China Brewery Sector - Credit Suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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26 October 2015

Asia Pacific/China

Equity Research

Beer & Alcoholic Beverages (Retailing CN (Asia)/Consumer Staples CN

(Asia)/Hotels/Restaurants/Gaming CN (Asia))

China Brewery Sector INITIATION

Quality matters!

Figure 1: Global brewers' EBITDA margin vs market share (%)

ABI USABI Canada

ABI MexicoABI Brazil

ABI LatAm South

ABI China

ABI Korea

Hein W.E

Hein C.E.E

SAB LatamSAB Colombia

SAB Europe

SAB US

SAB South Africa

SAB Africa

SAB Tanzania

CR SnowTsingtao

Yanjing

R² = 0.6586

0%

10%

20%

30%

40%

50%

60%

0% 20% 40% 60% 80% 100%

EB

ITD

A m

arg

in -

Market share - %

Source: Canadean, Company Data, Credit Suisse estimates

■ We initiate coverage on China Brewery Sector with a MARKET WEIGHT

stance. Premiumisation will be key to growth. We expect the Rmb485.3 bn

beer market to witness a 4-5.5% CAGR over 2015-19, mainly driven by ASP

hike owing to premiumisation. Rising middle class and uptrend in product mix

should support premiumisation. Volume growth will be sluggish, in our view.

■ Competition landscape changes may lead to profitability improvement.

Global brewery industry indicates that a stronger foothold leads to better

profitability. In China, the top four players with similar market shares are

competing across regions, and that is why the unit price and profit of China

brewers are much lower than that of global peers (figure 10). Potential co-

operation or consolidation among them may lead to less competition and

better utilisation of plants. Profitability improvement is possible.

■ Pecking order. Considering the slowdown in industry growth, the quality of

earnings and improvement of FCF will be more important, in our view. We

initiate coverage on Tsingtao with a NEUTRAL rating given the weak short-

term results due to competition from AB Inbev, but Tsingtao still delivers the

best ROE in the industry. Initiate CRB (291.HK) with a NEUTRAL rating,

mainly due to the higher-than-industry valuation. It is likely to have improving

profitability driven by a positive product mix change and a stronger foothold

in dominant regions. ROE will likely catch up with peers in the future. We

initiate Yanjing (000729.SZ) with a NEUTRAL rating, given its weak

fundamentals. Key risks:(1) Weaker consumption demand;(2) changing

consumer preference;(3) food safety; and (4) unfavourable weather.

Research Analysts

Simon Sun

852 2101 7652

[email protected]

Kevin Yin

852 2101 7655

[email protected]

Sanjeet Aujla

44 20 7888 0353

[email protected]

26 October 2015

China Brewery Sector 2

Focus tables and charts Figure 2: China beer market size growth forecasts Figure 3: Market share change forecast of major players

2014 2015E 2016E 2017E

Value (Rmb mn) 458,389 480,392 508,702 535,074 Discount 16,624 16,742 17,031 17,258 Mainstream 311,407 317,471 327,013 335,545

Premium 54,680 59,659 64,783 70,214

Superpremium 75,678 86,520 99,875 112,057

Value (US$ mn) 74,414 16,742 17,031 17,258

Mix - % 2014 2015E 2016E 2017E

Discount 3.6% 3.5% 3.3% 3.2% Mainstream 67.9% 66.1% 64.3% 62.7%

Premium 11.9% 12.4% 12.7% 13.1%

Superpremium 16.5% 18.0% 19.6% 20.9%

Volume (mn l) 53,653 53,225 53,595 53,994

ASP (Rmb/l) 8.54 9.03 9.49 9.91

YoY - % 2014 2015E 2016E 2017E

Value YoY% 6.3% 4.8% 5.9% 5.2% Volume YoY% -0.5% -0.8% 0.7% 0.7%

ASP YoY% 6.9% 5.6% 5.2% 4.4%

Source: Canadean, Credit Suisse estimates Source: NBS, Canadean, Credit Suisse estimates

Figure 4: ROE—Tsingtao is highest; CRB likely to catch up Figure 5: Forward P/E—CRB is much higher than peers

38.6

28.1 25.4

23.1 22.7

17.6

33.4

26.9

24.3

21.9 21.7

16.5

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

CRB Yanjing Tsingtao A Heineken Tsingtao H Carlsberg

2014A 2015E 2016E

Source: Bloomberg, Credit Suisse estimates Source: IBES, Credit Suisse estimates

Figure 6: Business model and financial matrix at a glance Figure 7: Valuation—EV/EBITDA comparison

Tsingtao CRB Yanjing Establishment 1903 1993 1980 Largest shareholder QD SASAC,

30.58%

CR Holdings,

50.91%

BJ SASAC,

57.57%

Mgmt Holding 0.04% <0.01% 0.02%

Net sales (mn $) 4,361 3,996 1,844

Volume (Mhl) 9.154 11.842 5.321

GP margin 38.3% 44.8% 40.7%

SG&A ratio 24.3% 30.3% 22.8% OP margin 7.9% 7.2% 6.7%

Net margin 6.9% 2.1% 5.4%

ROE 13.5% 7.3% 6.1%

05-14 Sales CAGR 12.6% 19.7% 12.0%

05-14 Earnings CAGR 23.1% - 11.3%

17.7

13.0

11.1

8.9

13.3 13.7

12.111.3

9.1

12.411.9

11.3 10.6

8.3

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Tsingtao CRB Yanjing Heineken Carlsberg

2014 2015E 2016E

Note:2014 financials. Source: Company Data, Credit Suisse Source: IBES, Credit Suisse estimates

Figure 8: Valuation comps

Company Rating Mktcap

US$ mn

Trading

price

Target

price

Upside EV/EBITDA P/E NP CAGR

15-17E

Div. yld

12MF 2015E 2016E 2017E 2015E 2016E 2017E

Tsingtao H N 6,980 38.60 40.00 4% 13.1 12.2 11.2 23.6 22.6 21.3 5.3% 1.3%

Tsingtao A N 6,980 33.95 35.00 3% 13.1 12.2 11.2 25.3 24.2 22.8 5.3% 1.3%

CRB N 4,690 14.94 16.00 7% 13.6 11.7 9.9 38.3 33.2 27.2 18.7% 1.2%

Yanjing N 3,663 8.26 8.70 5% 11.9 11.1 10.1 28.3 27.2 25.8 4.8% 1.0%

Note: price as of 23 October, 2015. Source: IBES, Credit Suisse estimates

26 October 2015


Premiumisation should support growth

We expect the Rmb485.3 bn beer market to have a 4-5.5% CAGR over 2015-19 mainly

driven by the ASP hike under the premiumisation trend. Volume growth will be sluggish

due to a weakening economy and unfavourable demographic changes, in our view. But

the rising middle class and uptrend in product mix should support premiumisation, which

will offset the negative impact of weak volume growth, in our view.

Consolidation: Possible big moves ahead!

The combined market share of the top four players increased from 57% in 2010 to 66% in

2014. But still the market share difference among the top four players is not significant and this

leads to competition across regions. Given that most mid-small sized brewers have been

acquired by leading players in the past few years, we expect that M&As among leading players

are possible. Yanjing is likely to become a major target. CRB is well positioned for M&As.

The ongoing ABInbev and SABMiller deal may affect China's beer market, as SABMiller

holds 49% stake of "China Resource Snow". Whether ABInbev would fully or partially keep

the stake will be up to the decision of China's Ministry of Commerce, and the outcome is

highly uncertain. Should ABInbev have co-operation with CRB after the deal, the

combined market share could reach 40%, and they would have more stronghold regions

and wider product mix. If SABMiller is forced to sell the stake, CRB may exercise the right

of first refusal to buy back, which will have less significant change on China's beer market.

Profitability: CRB may be catching up while Tsingtao

remains strongest

The global brewery industry history shows that strong foothold leads to better profitability.

In China, the top four players with similar market shares are competing across regions.

That is why the unit price and profitability of Chinese brewers are much lower than global

peers (see figure 10). We believe that the premiumisation trend, a wider use of metal can

package and potential consolidation between big players or regional co-operation will help

profitability improvement. Synergy may come from less price competition, and better

utilisation of plants.

We expect CRB is most likely to benefit from the premiumisation trend, potential industry

consolidation and its cost control strategy. The profitability of CRB is likely to catch up. We

expect its ROE will increase from 3.25% in 2015 to 9.89% in 2019, given improving net

margin, asset turnover and cash position. Tsingtao is experiencing short-term earnings

pressure, negative product mix change and decreasing asset turnover competition from

AB Inbev in the premium segment, but its profitability remains the best in industry.

Pecking order: Quality matters

We initiate China's brewery sector with a MARKET WEIGHT stance. Considering the

slowdown in brewery industry's growth, the quality of earnings and improvement of free

cash flow will be more important, in our view. We initiate coverage on Tsingtao (168.HK &

600600.SS) with a NEUTRAL rating given the weak short-term results due to competition

from AB Inbev in premium products, but Tsingtao still delivers the best profitability. Initiate

CRB (291.HK) with a NEUTRAL rating mainly due to the higher-than-industry valuation. It

is likely to have improving profitability driven by a positive product mix change and

strengthening foothold in dominant regions. ROE will catch up with its peers in the future.

We initiate Yanjing (000729.SZ) with a NEUTRAL rating, given its weak fundamentals.

Investment risks

(1) Weaker consumption demand; (2) transition of consumer preference on alcoholic

drinks and (3) food safety and unfavourable industrial policies.

Expect 4-5.5% CAGR of

Rmb485.3 bn beer market

over 2015-19, mainly driven

by ASP hike

Potential M&As among Top

4 is possible; uncertainty

remains in competition

landscape

CRB's profitability will catch

up due to premiumisation

and consolidation; Tsingtao

is under short-term pressure

due to competition

Rate Market Weight for

China beer sector;

NEUTRAL for Tsingtao,

CRB and Yanjing

2

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Sec

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4

Peer comparison and sector valuation matrix Figure 9: Valuation matrix—global alcoholic beverage manufacturers comparison

Company name Ticker Mkt cap Currency Performance (%) P/E(X) EV/EBITDA(X) P/B(X) ROE% EPS

CAGR %

PEG DivYld

Reuters (US$, mn) Local 1M 3M 12M 2015 2016 2017 2015 2016 2017 2015 2016 2015 2016 2017 15-17 2015 12MF

International beer manufacturers

Heineken HEIN.AS 50,690 EUR 9% 9% 39% 23.1 21.9 20.2 11.3 10.6 9.7 3 3 16% 15% 15% 7% 3.3 1.6%

Carlsberg CARLb.CO 12,097 DKK 4% -14% 4% 17.6 16.5 14.9 9.1 8.3 8.0 1 1 9% 9% 9% 9% 2.0 1.7%

Kirin Holdings 2503.T 13,026 JPY 7% -6% 26% 41 37 34 9 8 8 2 2 3% 4% 4% 11% 3.9 2.5%

Asahi Group 2502.T 14,517 JPY 0% -5% 22% 22 23 22 10 10 9 2 2 8% 8% 8% 2% 14.3 1.4%

Simple avg. 26 25 23 10 9 9 2 2 9% 9% 9% 7% 5.9 1.8%

A/H-share beer manufacturers

China Res Beer 0291.HK 4,690 HKD 10% 19% 56% 38 33 27 14 11.7 10 2 2 7% 7% 8% 19% 2.0 1.2%

Tsingtao Brewery 0168.HK 6,980 HKD 9% -12% -31% 24 23 21 13 12.2 11 3 3 11% 11% 10% 5% 4.5 1.3%

Tsingtao Brewery 600600.SS 6,980 CNY 7% -16% -11% 25 24 23 13 12.2 11 3 3 11% 11% 10% 5% 4.8 1.3%

Yanjing Brewery 000729.SZ 3,663 CNY 9% -6% 24% 28 27 26 12 11.1 10 2 2 6% 6% 7% 5% 5.9 1.0%

ChongqingBrewery 600132.SS 1,133 CNY 12% -21% -3% n.a. n.a. n.a. n.a. n.a.

Zhujiang Brewery 002461.SZ 1,510 CNY 23% -41% -5% n.a. n.a. n.a. n.a. n.a.

Huiquan Brew 600573.SS 522 CNY 27% 11% 49% n.a. n.a. n.a. n.a. n.a.

Simple avg. 29 27 24 13 12 11 2 2 9% 9% 9% 9% 4.3 1.2%

International spirits manufacturers

Diageo DGE.L 72,050 GBp 7% 0% 5% 21 21 19 13 16 15 6 6 29% 26% 26% 3% 6.6 3.2%

Pernod-Ricard PERP.PA 30,565 EUR 14% -6% 17% 21 20 18 14 14 13 2 2 10% 11% 11% 7% 3.1 1.8%

Brown-Forman BFb.N 13,290 USD 11% 6% 24% 34 31 28 18 19 17 7 12 31% 39% 39% 9% 3.7 1.3%

Constellation Br STZ.N 23,862 USD 8% 18% 58% 31 27 24 17 16 14 4 4 17% 17% 17% 15% 2.1 1.0%

Thai Beverage TBEV.SI 12,507 SGD -2% -8% -8% 19 17 17 14 12 11 4 4 22% 23% 22% 8% 2.2 3.8%

Davide Campari CPRI.MI 4,962 EUR 9% 7% 39% 25 23 21 14 13 12 3 2 11% 11% 11% 11% 2.4 1.2%

Remy Cointreau RCOP.PA 3,330 EUR 13% -5% 10% 32 28 25 21 17 16 3 3 9% 9% 9% 13% 2.5 2.6%

Simple avg. 26 24 21 16 15 14 4 5 18% 19% 19% 9% 3.2 2.1%

A-share spirits manufacturers

Kweichow Moutai 600519.SS 41,698 CNY 8% -4% 46% 16 14 12 9 8 6 4 3 26% 24% 23% 14% 1.1 2.2%

Wuliangye Yibin 000858.SZ 15,367 CNY 0% -7% 49% 16 14 11 8 7 5 2 2 14% 15% 16% 19% 0.9 2.5%

Jiangsu Yanghe 002304.SZ 14,558 CNY 16% -7% 38% 18 15 13 10 8 6 4 3 23% 23% 24% 19% 1.0 2.9%

Luzhou Laojiao 000568.SZ 4,989 CNY 9% -11% 40% 20 16 15 10 8 7 3 3 15% 17% 16% 13% 0.0 2.8%

Shanxi Fen Wine 600809.SS 2,419 CNY 17% -9% 11% 35 29 27 17 14 12 4 3 10% 12% 12% 15% 2.3 1.1%

Tuopai Shede 600702.SS 800 CNY 12% -42% 10% 328 239 182 n.a. n.a. n.a. 2 n.a. 34% 9.6

Laobaigan Liquor 600559.SS 1,390 CNY 17% -16% 141% 85 50 28 29 21 10 9 8 13% 20% 20% 75% 1.1 0.4%

AGSW 600199.SS 778 CNY 10% -14% 9% 31 23 n.a. n.a. n.a. 1 2 7% 9% 9% 2.5%

YLT 600197.SS 798 CNY 6% -9% 16% 14 n.a. n.a. n.a. n.a. n.a.

Gu Jing 000596.SZ 1,811 CNY 10% -19% 28% 23 20 17 13 11 8 3 3 15% 15% 15% 16% 1.4 1.2%

Huzhu 002646.SZ 1,492 CNY 12% -21% 28% 27 24 20 21 19 15 4 4 14% 14% 14% 18% 1.5 1.7%

Huangtai Wine 000995.SZ 280 CNY 17% -19% -23% n.a. n.a. n.a. n.a. n.a.

