Ganbei (cheers) to Tsingtao Beer

Founded in 1903 by enterprising British and German merchants in the city of Qingdao on China’s East Coast, Tsingtao Brewery Company Limited has become a conglomerate intent on domestic and Asian domination. Not only is the Chinese beer industry ripe for long-term investment, Tsingtao Brewery is leading the charge.

Fact: China’s beer industry is the most profitable in the world. This is a fact that investors have caught onto – Tsingtao is trading at 24 times estimated earnings and China Resources at 27 versus Anheuser Busch’s 15 and Carlsberg’s 10. In 2012, Chinese beer breweries produced 49.02 million kiloliters, which put China as the world’s largest beer market ahead of the USA. Just last year, China’s beer industry production grew by 5% – double the 2.5% growth for the global market. Compared to stagnant beer sales in developed markets, China’s beer consumption per capita has the potential to increase to two times the level in the USA. Per capita beer consumption in 20 major Chinese provinces averages less than 33 liters, way below 100 in some European countries, 40 in South Korea and Japan and 65 in Brazil. After three decades of consolidation in the Chinese beer industry, three domestic brands dominate - China Resources Snow Brewery, Tsingtao Brewery and Yanjing Brewery – and three foreign brands - Anheuser-Busch InBev, SAB Miller and Carlsberg. With 80 breweries and a 21 percent market share, the largest beer manufacturer by production volume is China Resources Snow Breweries – a joint venture between China Resources Enterprises Ltd and the world’s second largest brewery SAB Miller. Tsingtao Brewery follows with 16%, Beijing Yanjing Brewery (11%), Anheuser Busch (11%), and Carlsberg (8%). Perhaps the greatest immediate push for growth by any of the major brewers in China is Anheuser-Busch who produced around 5.8 million tons of beer in 2012 and has plans to invest RMB20 billion in constructing around ten new manufacturing plants to achieve its aim of 15 million tons by 2015. However, operating margins at domestic brands Tsingtao and Yanjing are less than 10%, which is significantly below the 15% mark at Carlsberg and Anheuser Busch. Furthermore, the price of beer in China right now is far below the international level, which means there may be room to leverage this to increase profits.

One area of the Chinese beer market where there will be a battle for control is in premium draught beers, currently just 5% of China’s overall beer market. This is tiny compared to 50% in developed markets such as France and Germany and 30% in the USA. By 2020, premium beer is projected to account for 25% of China’s annual production as a wealthier middle class emerges and brand awareness and lifestyle become more dominant issues. Anheuser Busch currently dominates China’s premium beer market with a 45% share. Tsingtao is second with a 15% share followed by Heineken (7.5%) and Carlsberg (6%). Now that they are investing in this market segment, Tsingtao, Yanjing and China Resources are likely to see their premium segment grow more rapidly than foreign brands as they are helped by their vast sales network, nationwide presence, cost advantage, and the fact that they are producing a Chinese product that is a sign of China’s economic development. The domestic brewers are attracted by the allure of higher profit margins of around 50% for premium beers as opposed to 30% for mainstream products as premium beers are typically priced 30-50% higher than regular beers.

The well-hopped standard pilsner with 4.7% alcohol - Tsingtao Beer, produced by Tsingtao Brewery Company Limited, has been the best selling beer in China ever since 2002 and the most widely exported Chinese beer (82 countries). Tsingtao Brewery has 60 breweries in 19 locations across China. Tsingtao Brewery is currently China’s second largest brewer by capacity and has been listed on both the Hong Kong and Shanghai stock exchanges since 1993. In fact, Tsingtao accounts for about 16% of the domestic market and 50% of China’s beer exports. 2012 was a great year for Tsingtao as their revenue increased 13% from the last year with their revenue growth contributing to half the entire growth of the Chinese beer industry in 2012. However, net profit for Tsingtao Brewery in 2012 was around US$450 million, which was short of analysts’ expectations as sales growth was hit by rising labour, packaging and raw materials (barley) costs. Tsingtao was rated the top Chinese brand by foreigners according to an Interbrand survey, with Lenovo and Huawei in second and third respectively. This has largely been a result of cleverly deployed marketing campaigns using the 2008 Olympic Games, US National Basketball Association and the annual international Tsingtao Beer Festival. Tsingtao also set up a partnership with Anheuser-Busch to use their existing supply-lines and relationships to successfully penetrate the North American market and become the number one selling Asian beer brand on the continent. Faced with ever-increasing costs in China, Tsingtao Brewery have adopted a strategy of investing in companies and assets in less developed countries as well as continually focusing on increasing their products’ value in order to maintain a balance between price and high-quality. Tsingtao’s expansion strategy prioritises the domestic Chinese market, Asian markets and emerging markets in Latin America, ASEAN and the Middle-East. 2012 saw the completion of Tsingtao Brewery’s new plants in central and northwestern China that will help the company to produce more than 10 million kiloliters by 2014, about one-fifth of China’s entire beer production. Tsingtao Brewery is aiming to expand market share in China by raising sales volumes in central and northwestern China as the Eastern market is saturated. In 2011, they opened a manufacturing plant in Bangkok to service South-East Asia, which is the first overseas foray by a Chinese brewery. By setting up their plant in Thailand, they can avoid tariffs in Thailand, logistics can be shortened, and freshness of beers guaranteed as well as access to cheap labour. One arm of its global strategy is based on building a premium beer brand. To compete in the high-end market where foreign breweries have developed greater advantages, Tsingtao has introduced Augerta, using a German formula, and Yipin Draft, which uses hops from the Czech Republic.

There is a lot of room for growth in China’s beer market, but now the key will be through innovation. The companies that look at innovative distribution channels such as e-commerce and the development of logistics dealing with retail terminals could differentiate themselves from both domestic and international competitors. Innovation also has to follow the change in beer consumption behaviour in China which is shifting from drinking the most volume to enjoying the drink. Buying Tsingtao Brewery shares are a long-term bet and are currently priced at CNY37.4 on the Shanghai stock exchange and HKD52.2 on the Hong Kong stock exchange with 11% one-year return and dividend growth of 5.05%. So grab a Tsingtao beer and say ‘ganbei’ because that’s what one billion people will be doing very soon.