Chinese beer
Calls of gan bei at China's Chongqin Brewery ring truer than the toasts in Edinburgh. Scottish &
Newcastle's $63m offer for a 20 per cent slice of Chongqin Brewery works out at a generous $40 a hectolitre. Even
if the promised inclusion of other assets brings that lower, it looks as if S&N is buying into China at the top of
the investment cycle. Valuations have been steadily rising to a recent average of about $30 a hectolitre. Anheuser-Busch
began its creeping stake in Tsingtao Brewery at below $25; by June, SABMiller was paying $33 a hectolitre for its Harbin
Brewery purchase.
China is down to be the world's biggest beer market next year, growing at an annual 6 per cent; but it is far
from the most profitable. Massive over-capacity means cheap beer (12 cents a bottle) and growth is decelerating. Like
Russia, China requires heavy ongoing reinvestment: breweries are mostly old and often run on an uneconomic scale. Rising
grain prices are further eroding margins.
SABMiller was an early entrant and its record remains among the best. However, even it squeezes out only about $2.50
of earnings before interest and tax per hectolitre in China, or one quarter of group average. Its returns are below the
cost of equity in China. For S&N, faced with a declining UK market and slow growth, $64m may look like small beer
given the growth prospects. It should have looked at the more sobering view: it will share that market with 400 other
brewers that boast an average net profit margin of 0.5 per cent.
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