Simple avg. 56 44 36 15 12 9 4 3 15% 17% 17% 25% 2.1 1.9%

Note: price as of 23 October, 2015. Source: IBES, Credit Suisse estimates

2

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Figure 10: Peer comparison—CRB, Tsingtao, Yanjing and ABInbev 2014

US$ ABI China CRB Tsingtao Yanjing ABI Global

Net sales 3,873 3,996 4,361 1,844 47,063

COGS -2,058 -2,455 -2,906 -1,216 -18,756

Gross profit 1,815 1,541 1,456 628 28,307

Gross profit margin - % net sales 46.9% 38.6% 33.4% 34.1% 60.1%

SG&A 1,577 1,258 1,144 473 13,196

as % net sales -40.7% -31.5% -26.2% -25.7% -28.0%

EBITDA 716 561 463 296 18,465

EBITDA margin - % net sales 18.5% 14.0% 10.6% 16.0% 39.2%

EBIT 238 284 312 155 15,111

EBIT margin - % net sales 6.1% 7.1% 7.2% 8.4% 32.1%

Depreciation as % net sales 12.3% 6.9% 3.5% 7.6% 7.0%

Volume - mhl 71 118 92 53 459

Per hl analysis - $ ABI China CRB Tsingtao Yanjing ABI Global

Net sales 54.2 33.8 47.6 34.7 102.6

COGs -28.8 -20.7 -31.7 -22.8 -40.9

Gross profit 25.4 13.0 15.9 11.8 61.7

SG&A 22.1 10.6 12.5 8.9 28.8

EBITDA 10.0 4.7 5.1 5.6 40.2

Operation analysis ABI China CRB Tsingtao Yanjing ABI Global

Market share - % 14.5% 24.1% 18.6% 10.8%

# Breweries 49 98 61 42

Volume per brewery 1.5 1.2 1.5 1.3

Av # employees 37,860 - 43,126 40,109

Capacity - mhl 130 201 130

Provinces covered 15 25 20 16

Capacity utilisation - % 55% 59% 75%

Peak capacity utilisation - % c75% 76%

2012-14 avg

China capex as % sales 25% 12% 8% 11%

Capex/depreciation - x 2.0 1.9 2.4 1.7

Note: Net sales is gross sales minus excise duty. Source: Company data, Credit Suisse estimates

26 October 2015


Premiumisation should support growth Volume growth will likely be marginal

China is the largest beer consumption country by volume (53.65 mn kl total consumption

in 2014, 26.75% of worldwide consumption) given the large population. The overall CAGR

of market size by value was +10.3% during 2006-11, mainly driven by volume growth

(+7.5% volume CAGR during 2006-11).

However, the industry volume growth rate has slowed down since 2012 as volume CAGR

was only +1.9% during 2012-14. In 1H15, the overall volume sales declined by ~7.2%.

The key reasons are:

■ High comp base in 1H14 due to the 2014 World Cup; abnormal cool weather in some

regions during summer season in 1H2015;

■ Slowing down of macroeconomic growth and investment activities had negative impact

on the demand from mass market consumer;

■ Demographic change leading to a decline in growth of legal drinking age (LDA)

population and youth, who are major consumers of low alcohol percentage beverage.

Figure 11: China beer market size estimates—Volume

growth slowdown (mn litres)

Figure 12: Major players' sales volume declined since

2014

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

0

10,000

20,000

30,000

40,000

50,000

60,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015E

2016E

2017E

2018E

2019E

2020E

Discount Mainstream Premium

Superpremium YoY%

3%

6%

84%

7%

2%

5%

86%

7%

Source: Canadean, Credit Suisse estimates Source: Company data, NBS, Credit Suisse

Figure 13: Legal drinking age population growth has been

decelerating and young population is declining

Figure 14: China's has an ageing population, with more

and more population age over 35 year olds

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Total Population LDA Population (18+) Young population (18-35)

30%21% 20%

32%

28% 26%

38%51% 54%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

<18 18-35 >35

Source: Census Bureau, Credit Suisse Source: Census Bureau, Credit Suisse estimates

26 October 2015


Figure 15: Per capita beer consumption—China is higher

than world average and comparable with Asian countries

Figure 16: On premise vs off premise volume (M Litres)

73.5

45.5 45.0

39.3

27.0 26.523.1

20.4

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

US South Korea Japan China Thailand World Avg Taiwan Singapore

10,000

20,000

30,000

40,000

50,000

60,000

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015E

Off Premise On Premise

46%

54%

45%

55%

Source: Canadean, Kirin, Credit Suisse research Source: Canadean, Credit Suisse research

Premiumisation to be main growth driver

ASP increase accelerated over the past few years. Blended ASP of beer in China

increased from Rmb6.19/l in 1999 to Rmb8.54/l in 2014 (up 38%). The premiumisation

process accelerated in recent years, as the CAGR of ASP was 5.1% during 2010-14 vs

1.8% during 2005-10. The hike in ASP has become the key growth driver over the past

few years, given that the industry volume growth is slowing ( 2010-14 CAGR ASP vs

Volume: 5.1% vs 3.7%).

The ASP hike over last few years was mainly due to: (1) product mix change as high

ASP products take higher market share, whereas the on-premise channel of premium

super premium products market share raised to 42.8% in 2014 from 30.1% in 2005. (2)

Product price increase over the past few years, as different price range products

experienced ASP hike during the period.

Figure 17: Increase in ASP is major driver for future

growth

Figure 18: Market share changes by price range: on-

premise channel has clear premiumisation trend

Source: Canadean, Credit Suisse estimates Source: Canadean, Credit Suisse

ASP hike will continue. The premiumisation trend in on-premise channel is significant,

but so far we have not seen it in off-premise channels. We expect the ASP hike trend to

continue, given that:

■ More mid upper households. Increasing number of mid and upper households, who

pursue quality than being price sensitive. This will support the consumption upgrade.

26 October 2015


■ Chinese beer average ASP of discount/mainstream/premium segments are

much lower than similar products in other countries. There is still potential for

ASP increase in different price ranges, together with the increasing disposable

income.

■ Shift of price range mix of beer market. 91.7% of beer sold in China are

mainstream and discounted beer. This percentage is much higher than in the US

(66.7%), Singapore (65.6%) and UK (61.1%). We expect premium and super premium

to take more market share in the future given consumption upgrade.

Figure 19: China household structure

Source: BCG Note*: Disposable income after tax in 2014.

Figure 20: China has the lowest ASP in each price range

of beer in 2014 (Unit: USD/L)

Figure 21: Most of beer sold in China are discount and

mainstream products—2014

Source: Canadean, Credit Suisse Source: Canadean, Credit Suisse

Rmb458 bn market likely to grow at 3-5% over 2015-20. We expect the volume CAGR

over 2015-2020 to be 0.7% and 0.5% for on-premise channel and off-premise channel,

respectively, considering the trend of slowing down volume growth. We expect premium

and super premium to maintain stronger volume growth rates than mainstream and

discount products.

As a result of this product mix change the average ASP CAGR will be 3-4% in 2015-20.

We expect the overall beer market size to rise from US$74.4 bn in 2014 to US$100 bn by

2020. CAGR of the value of market size will likely be 3%-5% during 2015-20.

26 October 2015


Figure 22: Top five players main product portfolio price—Off Trade

Note: Price standardised to 500ml bottle; Off-trade includes supermarkets, hypermarkets and internet retailing. Source: Euromonitor, JD.com,

company data, Credit Suisse estimates.

26 October 2015


Figure 23: Industry demand estimates – market size, volume and ASP

2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 09-14 CAGR 15-19 CAGR

On Premise Volume (mn litres) 23,645 24,895 24,918 24,852 25,092 25,333 25,513 25,639 25,738 4.8% 0.7% Discount 968 1,003 984 955 943 931 922 915 910 2.9% -1.0% Mainstream 19,562 20,296 19,952 19,653 19,594 19,555 19,516 19,496 19,476 3.8% -0.2% Premium 2,211 2,494 2,692 2,826 2,968 3,116 3,241 3,338 3,405 11.6% 3.8% Super premium 903 1,102 1,289 1,418 1,588 1,731 1,835 1,890 1,947 12.0% 6.5% Volume YoY% 5.1% 5.3% 0.1% -0.3% 1.0% 1.0% 0.7% 0.5% 0.4% Discount 3.8% 3.5% -1.8% -3.0% -1.3% -1.2% -1.0% -0.8% -0.5% Mainstream 5.1% 3.8% -1.7% -1.5% -0.3% -0.2% -0.2% -0.1% -0.1% Premium 4.9% 12.8% 7.9% 5.0% 5.0% 5.0% 4.0% 3.0% 2.0% Super premium 5.9% 22.0% 17.0% 10.0% 12.0% 9.0% 6.0% 3.0% 3.0% ASP (Rmb/L) 9.53 10.32 11.17 11.90 12.63 13.29 13.89 14.34 14.80 4.8% 4.5% Discount 6.05 6.34 6.59 6.82 7.02 7.20 7.38 7.53 7.68 2.9% 2.4% Mainstream 7.04 7.37 7.66 7.93 8.17 8.37 8.58 8.75 8.93 2.9% 2.4% Premium 16.59 17.38 18.07 18.76 19.36 19.94 20.50 21.03 21.56 3.0% 2.8% Super premium 50.09 52.46 54.56 56.64 58.45 60.20 61.89 63.50 65.09 3.0% 2.8% ASP YoY% 2.3% 8.3% 8.2% 6.5% 6.2% 5.2% 4.5% 3.3% 3.2% Discount 2.2% 4.7% 4.0% 3.5% 3.0% 2.5% 2.5% 2.0% 2.0% Mainstream 2.2% 4.7% 4.0% 3.5% 3.0% 2.5% 2.5% 2.0% 2.0% Premium 2.1% 4.8% 4.0% 3.8% 3.2% 3.0% 2.8% 2.6% 2.5% Super premium 2.2% 4.7% 4.0% 3.8% 3.2% 3.0% 2.8% 2.6% 2.5% Value (Rmb mn) 225,431 257,003 278,340 295,691 316,943 336,773 354,271 367,751 380,978 9.9% 5.2% Discount 5,859 6,352 6,486 6,512 6,620 6,704 6,803 6,884 6,986 6.0% 1.4% Mainstream 137,669 149,515 152,859 155,836 160,030 163,703 167,460 170,638 173,877 6.8% 2.2% Premium 36,687 43,346 48,651 53,025 57,457 62,140 66,435 70,208 73,402 14.9% 6.7% Super premium 45,216 57,790 70,344 80,319 92,835 104,226 113,573 120,022 126,713 15.4% 9.5% Value YoY% 7.5% 14.0% 8.3% 6.2% 7.2% 6.3% 5.2% 3.8% 3.6% Discount 6.1% 8.4% 2.1% 0.4% 1.7% 1.3% 1.5% 1.2% 1.5% Mainstream 7.4% 8.6% 2.2% 1.9% 2.7% 2.3% 2.3% 1.9% 1.9% Premium 7.2% 18.2% 12.2% 9.0% 8.4% 8.1% 6.9% 5.7% 4.5% Super premium 8.1% 27.8% 21.7% 14.2% 15.6% 12.3% 9.0% 5.7% 5.6% Off Premise Volume (mn litres) 28,057 29,042 28,736 28,372 28,503 28,660 28,815 28,951 29,085 3.6% 0.5% Discount 2,505 2,596 2,549 2,485 2,455 2,428 2,404 2,385 2,373 2.8% -0.9% Mainstream 24,750 25,560 25,185 24,808 24,882 24,982 25,081 25,157 25,232 3.4% 0.3% Premium 561 635 700 742 794 850 901 955 1,003 13.6% 6.2% Super premium 240 250 301 337 371 401 429 454 477 11.5% 7.2% Volume YoY% 2.9% 3.5% -1.1% -1.3% 0.5% 0.6% 0.5% 0.5% 0.5% Discount 4.3% 3.6% -1.8% -2.5% -1.2% -1.1% -1.0% -0.8% -0.5% Mainstream 2.6% 3.3% -1.5% -1.5% 0.3% 0.4% 0.4% 0.3% 0.3% Premium 7.6% 13.2% 10.3% 6.0% 7.0% 7.0% 6.0% 6.0% 5.0% Super premium 14.2% 4.3% 20.4% 12.0% 10.0% 8.0% 7.0% 6.0% 5.0% ASP (Rmb/L) 5.72 6.00 6.27 6.51 6.73 6.92 7.11 7.28 7.44 3.1% 2.7% Discount 3.65 3.82 3.98 4.12 4.24 4.35 4.45 4.54 4.63 2.9% 2.4% Mainstream 5.78 6.05 6.30 6.52 6.71 6.88 7.05 7.19 7.34 2.9% 2.4%

Premium 7.91 8.28 8.61 8.94 9.22 9.50 9.77 10.02 10.27 2.8% 2.8% Super premium 16.26 17.03 17.72 18.39 18.98 19.55 20.10 20.62 21.14 3.0% 2.8% ASP YoY% 2.3% 4.8% 4.5% 3.9% 3.3% 2.8% 2.8% 2.3% 2.3% Discount 2.1% 4.7% 4.0% 3.5% 3.0% 2.5% 2.5% 2.0% 2.0% Mainstream 2.2% 4.7% 4.0% 3.5% 3.0% 2.5% 2.5% 2.0% 2.0% Premium 2.4% 4.7% 3.9% 3.8% 3.2% 3.0% 2.8% 2.6% 2.5% Superpremium 2.2% 4.7% 4.0% 3.8% 3.2% 3.0% 2.8% 2.6% 2.5% Value (Rmb mn) 160,610 174,171 180,049 184,701 191,760 198,301 204,964 210,694 216,471 6.8% 3.2% Discount 9,155 9,929 10,138 10,230 10,411 10,554 10,709 10,836 10,998 5.7% 1.5% Mainstream 143,113 154,721 158,547 161,635 166,984 171,843 176,843 180,921 185,094 6.3% 2.7% Premium 4,440 5,262 6,029 6,634 7,326 8,073 8,797 9,568 10,297 16.8% 9.2% Super premium 3,902 4,260 5,334 6,201 7,040 7,831 8,614 9,368 10,082 14.8% 10.2% Value YoY% 5.3% 8.4% 3.4% 2.6% 3.8% 3.4% 3.4% 2.8% 2.7% Discount 6.5% 8.5% 2.1% 0.9% 1.8% 1.4% 1.5% 1.2% 1.5% Mainstream 4.8% 8.1% 2.5% 1.9% 3.3% 2.9% 2.9% 2.3% 2.3% Premium 10.1% 18.5% 14.6% 10.0% 10.4% 10.2% 9.0% 8.8% 7.6% Super premium 16.7% 9.2% 25.2% 16.3% 13.5% 11.2% 10.0% 8.8% 7.6% Total market size Value (Rmb mn) 386,041 431,175 458,389 480,392 508,702 535,074 559,235 578,445 597,449 8.6% 4.5% Value (US$ mn) 62,669 69,996 74,414 77,986 82,582 86,863 90,785 93,903 96,988 8.6% 4.5% Volume (mn litres) 51,701 53,936 53,653 53,225 53,595 53,994 54,328 54,590 54,823 4.1% 0.6% ASP (Rmb/L) 7.47 7.99 8.54 9.03 9.49 9.91 10.29 10.60 10.90 4.3% 3.8% Value YoY% 6.6% 11.7% 6.3% 4.8% 5.9% 5.2% 4.5% 3.4% 3.3% Volume YoY% 3.9% 4.3% -0.5% -0.8% 0.7% 0.7% 0.6% 0.5% 0.4% ASP YoY% 2.6% 7.1% 6.9% 5.6% 5.2% 4.4% 3.9% 2.9% 2.8%

Source: Canadean, Credit Suisse estimates

26 October 2015


Consolidation: Possible big moves ahead! Consolidated but still competitive

Consolidated market but still competitive, as major players are still competing in

different regions. National players have been consolidating the market through capacity

expansion and M&As over the past five years. The combined market share of the top four

players increased from 57% in 2010 to 66% in 2014. But still the market share differences

among the top four players are not significant and this leads to competition across regions.

This is the reason why the profitability of leading Chinese brewers did not improve much

as the consolidation happened. The Herfindahl-Hirschmann Index was still 0.13 in 2014

which still indicates moderate competitive environment in the market.

Figure 24: Market shares by volume (%)—company Figure 25: Combined market share of top five players

91.8%

84.5%

72.9% 70.9%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Japan US UK China

Source: NBS, Canadean, Credit Suisse estimates Source: Euromonitor, Credit Suisse research

Figure 26: Consolidation has led to China's HHI to double

over the past decade China Herfindahl-Hirschmann Index

Figure 27: Overall Market shares by volume (%) —brand

Source: Canadean, Credit Suisse estimates Source: Euromonitor, Credit Suisse research

Consolidation: Possible big moves ahead

Further M&As are still likely and big deals between major players are possible. The

top four players actively acquired major regional players over the past five years to

penetrate into new regions and lift market share. Most major regional players with

26 October 2015


200'000-300'000 KL capacity were merged. Now, only few 20~30 KL capacity regional

players are left. Moving forward, Henan Jinxing (KingStar) and Yunnan Lancangjiang are

the remaining regional brands that may attract national players. Currently, KingStar is the

sixth brewer with a 2.5% market share by volume in 2014, and its home market Henan is

the third beer production province in China.

