Analysis of the Current State of China's Beer Industry

Sales continue to decline, while market size, revenue, and profits remain stable, and the decline in barley prices narrows. By October 2015, the main business revenue of the beer manufacturing industry reached 166 billion yuan, a year-on-year increase of 1.39%, but the growth rate slowed by 2.59 percentage points year-on-year. In terms of sales, the annual beer production in 2015 was 47.16 million kiloliters, a year-on-year decrease of 4.18%. In terms of profits, by October 2015, profits reached 13.9 billion yuan, a year-on-year increase of 6.47%. According to the "2016-2020 China Beer Industry Investment Analysis and Prospect Forecast Report" released by CIC Consulting, beer industry production continued to decline, but revenue and profits maintained positive growth. In 2015, the overall trend of barley prices remained stable, with the year-on-year decline narrowing from 18% at the beginning of the year to 4% at the end of the year. In the first quarter of 2016, barley prices were $121.09 per metric ton, a year-on-year decline of 9.52%. Under pressure from giants, small breweries generally suffered losses, and industry consolidation may continue.

The beer industry remains sluggish, with most 2015 annual reports showing negative growth; Snowflake is fully owned by China Resources, and the domestic competitive landscape remains unchanged. Among listed beer companies, only Chongqing Brewery recorded positive revenue growth in both the 2015 annual report and the 2016 first-quarter report, indicating the industry remains sluggish. In terms of market structure, China Resources acquired SABMiller's 49% stake in China Resources Snow Breweries for $1.6 billion. After the acquisition, China Resources holds 100% of Snow. The transaction will be completed at the time of or within 24 hours of the AB InBev and SABMiller acquisition. The acquisition price is relatively low. In 2015, the market share of the top five beer companies was: China Resources Snow 24.6%, Tsingtao Brewery 17.9%, AB InBev 15.7%, Yanjing Brewery 10.5%, and Carlsberg 5%. Typically, when the CR5 of the beer industry exceeds 80%, the industry structure stabilizes, which is expected to improve the gross and net profit margins of leading companies. In the U.S. beer market, CR5 reaches 84.4%, with AB InBev alone accounting for 45.3% of the U.S. beer market. In 2014, its gross margin was as high as 60.2% and net profit margin as high as 15.2%. In contrast, China's beer leaders are relatively balanced in power, constraining each other, with net profit margins of only 5%-7%. According to the "2016-2020 China Beer Industry Investment Analysis and Prospect Forecast Report" released by CIC Consulting, with SAB completely exiting Snow, the domestic market structure is expected to remain unchanged. As China is the largest beer market, AB InBev, which holds 21% of the global market share, only has 14% in China. After SAB exits Snow, ABI is expected to continue cultivating the Chinese market, engaging in direct competition. The short-term competitive landscape remains intense, and the window for net profit improvement is still uncertain. We will continue to monitor the possibility of domestic beer consolidation and look forward to changes in the market structure that could open the path to higher net profits.

Analysis of Investment Potential in China's Beer Industry

Regions with Future Investment Potential in China's Beer Industry

In developed regions of China, per capita beer consumption has become saturated. For example, per capita consumption in Beijing, Zhejiang, and Fujian far exceeds the national average, leaving limited growth potential in these areas. From the perspective of per capita consumption, the central and western regions have greater development space, such as Guizhou, Yunnan, Hunan, Hubei, Guangxi, Hainan, Jiangxi, and Sichuan. From the perspective of beer prices, retail prices are higher in Jiangxi, Guangdong, Yunnan, Sichuan, Hunan, and Hainan, indicating higher profit levels for beer companies. According to the "2016-2020 China Beer Industry Investment Analysis and Prospect Forecast Report" released by CIC Consulting, future industry growth will largely depend on the growth of beer consumption in these regions.

Below, we illustrate with the situation of listed companies.

1. Tsingtao Brewery's Advantageous Regions and Future Growth Areas

From the company's regional sales situation, Tsingtao Brewery's recent growth has mainly come from its advantageous regions of Qingdao and South China, while sales outside North China and Qingdao have remained basically unchanged. Since per capita beer consumption in Qingdao has reached 150 liters, comparable to Germany's per capita consumption, future beer consumption growth in Qingdao will gradually slow down. Other areas in Shandong outside Qingdao are expected to become new growth points for the company. In addition, per capita beer consumption in South China is still relatively low compared to its economic development level, and with higher profit margins in the region, South China is the source of future profit growth. In North China, squeezed by Yanjing and Snow, short-term performance is unlikely to improve.

