"Are you here to see the land? The workers have already dispersed." On May 10, 2016, a security guard at the Yongchuan branch of Chongqing Brewery Co., Ltd. (600132.SH, hereinafter "Chongqing Brewery") asked an Economic Observer reporter. The factory had been closed for six months, and less than a kilometer away stood the city's newly built Wanda Plaza. Chongqing Brewery, a beer company with a 58-year history, had seen its actual controller change years earlier from Chongqing Textile Group to the global beer giant Carlsberg Brewery Co., Ltd. (hereinafter "Carlsberg"). Carlsberg held a 42.54% stake in Chongqing Brewery through Carlsberg Brewery Hong Kong Co., Ltd. and Carlsberg Chongqing Co., Ltd. It is also the only listed company in China's beer industry controlled by a foreign entity. The 2015 annual report showed that Chongqing Brewery lost approximately 65 million yuan, marking its first reported loss.

Sequential Closures and Shutdowns Starting in April 2015, Carlsberg, as the actual controller of Chongqing Brewery, began cleaning up Chongqing Jiachen Bioengineering Co., Ltd. (hereinafter "Jiachen Bio"), a subsidiary that had fallen into trouble due to the hepatitis B vaccine failure. On April 18, 2015, Carlsberg made a board decision to cease Jiachen Bio's production operations.

At the same time, Chongqing Brewery's then General Manager Kaare Zoffmann Jessen (Chinese name: Yang Guorui) announced his resignation on April 23, 2015.

A month later, Chongqing Brewery (Group) Co., Ltd. (hereinafter "Chongqing Brewery Group"), the former actual controller, quickly sold off all its shares in Chongqing Brewery before the Chinese stock market crash in June 2015. On May 13, 2015, Chongqing Brewery announced that Chongqing Brewery Group had fully reduced its 4.95% stake, severing all ties. From then on, Carlsberg faced no interference from Chongqing Brewery Group in its decisions regarding Chongqing Brewery.

The actual production shutdowns of branches began in October 2015. Chongqing Brewery either terminated production or directly closed four branches: Anhui Jiuhuashan, Guizhou Liupanshui, Chongqing Yongchuan, and Chongqing Qianjiang. Chairman Li Qiji told Economic Observer that these branches had excess beer production capacity.

On October 9, 2015, the board of Chongqing Brewery announced: Given that Anhui Jiuhuashan Co., Ltd. had been loss-making for several consecutive years, to improve the company's operations, enhance market competitiveness, and optimize resource allocation, it decided to terminate all production operations at Jiuhuashan and optimize its sales business. Jiuhuashan would continue to sell beer products.

On November 30, 2015, the board decided to close the Yongchuan branch. The board resolution stated that Yongchuan, only 80 kilometers from the main urban area, had only a packaging line. The beer liquid had to be produced at the Mawangxiang and Dazhulin plants and then transported to Yongchuan for filling. Moreover, due to the off-season, Yongchuan would halt production for 4 to 5 months each year.

An Economic Observer reporter visited the Yongchuan branch in May 2016 and confirmed it was closed, with only a security guard on site. The most valuable asset was the land, now surrounded by residential buildings and just one block from the bustling Wanda Plaza. From this perspective, closing Yongchuan and selling its land would benefit the company's finances.

On January 13, 2016, the board made a third resolution to close the Qianjiang branch. The reasons given: Due to the consumption capacity in the Qianjiang area, beer sales prices were significantly lower than in the main urban area of Chongqing. Also, it was close to other breweries of the company. Based on future market capacity and market share analysis, the capacity utilization of Qianjiang would be very low now and in the future. The equipment was aging, and continuing operations would lead to high unit production costs, hindering market competition and business development, and burdening financial performance.

On February 27, 2016, the board again resolved to close the Guizhou Liupanshui branch, citing the same reasons: limited consumption capacity, outdated equipment, high maintenance costs, and adverse effects on competition and financial performance.

Thus, Chongqing Brewery closed three branches (Yongchuan, Qianjiang, Liupanshui) and halted production at Jiuhuashan.

Accompanying the plant closures were numerous resignations of senior executives. Besides the aforementioned General Manager Kaare Zoffmann Jessen in April 2015, within the following year and a half, eight directors and executives resigned: Assistant to the General Manager Liu Dehua, Deputy General Manager Yu Chao, Director Stephen Patrick Maher (Chinese name: Ma Ruchao), Deputy General Manager Zhang Jingtao, Deputy General Manager Chen Taifu, Securities Affairs Representative Yang Yong, Deputy General Manager Lü Yandong, and Director Gavin Brockett.

With branch closures and financial losses, the executive team kept leaving. In the 2015 annual report, over 80% of the general managers and deputy general managers earning salaries above one million yuan had departed.

Controversial Related-Party Transactions Another contentious issue for Chongqing Brewery was its growing related-party transactions with major shareholder Carlsberg. Data showed that in 2015, related-party transactions amounted to 750 million yuan, mainly involving entrusted processing for Carlsberg and its affiliates, and sales and purchases with Chongqing Jiawei Beer Co., Ltd.

On April 9, an announcement confirming the 2015 daily related-party transactions showed that the actual amounts exceeded the initial estimates by 22.41 million yuan.

Chairman Li Qiji told Economic Observer that due to overcapacity, Carlsberg Brewery (Guangdong) Co., Ltd. (hereinafter "Carlsberg Guangdong") entrusted Chongqing Brewery to produce Carlsberg, Tuborg, and Kronenbourg 1664 Blanc brands. In 2015, Chongqing Brewery processed 26,300 kiloliters of beer, achieving sales of 131.4035 million yuan (including tax).

Chongqing Brewery also paid Carlsberg Guangdong approximately 15 million yuan in trademark licensing fees for Carlsberg and Tuborg, and provided a warehouse in the New North Zone for Carlsberg's use.

At the shareholders' meeting on May 6, 2016, a minority shareholder questioned whether Carlsberg-controlled Chongqing Brewery would, like Coca-Cola with Tianfu Cola, let its local brands (Shancheng and Chongqing) shrink and eventually lose to Carlsberg's own brands.

Chairman Li Qiji responded, "We also hope to see the growth of Chongqing Brewery's local brands, creating a win-win situation with Carlsberg."

Unfortunately, given the shrinking (closed plants) and growing related-party transactions, Chongqing Brewery's market share is being competed for by Tuborg and Carlsberg, both under the same major shareholder.

When asked about the licensing fee for Tuborg, Li Qiji told Economic Observer that all sales within Chongqing go to Chongqing Brewery; outside the region, fees must be paid to Carlsberg.

The 2016 related-party transaction budget showed an increase, not a decrease, totaling 1.066 billion yuan, up 40% from the 750 million yuan actually incurred the previous year.

When Carlsberg completed its acquisition of Chongqing Brewery in 2013, it made a commitment to "avoid potential horizontal competition": On October 31, 2013, Carlsberg promised that, subject to regulatory and shareholder approval, it would inject its domestic beer assets and businesses that potentially competed with Chongqing Brewery into the company. It also committed to fully resolve horizontal competition within 4 to 7 years after the tender offer, and to restrict its domestic subsidiaries from directly competing with Chongqing Brewery.

However, currently, the Carlsberg and Tuborg beers produced by Chongqing Brewery under entrustment are already competing with Chongqing Brewery both within and outside Chongqing. Carlsberg also uses Chongqing Brewery's warehouse and charges brand licensing fees.

Amid these contradictions, Chongqing Brewery reported its first loss. In the 4 to 7 years after Carlsberg's acquisition, the path Chongqing Brewery will take remains to be tested.

(Source: Economic Observer)

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