Tsingtao Brewery troubled by shift in product mix

Its core brands sales fell to 54%.

According to Maybank Kim Eng, Tsingtao Brewery's margins were affected by an unfavourable shift in its product mix, with volumes of lower-margin secondary brands rising 16% YoY. Sales of Tsingtao’s core brands fell from 56% of total sales in FY11 to 54% in FY12 as volumes rose just 7% YoY.

It also outlined other major drawbacks that haunt Tsingtao Brewery's outlook including 1) GPM came off by 1.9ppts YoY to 40.4% due to limited ASP hikes amid cost pressures from rising wages and new capacity overheads, buffered somewhat by an increase in government grants and interest income.

However, Maybank noted that key positives are: i) sales volume growth of 10.5% YoY surpassed the industry’s 3% growth and CRE’s Snow/Yanjing volume growth of 4%/(2%) YoY; as such, Tsingtao’s market share rose 3ppts YoY to 16%; ii) volume of its highend products (eg. canned beer and draft beer) was up 17% YoY, making up of 16% of its total sales volume. Key takeaways from the briefing: i) 1Q13 sales volume grew 10-11% YoY. 

Here's more:

Management expects sales volumes of its core brand to grow in line with total sales growth, while volume growth of secondary brands will continue to be more impressive; it reiterated its target of achieving a sales volume CAGR of 12.5% until 2014, implying volume sales of 100m hl;

ii) Chairman expects near term wage pressure to sustain as Tsingtao continues expanding in new markets and builds new factories;

iii) management sees limited potential for ASP hikes in the near term given intense market competition. It believes that the big players have yet to command enough pricing power over customers although the top four players now account for 60% of the PRC brewery market;

iv) the industry is expected to enter the last phase of consolidation in next three to five years; v) management sees some room for upside in gross margins in FY13, as the price of imported barley has showed signs of stabilising YTD after strong rally last year;

vi) management expects the restructuring and integration work with Suntory in Shanghai and Jiangsu Province to be completed by the middle of the year. 

Currently CRE’s Snow, Tsingtao and Suntory brands share this market evenly. Separately, CRE is expecting 1Q13 beer sales volume growth to be in the high single digits to low teens, while retail SSSG was 2-3% in 2M13 as hypermarket sales were negatively affected by anti-corruption measures.