Will Interbrew get hammered in China?

Beer giant, Interbrew has taken a 24% stake in one of China''s biggest brewers.

In another key example of M&A in China, global beer giant, Interbrew has finally acquired a 24% stake in Zhujiang, a brewer with a 50% market share in Guangdong province. The Belgian-headquartered company will now be able to add Zhujiang's seven million hectolitres of production to its other China assets.

In total it can claim 12 million hectolitres of Chinese beer production, putting it in China's top five. To put that in perspective, total beer consumption in the UK is 58 million hectolitres.

Comments Interbrew's spokesperson, Corneel Maes, "Our relationship with this company goes back to 1984, and this is part of our focus in becoming a major brewer in Southern and Eastern China. We want to play a consolidator role in China's beer market."

China's beer market is notoriously fragmented, with around 400 brewers at the last count. However, that is an improvement on a couple of years ago when there were around 800.

Today, the top 10 account for around 45% of the industry's volumes. In the past, China's beer market and its chronic overcapacity have made it it a graveyard for foreign brewers. Fosters fared badly, and Lion Nathan are known to have expressed an interest in exiting.

Interbrew's timing may prove better, however. Next year Zhujiang will list on the local A share market and will then have an acquisition currency to further consolidate the local beer market.

Meanwhile, Interbrew has bought its stake in Zhujiang at seven times EBIT (earnings before interest and tax), which looks a fair valuation. The Southern Chinese brewer has been growing profits and on listing is certain to rate a much higher multiple than seven times.

Its nearest comparable, Hong Kong-listed Guangdong Brewery, trades on a PE ratio of 16.96; and encouragingly for those looking at the Southern Chinese beer market, Guangdong Brewery saw its profits more than double in the first half.

Meanwhile, Harbin Brewery was brought to market by Cazenove in June and with 11.25 million hectolitres of capacity (and 95% capacity utilization), it is trading on a PE ratio of 16.2. This suggests the value of Interbrew's investment ought to roughly double with the company's listing.

Of course, Interbrew is not an asset trader and so this number will be of less relevance to it than the potential growth it sees. China general manager, Wai Kee Tan says: "I suspect beer consumption in China's major cities is no weaker today than in the rest of Asia. Plus there is a huge rural population that is now just catching on to beer."

In addition, he says, Zhujiang will gain from the relationship with Interbrew via its technical and marketing expertise. In particular China's third most popular beer brand will have a chance to use Interbrew's distribution network for exports.

Interbrew currently has experts in Canada testing the Chinese beer in the international market, with a view to altering the beer's formula slightly for the export market. Lastly, given all that has been written in the preceding paragraphs, it will comfort Interbrew's shareholder to know that this possibly-vital bridgehead into China will cost only $19.5 million. More beers, anyone?

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