Figure 28: Top 4 players' major M&A cases summary 2010-14

Date Acquirer Target Equity % Capacity

('000 KL)

Transaction

amount (Rmb mn)

Avg price

(Rmb/ton)

2010.8 Yanjing Henan Yueshan 90% 250 144 638

2010.8 Yanjing Henan Yueshan (Suiping) 100% 150 98 651

2010.9 Tsingtao Shanxi Jiahe 100% 180 170 944

2010.11 CRB Hangzhou Xihu 45% 300 268 1,985

2010.11 Yanjing Inner Mongolia Jinchuan 96% 150 152 1,052

2010.12 Tsingtao Shandong Xin Immense 100% 550 1,873 3,405

2011.1 CRB Henan Aoke 100% 290 300 1,034

2011.2 AB Inbev Liaoning Daxue 100% 500 1,200 2,400

2011.2 CRB Jiangsu Santai 100% 200 250 1,250

2011.3 AB Inbev Henan Weixue 50% 300 520 3,467

2011.3 Tsingtao Hangzhou Zijintan 80% 200 186 1,163

2011.6 CRB Liaoning Moni 80% 190 300 1,974

2011.7 CRB Henan Lanpai 100% 150 75 500

2011.8 CRB Hangzhou Xihu 55% 500 300 1,091

2011.9 Yanjing Hebei Tianniu 100% 100 108 1,077

2011.11 Tsingtao Guangdong Huoli 100% 150 190 1,267

2012.6 Tsingtao Shanghai Suntory (JV) 50% 600 1,336 4,453

2013.2 CRB Kingway China 100% 1,450 5,384 3,713

2013.4 AB Inbev Asia Beer 100% 900 2,509 2,787

2013.5 Tsingtao Shaanxi Hans 100% 300 371 1,238

2013.12 Tsingtao Hebei Jiahe 50% 300 300 2,000

2013.12 Tsingtao Hebei Xinzhonglou 100% 200 348 1,740

2014.4 AB Inbev Jilin Ginsber 100% 800 3,800 4,750

2014.5 AB Inbev Jiangsu Boss 100% 1,000 2,450 2,450

2014.7 Tsingtao Shandong Lulansha 55% 300 380 2,303

Source: Company data, Internet data, Credit Suisse estimates

Competition in East, Central and South China is still fierce. Guangdong and Henan, as the

2nd

and 3rd

largest beer production provinces, become the major battlefield among leading

players, followed by Hubei and Jiangsu where annual beer production exceeds 2 mn KL.

Hebei, Jiangxi, Yunan and Hunan are also critical markets for leading players to penetrate.

All together, these "non-strong hold" regions have 20.02 mn KL annual beer production,

which accounts for 40.74% national beer production in 2014. Also M&As among big

players are more likely given that less mid-sized brewers are left. This may significantly

change the competitive landscape.

Yanjing, Tsingtao and Carlsberg have large portions of volume produced from strong hold

(>60%), and we expect this part to grow steadily as they gradually take up shares from

mid-small size players within this region. On the contrary, the portion in competitors' strong

hold is likely to remain sluggish as the competition landscape has stabilised in this region,

where the No. 1 player has strong pricing power and higher utilisation rate of capacity.

After all, the largest uncertainty comes from non-strong holds as mentioned above.

Notably, ABI has 44.0% of total volume from non-strong hold, followed by CRB's 32.8%,

and 15%-20% from other three players.

Yangjing could become a potential target for M&As. Under the competition landscape,

it is likely that top players could further consolidate to improve pricing power and

operational efficiency, with Yanjing being the most possible target to be acquired in our

view, considering its current market position and shareholder structure.

Acquiring Yanjing would bring substantial influence to the current competition landscape.

Given the ongoing AB Inbev and SABMiller deal, anti-trust concerns make it unlikely for

AB Inbev China to approach Yanjing M&A.

26 October 2015


If Yanjing is acquired by CRB, then it can achieve a dominant position in most provinces of

North China (Beijing, Tianjin, Shanxi, Inner Mongolia) and Southwest (Sichuan, Guizhou,

Guangxi), create balance in Northeast with AB Inbev and in West with Carlsberg, while

significantly improve competitiveness in East and South China (Shanghaim Jiangsu,

Zhejiang, Hubei, Hunan and Guangdong). The combined market share would reach

~35%, far more than other players, which brings synergy in pricing power and hence

higher margins. However, CRB and Yanjing have a similar product mix, with a focus on

mid/low end products but lack premium brands.

Figure 29: Major players' market position analysis—2014

Note: Data based on production volume; painted area means strong hold. Source: Source: Wind, Beer Professional Committee, Credit Suisse

estimates

Figure 30: Top 5 players' 2014 volume break down

Strong hold Weak hold Competition

ABI 46.1% 9.8% 44.0%

CRB 57.6% 9.6% 32.8%

Tsingtao 61.6% 14.5% 23.8%

Yanjing 69.5% 14.6% 15.9%

Carlsberg 79.0% 5.6% 15.4%

Note: Weak hold refers to competitors' strong hold market. Source: Beer Professional Committee , Credit

Suisse estimates

Global market landscape change may have significant impact on Chinese market.

The potential M&A deal between AB Inbev and SABMiller may have significant impact on

China's beer market, as SABMiller holds 49% stake of "China Resource Snow" (No 1

brewery in China). How AB Inbev is going to deal with the 49% stake in "China Resource

Snow" will be very important to China's beer market. Given that the deal is still ongoing

26 October 2015


and the anti-trust concerns in China, the impact of this deal on China's beer market is

highly uncertain for now.

We provide different scenario analysis below:

1) AB Inbev keeps or partially keeps the SABMiller stake of "China Resource

Snow". This may lead to the dramatic competitive landscape change of China's beer

market, given CRB and AB Inbev will have a combined market share ~40%. Synergy

may come from the well-developed plant network nationwide and the strengthening

foothold in North-eastern, Eastern and Southern parts of China. Also, CRB may

benefit from the premiumisation experience of AB Inbev.

The key uncertainty about this possibility is the Anti-Trust concern and the decision of

the ministry of commerce. Although the ~40% market share does not breach the

regulation of anti-trust law in China (Combined market share of two players is not

allowed to exceed 66%), the ministry of commerce did put regulation on AB Inbev,

during the Anheuser-Busch and Inbev M&A case in 2008. AB Inbev is not allowed to

approach CRB or Yanjing through M&As without the approval of the ministry of

commerce.

Figure 31: Shareholding structure—pre and post disposal of non-beer assets

Source: Company data

2) SABMiller is required to sell its stake in "China Resource Snow", and China

Resource Beer exercises the right of first refusal. If the ministry of commerce

requires SABMiller to sell the 49% stake of "China Resource Snow", CRB is likely to

exercise the right of first refusal and buy the stake back. CRB now has a HK$10 bn

credit line from China Resources Holding and also CRB is capable of financing

through bank loans for the buyback.

CRB fully or partially buys back the 49% stake using debt. CRB is likely to be

earnings accretive.

If we assume that CRB uses debt to finance with interest rate ranging between 2%

and 4%, and the price paid to fully buy back the 49% stake from SABMiller is in the

range of 12.70 (CRH buy back price) to 16.00 per share, then. it will lead to 0-56%

earnings accretion.

If we assume that CRB uses debt to finance with interest rate in the range of 2-4%,

and the price paid to fully buy back the 20% stake from SABMiller is in the range of

12.70 (CRH buy back price) to 16.00 per share, then it will lead to 10-30% earnings

accretion.

26 October 2015


Figure 32: Sensitive analysis on 2016 net profit and P/E if CRB uses debt to buyback

49% stake of China Resource Snow

Assumed Buy back

Price(HK$)

12.7 14.0 15.2 16.5 17.8 19.1

Premium on top of base

buyback Price(HK$)

0% 10% 20% 30% 40% 50%

Cash amount for 49%

stake of "CRS" (HK$, Mn)

29,687 32,656 35,625 38,594 41,562 44,531

Value impact on 2016 Net Profit to shareholders

Under different Interest Rate (HK$ Mn)

2% 641.4 598.1 554.8 511.4 468.1 424.7

3% 424.7 359.7 294.7 229.7 164.7 99.6

4% 208.0 121.3 34.6 (52.1) (138.7) (225.4)

5% (8.7) (117.1) (225.4) (333.8) (442.1) (550.5)

% impact on 2016 Net Profit to shareholders

under different interest rate(HK$, Mn)

2% 57.3% 53.5% 49.6% 45.7% 41.8% 38.0%

3% 38.0% 32.2% 26.3% 20.5% 14.7% 8.9%

4% 18.6% 10.8% 3.1% -4.7% -12.4% -20.2%

5% -0.8% -10.5% -20.2% -29.8% -39.5% -49.2%

Valuation 2016 P/E before buyback (trading)

33.19X

2016 P/E after buyback under different interest rate

2% 21 22 22 23 23 24

3% 24 25 26 28 29 30

4% 28 30 32 35 38 42

5% 33 37 42 47 55 65

Source: Company data, Credit Suisse estimates

3) SABMiller is required to sell the stake of "China Resource Snow", and other

players buy the stake. If CRB fails to exercise the right of first refusal and other

leading players may become minority shareholders of "China Resource Snow".

Although synergies may come from stronger regional foothold if Tsingtao or Yanjing

becomes the minority shareholder, it is unlikely for Tsingtao or Yanjing to carry out the

purchase given the weaker financial position.

Foreign players may also become potential bidders. If Carlsberg becomes the minority

shareholder, synergy may come from geographically complementary strong foothold

regions in China, given Carlsberg is strong in Western part of China. If other foreign

players become the minority shareholders, the competition landscape is not likely to

change.

26 October 2015


Profitability: CRB may catch up while Tsingtao remains strongest Industry profitability much lower than global peers

Overall, the profitability of China brewery companies is lower than global peers, mainly due

to strong competition and low ASP. The retail price/KL of Chinese breweries is >25% lower

than global peers. EBITDA/KL of Chinese breweries are less than one-third of global peers.

Figure 33: Price/KL (US$) is low for China beer makers Figure 34: EBITDA/KL(US$) is also low

1,416

940

820 761 754

611 508 487

390 376

-

200

400

600

800

1,000

1,200

1,400

1,600

Heineken

ABI

Carlsberg

SABMiller

Asahi

ABI APAC

Tsingtao

Zhujiang

Yanjing

CRE

2011 2012 2013 2014

Unit beer price is low in China

404.1

309.8

190.0 164.3

55.7 50.8 47.4

-

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

ABI

Heineken

SABMiller

Carlsberg

Yanjing

Tsingtao

CRE

2011 2012 2013 2014

Source: Euromonitor, Company data, Credit Suisse Source: Company data, the BLOOMBERG PROFESSIONAL™

service, Credit Suisse

Figure 35: Peer comparison—CRB, Tsingtao, Yanjing and ABInbev 2014

US$ ABI China CRB Tsingtao Yanjing ABI Global

Net sales 3,873 3,996 4,361 1,844 47,063

COGs -2,058 -2,455 -2,906 -1,216 -18,756

Gross profit 1,815 1,541 1,456 628 28,307

Gross profit margin - % 46.9% 38.6% 33.4% 34.1% 60.1%

SG&A 1,577 1,258 1,144 473 13,196

as % net sales -40.7% -31.5% -26.2% -25.7% -28.0%

EBITDA 716 561 463 296 18,465

EBITDA margin - % 18.5% 14.0% 10.6% 16.0% 39.2%

EBIT 238 284 312 155 15,111

EBIT margin - % 6.1% 7.1% 7.2% 8.4% 32.1%

Depreciation as % net sales 12.3% 6.9% 3.5% 7.6% 7.0%

Volume - mhl

Per hl analysis - $ ABI China CRB Tsingtao Yanjing ABI Global Net sales 54.2 33.8 47.6 34.7 102.6

COGs -28.8 -20.7 -31.7 -22.8 -40.9

Gross profit 25.4 13.0 15.9 11.8 61.7

SG&A 22.0 10.6 12.5 8.9 28.8

EBITDA 10.0 4.7 5.1 5.6 40.2

Operation analysis ABI China CRB Tsingtao Yanjing ABI Global Market share - % 14.5% 24.1% 18.6% 10.8% # Breweries 49 98 61 42

Volume per brewery 1.5 1.2 1.5 1.3

Av # employees 37,860 - 43,126 40,109

Capacity - mhl 130 201 130 Provinces covered 15 25 20 16



2012-14 avg




26 October 2015


Moving forward, we expect further consolidation to improve the pricing power of dominant

players in their strong hold regions, and further premiumisation will lead to product mix

upgrade and margin expansion. Industry profitability should gradually improve to match

global peers in future.

Profitability: CRB is catching up

We believe CRB is most likely to benefit from the premiumisation trend, potential industry

consolidation and its own cost control strategy.

If the competition landscape remains unchanged, the profitability of CRB will still catch up

with Tsingtao and Yanjing. We expect CRB’s ROE increase from 3.25% in 2015 to 9.89%

in 2019 (vs decline in Tsingtao from 11.32% to 10.58%), given:

(1) improving net margin due to positive product mix change and strong cost control: CRB

is having positive product mix change from discount products to mainstream and

above products. More canned beer sold will help margin expansion. Stronger cost

control has been implied given the weak volume growth of the beer industry.

(2) Asset turnover improvement given higher-than-peers sales growth ( CRB 5%~7%, VS

Tsingtao -3%~2% and Yanjing -5%~2% ). Positive product mix change should help

CRB achieving better than peers' sales growth rate. Also, the volume growth rate of

CRB is better than peers.

(3) Gearing ratio likely to be lower given improving cash position to repay debt. We

believe if less capex is invested in capacity expansion, then free cash flow will improve

over next few years. This will help CRB in repaying current debts and lowering

leverage. CRB is likely to become net cash in 2017.

Figure 36: Profitability—CRB's ROE is catching up Figure 37: CRB Net profit margin will improve

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 38: CRB's asset turnover will improve and

Tsingtao's asset turnover will decline

Figure 39: CRB's leverage will go down slightly

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

26 October 2015


Strong foothold leads to better profitability

The global brewery industry history shows that strong foothold leads to better

profitability. We compared the EBITDA of beer companies to market share in each

regional market. Our finding suggests that higher the stronger foothold a beer company

has in the regional market, higher the EBITDA margin. This can be explained by (1)

dominant position with less competition leading to less price war and higher gross profit

margin; (2) strong foothold means high consumer recognition and lower marketing

expenses; and (3) higher market share leading to utilisation of regional productivity and

lower depreciation and amortisation in the long run. Chinese beer margins are amongst

the lowest in global beer industry, given the relatively fragmented industry.

