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Morningstar | Despite Weak Consumer Sentiment, Heineken Will Strengthen CRB's Presence in the Premium Segment

China Resources Beer, formerly known as China Resources Enterprise, disposed all of its nonbeer businesses in September 2015 to become a pure beer player. Through a series of merger and acquisition activities, the company retains its leadership position in China’s beer industry, with market share by sales volume expanding from 18% in 2008 to 27% in 2017, versus 18.1% for Tsingtao, 15.9% for ABI China, and 10.3% for Yanjing. Like its rivals, CR Beer enjoyed prolonged growth of sales volume and revenue in its beer business before 2015, owing to a series of economic and industry tailwinds during that period. Since 2014, the beer industry in China has been declining as a result of several headwinds, including a sluggish economy, unfavorable demographic structure, unfavorable weather conditions, market share expansion of baijiu and wine, and intensifying competition from overseas brands. While industry sales volume declined 5.1% and 3.9% year on year in 2015 and 2016, respectively, CR Beer reported superior sales volume growth of negative 1.3% and 0.3% year over year during the same time frame. However, we think these headwinds will put continued downward pressure on beer players’ performance. Given competition from baijiu and wine and the decrease in young people as a percentage of the total population, we think beer consumption per capita in China has limited upside.Despite our pessimistic view of the industry, we think CR Beer will benefit from the beer segment's ongoing consolidation and expand its market share. Given the unfavorable operating environment, we think some small beer players will be gradually crowded out, owing to the need for heavy investment in marketing and distribution network. CR Beer stands to benefit, given its massive market scale and strong financial support from its parent company. Additionally, CR Beer will enjoy margin improvement due to the ongoing product mix upgrade. The company’s mid- to high-end products as a percentage of total sales volume rose from 21% in 2011 to 50% in 2016 and will further increase in the next five years.