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CSCI-Food & Beverages-China Beer Industry：Price hikes suggest rising competitiveness for domestic brands - 20180108

Price hikes suggest rising competitiveness for domestic brands

• According to media reports last Friday, local brewers such as China Resources (CR) Beer, Tsingtao and Yanjing Beer have raised their wholesale prices by 10-20% YoY in Jan-18. Accordingly, CR Beer has hiked the retail prices of 550ml beer for its major product series, including Snow Draft Beer and Brave the World Series, by an average of RMB2-10/unit, whereas the extent of price increase by Tsingtao was unclear.
• There was no official announcement of the price adjustment by most of the companies, but we believe the news source has likely come from the brewers’ internal price revision announcements issued to their respective distributors. Nonetheless, it reaffirms our findings of last Dec that domestic beer brands have hiked prices of their mid-to-high end product series.
• Such price adjustment on an industry-wide basis, which has not happened in the past decade, indicates that the competitive landscape is currently undergoing a change in favour of the domestic brewers. Domestic brewers have struggled in the past due to the severe competition from foreign beer brands. However, over the past three years, domestic brewers have been catching up rapidly on product upgrades, and hence, we expect to see the gap between domestic and foreign beer brands to narrow further going forward. We continue to prefer CR Beer (291.HK, BUY) over Tsingtao Brewery (168.HK, HOLD) on the back of CR Beer’s higher operating leverage.

Price rises for domestic beers, versus a decline for major foreign beers. Our channel checks in Dec of last year indicated that CR Beer has indirectly raised prices by more than 30% as compared to the level in Jul-17 (see Figure 1) since the launch of their “Concept Series” in Nov-17. Meanwhile, we found that Tsingtao has also mildly raised its mid-to-high end series, but saw a drop in the low-end Laoshan brand. Harbin beer raised prices by 31%-48% during the same period. We started to conduct channel checks again in Jan of this year and discovered that CR Beer’s prices have remained stable whist there have been a drastic 9%-33% increase in Tsingtao’s prices across almost all of its product categories as compared to the levels in Dec last year. And as for foreign beer brands, the price trend of the majority of them has remained stagnant as of Jan this year since reducing their prices in Dec last year, with the exception of Asahi which has continued to see its prices on the rise.

An inflexion point for domestic brewers with the change in competitive landscape starting in 2H17. We are now seeing a gradual change in the competitive landscape of China’s beer industry in favour of the domestic brewers leveraging on the ability to adopt an industry-wide price hike by the domestic brands, which we believe will alleviate their input cost pressure on expectation of greater margin upside going forward. Moreover, we anticipate closures of excess production capacity to continue in the foreseeable future, and thus subsequent improvement in asset return, which will drive up sectoral EBITDA leading to further re-rating of the entire sector in 2018, in our view. We continue to favour CR Beer (291.HK, BUY) over Tsingtao Brewery (168.HK, HOLD) on the back of CR Beer’s higher operating leverage.