Figure 40: Global beer EBITDA margin v market share - %

ABI US

ABI Canada

ABI Mexico

ABI BrazilABI LatAm South

ABI China

ABI Korea

Hein W.E

Hein C.E.E

Hein Americas

Hein Mexico

Hein Asia Pac

Hein Africa

Carl W.E

Carl E.E

Carl Asia

SAB Latam

SAB Colombia

SAB Europe

SAB US

SAB South Africa

SAB Africa

Castel

SAB TanzaniaSAB Australia

CR Snow

Efes Turkey

EFES EBI

MC Europe

MC Canada

CCU Argentina

Guinness Nigeria

Tsingtao

Yanjing

R² = 0.6586

0%

10%

20%

30%

40%

50%

60%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

EBIT

DA

mar

gin

-%

Market share - % Source: Company data, Credit Suisse estimates

Figure 41: Scenario analysis of different M&As combinations

Combination Additional strong

hold provinces

New strong hold as %

of national markets

Avg combined market

share in strong holds

Regional synergy

CRB+ABI 5 21.20% 71% High in Northeast and East China market

CRB+Tsingtao 3 10.90% 58% High in East China market

CRB+Yanjing 1 5.40% 55% High in North China market

CRB+Carlsberg 1 5.40% 51% High in Northwest China market

ABI+Tsingtao 1 4.10% 56% Will secure dominant foothold in Fujian and easing

competition in Guangdong

Yanjing+ABI 0 - - Will secure dominant foothold in Fujian

Yanjing+Tsingtao 0 - - Low as Beijing and Tsingtao are in dominant positions

in each of the markets

Source: Company data, BPC, Credit Suisse estimates

26 October 2015


Figure 42: China beer market competition landscape summary 2014

ProductionMn Ton Name Mkt Share Name Mkt Share Name Mkt Share Name Mkt Share

Beijing 1.57 Yanjing 72% Tsingtao 12% CRE 2%

Tianjin 0.28 CRE 95%

Hebei 1.66 Tsingtao 25% CRE 24% ABI 18% Yanjing 9%

Shanxi 0.42 CRE 53% Tsingtao 31% Yanjing 10%

Inner Mongolia 1.09 Yanjing 75% CRE 20%

Liaoning 2.72 CRE 65% ABI 20%

Jilin 1.44 ABI 40% CRE 37%

Heilongjiang 2.04 ABI 42% CRE 41% Tsingtao 5%

Shanghai 0.61 Tsingtao 70% CRE 25%

Jiangsu 2.03 CRE 33% Tsingtao 31% ABI 25%

Zhejiang 2.67 CRE 47% ABI 36% Yanjing 8% Tsingtao 5%

Anhui 1.36 CRE 75% Carlsberg 9%

Fujian 1.82 ABI 67% Yanjing 17% Tsingtao 16%

Jiangxi 1.31 ABI 27% Yanjing 17% Tsingtao 3%

Shandong 7.41 Tsingtao 60% CRE 5% Yanjing 3%

Henan 4.04 Jinxing 27% ABI 13% CRE 7%

Hubei 2.24 ABI 36% CRE 22% Tsingtao 6% Yanjing 5%

Hunan 0.77 Yanjing 27% CRE 14% ABI 12% Carlsberg 11%

Guangdong 4.33 Zhujiang 24% ABI 20% Tsingtao 19% CRE 17%

Guangxi 1.90 Yanjing 79% Tsingtao 7% Zhujiang 5%

Hainan 0.07 Heineken 100%

Chongqing 0.74 Carlsberg 97%

Sichuan 2.28 CRE 60% Tsingtao 25% ABI 10%

Guizhou 0.79 CRE 53% Jinxing 12%

Yunnan 1.00 Lancangjiang 35% Carlsberg 25% Jinxing 15% Yanjing 10%

Xizang 0.16 Carlsberg 60% CRE 18%

Shaanxi 0.96 Tsingtao 78% Jinxing 12% CRE 8%

Gansu 0.66 Carlsberg 60% CRE 20% Tsingtao 15%

Qinghai 0.12 Carlsberg 75%

Ningxia 0.28 Carlsberg 70% CRE 20%

Xinjiang 0.46 Carlsberg 50% Yanjing 34%

Total 49.22

Province: >6 mn Lit res >4 mn Lit res >2 mn Lit res >1mn Lit res <1mn Lit res

Company: C R E Tsing t ao ABI A B I Y anjing C arlsberg

Cen

tral

Sout

hSo

uth

Wes

tN

orth

Wes

tMarket Share of Top Players

Nor

thN

orth

East

East

Source: Company data, BPC, Credit Suisse estimates

Further consolidation may help profitability improvement for leading companies.

Based on the current competition landscape, we conducted a scenario analysis on the

outcome and synergies if M&A happens between top players, as summarised in the table

above.

(1) CRB and AB Inbev: More synergy nationwide. If CRB and ABI come together, they

could gain strong foothold with solid average 71% combined market share in five more

provinces, namely Jiangsu, Zhejiang, Hubei, Jilin and Heilongjiang, which takes 21.2%

of the national beer market. Regionally, synergies will be significant in NorthEast and

East China, as they could dominate three provinces in North East, four provinces in

East coast, and enhance presence in Southwest. Additionally, CRB and ABI have a

diversified and complementary product portfolio, in which CRB has strong advantage

in the mid- and low-end with its No.1 brand "Snow", and ABI's strength lies in the

premium and super-premium categories. Put together, we regard this combination has

the largest potential synergy for both companies. In terms of profitability, the margins

in East and Southwest will definitely improve, or turn from loss making to profit making.

For instance, ABI's Double Deer brands in Zhejiang had ~-4% OP margin in 2014 due

to competition according to BPC's data. NorthEast will be even better for these two

(they are already doing well), and margin has further space to expand along with ASP.

(2) CRB and Tsingtao: Will have stronger position in eastern China. If CRB combines

with Tsingtao, there will be three more provinces with ~10.9% national market share,

which will then likely become their strong holds. The three provinces are Jiangsu,

Zhejiang and Gansu. Although the average 58% combined market share in these

three markets is not absolutely solid, the competition pressure will be greatly released.

26 October 2015


East China will be under control in this situation, as they dominate Shanghai, Jiangsu,

Zhejiang and Anhui; competition in North and Northwest will also be enhanced. Also,

their product portfolio can also match, as Tsingtao has certain portion in premium

brands and their mid- to low-end competitiveness will be improved. On the margin side,

Tsingtao could hopefully get released from the competition pressure in East due to

more evident market presence, and improve gross margin and operating margin. Also,

CRB could increase ASP and profitability in the region.

(3) Other possible combinations such as Yanjing+Tsingtao, Yanjing+CRB, Yanjing+ABI,

Tsingtao+ABI and CRB+Carlsberg, have far less synergy, in our view. The reason is

that Yanjing is just strong in Beijing, Guangxi and Inner Mongolia, but not as

competitive in other provinces, so that it is hard to change the competition landscape.

Similarly, Carlsberg mainly focuses on the western areas, and hence has little

influence to the pattern in other regions.

26 October 2015


Stock picks: Quality matters Valuation

Chinese brewery companies used to trade at high EV//EBITDA multiples, but the recent

correction due to unsatisfied 1H15 performance drove down their share prices.

CRB's shareholders approved the proposal to sell all non-beer assets in August 2015.

Now the company has changed its name to China Resources Beer (Holdings) Co Ltd from

China Resources Enterprise Limited, and become a beer-focused enterprise. Based on

the financial data of its beer business, CRB still trades at 11.8x 2016E EV/EBITDA,

compared with Tsingtao's 12.7x, Yanjing's 11.4x, Heineken's 10.6X and Carlsberg's 8.3x.

However, CRB's P/E multiple is far higher than its peers. It trades at 33x 2016E P/E, which

is >20% higher than Yanjing's 27x, Tsingtao A's 24X, Tsingtao H's 23x, Heineken's 22X

and Carlsberg's 17x.

Figure 43: Valuation—EV/EBITDA comparison Figure 44: Valuation—P/E comparison

17.7

13.0

11.1

8.9

13.3 13.7

12.111.3

9.1

12.411.9

11.3 10.6

8.3

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Tsingtao CRB Yanjing Heineken Carlsberg

2014 2015E 2016E

38.6

28.1 25.4

23.1 22.7

17.6

33.4

26.9

24.3

21.9 21.7

16.5

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0


2014A 2015E 2016E

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

estimates


estimates

Figure 45: Tsingtao A—forward P/E band Figure 46: EV/EBIDTA band—Tsingtao H

5

15

25

35

45

55

65

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15

Tsingtao A 12x 15x 20x 25x 35x

-

10

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30

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50

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70

12/0

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3

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4

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4

06/1

5

7X 11X 15X 19X 23X Price-H


Estimates

Source: the BLOOMBERG PROFESSIONAL™ service, IBES, Credit

Suisse Estimates

26 October 2015


Figure 47: EV/EBIDTA band—Tsingtao A Figure 48: EV/EBIDTA band—Yanjing

-

10

20

30

40

50

60

12/0

5

06/0

6

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6

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7

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7X 11X 15X 19X 23X Price-A

-

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16

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4

06/1

5

10X 13X 16X 19X 22X Price


Suisse Estimates


Suisse Estimates

Stock picking:

Considering the slowing industry growth we rate China's beer sector MARKET WEIGHT.

We believe that the quality of earnings and improving free cash flow will be more important.

Tsingtao Brewery remains the best quality player in the industry given highest ROE,

strong cash position and strong position in mainstream and above product category. We

initiate coverage with a NEUTRAL rating mainly due to the short-term earnings pressure

from AB Inbev competition and declining sales volume. Our target price of HK$40 for H-

share and Rmb35 for A-share are based on 13.3x 2016E EV/EBITDA, 4% and 3%

potential upside.

China Resources Beer: We initiate coverage with a NEUTRAL rating mainly due to the

higher-than-industry valuation. It is likely to have a positive product mix change from

discount to mainstream and above. There is potential to further consolidate the beer

market by expansion and M&As, and this may lead to strengthening its foothold in

dominant regions. This should lead to profitability improvement in the long run. Our target

price of HK$16 is based on 12.3X 2016E EV/EBITDA, 7% upside. CRB still trades at

11.8x 2016E EV/EBITDA, compared with Tsingtao's 12.7x, Yanjing's 11.4x, Heineken's

10.6X and Carlsberg's 8.3x. However, CRB's P/E multiple is far higher than its peers. It

trades at 33x 2016E P/E, which is >20% higher than Yanjing's 27x, Tsingtao A's 24X,

Tsingtao H's 23x, Heineken's 22X and Carlsberg's 17x.

Yanjing: We initiate coverage with a NEUTRAL rating and a Rmb8.70 TP based on 12.0x

2016E EV/EBITDA, or 5% upside, given its weak fundamentals.

2

6 O

cto

ber 2

015

Ch

ina B

rew

ery

Sec

tor

23

Figure 49: Valuation matrix – global alcoholic beverage manufacturers comparison

Company Name Ticker Mkt cap Currency Performance (%) P/E(X) EV/EBITDA(X) P/B(X) ROE% EPS

CAGR %

PEG DivYld

Reuters (US$, mn) Local 1M 3M 12M 2015 2016 2017 2015 2016 2017 2015 2016 2015 2016 2017 15-17 2015 12MF

International Beer Manufacturers

Heineken HEIN.AS 50,690 EUR 9% 9% 39% 23.1 21.9 20.2 11.3 10.6 9.7 3 3 16% 15% 15% 7% 3.3 1.6%

Carlsberg CARLb.CO 12,097 DKK 4% -14% 4% 17.6 16.5 14.9 9.1 8.3 8.0 1 1 9% 9% 9% 9% 2.0 1.7%

Kirin Holdings 2503.T 13,026 JPY 7% -6% 26% 41 37 34 9 8 8 2 2 3% 4% 4% 11% 3.9 2.5%

Asahi Group 2502.T 14,517 JPY 0% -5% 22% 22 23 22 10 10 9 2 2 8% 8% 8% 2% 14.3 1.4%

Simple avg. 26 25 23 10 9 9 2 2 9% 9% 9% 7% 5.9 1.8%

A/H-share Beer Manufacturers

China Res Beer 0291.HK 4,690 HKD 10% 19% 56% 38 33 27 14 11.8 10 2 2 7% 7% 8% 19% 2.0 1.2%

Tsingtao Brewery 0168.HK 6,980 HKD 9% -12% -31% 24 23 21 14 12.7 12 3 3 11% 11% 10% 5% 4.5 1.3%

Tsingtao Brewery 600600.SS 6,980 CNY 7% -16% -11% 25 24 23 14 12.7 12 3 3 11% 11% 10% 5% 4.8 1.3%

Yanjing Brewery 000729.SZ 3,663 CNY 9% -6% 24% 28 27 26 12 11.4 10 2 2 6% 6% 7% 5% 5.9 1.0%

ChongqingBrewery 600132.SS 1,133 CNY 12% -21% -3% n.a. n.a. n.a. n.a. n.a.

Zhujiang Brewery 002461.SZ 1,510 CNY 23% -41% -5% n.a. n.a. n.a. n.a. n.a.

Huiquan Brew 600573.SS 522 CNY 27% 11% 49% n.a. n.a. n.a. n.a. n.a.

Simple avg. 29 27 24 13 12 11 2 2 9% 9% 9% 9% 4.3 1.2%

International Spirits Manufacturers

Diageo DGE.L 72,050 GBp 7% 0% 5% 21 21 19 13 16 15 6 6 29% 26% 26% 3% 6.6 3.2%

Pernod-Ricard PERP.PA 30,565 EUR 14% -6% 17% 21 20 18 14 14 13 2 2 10% 11% 11% 7% 3.1 1.8%

Brown-Forman BFb.N 13,290 USD 11% 6% 24% 34 31 28 18 19 17 7 12 31% 39% 39% 9% 3.7 1.3%

Constellation Br STZ.N 23,862 USD 8% 18% 58% 31 27 24 17 16 14 4 4 17% 17% 17% 15% 2.1 1.0%

Thai Beverage TBEV.SI 12,507 SGD -2% -8% -8% 19 17 17 14 12 11 4 4 22% 23% 22% 8% 2.2 3.8%

Davide Campari CPRI.MI 4,962 EUR 9% 7% 39% 25 23 21 14 13 12 3 2 11% 11% 11% 11% 2.4 1.2%

Remy Cointreau RCOP.PA 3,330 EUR 13% -5% 10% 32 28 25 21 17 16 3 3 9% 9% 9% 13% 2.5 2.6%

Simple avg. 26 24 21 16 15 14 4 5 18% 19% 19% 9% 3.2 2.1%

A-share Spirits Manufacturers

Kweichow Moutai 600519.SS 41,698 CNY 8% -4% 46% 16 14 12 9 8 6 4 3 26% 24% 23% 14% 1.1 2.2%

Wuliangye Yibin 000858.SZ 15,367 CNY 0% -7% 49% 16 14 11 8 7 5 2 2 14% 15% 16% 19% 0.9 2.5%

Jiangsu Yanghe 002304.SZ 14,558 CNY 16% -7% 38% 18 15 13 10 8 6 4 3 23% 23% 24% 19% 1.0 2.9%

Luzhou Laojiao 000568.SZ 4,989 CNY 9% -11% 40% 20 16 15 10 8 7 3 3 15% 17% 16% 13% 0.0 2.8%

Shanxi Fen Wine 600809.SS 2,419 CNY 17% -9% 11% 35 29 27 17 14 12 4 3 10% 12% 12% 15% 2.3 1.1%

Tuopai Shede 600702.SS 800 CNY 12% -42% 10% 328 239 182 n.a. n.a. n.a. 2 n.a. 34% 9.6

Laobaigan Liquor 600559.SS 1,390 CNY 17% -16% 141% 85 50 28 29 21 10 9 8 13% 20% 20% 75% 1.1 0.4%

AGSW 600199.SS 778 CNY 10% -14% 9% 31 23 n.a. n.a. n.a. 1 2 7% 9% 9% 2.5%

YLT 600197.SS 798 CNY 6% -9% 16% 14 n.a. n.a. n.a. n.a. n.a.

Gu Jing 000596.SZ 1,811 CNY 10% -19% 28% 23 20 17 13 11 8 3 3 15% 15% 15% 16% 1.4 1.2%

Huzhu 002646.SZ 1,492 CNY 12% -21% 28% 27 24 20 21 19 15 4 4 14% 14% 14% 18% 1.5 1.7%

Huangtai Wine 000995.SZ 280 CNY 17% -19% -23% n.a. n.a. n.a. n.a. n.a.

Simple avg. 56 44 36 15 12 9 4 3 15% 17% 17% 25% 2.1 1.9%

Note: price as of Oct.23, 2015. Source: IBES, Credit Suisse estimates

26 October 2015


Figure 50: Peer comparison – CRB, Tsingtao, Yanjing and ABInbev

US$ ABI China CRB Tsingtao Yanjing ABI Global Net sales 3,873 3,996 4,361 1,844 47,063 COGs -2,058 -2,455 -2,906 -1,216 -18,756

Gross profit 1,815 1,541 1,456 628 28,307 Gross profit margin - % 46.9% 38.6% 33.4% 34.1% 60.1%

SG&A 1,577 1,258 1,144 473 13,196

as % net sales -40.7% -31.5% -26.2% -25.7% -28.0%

EBITDA 716 561 463 296 18,465 EBITDA margin - % 18.5% 14.0% 10.6% 16.0% 39.2%

EBIT 238 284 312 155 15,111

EBIT margin - % 6.1% 7.1% 7.2% 8.4% 32.1%

Depreciation as % net sales 12.3% 6.9% 3.5% 7.6% 7.0% Volume - mhl

Per hl analysis - $ ABI China CRB Tsingtao Yanjing ABI Global Net sales 54.2 33.8 47.6 34.7 102.6 COGs -28.8 -20.7 -31.7 -22.8 -40.9 Gross profit 25.4 13.0 15.9 11.8 61.7 SG&A 22.0 10.6 12.5 8.9 28.8 EBITDA 10.0 4.7 5.1 5.6 40.2

Operation analysis ABI China CRB Tsingtao Yanjing ABI Global Market share - % 14.5% 24.1% 18.6% 10.8% # Breweries 49 98 61 42

Volume per brewery 1.5 1.2 1.5 1.3 Av # employees 37,860 - 43,126 40,109

Capacity - mhl 130 201 130

Provinces covered 15 25 20 16



2012-14 avg



Source: Company data, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

26 October 2015


Investment risks Declining sales volume due to weaker consumption

demand

China's population growth rate has shown a decreasing trend in the past few years, and

the elderly population is taking a larger portion in the demographic structure. Much slower

young and adult population growth in the future may lead to weaker demand for beer.

