will be on building a "one-stop-shop" liquor business incorporating NZ Wines & Spirits and a distribution deal with Montana, further cemented by Lion's 28 per cent shareholding in the wine company.

The year's activities were characterised by strategic moves, including the buying of 43 Victorian hotels for $A60 million and the 28 per cent of Montana for $127 million.

The company also finally flicked Pepsi Australia to Cadbury Schweppes for an undisclosed sum and spent $A46.1 million on a share buyback.

In presenting the latest full year result, Mr Cairns drew a blue dotted line between the 1995-1997 period and the 1998-2000 period to separate the substantial losses and very modest gains of the earlier period from the growth in the latter years.

It is a message the chief executive does not tire of giving shareholders.

"Having demonstrated that we are able to deliver consistently good performance from our core brewing businesses we are now looking for opportunities to invest in growth," he said.

"In the last 12 months we have made considerable progress and with our robust underlying cash glow and strong financial position we have the ability to invest further in securing quality growth assets."

Lion Nathan shares closed up 10c to $4.90 on yesterday's result.