2. Yanjing Brewery's Advantageous Regions and Future Growth Areas

Yanjing Brewery's advantageous regions are Beijing and Guangxi. Per capita beer consumption in Beijing has reached 77 liters, leaving limited future growth. In Guangxi, per capita consumption is at a relatively low level, leaving significant room for future development. In addition, per capita consumption in the Fujian market is also higher than the national average, so growth space in that region is also very limited. Yanjing Brewery's main growth areas are Guangxi, Inner Mongolia, and Hubei.

From the distribution of the company's additional share issuance projects, the projects are mainly concentrated in Guangxi, Inner Mongolia, Hubei, Zhejiang, Sichuan, Shanxi, and Xinjiang. From the company's development approach, it strengthens advantageous regions while penetrating non-advantageous regions. Yanjing Brewery is strategically relatively stable, and its advantageous regions of Guangxi and Inner Mongolia still have significant development space.

3. Chongqing Brewery's Advantageous Regions and Future Growth Areas

Chongqing Brewery's advantageous region is Chongqing, while other areas in Sichuan are significantly affected by competition from China Resources Snow. Beer sales prices in Sichuan are relatively high, and profit levels are high, so the company's advantageous regions can still maintain the industry average growth rate. In Zhejiang and Anhui, competition is fierce, but the company's base is small, so it is not ruled out that the company may achieve growth rates higher than the industry average in these regions. In addition, the company acquired Hunan Guoren Brewery, giving Chongqing Brewery significant development space in South China.

Analysis of Beer Varieties with Future Investment Potential

1. Nutritional and Health Beer

Using special brewing processes, adding chrysanthemum, mint, bamboo leaves, honeysuckle, ginseng, ganoderma, wolfberry, jujube, and other traditional Chinese medicinal herbs to produce nourishing nutritional and health beers.

(1) Spirulina Beer: Spirulina is recognized by the scientific community as a source of high-quality plant protein and is the "nutrition champion" on Earth. Spirulina has effects such as enhancing immune function, antioxidant, anti-fatigue, and scavenging free radicals. Spirulina beer, brewed with high-quality malt, rice, and natural spirulina as main ingredients, retains the traditional taste and style of beer while having the unique pure natural green color of spirulina. It is clear and transparent, with high nutrition, low calories, and a mellow taste, and has a faint egg yolk aroma. It is a pure natural nutritional and health beverage.

(2) Compound SOD Beer: Compound SOD beer is produced using selected Australian malt, German Hallertau hops, strong yeast, and added compound SOD ingredients, using a unique fermentation process. In addition to SOD (plant extract), compound SOD also contains tea polyphenols, Hericium erinaceus polysaccharides, more than ten trace elements (zinc, selenium, manganese, etc.), various amino acids needed by the human body, and vitamins such as Vc and Ve. A bottle of compound SOD beer contains more than 200 units of SOD (usually each person only needs 150 units per day), which has obvious health effects, improving nutritional status, promoting metabolism, and enhancing immune function.

(3) Selenium-Enriched Beer: Selenium is an essential trace element for the human body. Cancer, Keshan disease, Kashin-Beck disease, and many other diseases are related to selenium deficiency. Selenium-enriched beer, produced by adding selenium to the original beer production process, not only has a special selenium-supplementing function but also becomes a unique new family of beer.

(4) Gynostemma Pentaphyllum Beer: Gynostemma pentaphyllum beer is made from imported barley, high-quality rice, and Xinjiang aromatic hops as raw materials, with natural mineral water as the base, and added gynostemma pentaphyllum saponins. It is scientifically brewed, not only maintaining the original color, aroma, taste, and nutritional components of beer but also increasing the effective components of gynostemma pentaphyllum saponins. It has a unique aroma of gynostemma pentaphyllum, clear and transparent product, fine, white, and persistent foam, pure and refreshing taste, and strong carbonation. Gynostemma pentaphyllum is a perennial herbaceous vine, containing 83 kinds of ginseng saponin components, with some functions and effects of ginseng, and also contains essential trace elements and vitamins and other nutrients.

