19 June 2019
Over the last three years, Tsingtao has suffered a more than 10 percent drop in turnover while net profit nearly halved. Photo: Reuters
Over the last three years, Tsingtao has suffered a more than 10 percent drop in turnover while net profit nearly halved. Photo: Reuters

Fosun buys Tsingtao stake: It may be too early for a toast

Chinese conglomerate Fosun International (00656.HK) paid HK$6.6 billion (US$844 million) for a 17.99 percent stake in Tsingtao Brewery Co. (00168.HK, 600600.CN), China’s second-largest brewer.

Fosun’s shares jumped nearly 9 percent on Thursday as investors applauded the deal, but it might be a bit too early for a toast.

Tsingtao was founded in 1903 by German and British merchants. In 1914, during the First World War, Japanese troops invaded Qingdao, occupied the brewery and changed its name.

After Japan’s surrender to the Allies and retreat from China in 1945, the brewery was turned into a Chinese brewery and renamed Tsingtao Brewery. And after the civil war in 1949, the Chinese government took control of the company.

Tsingtao Brewery launched an initial public offering in Hong Kong in July 1993, raising HK$900 million. In fact, it became the first H-share listing. (H shares refer to Hong -Konglisted shares issued by a company incorporated in the Chinese mainland.)

In 2002, it introduced American beer company Budweiser’s parent AB InBev as a strategic shareholder.

However, AB InBev decided to sell its entire stake to Japan’s Asahi Group Holdings in 2009. Asahi thus became Tsingtao’s second-largest shareholder.

Tsingtao and Asahi have never really worked closely together. The latter has no say in Tsingtao’s operation and has not been able to tap Tsingtao’s distribution network in China to sell Asahi products.

Meanwhile, Asahi has turned its eye to Europe, spending over US$5 billion since last year to acquire eight European beer brands including Peroni and Grolsch. It has also parted with several non-core assets in Asia to raise funds for those acquisitions in Europe. It has sold its stake in a joint venture with Tingyi, for example.

Many leading breweries, including Carlsberg and China Resources Beer, reportedly got interested when they learned about Asahi’s intention to offload its Tsingtao stake. That is perhaps why Fosun eventually won the deal and even got a deep discount.

The sale price of HK$27.22 per share was a 32 percent discount to Tsingtao’s last closing price of HK$40 on Wednesday.

It is believed that China does not want a famous indigenous brand to be controlled by foreigners. Selling to China Resources Beer is not an option either because the top Chinese brewery may become too large and dominate the market.

As for Fosun, the firm has been on an overseas spending spree and got rebuffed by the authorities earlier this year. This may explain why it is once more focusing on domestic acquisitions.

Tsingtao currently has a 17 percent share of the China market, occupying the number two spot and marginally above number three Yanjing Beer, which has a 16 percent market share. Rival Snow Beer, owned by China Resources Beer, is the top brewer with a 23 percent market share.

Over the last three years, Tsingtao has suffered a more than 10 percent drop in turnover while net profit nearly halved.

Fosun may have received a discount, but considering Tsingtao’s P/E and P/B ratio of 46 times and 3 times respectively, the deal is not exactly cheap. To make the deal a success, Fosun still has a lot of work to do.

Fosun has a decent record in rejuvenating state-owned companies through the introduction of better corporate governance and fresh resources. If it can do the same with Tsingtao, that is the time when Fosun, and investors, should really celebrate.

This article appeared in the Hong Kong Economic Journal on Dec 22

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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