Click image for details The beer industry is struggling in a downturn. Recently, we have observed potential changes in volume and price dynamics and catalysts. We focus on four questions: First, is there a possibility of breaking the co-opetition pattern in the beer industry? Second, is the recovery in beer sales a sustainable reversal? Third, apart from catalysts, what are the endogenous trends in the beer industry? Fourth, under long-term trends and short-term catalysts, what should be bought in the beer industry? First, is there a possibility of breaking the co-opetition pattern in the beer industry? Currently, the top five companies in the domestic beer market share are China Resources (24.6%), Tsingtao (17.9%), Budweiser (15.7%), Yanjing (10.5%), and Carlsberg (5%). The tight share of the top five and the strategy of high-end foreign brands to grab share make the industry's overall profitability poor. Recent developments in two events may bring changes to the industry landscape. Watch point 1: Asahi intends to sell 20% of Tsingtao Brewery's equity; who will become the acquirer? We discuss the following three scenarios:

  1. If China Resources is introduced and deeply participates in the company's operations, the synergy between the two will become the absolute market leader, with a 43% share quickly widening the gap from the second-place AB InBev's 16%. However, currently, cooperation between China Resources and Tsingtao faces constraints, including antitrust approval and local government negotiations. 2. If Carlsberg is introduced, the impact of the above two factors is small. Both parties can cooperate in brands and channels for win-win results, with less profit-sharing pressure, making cooperation more likely. Of course, the possibility of a share buyback cannot be ruled out. Asahi may sell 20% of Tsingtao's equity, and the destination is uncertain, but it may bring major changes to the beer industry landscape. Watch point 2: Yanjing Brewery's leadership transition and SOE reform expectations. The term of the company's sixth board of directors ended in August 2015, but the transition has been postponed repeatedly. The delayed election is expected to be completed before July 2017, and the company has also committed in its annual report to promote incentive plans for business backbone and management by June 30, 2017. Combined with the Beijing SASAC's incentive policies for employee stock ownership pilots, expectations for SOE reform are rising. If Yanjing introduces strategic investors through mixed-ownership reform, it will also usher in integration opportunities. Second, is the recovery in beer sales a sustainable reversal? Since 2011, national beer sales have entered a continuous decline, with the first negative growth in 2014. We believe there are three factors leading to the industry downturn: 1. The decline in real estate investment growth has led to a decrease in migrant workers' beer consumption; 2. Age differentiation: the elderly and post-90s have reduced demand for beer; 3. Cool summer climate has led to a decline in beer sales. Production has recovered somewhat since the second half of 2016. In August, beer production turned positive year-on-year, and maintained positive growth for five consecutive months, with 15.2% growth in December. Combined with real estate investment growth, we are cautiously optimistic in the medium term. Third, apart from catalysts, what are the endogenous trends in the beer industry? In the future, as domestic brands deepen cooperation with overseas brands, more domestic mid-to-high-end beer products that meet domestic consumer needs will effectively substitute imported beer, gradually reducing the impact of imported beer on the market. In addition, the international craft beer industry is developing rapidly, while China's craft beer started late, with clear development space; the price difference between Chinese craft beer and ordinary beer is 4 to 5 times, and gross margin and net margin can reach 50% and 30% respectively. Under the trend of consumption upgrading, China's craft beer industry will usher in new development opportunities. Risk factors: The industry's prosperity continues to decline, and M&A integration falls short of expectations. Fourth, under long-term trends and short-term catalysts, what should be bought in the beer industry? For endogenous trends, we recommend Chongqing Brewery and China Resources Beer; for event-driven, we recommend Tsingtao Brewery and Yanjing Brewery. The low-price dilemma under declining sales and balanced competition is a historical problem in China's beer industry. Since August 2016, beer production has recovered somewhat. We are cautiously optimistic in the medium term. Under event-driven factors, the balanced competition pattern in the beer industry is showing signs of breaking, and the industry is showing positive changes and potential for transformation. We suggest active attention. Consider targets from two dimensions: under endogenous trends, recommend Chongqing Brewery and China Resources Beer; under event-driven, recommend Tsingtao Brewery and Yanjing Brewery. -END-