(5) Ginger Beer: Using ginger juice and ginger residue separation, then processing the ginger juice, adding ginger residue during saccharification and ginger juice during fermentation, the resulting beer has good quality, unique taste, suitable for winter drinking, and has health effects such as disease prevention, fitness, regulating qi, and strengthening the stomach.

(6) Ginseng Beer: This product adds fortified ginseng components to beer, so that while maintaining the original style, flavor, and nutrition, it also adds the nutritional components of ginseng, with effects such as tonifying qi, nourishing the body, and prolonging life. It has a unique bitter and fragrant taste of ginseng.

(7) Pearl Health Beer: Adding hydrolyzed pearl nutrients, highly active calcium, and various essential amino acids to beer, it becomes a special functional beer with effects such as calcium supplementation and fitness.

2. New Grain Raw Material Beer

Using traditional beer brewing techniques, with corn, wheat, oats, black rice, soybeans, buckwheat, etc. as raw materials to brew new types of beer, including corn beer, wheat beer, oat beer, black rice beer, soybean low-alcohol beer, buckwheat red beer, etc.

(1) Black Rice Beer: Using black rice (also known as fragrant rice or tribute rice) as a brewing raw material. Black rice is rich in nutrition, containing eight essential amino acids for the human body, with balanced amounts close to or exceeding the amino acid pattern. In particular, lysine content is 2-3 times higher than ordinary rice, and it is rich in vitamins B1, B2, and trace elements such as calcium, phosphorus, iron, and zinc. It is truly a treasure among rice. In the Ming Dynasty, the great medical scientist Li Shizhen recorded in the "Compendium of Materia Medica" that black rice has the functions of "nourishing yin and tonifying the kidney, strengthening the stomach and warming the liver, improving eyesight and activating blood." Therefore, black rice beer has certain health benefits.

(2) Corn Beer: This is a new type of beer made mainly from corn. It has a pure taste, clear and transparent color, low alcohol content, low calories, and is rich in protein, vitamins, and amino acids, providing nutritional and health benefits to the human body.

3. Vegetable and Fruit Beer

This type of beer adds various vegetable juices or fruit juices, such as pineapple juice, tomato juice, carrot juice, spinach juice, cucumber juice, etc. It has both the taste of beer and the nutritional components of vegetables and fruits, supplementing the vitamins, minerals, and other beneficial substances needed by the human body. For example, pineapple juice beer is made by adding natural pineapple juice during the brewing process. It has rich foam, is cool and refreshing, with an alcohol content of less than 1%. It maintains the flavor of beer while also having the characteristics of fruit wine. It is a new type of drink suitable for those who are not good at drinking, drivers, and the elderly.

4. Specialty Beer

(1) Milk Beer: It breaks the conventional brewing method, using butter from milk and whey from milk protein as raw materials, adding a small amount of malt and hops, and fermenting with lactose. It has a unique and rich milky aroma when drinking. It is very delicious and memorable, and is deeply loved by people.

(2) Instant Beer: Produced based on the principle of instant coffee, this beer is very convenient to drink. Simply pour the concentrated beer liquid into a cup, add soda or mineral water, stir slightly, and it is ready to drink. The strength can be adjusted to taste, making it extremely convenient.

(3) Weight-Loss Beer: This is a new type of beer with a special weight-loss function. It has the effects of appetizing and strengthening the spleen, clearing heat and calming the mind. Those who want to lose weight can achieve weight-loss effects by drinking an appropriate amount with three meals a day.

(4) Ice Beer: It has a clear body, purer taste, softer and more elegant, with a slightly higher alcohol content than ordinary beer. It can be drunk directly or with ice, adjusting the richness of the beer at will. During the manufacturing process, the beer is first frozen to -4°C, then the ice crystals and impurities attached to them are filtered out to make a purer and more delicious ice beer. This product has a good market in Japan, Canada, and other countries.

(5) "Hot Pot" Beer: This beer is characterized by high calorie content and is suitable for winter drinking. It is brewed with high-quality medical stone mineral water as the base, using premium honeysuckle, imported hop products, etc., carefully brewed. The beer has a coffee color and a soft, pure taste.

(6) Organic Beer: This pollution-free beer introduced by Germany does not add any chemical substances from raw material production to the entire brewing process. It is brewed with barley and hops grown using organic fertilizers from animals and plants. This beer has a stronger sour taste and has become a popular beverage nowadays.

