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Chen eye may prove frothy for Tsingtao

By Ding Qingfen (China Daily)
Updated: 2009-05-14 08:08

Workers serve beer at the Tsingtao Brewery in Qingdao, Shandong province. [Agencies]

Chinese mining tycoon Chen Fashu obviously had more than beer in mind when he bought a significant minority stake in Tsingtao from AB InBev.

Although the acquisition itself surprised market analysts, 48-year-old Chen, a native of Fujian province, is a familiar figure among corporate elites in Shanghai and Hong Kong. Starting out in the retail business, Chen was credited with elevating Zijin, a little known mining operator, to China's largest gold producer with a listing on the Hong Kong bourse.

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For that feat, he had earned accolades as a man with the Midas touch. Now, with the Tsingtao stake buy under his belt, the stock market is waiting to see how he performs in a different league. With his newly acquired holding, Chen is expected to win a seat in the board of directors at Tsingtao, which is controlled by the Qingdao government.

Forging what was called a strategic partnership, US beer giant Anheuser-Busch bought a 27 percent stake in Tsingtao when the company entered China. The partnership began to make less and less sense after Anheuser-Busch was itself acquired in July 2008 by Belgium-based global brewer InBev, which has been pushing hard the sales of its various brands of beer in China in direct competition with Tsingtao, especially in the Chinese brewer's home province.

In late April, the merged company AB InBev sold a large part of its stake, amounting to 19.9 percent of Tsingtao's outstanding capital, to Japan's Asahi Breweries for $667 million. Shortly after that, it announced it had sold its remaining stake in Tsingtao to Chen for $235 million.

This arrangement has apparently eased the earlier concern of many Tsingtao fans that their favorite brand could fall into the hands of Asahi. The gravity of such concern prompted Tsingtao to issue a statement assuring supporters that the brand would remain in Chinese hands.

Tsingtao said in its written reply to China Daily that "the transaction is good for Tsingtao to develop as a Chinese brand in the long run."

Tsingtao Beer Group, wholly owned by the Qingdao government, has remained the largest single shareholder of the brewery with a 30 percent stake.

Investors, however, have been asking what the new partners of the brewer can bring to the table. For Asahi, the answer seems obvious. For a start, it is not a competitor of Tsingtao in the Chinese brewer's stronghold.

Entering the highly competitive Chinese market in 1994, the Asahi brand of premium beer has stayed on the fringes with an annual sales volume of about 640,000 kiloliters, a fraction of Tsingtao's sales of 5.43 million kiloliters in 2008. The combined sales of AB InBev's various brands, at 5.02 million kiloliters, was only slightly less than that of Tsingtao.

Chen may not know much about beer production and marketing, but he is widely lionized by the domestic media for his track record in enhancing the shareholder value of Chinese enterprises. Though publicity-shy, Chen is often compared by stock analysts and market commentators to US investment wizard Warren Buffett, who is anything but reserved.

Having founded the Fujian-based retailer New Huadu Industrial Group, of which he is chairman, Chen moved on to overhaul Zijin Mining, another Fujian concern. The company grabbed the headlines in 2003 when its HK$1.15 billion IPO in Hong Kong was 744 times over-subscribed, a record since 1997. Chen has remained the largest single shareholder in Zijin, with a 20.19 percent stake.

Last year, Hurun Report ranked Chen as the richest mining entrepreneur in China with a fortune worth 7.7 billion yuan, including his holdings in Zijin. True to form, Chen declined to be interviewed for this story.

But his closest aides said Chen and his associates could contribute significantly to Tsingtao's shareholders' value. "We could help Tsingtao optimize its corporate management and improve the company's overall value," Tang Jun, president and chief executive officer of New Huadu, told China Daily.

Despite its market dominance, Tsingtao has never quite won the hearts of investors like some other seemingly more aggressive mainland enterprises, Zijin included, whose managements are seen as having made greater efforts in maximizing the return on capital and assets. In contrast, "Tsingtao's management gives the impression, right or wrong, of being rather dowdy," said Huang Wei, beverage analyst from China Jianyin Investment Securities. "The company's management certainly needs some dressing up," he said.

While the developed countries have reached saturation point in beer consumption, the huge growth potential of the China market has been the focus of attention of breweries at home and abroad, especially since the outbreak of the global financial crisis.

China's beer sales volume has topped the world's for seven consecutive years, and it is widely expected that around 50 percent of the growth in global beer sales will come from China in the next 10 years.

After a drop in the latter half of last year, the beer market has begun to show definite signs of a recovery in sales volume this year. In the first quarter, the industrial output value of the nation's beer sector grew by 4.9 percent from a year earlier, and the output volume increased by 1.76 percent year-on-year. Analysts predicted that sales in the second and third quarter, which is the also the high season, will be much stronger than the first.

In the past five years, the world's leading beer producers have been actively fighting for a foothold in the Chinese market through mergers and acquisitions. InBev bought into Sedrin, the largest beer maker in Fujian province; AB purchased Harbin Brewery for 5 billion yuan; Japanese food group Suntory bought 74 percent share from Donghai, a leading brand in Shanghai.

But the drying up of bank loans and the sharp decline in sales following the global credit crisis has stalled the march of foreign breweries into China. A spokesman for AB InBev said that the sale of the stake in Tsingtao has helped ease the financial burden due to the spate of acquisitions in the past. Suntory of Japan also said recently that it had sold its stake in Donghai.

Tsingtao said recently that it would cut its capital spending this year to 900 million yuan from 2 billion yuan in 2008.

Tsingtao also said in 2009 it will focus on increasing its profitability and enhancing brand awareness globally through management reform and leveraging its strong presence in sports marketing.

Tsingtao has acquired a slew of local smaller brands in the past several years. From 2008, the company began to narrow its focus to only four major brands, also high- and mid-end brands, which generated 94 percent of the company's output volume last year, 18 percentage points higher than the previous year.