Tsingtao Brewery-A Alert:No signal of turnaround
Continued market share loss leads to poor 2016results
Stripping out the noises of one-off impacts such as acquisition of the SuntoryJV and making up for late tax payment of RMB338m in 2016, TsingtaoBrewery reported disappointing FY16results of 5.5% revenue decline and22.2% core earnings decline. Its core FY16EPS of RMB0.61per share is 8%below our forecasts. Singling out the fourth quarter, TB’s net revenue declineworsened to 12.7%. All metrics point to the fact that TB is losing market sharein the Chinese beer market.
Losing volume with weak ASP trend suggests deteriorating market position
In 2016, TB lost 6.6% volume and managed to increase its ASP by 1.3%,lagging behind its main competitors CR Beer (0.3% volume growth and 2.3%ASP hike) and ABInBev China (volume dropped 1.2%, ASP improved 2.7%).We admit the Chinese beer market was tough especially in 2015and 2016,however, TB’s market positioning is deteriorating more because of its ownproblems – such as brand fatigue and lack of proper motivation fordistributors.
Contracting to a regional player
Breaking down to each region, TB registered massive revenue retreat in tworegions, South China (-15%) and South East China (-39%). Revenue in threeother regions (Shandong Province, North China and East China) is effectivelyflat. A warning signal is South China turned to a loss after being profitable lastyear. So far, TB has only two home markets, Shandong and North China,which is mainly Shaanxi Province where it has a local brand Hans, that are stillprofit-making. If this trend continues, Tsingtao faces the risk of becoming aregional beer brand.
Slightly adjusted PT to RMB24.74on DCF model (8.8% WACC, 2% TG)
We keep our FY17EPS forecast unchanged and slightly revised up our pricetarget to RMB24.74(from RMB24.21) on time value accrual, and maintain Sellrating. The main upside risk is Asahi disposes 20% Tsingtao stake at apremium to market price, and beer market recovery is stronger than weexpected.