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This report has been prepared by UBS Securities Asia Limited.ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN
ON PAGE 47.UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this
report as only a single factor in making their investment decision.
Initiation of Coverage
UBS Evidence Lab: China Beer Sector
First year of volume recovery in 2017; what's next
We are positive on the China beer sector-
Beer consumption volume has turned positive for national breweries in 2017, and this is
reflected in the latest UBS Evidence Lab survey. Despite premiumisation and industry
consolidation, the China beer profit pool's (beer companies' aggregate EBIT) growth
has been slow since 2010. We believe Chinese breweries' profitability has reached an
inflection point, because of their supply discipline since 2014, an overall demand
recovery in the mass-market consumer segment in 2017, and cost savings. We forecast
a 28% CAGR for the China beer profit pool over 2017-20, driven by accelerating
premiumisation and asset rationalisation by Chinese breweries; we think this has been
overlooked by investors.
The UBS Evidence Lab survey of 1,680 regular beer consumers in tier-1 to tier-4 cities in
China and data science analysis showed increased spending in both volumes and value
in the past year, driven by more varieties of product offerings and higher incomes. We
attribute Anheuser-Busch InBev's (ABI) leading position in the premium segment to its
high penetration in on-premises channels in tier 1 and 2 cities. However, perceptions of
quality, high brand awareness and wide channel coverage, along with improved
execution in marketing and branding and a shift to off-premises consumption might
provide Tsingtao Beer and China Resources Beer (CRB) Snow upgrading opportunities.
National Chinese breweries' factory closures can yield profitability upside
Due to low volume growth expectations and capacity utilisation rates, breweries began
to close excess capacity in 2015. We expect factory closures to accelerate from 2018, as
SOE parent companies demand higher asset returns. In collaboration with the UBS
Quant team, we worked out 36% EBITDA improvement in total for the top four
national breweries from the closure of 20-30% of their factories.
Stock implications: Buy CRB; upgrade TB to Buy; Neutral on Yanjing Brewery
Of the three Chinese breweries, our most preferred stock is CRB. We initiate coverage
of CRB with a Buy rating, given its market share gains, mix upgrades and biggest
earnings upside from potential factory closures. We upgrade Tsingtao Brewery t
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