Today, China Resources Beer (Holdings) Company Limited announced its full-year results for 2019. According to the report, China Resources Beer achieved consolidated turnover of RMB 33.19 billion, up 4.2% from RMB 31.867 billion in 2018; net profit reached RMB 1.312 billion, up 34.3% year-on-year; and profit before interest and tax was RMB 2.163 billion, up 47.6% year-on-year.

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According to the analysis of the report, the growth was mainly driven by the following four factors:

1. Impairment losses on fixed assets from capacity optimization decreased compared to 2018

In recent years, China Resources Beer has been increasing its integration of breweries, continuously promoting the optimization of capacity layout, removing inefficient capacity, and increasing the average scale of production plants.

According to previous annual reports, in 2016, China Resources Beer operated 98 breweries; in 2017, the number of breweries decreased by 8; in 2018, 13 breweries ceased operations; in 2019, impairment losses on fixed assets and inventories were RMB 700 million and RMB 352 million respectively, and 7 breweries ceased operations during the year. In other words, within three years, China Resources Beer closed nearly 30 breweries.

By the end of 2019, China Resources Group operated 74 breweries in 25 provinces, municipalities, and autonomous regions across mainland China, with an annual production capacity of approximately 20.5 million kiloliters.

2. Efficiency improvements led to cost savings

However, the reduction in breweries does not mean a decline in production capacity. China Resources Beer disclosed in its report that beer sales volume increased by 1.3% year-on-year to approximately 11.434 million kiloliters.

Moreover, it must be pointed out that the improvement in efficiency is not only reflected in the reverse growth of capacity after plant closures. According to public data, since 2016, China Resources Beer's profit has more than doubled, but the number of employees has decreased from nearly 60,000 to just over 30,000, a reduction of nearly half.

After efficiency improvements and staff reductions, related employee compensation and resettlement costs can be saved. However, even so, in 2019, related employee compensation and resettlement costs for China Resources Beer reached approximately RMB 826 million.

3. New enterprise annuity plan

Fortunately, according to the report, the China Resources Beer Group implemented a new enterprise annuity plan effective from January 1, 2017, in 2018. The one-time provision for the 2017 annuity expense (approximately RMB 117 million) and the decrease in fixed asset impairment offset the increase in employee compensation and resettlement costs and the costs arising from the acquisition of Heineken China.

4. Contribution from Heineken China since the acquisition

In April 2019, China Resources Beer acquired the businesses of the Heineken Group in mainland China, Hong Kong, and Macau, namely Heineken (China) Enterprise Management Co., Ltd., Heineken Trading (Shanghai) Co., Ltd., Heineken Beer (Shanghai) Co., Ltd., Heineken Brewing (Guangzhou) Co., Ltd., Heineken Brewing (Zhejiang) Co., Ltd., Heineken Brewing (Hainan) Co., Ltd., and Heineken Hong Kong Limited (collectively, "Heineken China"), acquiring all equity interests in these seven companies.

In recent years, on the one hand, due to an aging population and a decline in the number of young people aged 20-25, the contribution to retail volume has been minimal; on the other hand, the reduction in the number of blue-collar workers in cities has led to a decrease in beer sales, especially in low-end products.

According to a report by market research firm Mintel, in the next five years, it is expected that the retail volume of China's beer market will decline, but the premiumization trend will likely maintain retail value growth.

China Resources has also been committed to building the premium market. Hou Xiaohai, General Manager of China Resources Beer, once said, "One of the ultimate goals of acquiring Heineken China is to win the premium market and surpass competitors." Through the acquisition of Heineken, China Resources can obtain two resources: one is the international brand resources of Heineken, and the other is Heineken's current market share and some channel resources in China's premium market.

As for the future of Heineken, China Resources is also full of confidence, hoping to introduce a series of Heineken brands to segment the market at prices between RMB 12 and RMB 15, thereby gaining "a market share close to that of Corona."

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In addition to introducing Heineken brand products, in 2019, China Resources Beer continued to enrich its product portfolio. In April and July 2019, it launched two new premium products, "Snow Marrs Green" and "Black Lion White Beer," which, together with the high-end "Jiangxin Yingzao" and the mid-to-high-end "Brave the World SuperX" launched in 2018, further drove the sales of mid-to-high-end beer.

Among them, "Snow Marrs Green" successfully completed its new product launch through "trendy launch event + celebrity endorsement." In addition, "Brave the World SuperX" and "Jiangxin Yingzao" continued to enhance brand image through IP-based promotion, providing strong momentum for the value enhancement and rejuvenation of the entire "Snow" brand.

The report also mentioned that, benefiting from the brand reshaping strategy, the product structure of "Snow" further improved. Coupled with the impact of the acquisition of Heineken China, sales of mid-to-high-end beer increased by 8.8% compared to 2018, leading to an overall average selling price increase of 2.8% compared to 2018.

At the same time, due to the efficiency improvements from capacity optimization and organizational restructuring, which saved part of the increased selling costs after the acquisition of Heineken China, as well as some raw material cost increases, the gross profit in 2019 increased by 9.2% compared to 2018, reaching RMB 12.226 billion.

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At the end of the business review, China Resources Group expressed its outlook for the future, stating that it will take "Decisive Battle for Premium, Quality Development" as its strategic management theme, implement various high-quality growth initiatives, actively practice the decisive battle for premium, and continue to leverage the long-term strategic cooperation with the Heineken Group to enhance the Group's brand competitiveness in the premium market.

In addition, China Resources Beer also discussed the impact of the COVID-19 pandemic. During the pandemic, the company resumed work and production gradually through remote work or shift work with the approval of provincial and municipal governments, and made various arrangements to quickly resume normal business and production once the pandemic passes. However, it is expected that the pandemic will have a certain negative impact on the Group's production and sales.

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