Besides, per capita consumption of beer in China was already higher than world average

in 2014 and at comparable levels with other Asian countries. Moving forward, per capita

beer consumption may grow at a slower pace or even remain unchanged or drop. The

combined effect from slower population growth and per capita consumption demand may

cause weaker consumption demand of beer, and hence a declining sales volume for

brewery sector.

Transition of consumer preference on alcoholic

drinks

Younger generation aged under 20-35 have grown up with strong preference for healthy

lifestyle. Their social activities tend to be casual and they prefer healthy beverages to

alcoholic beverages, and prefer alcoholic beverages with low alcohol content and tasty

flavours, such as premixes and RTDs, to traditional spirits and beer. The transition of

consumer preference may influence the demand for beer.

Food safety and unfavourable industrial policies

Food safety has increasingly attracted public and regulator attention along with several

food safety scandals in past few years. Any food safety incident would have a negative

impact on the industry reputation, leading to the decrease in sales volume. Also,

unfavourable industry policies, such as unfavourable taxation policies and ban on

government spending related demands, have short-term negative impact on industry

demand.

Unfavourable weather conditions

Hot weather favours beer sales while cold and rainy weather affect beer sales. Global

warming and El Nino have caused some abnormal weather phenomenon in China and

other countries. In 2014 the rainy weather in Northwest China provinces adversely

affected beer sales and their production, and similar unfavourable weather conditions in

beer sales' peak season may have short-term negative impact on brewery companies.

26 October 2015


Asia Pacific / China

China Resources Beer (Holdings) Co Ltd (0291.HK / 291 HK)

Premiumisation on the way

■ Initiate coverage with NEUTRAL and a target price of HK$16.00. China

Resources Beer (CRB) operates the largest beer business in China through

a 51-49 JV with SABMiller, the second-largest brewer in the world. As of

end-June 2015, CRB ran 98 breweries in 25 of the 34 provinces in China

with a total capacity of over 200 mn hectolitres, and its main brand "Snow"

has been the No.1 global beer brand by volume since 2008. We forecast 6%

organic sales growth over 2014-17.

■ Enhancing market position through a simplified business focus. The

company has simplified its business focus by selling out the non-beer assets

to its parent group, and obtained a HK$10 bn Credit line from the parent to

support the development of its beer business. We believe its experienced

management and proven M&A and operational track record will help CRB

gain market share in notwithstanding the competition and stand out in

industry consolidation.

■ Riding the premiumisation trend to improve profitability. The company

is focusing on product mix upgrade to increase the portion of mid-end and

premium products, leveraging on existing distribution channels. Also, the

cost control strategy may further improve operational efficiency. We forecast

a 5% ASP and 16% earnings CAGR over 2014-17 on the back of the

product mix upgrade, cost control and profitability improvement.

■ NEUTRAL; our target price of HK$16.00 is based on 12.3x 2016E

EV/EBITDA, at a comparable level to peers, implying 7% potential

upside. CRB still trades at 11.8x 2016E EV/EBITDA, compared with

Tsingtao's 12.7x, Yanjing's 11.4x, Heineken's 10.6X and Carlsberg's 8.3x.

However, CRB's P/E multiple is far higher than its peers. It trades at 33x

2016E P/E, which is >20% higher than Yanjing's 27x, Tsingtao A's 24X,

Tsingtao H's 23x, Heineken's 22X and Carlsberg's 17x. Key investment

risks are: slowing demand, change in consumers' preferences, food safety

issues and unfavourable industry policies.

Share price performance

40

60

80

100

120

6

11

16

Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the

MSCI CHINA F IDX which closed at 6527.05 on 23/10/15

On 23/10/15 the spot exchange rate was HK$7.75/US$1

Performance over 1M 3M 12M Absolute (%) 9.7 18.8 55.7 — Relative (%) -0.5 26.0 53.0 —

Financial and valuation metrics

Year 12/14A 12/15E 12/16E 12/17E Revenue (HK$ mn) 34,482.0 36,449.0 38,721.2 41,274.4 EBITDA (HK$ mn) 4,353.0 5,026.8 5,637.8 6,370.2 EBIT (HK$ mn) 2,200.0 2,635.2 3,037.4 3,620.6 Net profit (HK$ mn) 2,062.0 948.2 1,096.4 1,337.0 EPS (CS adj.) (HK$) 0.85 0.39 0.45 0.55 Change from previous EPS (%) n.a. Consensus EPS (HK$) n.a. 0.42 0.48 0.54 EPS growth (%) 93.4 -54.2 15.6 21.9 P/E (x) 17.5 38.3 33.2 27.2 Dividend yield (%) 0 1.0 1.2 1.5 EV/EBITDA (x) 5.6 13.6 11.8 9.9 P/B (x) 0.8 2.5 2.4 2.3 ROE (%) 7.3 3.3 7.4 8.6 Net debt/equity (%) Net cash 9.3 2.5 Net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating NEUTRAL* Price (23 Oct 15, HK$) 14.94 Target price (HK$) 16.00¹ Upside/downside (%) 7.1 Mkt cap (HK$ mn) 36,351 (US$ 4,690) Enterprise value (HK$ mn) 68,585 Number of shares (mn) 2,433.13 Free float (%) 48.0 52-week price range 15.28 - 7.37 ADTO - 6M (US$ mn) 21.8

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Simon Sun

852 2101 7652

[email protected]

26 October 2015


Focus charts Figure 51: 2014 revenue mix – by region Figure 52: 2014 volume mix – by brand

NorthEast China26%

Sichuan13%South China

12%

East China11%

North China10%

Zhejiang9%

Anhui9%

Central China

7%

NorthWest China

3%

Snow Classic50%

Snow YCTY36%

Snow Draft & other premium

4%

Bluw Sword3%

Kingway3%

Others4%

Source: Company Data, BPC, Credit Suisse Estimates Source: Company data, Euromonitor, Credit Suisse estimates

Figure 53: EV/EBIDTA comparison Figure 54: Revenue/NP/volume YoY growth

17.7

13.0

11.1

8.9

13.3 13.7

12.111.3

9.1

12.411.9

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Tsingtao CRE Yanjing Heineken Carlsberg

2014 2015E 2016E

6.1%

16.7%

-1.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

2010 2011 2012 2013 2014 2015H1

Revenue YoY% EBIT YoY% Volume YoY%

Source: Bloomberg, Credit Suisse estimates Source: Company data, Credit Suisse

Figure 55: P/E comparison Figure 56: EV/EBITDA band (Since Jul-15)

38.6

28.1 25.4

23.1 22.7

17.6

33.4

26.9

24.3

21.9 21.7

16.5

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2014A 2015E 2016E

8

10

12

14

16

18

20

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5

07/1

5

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Price 11X 12X 13X 14X 15X


estimates


Suisse estimates

26 October 2015


China Resources Beer 0291.HK / 291 HK Price (23 Oct 15): HK$14.94, Rating:: NEUTRAL, Target Price: HK$16.00, Analyst: Simon Sun

Target price scenario

Scenario TP %Up/Dwn Assumptions Upside Central Case 16.00 7.10 Downside

Key earnings drivers 12/14A 12/15E 12/16E 12/17E

Sales volume (ton) 11.8 12.0 12.1 12.3 ASP (mn/ton) 2,912 3,048 3,196 3,362 COGS (mn) 22,530 24,293 25,827 27,509 SG&A (mn) 10,446 10,413 10,812 11,136 — — — —

Income statement (HK$ mn) 12/14A 12/15E 12/16E 12/17E

Sales revenue 34,482 36,449 38,721 41,274 Cost of goods sold 22,530 24,293 25,827 27,509 SG&A 10,446 10,413 10,812 11,136 Other operating exp./(inc.) (3,120) (3,284) (3,555) (3,741) EBITDA 4,353 5,027 5,638 6,370 Depreciation & amortisation 2,153 2,392 2,600 2,750 EBIT 2,200 2,635 3,037 3,621 Net interest expense/(inc.) 188.0 88.2 92.6 29.5 Non-operating inc./(exp.) 1,605 — — — Associates/JV — — — — Recurring PBT 3,617 2,547 2,945 3,591 Exceptionals/extraordinaries — — — — Taxes 803.0 687.7 795.1 969.6 Profit after tax 2,814 1,859 2,150 2,621 Other after tax income — — — — Minority interests 752 911 1,053 1,285 Preferred dividends — — — — Reported net profit 2,062 948 1,096 1,337 Analyst adjustments — — — — Net profit (Credit Suisse) 2,062 948 1,096 1,337

Cash flow (HK$ mn) 12/14A 12/15E 12/16E 12/17E

EBIT 2,200 2,635 3,037 3,621 Net interest — — — — Tax paid — — — — Working capital — 14,644 (171) 550 Other cash & non-cash items 1,223 1,785 1,828 1,819 Operating cash flow 3,423 19,064 4,694 5,990 Capex (2,146) (3,210) (2,210) (1,560) Free cash flow to the firm 1,277 15,854 2,484 4,430 Disposals of fixed assets — — — — Acquisitions — — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) 16,761 — — — Investing cash flow 14,615 (3,210) (2,210) (1,560) Equity raised — — — — Dividends paid (276.0) (379.3) (438.5) (534.8) Net borrowings — — — — Other financing cash flow (2,343) (33,932) (1,402) (2,078) Financing cash flow (2,619) (34,311) (1,841) (2,613) Total cash flow 15,419 (18,457) 643 1,817 Adjustments — — — — Net change in cash 15,419 (18,457) 643 1,817

Balance sheet (HK$ mn) 12/14A 12/15E 12/16E 12/17E

Cash & cash equivalents 20,644 2,187 2,830 4,647 Current receivables 18,235 5,066 5,344 5,737 Inventories 9,612 10,932 11,622 12,379 Other current assets 183.0 183.0 183.0 183.0 Current assets 48,674 18,368 19,979 22,946 Property, plant & equip. 26,389 27,209 26,820 25,632 Investments 14.0 14.0 14.0 14.0 Intangibles 10,720 10,719 10,717 10,715 Other non-current assets 1,973 1,983 1,993 2,003 Total assets 87,770 58,293 59,523 61,311 Accounts payable 19,205 22,107 22,857 24,483 Short-term debt 3,251 277 — — Current provisions 401.0 294.0 340.0 414.6 Other current liabilities — — — — Current liabilities 22,857 22,678 23,197 24,898 Long-term debt 5,603 4,603 3,603 1,603 Non-current provisions 574.0 574.0 574.0 574.0 Other non-current liab. 1,558 1,558 1,558 1,558 Total liabilities 30,592 29,413 28,932 28,633 Shareholders' equity 43,741 14,532 15,189 15,992 Minority interests 13,437 14,348 15,401 16,686 Total liabilities & equity 87,770 58,293 59,523 61,311

Per share data 12/14A 12/15E 12/16E 12/17E

Shares (wtd avg.) (mn) 2,421 2,433 2,433 2,433 EPS (Credit Suisse) (HK$)

0.85 0.39 0.45 0.55 DPS (HK$) — 0.16 0.18 0.22 BVPS (HK$) 18.1 6.0 6.2 6.6 Operating CFPS (HK$) 1.41 7.84 1.93 2.46

Key ratios and valuation

12/14A 12/15E 12/16E 12/17E

Growth(%) Sales revenue 4.51 5.70 6.23 6.59 EBIT (14.8) 19.8 15.3 19.2 Net profit 94.9 (54.0) 15.6 21.9 EPS 93.4 (54.2) 15.6 21.9 Margins (%) EBITDA 12.6 13.8 14.6 15.4 EBIT 6.38 7.23 7.84 8.77 Pre-tax profit 10.5 7.0 7.6 8.7 Net profit 5.98 2.60 2.83 3.24 Valuation metrics (x) P/E 17.5 38.3 33.2 27.2 P/B 0.83 2.50 2.39 2.27 Dividend yield (%) — 1.04 1.21 1.47 P/CF 10.6 1.9 7.7 6.1 EV/sales 0.71 1.88 1.72 1.52 EV/EBITDA 5.6 13.6 11.8 9.9 EV/EBIT 11.2 26.0 21.9 17.4 ROE analysis (%) ROE 7.31 3.25 7.38 8.58 ROIC 4.57 5.00 7.05 8.67 Asset turnover (x) 0.39 0.63 0.65 0.67 Interest burden (x) 1.64 0.97 0.97 0.99 Tax burden (x) 0.78 0.73 0.73 0.73 Financial leverage (x) 1.54 2.02 1.95 1.88 Credit ratios Net debt/equity (%) (20.6) 9.3 2.5 (9.3) Net debt/EBITDA (x) (2.71) 0.54 0.14 (0.48) Interest cover (x) 12 30 33 123


0

5

10

15

20

25

30

35

40

45

2010 2011 2012 2013 2014 2015

12MF P/E multiple

0.0

0.5

1.0

1.5

2.0

2.5

2010 2011 2012 2013 2014 2015

12MF P/B multiple

Source: IBES

26 October 2015


Market leader with a strong presence

China Res Beer (previously as China Resources Enterprise) has had a successful track

record in the beer business since the establishment of the joint venture with SABMiller in

1994, with a 26% sales CAGR and 23% earnings CAGR over 1994–2014. In 2006, CRB

became the largest brewer in China by volume, and its major brand "Snow" has been the

No.1 global beer brand by volume since 2008. In 2014, CRB had a 23.2% market share

with a sales volume of 118 mn hectolitres; in 1H15, CRB recorded beer sales volume of

62.5 mn hectolitres (-0.8% YoY) even as beer sales in the country dropped 7.2% YoY for

the same period, and its revenue and net profit were HK$19.61 bn (+6.1% YoY) and

HK$544 mn (+30.5% YoY), respectively.

Figure 57: Revenue/NP/volume YoY growth Figure 58: 2014 revenue mix – by region

6.1%

16.7%

-1.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

2010 2011 2012 2013 2014 2015H1

Revenue YoY% EBIT YoY% Volume YoY%

NorthEast China26%

Sichuan13%South China

12%

East China11%

North China10%

Zhejiang9%

Anhui9%

Central China

7%

NorthWest China

3%

Source: Company data, Credit Suisse Source: Company Data, BPC, Credit Suisse Estimates

In the past ten years, CRB has led the industry consolidation with more than 20 M&As with

regional and local brands, and now operates 98 breweries in 25 of the 34 provinces in

China with a total capacity of over 200 mn hectolitres. As of end-2014, CRB had

established a strong hold on the North East, Shanxi, Sichuan, Guizhou, Anhui and

Zhejiang provinces which contributed c.60% of its revenues; also its presence in South

strengthened after it acquired Kingway in 2013.

Enhancing market position through a simplified

business focus

In August 2015, CRB's shareholders approved the disposal of the non-beer business and

a reduction in capital, with the company directing its focus on the beer business under a

simplified corporate structure. Besides, CRB obtained a HK$10 bn credit line from its

parent CR Holdings for a maximum of three years to support the development of its beer

business. Considering the weakness in industry demand in a weak macro environment

and low capacity utilisation within the beer industry, we believe consolidation will continue

in the coming years, with large players eating into the share of smaller breweries. We

believe its strong balance sheet, an experienced management and a proven M&A and

operational track record will help CRB gain more share in notwithstanding the competition

and stand out in industry consolidation.

26 October 2015


Figure 59: Shareholding structure—pre and post disposal of non-beer assets


Riding the premiumisation trend

Given the slow growth in industry demand, we believe premiumisation and ASP increase

will be the major drivers of revenue in the coming years, and most importantly, boost the

profitability of China breweries. To seize the growth opportunity of consumption upgrade,

CRB has adopted a premiumisation-focused strategy, and launched mid- to high-end

products (YCTY, Draft, Opera, etc.) since 2010. In 2014, the mid- to high-end products

accounted for 41% of total sales volume, compared with 29% in 2012, and CRB recorded

a 5.1% ASP CAGR over 2008-2014, much higher than its domestic peers Tsingtao and

Yanjing.

