Leading Independent Investment Research, Morningstar, Inc.

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Leading Independent Investment Research

Morningstar, Inc.

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Thematic (Sector/Industry)

China Beverages / Thematic (Sector/Industry)

Chinese breweries saw a good sign of recovery as the total production volume improved in the second quarter, mainly owing to favorable weather conditions in higher temperatures and a lower year-ago base having declined 11% in second-quarter 2016. However, we don’t intend to change our fair value estimates for <a href="https://www.smartkarma.com/entities/399" target="_blank" data-smartkarma-citation="entities:399:1">China Resources Beer (291 HK)</a> and <a href="https://www.smartkarma.com/entities/1296" target="_blank" data-smartkarma-citation="entities:1296:1">Tsingtao Brewery Co Ltd H (168 HK)</a> at this stage.The total beer production volume recovered from a 2.9% year-on-year decline in the first quarter to 3.7% year-on-year growth in the second quarter, according to the National Bureau of Statistics of China. Meanwhile, we also saw a sign of receding competition from the imported beer, particularly for the high-end segment, as the volume growth decelerated to 1.5% year on year in the second quarter, from 17.4% year on year in the first quarter. Overall, we believe the Chinese breweries, including CR Beer and Tsingtao, are on the track of recovery from stagnated beer consumption in recent years.The total beer production volume in the first half, up 0.8% year on year to 22.69 million kiloliters, was in line with our expectation. On top of rising average selling prices from product mix upgrades and inflation, we anticipate CR Beer to deliver 5%-6% revenue growth in the first half, while expecting Tsingtao’s revenue to grow slightly lower in the range of 3%-4%. In terms of profitability, although the gross margins for both companies are expected to see some downward pressures from increasing costs from the packaging materials, the negative impact should be minimal, thanks to lowering malt costs, improving sales volume, and average selling price hikes. Based on our observation, we didn’t see aggressive marketing and promotional activities from either the domestic or foreign breweries in the first six months. We expect to see a modest increase in operating expense as percentage of revenue in the first half for both CR Beer and Tsingtao, as the competition seemed to be easing.Analyst: Allen Cheng

Chinese breweries saw a good sign of recovery as the total production volume improved in the second quarter, mainly owing to favorable weather conditions in higher temperatures and a lower year-ago base having declined 11% in second-quarter 2016. However, we don’t intend to change our fair value estimates for China Resources Beer (291 HK) and Tsingtao Brewery Co Ltd H (168 HK) at this stage.The total beer production volume recovered from a 2.9% year-on-year decline in the first quarter to 3.7% year-on-year growth in the second quarter, according to the National Bureau of Statistics of China. Meanwhile, we also saw a sign of receding competition from the imported beer, particularly for the high-end segment, as the volume growth decelerated to 1.5% year on year in the second quarter, from 17.4% year on year in the first quarter. Overall, we believe the Chinese breweries, including CR Beer and Tsingtao, are on the track of recovery from stagnated beer consumption in recent years.The total beer production volume in the first half, up 0.8% year on year to 22.69 million kiloliters, was in line with our expectation. On top of rising average selling prices from product mix upgrades and inflation, we anticipate CR Beer to deliver 5%-6% revenue growth in the first half, while expecting Tsingtao’s revenue to grow slightly lower in the range of 3%-4%. In terms of profitability, although the gross margins for both companies are expected to see some downward pressures from increasing costs from the packaging materials, the negative impact should be minimal, thanks to lowering malt costs, improving sales volume, and average selling price hikes. Based on our observation, we didn’t see aggressive marketing and promotional activities from either the domestic or foreign breweries in the first six months. We expect to see a modest increase in operating expense as percentage of revenue in the first half for both CR Beer and Tsingtao, as the competition seemed to be easing.Analyst: Allen Cheng

Chinese Beer Production Volume Improved in 2Q17 Due to Favorable Weather Conditions