When the post-90s generation starts to slowly enter their 'midlife crisis', what should be done? Recently, a new term called 'health punk' has emerged online, which is a self-deprecating joke by countless 'middle-aged young men and women' about the century-old question: 'Should I drink goji berry-flavored beer or pu-erh tea-flavored beer?' Whether it's goji berry or pu-erh flavor, it's still beer, which shows the status of beer in people's hearts. And if you walk into any Chinese restaurant, the drinks menu will surely have the name Tsingtao Beer, enough to show Tsingtao's leading position in China's beer industry.

Tsingtao Brewery Suddenly Dumped

On the evening of October 12, Tsingtao Brewery announced that its second-largest shareholder, Japan's Asahi Group, was considering the possibility of transferring all or part of its shares in the company for commercial arrangement reasons. Asahi currently holds 270 million H-shares of Tsingtao, approximately 19.99% of the total share capital. Asahi has been cooperating with Tsingtao for 8 years now, and given its recent tightening and selling off of its business in China, it is not surprising that it is withdrawing from Tsingtao. But purely in terms of its investment in Tsingtao's H-shares, Asahi has made a fortune. On August 27, 2009, Asahi acquired 19.99% of Tsingtao's shares from Budweiser for approximately $670 million. Based on Tsingtao's closing price of HK$32.8 today, if Asahi sells all its shares, it could profit at least $400 million from the transaction.

Tsingtao Brewery has a long history and is China's second-largest beer producer, second only to China Resources Beer, which owns the Snow brand. Facing the dilemma of a 5.53% decline in revenue and a 39.09% decline in net profit in 2016, Tsingtao pointed out in its annual report that after two consecutive years of decline in the Chinese beer market, consumer spending still faces significant pressure. The beer industry's production volume in 2016 decreased by 0.1% year-on-year, and sluggish mid-to-high-end restaurant consumption and abnormal weather had adverse effects on beer sales.

China's beer market has been weak for the past two to three years, with sales significantly lower than before, partly due to the rise of the health trend in recent years. Data from the first half of this year shows that beer sales increased by 0.8% from January to June, the first positive half-year rebound after three consecutive years of decline, indicating that the entire beer industry is finally recovering. According to Tsingtao's 2017 interim report, Tsingtao achieved operating revenue of 15.063 billion yuan, a year-on-year increase of 2.15%; net profit attributable to shareholders of the listed company was 1.148 billion yuan, a year-on-year increase of 7.43%. Sales volume, operating revenue, and net profit all increased, with varying degrees of growth in all major regions, except for the Southeast region, which saw a 45.78% decline in operating revenue due to lack of competitive advantage.

With fierce competition in the domestic beer industry, Tsingtao has set its sights overseas. In the first half of 2017, Tsingtao's external transaction revenue from mainland China was approximately 14.706 billion yuan, a slight increase of 1.7% compared to the same period last year; external transaction revenue from Hong Kong, Macau, and other overseas regions increased by approximately 5.4% and 31.21% respectively, showing that Tsingtao, as a world brand, is rapidly expanding overseas.

Or an Opportunity for Industry Consolidation

The Chinese have a long history of drinking alcohol. Singing with wine and enjoying conversation over drinks seem to be a staple at any Chinese dinner table. In modern society, where stress is high, going for a drink after work has become a habit for many office workers. While baijiu (white liquor) is good, it can easily lead to intoxication; if you want to avoid getting drunk but still enjoy a refreshing drink, beer is the best choice.

Tsingtao has previously stated that with the diversification of consumer demand for beer products leading to structural upgrades in market consumption, and the increase in sales of foreign and imported beers in the domestic market, competition among beer companies in terms of brand, variety, and channels has become more intense. In 2016, the top five companies in the beer industry—China Resources Snow, Tsingtao, Budweiser InBev, Yanjing, and Carlsberg—had market shares of 25.6%, 17.2%, 16.2%, 9.3%, and 5% respectively by sales volume.

Budweiser InBev is a favorite imported brand among many young people, and it is definitely the leader in the imported beer market. Its subsidiary Harbin Beer has also emerged as a dark horse in the beer industry in recent years, winning consumer favor with excellent quality. However, when compared directly with its long-established peer China Resources Beer, Tsingtao still falls slightly short. In the first half of the year, China Resources Beer's sales volume increased by 2.9% year-on-year. China Resources has stated that in the second half of the year, in addition to continuing to use its current product portfolio including Snow Face, Snow Pure, and Brave the World as the main sales line, it will also gradually launch some personalized products in the mid-range, high-end, and super-premium segments, and strengthen sales of dark beer and white beer to help China Resources develop in the mid-to-high-end and central city markets. Tsingtao's sales volume growth in the first half of the year was lower than China Resources', and it is not that Tsingtao lacks mid-to-high-end products. In recent years, it has launched distinctive new products such as 'Classic 1903, Whole Wheat White Beer, Raw Draft, and Pilsner Craft Beer', but in the first half of 2017, these high-end products sold a total of 900,000 kiloliters, not a significant increase from the 890,000 kiloliters in the same period last year.

As early as January, foreign media reported that Asahi planned to sell its stake in Tsingtao, and the market speculated that China Resources intended to acquire this 20% stake. At the interim results meeting, China Resources did not explicitly deny the rumor and generously stated that it would maintain its previous attitude, paying close attention to industry development, imported beer development, and craft beer development, and would also pay attention to any merger and acquisition opportunities, approaching M&A projects with an open mind. Although the CR5 of China's beer industry has exceeded 70%, and industry concentration looks good, price wars to grab market share have been extremely fierce, leading to a continuous decline in the overall gross margin of the beer industry. If China Resources can take over Tsingtao's nearly 20% stake, the alliance of the two giants would undoubtedly be a 'major earthquake' for the beer industry.

Not only are 'health punk' post-90s approaching midlife crisis, but China's beer industry may also be facing a midlife crisis, and Tsingtao is no exception. Asahi has been in the Chinese market for so many years, perhaps because the gross margin of its business in China no longer satisfies it, and it wants to invest in the European market with higher margins, which is the real reason for 'abandoning' Tsingtao. China's beer industry is still in the process of seeking change, and China's consumer market is vast. Whoever takes over Tsingtao's 20% stake, we hope they can inject new vitality into Tsingtao.

Source: Hong Kong Stock Code (ID: finet_ggjm)

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