Moving forward, we expect further product mix upgrade as we see great scope for unit

price improvement. In 2014, CRB's ASP was only c.US$376/ KL, the lowest in among the

top five players in China and far less than global peers. The company is now focusing on

increasing the portion of mid-end and premium products. In 1H15, the ASP increased

6.8% YoY to c.US$409/KL. We forecast 5.1% ASP and 16% earnings CAGR over 2014-

17 on the back of product mix upgrade, and the consequential margin expansion and

profitability improvement.

Figure 60: 2014 volume mix – by brand Figure 61: Unit price comparison (US$/KL)

Snow Classic50%

Snow YCTY36%

Snow Draft & other premium

4%

Bluw Sword3%

Kingway3%

Others4%

1,416

940

820 761 754

611 508 487

390 376

-

200

400

600

800

1,000

1,200

1,400

1,600

Heineken

AB

I

Carlsberg

SA

BM

iller

Asahi

AB

I AP

AC

Tsingtao

Zhujiang

Yanjing

CR

E

2011 2012 2013 2014

Unit beer price is low in China

Source: Company data, Euromonitor, Credit Suisse estimates Source: Source: Euromonitor, Credit Suisse Company data,

Bloomberg, Credit Suisse

26 October 2015


Scenario analysis if CRB buys back stake from

SABMiller

SABMiller is required to sell its 49% stake in "China Resource Snow", and if that happens

China Resources Beer will have the right of first refusal. If the Ministry of Commerce

requires SABMiller to sell the 49% stake in "China Resource Snow", CRB is likely to

exercise the right of first refusal and buy back SABMiller's stake. CRB already has a

HK$10 bn credit line from China Resources Holdings. Moreover, CRB is capable of

financing the buyback through bank loans.

CRB may fully or partially buy back the 49% stake using debt, and is likely to witness a

boost to earnings.

Assuming CRB uses debt to finance the 49% stake buy back at an interest rate of 2%-4%,

and the price paid is between HK$12.70 (CRH's buy back price) and HK$16.00 per share,

this will lead to 0%~56% accretion to earnings.

However, there will be a 10%-30% accretion to earnings if CRB buys back a 20% stake

from SABMiller, other considerations being unchanged.

Figure 62: Sensitive analysis on 2016 net profit and PER assuming CRB uses debt to buy

back SABMiller's 49% stake in China Resource Snow

Assumed buy back

price (HK$)

12.7 14.0 15.2 16.5 17.8 19.1


buyback price

0% 10% 20% 30% 40% 50%

Cash amount for 49%

stake of "CRS" (HK$ mn)

29,687 32,656 35,625 38,594 41,562 44,531


Under different interest rates (HK$ mn)

2% 641.4 598.1 554.8 511.4 468.1 424.7

3% 424.7 359.7 294.7 229.7 164.7 99.6

4% 208.0 121.3 34.6 (52.1) (138.7) (225.4)

5% (8.7) (117.1) (225.4) (333.8) (442.1) (550.5)


under different interest rates (HK$ mn)

2% 57.3% 53.5% 49.6% 45.7% 41.8% 38.0%

3% 38.0% 32.2% 26.3% 20.5% 14.7% 8.9%

4% 18.6% 10.8% 3.1% -4.7% -12.4% -20.2%

5% -0.8% -10.5% -20.2% -29.8% -39.5% -49.2%


33.19x

2016 P/E after buyback under different interest rates

2% 21 22 22 23 23 24

3% 24 25 26 28 29 30

4% 28 30 32 35 38 42

5% 33 37 42 47 55 65


26 October 2015


Figure 63: Sensitive analysis on 2016 net profit and PER assuming CRB uses debt to buy

back a 20% stake in China Resource Snow

Assumed buy back

price(HK$)

12.7 14.0 15.2 16.5 17.8 19.1


buyback price

0% 10% 20% 30% 40% 50%

Cash amount for 20%

stake in "CRS" (HK$ mn) 12,117 13,329 14,541 15,752 16,964 18,176


Under different interest rates (HK$ mn)

2% 306.2 293.6 281.1 268.5 256.0 243.4

3% 243.4 224.6 205.7 186.9 168.0 149.2

4% 180.6 155.5 130.4 105.2 80.1 55.0

5% 117.8 86.4 55.0 23.6 (7.8) (39.2)


under different interest rates (HK$ mn)

2% 27.8% 26.7% 25.5% 24.4% 23.2% 22.1%

3% 22.1% 20.4% 18.7% 17.0% 15.3% 13.5%

4% 16.4% 14.1% 11.8% 9.6% 7.3% 5.0%

5% 10.7% 7.8% 5.0% 2.1% -0.7% -3.6%


33.19x

2016 P/E after buyback under different interest rates

2% 26.38 26.62 26.86 27.11 27.36 27.61

3% 27.61 28.01 28.41 28.83 29.25 29.69

4% 28.97 29.55 30.15 30.78 31.43 32.11

5% 30.46 31.27 32.11 33.01 33.96 34.96


Valuation expensive compared with peers

Our target price of HK$16.00 is based on 12.3x 2016E EV/EBITDA, at a comparable level

with peers, implying 7% potential upside. CRB still trades at 11.8x 2016E EV/EBITDA,

compared with Tsingtao's 12.7x, Yanjing's 11.4x, Heineken's 10.6X and Carlsberg's 8.3x.

However, CRB's P/E multiple is far higher than its peers. It trades at 33x 2016E P/E, which

is >20% higher than Yanjing's 27x, Tsingtao A's 24X, Tsingtao H's 23x, Heineken's 22X

and Carlsberg's 17x.

Although the EV/EBITDA multiple is comparable with peers, the high P/E multiple

suggests the shares are expensive, even considering the 2017E P/E multiples.

Figure 64: EV/EBIDTA comparison Figure 65: P/E comparison

17.7

13.0

11.1

8.9

13.3 13.7

12.111.3

9.1

12.411.9

11.3 10.6

8.3

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Tsingtao CRE Yanjing Heineken Carlsberg

2014 2015E 2016E

38.6

28.1 25.4

23.1 22.7

17.6

33.4

26.9

24.3

21.9 21.7

16.5

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0


2014A 2015E 2016E

Source: Bloomberg, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates

26 October 2015


Major investment risks

Corporate structure witnessing a change

CRB is going through the process of disposal of all non-beer assets to its parent company.

The corporate structure of the listed company will get simplified post the deal.

Consequently, there will be changes and uncertainties around the corporate structure,

management focus and development strategies which may have influence the

performance of the company.

Uncertainty around the competitive landscape

The domestic as well as the global beer industry is still in a phase of consolidation, and

potential M&As among large players could significantly alter the competitive landscape of

the industry. Any such move from competitors may have an influence on the company.

26 October 2015



Tsingtao Brewery

(0168.HK / 168 HK)

Defending market share

■ Initiate coverage with NEUTRAL. Established in 1903, Tsingtao is one of the oldest brewers in China. At the end of 2014, Tsingtao owned 61 breweries in 20 provinces of China, with a total capacity of 130 mn hectolitres (including JVs). In 1H15, Tsingtao reported a revenue of Rmb16.1 bn (-5.3% YoY) and earnings of Rmb1.2 bn (-14.7% YoY) on a beer sales volume of 49.18 mn hectolitres (-7.4% YoY), even as the industry saw a 6.2% volume drop. The sales volume of its main brand "Tsingtao" decreased 6.6% in 1H15, following an 8.1% drop in 2H14.

■ Pressure on main brand sales remains; trying hard to defend market share. Tsingtao is losing market share in South, East and Southeast China due to fierce competition, especially from ABI, for its major brand "Tsingtao". We expect the trend to continue in the short term since the company has not come forward with an effective solution so far, and even cut marketing expense by 24% in 1H15. Its short-term strategy to further expand in North may improve efficiency by connecting the Shandong and Shaanxi regions where it has strong presence, but it will be hard to make up for the market share loss in Southern China.

■ Premiumisation faces difficulties; margin erosion may continue. Tsingtao's ASP in 2014 was already much higher than CRB and Yanjing's, due to fast premiumisation over 2004-08. However, further premiumisation may encounter difficulties, especially under the current competitive industrial landscape and struggling sales of its main brand. Gross margin decreased 1.68 pp in 1H15 due to product mix change and higher portion of fix costs, and we see few signs of improvement in the short term. We forecast a 5.3% earnings CAGR on a 2.3% revenue CAGR over 2015-17.

■ NEUTRAL; our target price of HK$40 is based on 13.3x 2016E EV/EBITDA, at its historical lower range and comparable with peers, implying 4% upside. Tsingtao trades at 12.7x 16E EV/EBITDA, compared with CRB's 11.8x, Yanjing's 11.4x, Heineken's 10.6x and Carlsberg's 8.3x . Key investment risks are slowing demand, change in consumers' preferences, food safety issues and unfavourable industrial policies.


40

60

80

100

120

20

40

60

80

Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15



MSCI CHINA F IDX which closed at 6527.05 on 23/10/15

On 23/10/15 the spot exchange rate was HK$7.75/US$1

Performance over 1M 3M 12M Absolute (%) 9.3 -11.9 -30.7 — Relative (%) -0.8 -4.6 -33.5 —


Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 29,049.3 28,075.7 28,629.1 29,405.5 EBITDA (Rmb mn) 2,858.8 2,776.4 2,853.9 2,968.3 EBIT (Rmb mn) 1,925.6 1,812.9 1,837.5 1,898.0 Net profit (Rmb mn) 1,990.1 1,812.1 1,894.2 2,009.0 EPS (CS adj.) (Rmb) 1.47 1.34 1.40 1.49 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 1.38 1.46 1.52 EPS growth (%) 0.8 -8.9 4.5 6.1 P/E (x) 21.5 23.6 22.6 21.3 Dividend yield (%) 1.4 1.3 1.4 1.5 EV/EBITDA (x) 13.4 13.6 12.7 11.6 P/B (x) 2.8 2.6 2.4 2.2 ROE (%) 13.5 11.3 11.0 10.8 Net debt/equity (%) Net cash Net cash Net cash Net cash


Rating NEUTRAL* Price (23 Oct 15, HK$) 38.60 Target price (HK$) 40.00¹ Upside/downside (%) 3.6 Mkt cap (HK$ mn) 54,094 (US$ 6,980) Enterprise value (Rmb mn) 37,892 Number of shares (mn) 1,350.98 Free float (%) 50.9 52-week price range 57.3 - 33.9 ADTO - 6M (US$ mn) 78.8




Research Analysts

Simon Sun

852 2101 7652

[email protected]

26 October 2015



Shandong48%

North China17%

South China14%

East China10%

South-East China

9%

Oversea2%

Tsingtao High-end18%

Tsingtao Classic

31%

Laoshan15%

Hans6%

Immense6%

Others24%

Source: Company Data, Beer Professional Committee (BPC), Credit

Suisse Estimates

Source: Company Data, BPC, Credit Suisse Estimates

Figure 68: 2014 operation comparison – by region Figure 69: Revenue/NP/volume YoY growth

5.7%

10.8% 10.9%

7.1% 6.6%

2.6%

-7.9%0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Oversea Shandong North South Blended SouthEast East

EBIT Margin ASP (Rmb/KL)

-5.3%

-14.7%

-7.4%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

2010 2011 2012 2013 2014 20151H

Revenue YoY% NP YoY% Volume YoY%

Source: Company Data, BPC, Credit Suisse Estimates Source: Company data, Credit Suisse

Figure 70: EV/EBITDA (std. deviation) Figure 71: EV/EBITDA band

0

5

10

15

20

25

30

35

12/0

5

06/0

6

12/0

6

06/0

7

12/0

7

06/0

8

12/0

8

06/0

9

12/0

9

06/1

0

12/1

0

06/1

1

12/1

1

06/1

2

12/1

2

06/1

3

12/1

3

06/1

4

12/1

4

06/1

5

Mean +1 STD +2 STD-1 STD -2 STD EV/EBITDA

-

10

20

30

40

50

60

70

12/0

5

06/0

6

12/0

6

06/0

7

12/0

7

06/0

8

12/0

8

06/0

9

12/0

9

06/1

0

12/1

0

06/1

1

12/1

1

06/1

2

12/1

2

06/1

3

12/1

3

06/1

4

12/1

4

06/1

5

7X 11X 15X 19X 23X Price-H

Source: Bloomberg, IBES, Credit Suisse Estimates Source: Bloomberg, IBES, Credit Suisse Estimates

26 October 2015


Tsingtao Brewery 0168.HK / 168 HK Price (23 Oct 15): HK$38.60, Rating:: NEUTRAL, Target Price: HK$40.00, Analyst: Simon Sun





Income statement (Rmb mn) 12/14A 12/15E 12/16E 12/17E

Sales revenue 29,049 28,076 28,629 29,405 Cost of goods sold 17,899 17,533 17,793 18,219 SG&A 7,045 6,691 6,934 7,178 Other operating exp./(inc.) 1,246 1,075 1,049 1,040 EBITDA 2,859 2,776 2,854 2,968 Depreciation & amortisation 933 964 1,016 1,070 EBIT 1,926 1,813 1,837 1,898 Net interest expense/(inc.) (334.7) (305.8) (352.0) (434.7) Non-operating inc./(exp.) 422.7 359.4 400.8 414.6 Associates/JV — — — — Recurring PBT 2,683 2,478 2,590 2,747 Exceptionals/extraordinaries — — — — Taxes 663.5 619.5 647.6 686.8 Profit after tax 2,020 1,859 1,943 2,060 Other after tax income — — — — Minority interests 29.4 46.5 48.6 51.5 Preferred dividends — — — — Reported net profit 1,990 1,812 1,894 2,009 Analyst adjustments — — — — Net profit (Credit Suisse) 1,990 1,812 1,894 2,009

Cash flow (Rmb mn) 12/14A 12/15E 12/16E 12/17E

EBIT 1,926 1,813 1,837 1,898 Net interest — — — — Tax paid — — — — Working capital (929.7) (374.4) (55.2) 63.6 Other cash & non-cash items 694.7 670.3 750.6 782.3 Operating cash flow 1,691 2,109 2,533 2,744 Capex (1,949) (1,360) (810) (780) Free cash flow to the firm (258) 749 1,723 1,964 Disposals of fixed assets — — — — Acquisitions — — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) (1,360) 27 28 29 Investing cash flow (3,308) (1,333) (782) (751) Equity raised — — — — Dividends paid (685.5) (561.7) (587.2) (622.8) Net borrowings — — — — Other financing cash flow (1,769) (49) 352 435 Financing cash flow (2,455) (610) (235) (188) Total cash flow (4,073) 166 1,516 1,804 Adjustments — — — — Net change in cash (4,073) 166 1,516 1,804

Balance sheet (Rmb mn) 12/14A 12/15E 12/16E 12/17E

Cash & cash equivalents 6,389 6,555 8,070 9,874 Current receivables 330.6 318.2 328.8 337.9 Inventories 2,487 2,441 2,495 2,573 Other current assets 1,146 1,252 1,400 1,496 Current assets 10,352 10,566 12,294 14,281 Property, plant & equip. 10,189 10,586 10,385 10,125 Investments 1,548 1,548 1,548 1,548 Intangibles 4,088 4,094 4,093 4,064 Other non-current assets 828.0 820.5 816.7 814.8 Total assets 27,004 27,615 29,136 30,833 Accounts payable 2,586 2,542 2,580 2,678 Short-term debt 434.5 80.0 80.0 80.0 Current provisions 1,121 954 976 984 Other current liabilities 5,087 4,966 5,072 5,225 Current liabilities 9,228 8,542 8,708 8,967 Long-term debt 2.8 2.8 2.8 2.8 Non-current provisions 158.5 158.5 158.5 158.5 Other non-current liab. 2,327 2,327 2,327 2,327 Total liabilities 11,717 11,030 11,197 11,456 Shareholders' equity 15,388 16,638 17,945 19,331 Minority interests (100.3) (53.8) (5.2) 46.3 Total liabilities & equity 27,004 27,615 29,136 30,833


Shares (wtd avg.) (mn) 1,351 1,351 1,351 1,351 EPS (Credit Suisse) (Rmb)

1.47 1.34 1.40 1.49 DPS (Rmb) 0.45 0.42 0.43 0.46 BVPS (Rmb) 11.4 12.3 13.3 14.3 Operating CFPS (Rmb) 1.25 1.56 1.87 2.03


12/14A 12/15E 12/16E 12/17E

Growth(%) Sales revenue 2.68 (3.35) 1.97 2.71 EBIT 2.96 (5.85) 1.36 3.29 Net profit 0.85 (8.94) 4.53 6.06 EPS 0.85 (8.94) 4.53 6.06 Margins (%) EBITDA 9.8 9.9 10.0 10.1 EBIT 6.63 6.46 6.42 6.45 Pre-tax profit 9.2 8.8 9.0 9.3 Net profit 6.85 6.45 6.62 6.83 Valuation metrics (x) P/E 21.5 23.6 22.6 21.3 P/B 2.78 2.57 2.38 2.21 Dividend yield (%) 1.42 1.31 1.37 1.46 P/CF 25.3 20.3 16.9 15.6 EV/sales 1.32 1.35 1.27 1.18 EV/EBITDA 13.4 13.6 12.7 11.6 EV/EBIT 19.9 20.9 19.8 18.2 ROE analysis (%) ROE 13.5 11.3 11.0 10.8 ROIC 17.5 14.0 13.7 14.6 Asset turnover (x) 1.08 1.02 0.98 0.95 Interest burden (x) 1.39 1.37 1.41 1.45 Tax burden (x) 0.75 0.75 0.75 0.75 Financial leverage (x) 1.77 1.67 1.62 1.59 Credit ratios Net debt/equity (%) (38.9) (39.0) (44.5) (50.5) Net debt/EBITDA (x) (2.08) (2.33) (2.80) (3.30) Interest cover (x) (5.75) (5.93) (5.22) (4.37)


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2010 2011 2012 2013 2014 2015

12MF P/E multiple

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26 October 2015


Well-known brand with a long history

Tsingtao was originally founded in 1903 by German and British businessmen in

Shandong, the province with the highest beer consumption in China (c.74.1 mn hectolitres

in 2014). It was also the first overseas-listed and dual-listed Mainland company (dual listed

in HK and SH in 1993). After 112 years of development, Tsingtao became the second-

largest brewer in China, with sales of 91.54 mn hectolitres in 2014 and an 18.4% market

share. As of end-2014, Tsingtao operated 61 breweries in 20 out of the 34 provinces in

China with a total of 130 mn hectolitre capacity (including a 30 mn hectolitre capacity from

JVs/associates). Its main brand "Tsingtao" was worth Rmb105 bn in value by 1H15,

according to World Brand Lab.

