1. Company Introduction - TSINGTAO Brewery Co., LTD

History. Tsingtao Beer, one of the oldest brewery brands in China, can trace its colonial roots back to 1903, when German forces occupied Qingdao (Coastal city located in Shandong province in China). Beer businessmen from Germany and British founded the Tsingtao brewery factory in Qingdao and started to brew in the European way. Since Japan seized China from Germany during the First World War Japanese took the control of Tsingtao from Germans and run the company in effect until 1945. As the People’s Republic of China was established in 1949, Tsingtao became state-owned enterprise. It was privatized in 1990s with the formation of Tsingtao Brewery Company Ltd. and then issued H-shares in Hong Kong which were listed on the Stock Exchange in 1993, being the first domestic enterprise listed on an overseas stock exchange. Following this, in the same year Tsingtao issued A-shares in China, which were listed on SSE.

Shareholders. When Tsingtao was listed on Hong Kong stock market, Anheuser-Busch, the world biggest brewery, acquired 4.5% of shareholding in order to enter Chinese market and extended its shareholding to 27% in 2002. As the Interbrew, Belgium brewery company, merged Anheuser-Busch in 2008, Japanese Asahi group replaced ABInBev’s position with about 20% of shareholding, which is the 2nd largest majority shareholder after Tsingtao Group. (Please see the appendix 1, “Shareholders”)

Performance. At present, Tsingtao Beer occupies leading position in the domestic beer industry in terms of size with 54 wholly-owned and controlling breweries, and 11 associated breweries in 20 provinces, cities and regions all over China. Tsingtao Beer currently ranked the second in terms of domestic market share with 20.6%. Also, Tsingtao Beer is widening the business scope internationally and the products are distributed more than 80 countries throughout the world. Although the revenue is steadily growing, the recent operating profit is relatively decreased compared to 2010.

2. Background of Beer Industry in China

Growth of beer market. The global beer consumption in 2011 was 181.6 billion liters and the consumption of China which is about 27% by 49 billion liters. In 2002, China overtook the USA to become the leading beer market in terms of volume sales. Since that time, China has been the biggest beer market in the world by volume for the 10th consecutive years. Chinese beer market has grown since 2000, at a CAGR of 44.4%. It is about three times the world beer market’s CAGR, which is 2.6%. This is due to the huge Chinese drinking population, which is 800 million people of a total 1.2 billion population. (Please see the appendix 3, “China beer consumption”)

Change of consumer behaviors. China’s unprecedented economic growth has led to increased disposable income, which has caused a rise in consumption and changes in eating and drinking habits. Chinese beer has seen a growth in popularity internationally in the past few decades. The rise of China’s middle class and increases in discretionary income have allowed many consumers to afford foreign-made and foreign-branded alcoholic beverages.
The growing health craze is also influencing the development of beer industry. Low-alcohol beers will continue develop in China while Chinese consumers’ habits and acceptance of the new-flavored and healthy beers develop. There remains strong potential for developing volume per capita consumption among key consumer groups, including youth consumers and women, while older consumers are showing an increasing propensity towards buying more premium beers, thus adding more value to the market.

Fierce competition. In China, with the improvement of living standards and the deregulation of government, buying beer has become routine problem solving. As a kind of fast moving consumer goods, beer appears in the Chinese daily life frequently. When people need to drink beer, everyone will have some brands for choosing.
Currently, the Chinese beer market is doing the most intense chicken game in the world market. The reason is that more than 40% of 400 beer brewers in China have had a deficit and major Chinese beer brewers have also expanded capacity by way of new construction, mergers & acquisitions or construction expansion. Also, foreign competitors - including ABInbev, Heineken, and Carlsberg - have been determined to offset the decline in their domestic markets by capturing new growth opportunities in China.
As a result, the four biggest players China’s beer market - China Resources Snow, Tsingtao, Anheuser-Busch InBev and Beijing Yanjing - accounted for a total of 45% market share in 2005 and increased gradually, accounted for 60% in 2013. The oligopoly situation of the Chinese beer market will be becoming more severe and likely to change the winner-take-all structure gradually. (Please see the appendix 4, “Beer market share in China”)

3. Global Trend of Beer Industry

Global beer company ranking. In 2011, the beer consumption in the world is about 180 million hectoliter which increased 2.4% comparing 2010 year. Due to Asian regional beer company, there are beer companies growing fast that CRE(china) +10.3%(+yoy), Tsingtao brewery +12.6%(+yoy), Beijing Yanjing beer +7.5%(+yoy), San Miguel +10%(+yoy). The high ranked 15 beer companies are occupying 80.6% of the world beer industry. In other word, it is mostly concentrated on a few number of top beer companies.
In 2011, AB Inbev, the world top beer company, merged with Grupo Modelo(Mexican beer company) which is famous for “Corona”. For reference, Grupo Model is capturing 60% of Mexican beer market. As AB Inbev’s M&A, their market share is 26% of world beer market. SABMiller, Second ranked beer company in the world, also merged with Foster’s which is capturing 50% of Australia beer market.

Global beer product. According to the perspective of beer product, CRE(China beer company)’s “Snow” is the best seller in the world. Even though, “Snow” is mostly sold in Chinese market. But a lot of Chinese buy that beer comparing the other global brand. Especially, “Snow” is growing so fast comparing “Tsingtao beer” in Chinese beer market. Because the sales of “Snow” is disperse through all over the region in China. SABMiller is 49% shareholder of CRE(china). Besides “Snow” beer, “Bud light” and “Budweiser” is ranked in second and 4th. These two beer products are also produced by AB Inbev. AB Inbev has 7 high ranked beer products(Bud light, Budweiser, Skol, Corona, Brahma, Harbin, Sedrin) of top 15.

Global beer country. In view of country, China is the most consumption country in the world.(490 million hectoliter) U.S.A is second consuming country. Brazil, Russia, Germany , Mexico is 3~6th in the world. Japan is the 7th. Germany is the best consumption country in the European market. The interesting thing is that the traditional beer consumption countries(U.S.A, Germany, England) is slowing down to sales of beer. On the other hand, the new emerging beer consumption countries(China, Brazil, Mexico) is soaring to sales of beer in the world. Beer is becoming more popular alcohol product wherever it is produced. Especially we have to consider the potential growth of Chinese beer market. It is still growing fast because of a lot of demand for Chinese beer consumption.