According to the "2016-2020 China Beer Industry Investment Analysis and Prospect Forecast Report" released by CIC Consulting, to prosper the beer market and meet consumer demand, beer companies should not only pursue scale but also adapt to the needs of different consumption levels, consumer groups, and tastes through product diversification. As people's health awareness increases, various health beers will become the mainstream of beer consumption.

Prospect Forecast Analysis of China's Beer Industry

In previous years, China's beer industry continuously played the game of "big fish eating small fish." With the expansion of domestic and foreign industry giants such as China Resources Snow, Tsingtao Brewery, and AB InBev, a large number of small and medium-sized beer producers gradually disappeared.

After a series of mergers, acquisitions, and capacity expansion, China's beer industry entered the era of oligopoly. Currently, the market concentration of the top five domestic beer groups (China Resources Snow, Tsingtao Brewery, AB InBev, Yanjing Brewery, and Carlsberg) has approached 80%. However, with changes in the industry environment and per capita consumption gradually approaching its limit, land grabbing is clearly a thing of the past. The industry is in an era of structural adjustment. According to changes in consumer psychology, beer consumption has begun a transformation from quality to branding. Intense market competition has led beer companies to continuously adjust their product structures and upgrade products and brands.

For the beer industry with huge production capacity, to achieve a shift in growth speed without losing momentum, in addition to accelerating product upgrades, it is also necessary to do a good job in marketing. In terms of offline channels, beer companies comprehensively improve market coverage, actively expand the vast rural market, and strive to open up the "last mile" of beer sales. In terms of online channels, beer giants generally open flagship stores on Tmall, JD.com, 1号店, etc., achieving consumption convenience through e-commerce.

Although China is already a major beer producer, it has not yet reached the level of a strong beer country. To achieve a qualitative transformation from a major beer producer to a strong one, it is necessary to seriously face and solve a series of unreasonable phenomena and problems in the current beer industry. Secondly, due to long-term crazy mergers and acquisitions, large-scale repeated construction, and capacity expansion, the Chinese beer industry has intensified disorderly market competition. Monopolistic behaviors such as bullying the market are becoming increasingly prevalent. Coupled with the intervention of foreign capital, the entire industry has fallen into a monopoly quagmire.

The "2016-2020 China Beer Industry Investment Analysis and Prospect Forecast Report" released by CIC Consulting believes that excessive competition in the beer market has led to serious homogenization competition among domestic beers. In the past, they have been fighting price wars and seizing terminals, but there are deficiencies in product innovation. With consumers' demand for personalization and the advent of the Internet+ era, some new products have been continuously launched, making consumers pursue fun, personalized, and youthful products. However, at present, domestic beers still lack these personalized elements to attract young consumers. In terms of product packaging and taste innovation, imported beers are significantly better than domestic beers. Because imported beers are diverse, including pasteurized beer, draft beer, fresh beer, dark beer, wheat beer, and even some high-alcohol beers, craft beers, etc., they fill some gaps in the domestic beer market.

(I) CIC Consulting's Forecast of China's Beer Industry Production from 2016 to 2020

Based on the above factors and data, CIC Consulting predicts that in 2016, China's beer industry production will reach 47.88 million kiloliters, and by 2020, it is expected to reach 54.44 million kiloliters. The average annual compound growth rate for the next five years (2016-2020) will be approximately 3.26%.

(II) CIC Consulting's Forecast of China's Beer Industry Total Assets from 2016 to 2020

Based on the above factors and data, CIC Consulting predicts that in 2016, China's beer industry total assets will reach 246.7 billion yuan, and by 2020, it is expected to reach 311.5 billion yuan. The average annual compound growth rate for the next five years (2016-2020) will be approximately 6.00%.

(III) CIC Consulting's Forecast of China's Beer Industry Sales Revenue from 2016 to 2020

Based on the above factors and data, CIC Consulting predicts that in 2016, China's beer industry sales revenue will reach 204.7 billion yuan, and by 2020, it is expected to reach 237.9 billion yuan. The average annual compound growth rate for the next five years (2016-2020) will be approximately 3.83%.

(IV) CIC Consulting's Forecast of China's Beer Industry Total Profits from 2016 to 2020

Based on the above factors and data, CIC Consulting predicts that in 2016, China's beer industry total profits will reach 16.60 billion yuan, and by 2020, it is expected to reach 22.81 billion yuan. The average annual compound growth rate for the next five years (2016-2020) will be approximately 8.27%.

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