20150623-高盛-China_Beer__The_Final_Frontier__potential_for_industry_profit_pool_to_expand_3-7x_37页_828kb

Summary: China Beer Industry Analysis

Core Content

The China beer market, though the world's largest by volume, has historically been characterized by low prices and fragmented competition. Despite its size, the industry profit pool is currently estimated at US$1.1bn, which is only 15% of the US market's size. However, the report highlights the potential for significant growth in the beer industry's profit pool, projecting it could expand to US$3bn to US$7bn by 2019E, driven by premiumization and further consolidation.

Main Points

• Market Growth: China's beer market is expected to grow at an 8% CAGR in retail sales from 2014 to 2019E, reaching US$110bn, which is slightly below Euromonitor's forecast of US$122bn.

• Price and Volume Dynamics: China's beer prices are among the lowest globally, at US$1.6/Ltr, compared to US$4.1/Ltr in the US. This, combined with high volumes, has led to lower operating margins and a fragmented market structure.

• Consolidation Potential: With the top 5 players holding around 75% of the market, the report suggests that further consolidation among these players could significantly change the industry landscape and improve profitability.

• M&A Drivers: The report identifies several factors that could drive M&A activity, including the need for organic growth, unlevered balance sheets, attractive pricing of China assets, and supportive SOE reforms.

• Government Approval: While government approval could be a hurdle due to anti-competition and foreign ownership concerns, historical trends indicate that the process has been relatively lenient, and recent SOE reforms classify beer as a competitive industry, not requiring majority government ownership.

• Stock Recommendations: The report provides key stock calls, recommending to Buy CRE and Sell Tsingtao in China, and Buy ABI and Buy SAB in Europe, while Selling Carlsberg due to structural challenges.

Key Stock Calls

China

• CRE (Buy): After the disposal of CR Retail, CRE becomes a beer pure play. It is expected to benefit from product and price upgrades, with a potential 15% EPS CAGR. Its current valuation implies a 12.8x EV/EBITDA, which is a 20% discount to Tsingtao's valuation.
• Tsingtao (Sell): Tsingtao is lagging in volume and ASP growth compared to its competitors. It faces a difficult choice between boosting marketing to reinvigorate the premium brand or cutting SG&A to focus on profits, with only 1% EPS CAGR expected.

Europe

• ABI (Buy): ABI is expected to double its EPS within four years due to cash deployment and synergies. It is considered a strong contender for market transformation.
• SAB (Buy): SAB is well-positioned with access to early-stage beer markets and dominant shares in consolidated markets. It is seen as a strategic asset.
• Carlsberg (Sell): Carlsberg is expected to trade at a 25% discount to the European staples sector due to structural challenges in key markets like Russia and Europe.

"Ready", "Willing" and "Able" Parties

The report identifies potential M&A combinations among the eight companies with exposure to China:

• ABI-SAB-CR Snow: This combination could significantly redefine the market landscape with a combined market share of 41% and substantial synergies.
• CR Snow-Tsingtao: This combination could also lead to major changes, with a combined market share of 43%, though it may face company-specific hurdles.

Profit Pool Expansion

• Scenario 1 (Organic Competition): Industry EBIT margins could rise from ~5% to 10% by 2019, increasing the profit pool to US$3.1bn.
• Scenario 2 (Inorganic Competition): Further M&A activity could accelerate consolidation and push the profit pool to US$6.9bn by 2019E.

Key Charts and Data

• Profit Pool Growth: Projected from US$1bn in 2014 to US$3bn–7bn by 2019E.
• Market Share and EBIT Margins: Highlight the disparity between China's low EBIT margins and those in more consolidated global markets.
• Financial Comparisons: Includes a detailed comparison of key financial metrics for both China and global beer companies.

Conclusion

The China beer industry is at a pivotal stage, with the potential for a significant transformation through consolidation and premiumization. The report outlines a clear path for growth, emphasizing the role of M&A and strategic moves in redefining the market. Investors are advised to consider these factors in their decision-making, with specific stock recommendations based on valuation and competitive positioning.