Date
18 October 2017

Looming price war may spoil CRE party

Take a hot, humid summer and throw in a beer — you get the kind of numbers investors drink to.

In the case of China Resources Enterprise (CRE) (00291.HK), it was a 36 percent increase in third-quarter underlying profit, largely fueled by its alcoholic beverage business.

Its Snow beer brand had much to do with it. The sultry summer made it the drink of choice.

In fact, CRE has had a virtual lock on China’s beverage market, especially in the southwest. 

But a looming price war is about to put this captive market under threat of intensifying competition as domestic and global players make inroads into the Chinese hinterland.

Beijing Yanjing Brewery (000729.CN) and Tsingtao Brewery (00168.HK) are rushing construction of manufacturing plants in Guizhou and Sichuan. Danish giant Carlsberg has raised its stake in Chongqing Brewery (600132.CN), boosting its presence in the midwest.

It’s too early to say which brand will ultimately dominate an increasingly crowded market. But one thing is clear: the clustering of production capacity in the region will lead to price competition which in turn could erode CRE’s Snow beer margins.

Worse still, CRE will consolidate newly acquired Kingway Brewery into its financial results this quarter. The loss-making brewery is expected to weigh on CRE’s business performance in the fourth quarter.

– Contact the writer at [email protected]

RA

EJI Weekly Newsletter

Please click here to unsubscribe