Figure 72: 2014 revenue mix – by region Figure 73: 2014 volume mix – by brand

Shandong48%

North China17%

South China14%

East China10%

South-East China

9%

Oversea2%

Tsingtao High-end18%

Tsingtao Classic

31%

Laoshan15%

Hans6%

Immense6%

Others24%

Source: Company Data, BPC, Credit Suisse Estimates Source: Company Data, BPC, Credit Suisse Estimates

Tsingtao has a solid position (c.60% market share) in the Shandong province, its base

market, which contributed 48% to its total beer revenue; it also has a wide presence in

North China with a dominant position in Shaanxi; it is highly competitive in East, especially

in Shanghai and Jiangsu, and has a good presence in South and Southeast, led by

Guangdong and Sichuan. Its nationally famous brand "Tsingtao" is also exported to Hong

Kong, Macau, Taiwan and other overseas markets. In terms of brand portfolio, its main

brand "Tsingtao" accounted for 49% of total volume (including an 18% contribution from

high-end products such as Augerta, Draft, etc.) in 2014, followed by the regional brand

"Laoshan" (15%), and local brands "Immense" (6%, Shandong) and "Hans" (6%, Shaanxi).

Trying hard to defend market share

Tsingtao had an 18.4% market share in 2014, according to Euromonitor, with beer sales of

91.54 mn hectolitres. Revenue and net profit grew 2.7% and 0.8%, respectively, but the

results vary by regions. On the positive side, Shandong stood out with a 10.8% OPM and

Rmb3,495/KL ASP on the back of a strong control in channels, and North China showed a

10.9% OPM despite a low ASP of Rmb2,070/KL on good cost control. South recorded a

negative 7.3% revenue growth, but saw an above average OPM of 7.1% at Rmb3,212/KL

ASP. Southeast and Overseas were also profit making although their OPM fell below the

company's blended level of 6.6%, and we saw a significantly lower OPM of 2.6% in

Southeast despite a high ASP of Rmb3,394/KL, implying high channel costs. On the flip

side, East China marked a 7.9% decline in OPM with a Rmb2,224/KL ASP, which dragged

down the overall performance.

Given the recent weakness in macro and a slowdown in industry growth, Tsingtao

experienced negative revenue (-5.3% YoY) and earnings (-14.7% YoY) growth in 1H15.

Sales volume dropped 7.4% from 1H14 to 492 mn hectolitres compared with the 6.2%

26 October 2015


drop in national production growth, indicating a loss of market share. Digging further, we

noticed a double-digit revenue decrease in East (-15.2% YoY) and Southeast (-11.3%

YoY), and slip in all other regions with no positive growth. The company suggested that

one major reason for the weaker performance was the sales of main brand "Tsingtao" (-

6.6% YoY) encountering fierce competition in South, East and Southeast markets,

especially from ABInbev which is ambitious in expansion. We expect Tsingtao to be

defensive in the short term, as it is cutting marketing and promotional expenses

considerably (-24% YoY in 1H15), and the dip in market share in South, East and

Southeast may continue if no effective solution is brought forth. To make up for the

potential market share loss in Southern China, the company is directing greater efforts on

penetrating the Hebei and Henan markets in North, with the intention of connect its strong

markets of Shandong and Shaanxi, and improving efficiency by utilising their regional

competitiveness advantage. Under the current competitive landscape and industry growth,

we forecast -3.8% volume growth in 2015 for Tsingtao considering the high base of 1H14

(World Cup effect), and 1.8% volume CAGR over 2015-18.

Figure 74: Revenue/NP/volume YoY growth Figure 75: 2014 operation comparison – by region

-5.3%

-14.7%

-7.4%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

2010 2011 2012 2013 2014 20151H


5.7%

10.8% 10.9%

7.1% 6.6%

2.6%

-7.9%0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Oversea Shandong North South Blended SouthEast East

EBIT Margin ASP (Rmb/KL)

Source: Company data, Credit Suisse Source: Company Data, BPC, Credit Suisse Estimates

Margins under pressure on declining main brand

sales

In 1H15, Tsingtao's gross margin decreased 1.34 pp from 1H14 to 38.9%, mainly due to

changes in product mix, plus a higher portion of fixed costs due to lower sales volume. In

the past five years, gross margin has demonstrated a declining trend – from 44.2% in

1H10 to 38.9% in 1H15, along with a slowdown in the main brand "Tsingtao's" sales

volume. In 2H14 and 1H15, in particular, main brand sales fell 8.1% and 6.6% and gross

margins slipped 1.5 pp and 1.34 pp, respectively. Given the challenging situation in South,

East and Southeast markets and the company's short-term strategy to develop the market

in North, where ASP is low and regional and local brands corner lion's share, the pressure

on margins may persist in the coming years.

Further premiumisation also faces difficulties. Tsingtao's ASP (gross, before sales tax) has

seen a fast increase over 2005-08 (6.1% CAGR) to Rmb2,933/KL under the influence of

ABInbev, who was then the second-largest shareholder of Tsingtao (sold out stake in

2009), followed by a moderation over 2009-12 (2.3% CAGR), and then a decline in 2013

and 2014. In the past five years, Tsingtao has been promoting high-end products, such as

Augerta, Draft and a small bottle package, which posted a 14.4% volume CAGR over

2010-14 to 16.6 mn hectolitre. However, over 2008-14, Tsingtao only saw a 1.2% ASP

26 October 2015


CAGR, which was the lowest among the top five Chinese players, and fell well below the

CPI CAGR of 2.5%. By 2014, Tsingtao's ASP of Rmb3,142/KL was already much higher

than CRB's Rmb2,329/KL and Yanjing's Rmb2,398/KL, though still lower than ABI's

Rmb3,758/KL. We see challenges ahead for Tsingtao's ASP improvement amid struggling

sales of its main brand. We forecast a 0.7% ASP CAGR over 2015-18.

Figure 76: Margin erosion on main brand volume slip Figure 77: Price index (2008=100) – Tsingtao struggles

44.2%42.8%43.2%

40.8%40.5%39.8%41.5%

38.0%40.2%

35.9%38.9%

-10.5%

0.5%

7.1%

-8.1% -6.6%

-20%

-10%

0%

10%

20%

30%

40%

50%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15

GPM "Tsingtao" Volume YoY

90

100

110

120

130

140

150

160

170

2008 2009 2010 2011 2012 2013 2014ABI Carlsberg CRE

Yanjing CPI Tsingtao

Source: Company data, Credit Suisse Source: Bloomberg, Credit Suisse estimates

Figure 78: Tsingtao product mix and ASP change

Source: Company data, Canadean, Credit Suisse

Figure 79: Tsingtao shareholding structure


26 October 2015


On 18 Oct 2015, Tsingtao signed an agreement with Suntory to buy back remaining 50%

equity of their beer production and sales JVs in East China for Rmb8.23 mn in cash. If the

agreement goes through, Tsingtao will have the right to use the "Suntory" trademark and

sell Suntory products in designated regions, and the JVs will be consolidated into

Tsingtao's financial statement. Last year, the JVs recorded total revenues of Rmb5.51 bn

and a net loss of Rmb183 mn, which, if consolidated in 2014, would have increased

Tsingtao's consolidated revenue by 19% but decreased net profit by 4.6%. Since the JVs

have been producing and selling beer products for "Tsingtao", we believe there will be

certain yet limited operational efficiency improvement; but the company's overall

profitability will be hurt due to the losses from JVs under market competition. The deal is

still pending for approval from shareholders and the Ministry of Commerce.

Figure 80: Impact on income statement – JVs share buyback (Unit: Rmb mn)

2014 JV1 (Sales Co) JV2 (Beer Co) Tsingtao Consolidated Change %

Rev. 3,009 2,505 29,049 34,562 19.0%

OP (236) 4 1,926 1,809 -6.0%

NP (228) 45 1,990 1,899 -4.6%

1H15 JV1 (Sales Co) JV2 (Beer Co) Tsingtao Consolidated Change %

Rev. 1,520 1,269 16,067 18,856 17.4%

OP (129) 4 1,445 1,383 -4.3%

NP (128) 9 1,199 1,139 -5.0%


Valuation

Our target price of HK$40 is based on 13.2x 2016E EV/EBITDA, at its historical lower

range and comparable with peers, implying a 8% upside. Tsingtao trades at 12.7x 16E

EV/EBITDA, compared with CRB's 11.8x, Yanjing's 11.4x, Heineken's 10.6x and Carlsberg's

8.3x. Tsingtao has traded at higher multiples historically, as a portion of its products is

produced by contract manufacturers, and it realised that part of the revenue without

consolidating the assets/liabilities of those contract manufacturers' plants.


Slowdown in industry demand

China's population growth, especially young generation and adults, has slowed down in

the recent years; per capita consumption of beer in China is also higher than the world

average. In a weak macroeconomic environment, beer industry demand is slowing down

and may adversely affect the company's sales growth.

Transition in consumers' preference away from alcoholic drinks

The young generation has grown up with a preference for healthy lifestyle, and it prefers

healthy drinks to alcoholic beverages. The transition in consumers' preferences may

influence the industry demand and the company's performance.

26 October 2015



Tsingtao Brewery

(600600.SS / 600600 CH)

Defending market share

■ Initiate coverage with NEUTRAL. Established in 1903, Tsingtao is one of the oldest brewers in China. At the end of 2014, Tsingtao owned 61 breweries in 20 provinces of China, with a total capacity of 130 mn hectolitres (including JVs). In 1H15, Tsingtao reported a revenue of Rmb16.1 bn (-5.3% YoY) and earnings of Rmb1.2 bn (-14.7% YoY) on a beer sales volume of 49.18 mn hectolitres (-7.4% YoY), even as the industry saw a 6.2% volume drop. The sales volume of its main brand "Tsingtao" decreased 6.6% in 1H15, following an 8.1% drop in 2H14.

■ Pressure on main brand sales remains; trying hard to defend market share. Tsingtao is losing market share in South, East and Southeast China due to fierce competition, especially from ABI, for its major brand "Tsingtao". We expect the trend to continue in the short term since the company has not come forward with an effective solution so far, and even cut marketing expense by 24% in 1H15. Its short-term strategy to further expand in North may improve efficiency by connecting the Shandong and Shaanxi regions where it has strong presence, but it will be hard to make up for the market share loss in Southern China.

■ Premiumisation faces difficulties; margin erosion may continue. Tsingtao's ASP in 2014 was already much higher than CRB and Yanjing's, due to fast premiumisation over 2004-08. However, further premiumisation may encounter difficulties, especially under the current competitive industrial landscape and struggling sales of its main brand. Gross margin decreased 1.68 pp in 1H15 due to product mix change and higher portion of fix costs, and we see few signs of improvement in the short term. We forecast a 5.3% earnings CAGR on a 2.3% revenue CAGR over 2015-17.

■ NEUTRAL; our TP of Rmb35 is based on 13.3x 2016E EV/EBITDA, at its historical lower range and comparable with peers, implying a 3% upside. Tsingtao trades at 12.7x 16E EV/EBITDA, compared with CRB's 11.8x, Yanjing's 11.4x, Heineken's 10.6x and Carlsberg's 8.3x. Key investment risks are slowing demand, change in consumers' preferences, food safety issues and unfavourable industrial policies.


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25-Oct-13 25-Oct-14



Shanghai Shenzhen CSI300 index which closed at 3524.53 on

23/10/15

On 23/10/15 the spot exchange rate was Rmb6.36/US$1

Performance over 1M 3M 12M Absolute (%) 6.9 -16.3 -11.2 — Relative (%) -3.3 -9.0 -14.0 —


Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 29,049.3 28,075.7 28,629.1 29,405.5 EBITDA (Rmb mn) 2,858.8 2,776.4 2,853.9 2,968.3 EBIT (Rmb mn) 1,925.6 1,812.9 1,837.5 1,898.0 Net profit (Rmb mn) 1,990.1 1,812.1 1,894.2 2,009.0 EPS (CS adj.) (Rmb) 1.47 1.34 1.40 1.49 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 1.37 1.46 1.48 EPS growth (%) 0.8 -8.9 4.5 6.1 P/E (x) 23.0 25.3 24.2 22.8 Dividend yield (%) 1.3 1.2 1.3 1.4 EV/EBITDA (x) 13.4 13.6 12.7 11.6 P/B (x) 3.0 2.8 2.6 2.4 ROE (%) 13.5 11.3 11.0 10.8 Net debt/equity (%) Net cash Net cash Net cash Net cash


Rating NEUTRAL* Price (23 Oct 15, Rmb) 33.95 Target price (Rmb) 35.00¹ Upside/downside (%) 3.1 Mkt cap (Rmb mn) 44,364 (US$ 6,980) Enterprise value (Rmb mn) 37,892 Number of shares (mn) 1,350.98 Free float (%) 34.9 52-week price range 57.4 - 29.5 ADTO - 6M (US$ mn) 78.8




Research Analysts

Simon Sun

852 2101 7652

[email protected]

26 October 2015


Tsingtao Brewery 600600.SS / 600600 CH Price (23 Oct 15): Rmb33.95, Rating:: NEUTRAL, Target Price: Rmb35.00, Analyst: Simon Sun






Sales revenue 29,049 28,076 28,629 29,405 Cost of goods sold 17,899 17,533 17,793 18,219 SG&A 7,045 6,691 6,934 7,178 Other operating exp./(inc.) 1,246 1,075 1,049 1,040 EBITDA 2,859 2,776 2,854 2,968 Depreciation & amortisation 933 964 1,016 1,070 EBIT 1,926 1,813 1,837 1,898 Net interest expense/(inc.) (334.7) (305.8) (352.0) (434.7) Non-operating inc./(exp.) 422.7 359.4 400.8 414.6 Associates/JV — — — — Recurring PBT 2,683 2,478 2,590 2,747 Exceptionals/extraordinaries — — — — Taxes 663.5 619.5 647.6 686.8 Profit after tax 2,020 1,859 1,943 2,060 Other after tax income — — — — Minority interests 29.4 46.5 48.6 51.5 Preferred dividends — — — — Reported net profit 1,990 1,812 1,894 2,009 Analyst adjustments — — — — Net profit (Credit Suisse) 1,990 1,812 1,894 2,009


EBIT 1,926 1,813 1,837 1,898 Net interest — — — — Tax paid — — — — Working capital (929.7) (374.4) (55.2) 63.6 Other cash & non-cash items 694.7 670.3 750.6 782.3 Operating cash flow 1,691 2,109 2,533 2,744 Capex (1,949) (1,360) (810) (780) Free cash flow to the firm (258) 749 1,723 1,964 Disposals of fixed assets — — — — Acquisitions — — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) (1,360) 27 28 29 Investing cash flow (3,308) (1,333) (782) (751) Equity raised — — — — Dividends paid (685.5) (561.7) (587.2) (622.8) Net borrowings — — — — Other financing cash flow (1,769) (49) 352 435 Financing cash flow (2,455) (610) (235) (188) Total cash flow (4,073) 166 1,516 1,804 Adjustments — — — — Net change in cash (4,073) 166 1,516 1,804


Cash & cash equivalents 6,389 6,555 8,070 9,874 Current receivables 330.6 318.2 328.8 337.9 Inventories 2,487 2,441 2,495 2,573 Other current assets 1,146 1,252 1,400 1,496 Current assets 10,352 10,566 12,294 14,281 Property, plant & equip. 10,189 10,586 10,385 10,125 Investments 1,548 1,548 1,548 1,548 Intangibles 4,088 4,094 4,093 4,064 Other non-current assets 828.0 820.5 816.7 814.8 Total assets 27,004 27,615 29,136 30,833 Accounts payable 2,586 2,542 2,580 2,678 Short-term debt 434.5 80.0 80.0 80.0 Current provisions 1,121 954 976 984 Other current liabilities 5,087 4,966 5,072 5,225 Current liabilities 9,228 8,542 8,708 8,967 Long-term debt 2.8 2.8 2.8 2.8 Non-current provisions 158.5 158.5 158.5 158.5 Other non-current liab. 2,327 2,327 2,327 2,327 Total liabilities 11,717 11,030 11,197 11,456 Shareholders' equity 15,388 16,638 17,945 19,331 Minority interests (100.3) (53.8) (5.2) 46.3 Total liabilities & equity 27,004 27,615 29,136 30,833





12/14A 12/15E 12/16E 12/17E

Growth(%) Sales revenue 2.68 (3.35) 1.97 2.71 EBIT 2.96 (5.85) 1.36 3.29 Net profit 0.85 (8.94) 4.53 6.06 EPS 0.85 (8.94) 4.53 6.06 Margins (%) EBITDA 9.8 9.9 10.0 10.1 EBIT 6.63 6.46 6.42 6.45 Pre-tax profit 9.2 8.8 9.0 9.3 Net profit 6.85 6.45 6.62 6.83 Valuation metrics (x) P/E 23.0 25.3 24.2 22.8 P/B 2.98 2.76 2.56 2.37 Dividend yield (%) 1.33 1.22 1.28 1.36 P/CF 27.1 21.7 18.1 16.7 EV/sales 1.32 1.35 1.27 1.18 EV/EBITDA 13.4 13.6 12.7 11.6 EV/EBIT 19.9 20.9 19.8 18.2 ROE analysis (%) ROE 13.5 11.3 11.0 10.8 ROIC 17.5 14.0 13.7 14.6 Asset turnover (x) 1.08 1.02 0.98 0.95 Interest burden (x) 1.39 1.37 1.41 1.45 Tax burden (x) 0.75 0.75 0.75 0.75 Financial leverage (x) 1.77 1.67 1.62 1.59 Credit ratios Net debt/equity (%) (38.9) (39.0) (44.5) (50.5) Net debt/EBITDA (x) (2.08) (2.33) (2.80) (3.30) Interest cover (x) (5.75) (5.93) (5.22) (4.37)


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2010 2011 2012 2013 2014 2015

12MF P/E multiple

0

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2010 2011 2012 2013 2014 2015

12MF P/B multiple

Source: IBES

26 October 2015



Yanjing Brewry

(000729.SZ / 000729 CH)

National player with a strong regional position

■ Initiate coverage with NEUTRAL and a target price of Rmb8.70.

Established in 1980, Yanjing is the fourth-largest player in the China brewery

industry with total beer sales volume of 53.21 mn hectolitres and 10.8%

market share in 2014. Yanjing has 42 breweries in 16 provinces in China

with a dominant position in Beijing, Guangxi and Inner Mongolia, and a

growing presence in Yunnan, Xinjiang and Sichuan. Its strategic "1+3"

brands (Yanjing, plus Liquan, Huiquan and Snow Deer) accounted for 90%

of its sales volume in 2014.

■ Continuing consolidation and premiumisation in its strongholds; yet

pressure on sales and earnings remain in other regions. We expect

further market share gains and increase in ASP in Beijing, Guangxi and

Inner Mongolia on the back of a well-penetrated distribution channel, leading

to an above average sales growth and higher margins. However,

competition in other regions may result in challenges to ASP and sales, and

high channel costs to maintain presence will pressure profitability and be a

drag on overall performance. We forecast 4.3% earnings CAGR on a 2.6%

sales CAGR over 2015-2018.

■ No significant improvement in fundamentals in the short term, SOE

reform may be a catalyst. Yanjing's sales volume dropped 3.58% YoY in

1H15 due to weak demand and an unfavourable weather in Southwest, while

ASP fell 6.8% due to promotions. We see no significant improvement in

fundamentals in the current competitive landscape; however, possible SOE

reform plans such as introducing strategic investors or partnership with other

players could lead to critical changes in operational efficiency and profitability.

■ NEUTRAL; our TP of Rmb8.70 is based on 12.0x 2016E EV/EBITDA, at

its historical lower range and comparable with peers, implying an 8%

upside. Yanjing trades at 11.4x 16E EV/EBITDA, compared with Tsingtao's

12.7x, CRB's 11.8x, Heineken's 10.6X and Carlsberg's 8.3X. Key

investment risks are slowing demand, change in consumers' preferences,

food safety issues and unfavourable policies.


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25-Oct-13 25-Oct-14



Shanghai Shenzhen CSI300 index which closed at 3524.53 on

23/10/15

On 23/10/15 the spot exchange rate was Rmb6.36/US$1

Performance over 1M 3M 12M Absolute (%) 9.0 -6.3 23.8 — Relative (%) 1.0 9.3 -23.3 —


Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 13,503.8 12,704.6 12,976.9 13,332.5 EBITDA (Rmb mn) 1,821.9 1,925.1 1,983.8 2,067.0 EBIT (Rmb mn) 955.2 1,044.7 1,057.4 1,102.0 Net profit (Rmb mn) 791.6 821.9 856.9 903.1 EPS (CS adj.) (Rmb) 0.28 0.29 0.30 0.32 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 0.28 0.30 0.34 EPS growth (%) 1.3 3.5 4.3 5.4 P/E (x) 29.3 28.3 27.2 25.8 Dividend yield (%) 1.0 1.0 1.0 1.1 EV/EBITDA (x) 13.4 12.2 11.4 10.4 P/B (x) 1.9 1.8 1.8 1.7 ROE (%) 6.6 6.6 6.6 6.7 Net debt/equity (%) 0.18 Net cash Net cash Net cash


Rating NEUTRAL* Price (23 Oct 15, Rmb) 8.26 Target price (Rmb) 8.70¹ Upside/downside (%) 5.3 Mkt cap (Rmb mn) 23,281 (US$ 3,663) Enterprise value (Rmb mn) 23,486 Number of shares (mn) 2,818.54 Free float (%) 37.6 52-week price range 12.78 - 6.66 ADTO - 6M (US$ mn) 77.5




Research Analysts

Simon Sun

852 2101 7652

[email protected]

Kevin Yin

852 2101 7655

[email protected]

26 October 2015



Guangxi29%

Beijing23%

South China18%

Inner Mongolia11%

North China10%

Central & East China

9%

Yanjing68%

Liquan16%

Huiquan5%

Snow Deer1% Others

10%

Source: Company Data, Beer Professional Committee (BPC), Credit

Suisse Estimates

Source: Company Data, Euromonitor, Credit Suisse Estimates

Figure 83: 2014 operation comparison – by region Figure 84: Revenue/NP/volume YoY growth

17.3%

13.0%

7.1%

5.2%4.0%

-2.8%

-7.2% -

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Beijing Guangxi Blended InnerMongolia

SouthChina

Central &East

China

NorthChina

OP Margin ASP (Rmb/KL)

-10.2%

2.8%

-3.6%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

2010 2011 2012 2013 2014 2015H1


Source: Company data, BPC, Credit Suisse estimates Source: Company data, Credit Suisse

Figure 85: EV/EBITDA (Std. deviation) Figure 86: EV/EBITDA band

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3

12/1

3

06/1

4

12/1

4

06/1

5

Mean +1 STD +2 STD-1 STD -2 STD EV/EBITDA

-

2

4

6

8

10

12

14

16

12/0

5

06/0

6

12/0

6

06/0

7

12/0

7

06/0

8

12/0

8

06/0

9

12/0

9

06/1

0

12/1

0

06/1

1

12/1

1

06/1

2

12/1

2

06/1

3

12/1

3

06/1

4

12/1

4

06/1

5

10X 13X 16X 19X 22X Price

Source: Bloomberg, IBES, Credit Suisse Estimates Source: Bloomberg, IBES, Credit Suisse Estimates

26 October 2015


Yanjing Brewery 000729.SZ / 000729 CH Price (23 Oct 15): Rmb8.26, Rating:: NEUTRAL, Target Price: Rmb8.70, Analyst: Simon Sun




— — — — — — — — — — — — — — — — — — — —


Sales revenue 13,504 12,705 12,977 13,333 Cost of goods sold 8,013 7,421 7,547 7,714 SG&A 3,080 2,923 3,030 3,134 Other operating exp./(inc.) 589.0 435.3 416.4 418.1 EBITDA 1,822 1,925 1,984 2,067 Depreciation & amortisation 866.7 880.5 926.4 965.0 EBIT 955 1,045 1,057 1,102 Net interest expense/(inc.) 58.1 42.8 14.7 0.6 Non-operating inc./(exp.) 151.7 139.8 99.9 102.7 Associates/JV — — — — Recurring PBT 1,049 1,142 1,143 1,204 Exceptionals/extraordinaries — — — — Taxes 257.2 319.6 285.6 301.0 Profit after tax 791.6 821.9 856.9 903.1 Other after tax income — — — — Minority interests — — — — Preferred dividends — — — — Reported net profit 791.6 821.9 856.9 903.1 Analyst adjustments — — — — Net profit (Credit Suisse) 791.6 821.9 856.9 903.1


EBIT 955 1,045 1,057 1,102 Net interest — — — — Tax paid — — — — Working capital (572.1) 192.7 65.1 7.3 Other cash & non-cash items 819.6 676.0 732.5 761.9 Operating cash flow 1,203 1,913 1,855 1,871 Capex (889.6) (630.0) (555.0) (490.0) Free cash flow to the firm 313 1,283 1,300 1,381 Disposals of fixed assets — — — — Acquisitions — — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) 14.9 17.9 (3.5) 16.7 Investing cash flow (874.7) (612.1) (558.5) (473.3) Equity raised — — — — Dividends paid (418.9) (229.3) (239.1) (260.1) Net borrowings — — — — Other financing cash flow 218.0 (834.0) (14.9) (0.8) Financing cash flow (201) (1,063) (254) (261) Total cash flow 127 238 1,043 1,137 Adjustments — — — — Net change in cash 127 238 1,043 1,137


Cash & cash equivalents 1,732 1,970 3,013 4,150 Current receivables 189.9 180.9 181.7 186.7 Inventories 4,081 3,710 3,697 3,779 Other current assets 341.7 334.2 347.1 346.0 Current assets 6,345 6,195 7,238 8,461 Property, plant & equip. 11,046 10,749 10,342 9,833 Investments 254.1 254.1 254.1 254.1 Intangibles 1,178 1,225 1,260 1,294 Other non-current assets 107.6 113.1 123.6 114.1 Total assets 18,931 18,536 19,218 19,956 Accounts payable 1,002 928 943 964 Short-term debt 1,657 866 866 866 Current provisions 287.8 332.9 319.5 338.0 Other current liabilities 2,488 2,321 2,383 2,439 Current liabilities 5,435 4,448 4,512 4,608 Long-term debt 99.0 99.0 99.0 99.0 Non-current provisions 2.9 3.0 3.1 3.2 Other non-current liab. 14.8 14.6 14.4 14.2 Total liabilities 5,552 4,564 4,629 4,724 Shareholders' equity 12,252 12,762 13,294 13,847 Minority interests 1,127 1,209 1,295 1,385 Total liabilities & equity 18,931 18,536 19,218 19,956





12/14A 12/15E 12/16E 12/17E

Growth(%) Sales revenue (1.78) (5.92) 2.14 2.74 EBIT 8.6 9.4 1.2 4.2 Net profit 1.33 3.83 4.26 5.38 EPS 1.28 3.50 4.26 5.38 Margins (%) EBITDA 13.5 15.2 15.3 15.5 EBIT 7.07 8.22 8.15 8.27 Pre-tax profit 7.8 9.0 8.8 9.0 Net profit 5.86 6.47 6.60 6.77 Valuation metrics (x) P/E 29.3 28.3 27.2 25.8 P/B 1.89 1.82 1.75 1.68 Dividend yield (%) 0.97 0.99 1.03 1.12 P/CF 19.3 12.2 12.5 12.4 EV/sales 1.81 1.85 1.74 1.61 EV/EBITDA 13.4 12.2 11.4 10.4 EV/EBIT 25.6 22.5 21.3 19.5 ROE analysis (%) ROE 6.60 6.57 6.58 6.65 ROIC 5.49 5.70 6.22 6.72 Asset turnover (x) 0.71 0.69 0.68 0.67 Interest burden (x) 1.10 1.09 1.08 1.09 Tax burden (x) 0.75 0.72 0.75 0.75 Financial leverage (x) 1.41 1.33 1.32 1.31 Credit ratios Net debt/equity (%) 0.2 (7.2) (14.0) (20.9) Net debt/EBITDA (x) 0.01 (0.52) (1.03) (1.54) Interest cover (x) 16 24 72 1,921


0

5

10

15

20

25

30

35

40

45

2010 2011 2012 2013 2014 2015

12MF P/E multiple

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2010 2011 2012 2013 2014 2015

12MF P/B multiple

Source: IBES

26 October 2015


Regional leader with national presence

Originating in Beijing, Yanjing has now become the fourth-largest brewer in China after 35

years of development, with 42 breweries in 16 of the 34 provinces in China. Over the 15-

year period from 1999 to 2014, Yanjing recorded a 7.3% earnings CAGR on a 14.6%

revenue CAGR, and its revenue and NP were Rmb13.5 bn (-1.8% YoY) and Rmb777 mn

(+7.0% YoY), respectively, last year.

In 2014, Yanjing sold a total of 53.21 mn hectolitres of beer, accounting for 10.8% market

share. Its primary brand "Yanjing" accounted for 68% of total volume sold, and three major

brands "Liquan", "Huiquan" and "Snow Deer" contributed another 22% [see figure 103

below, 10% from others]. Yanjing has solid market share in Beijing, Guangxi and Inner

Mongolia (all >70%, strongly held), a wide presence in North, East and Central China, and

rapidly growing sales in Xinjiang, Yunnan and Sichuan.

Due to a weak macro environment and unfavourable weather conditions in Southwest

China in 1H15, Yanjing reported a 3.6% YoY decline in beer sales volume to 29.6 mn

hectolitres, compared with the 6.2% decrease in total national beer production. ASP also

dropped 6.8% due to more promotions under weak demand. However, net profit grew

2.8% YoY, despite a 10.2% drop in beer revenue, mainly due to lower cost of raw

materials.

Figure 87: Beer revenue/NP/Volume YoY Growth Figure 88: 2014 Volume Mix – by Brand

-10.2%

2.8%

-3.6%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

2010 2011 2012 2013 2014 2015H1


Yanjing68%

Liquan16%

Huiquan5%

Snow Deer1% Others

10%

Source: Company data, Credit Suisse Source: Company Data, Euromonitor, Credit Suisse Estimates

Further consolidation and premiumisation in

strongly held markets

In 2014, strongly held regions (Beijing, Guangxi and Inner Mongolia) contributed c.63% of

Yanjing's total beer revenues and c.58% of its total sales volume. Most importantly, these

markets saw significantly higher margins and ASPs, mainly due to well-penetrated

distribution channels and strong brand recognition. For instance, Beijing and Guangxi

achieved 17.3% and 13.0% operating margin in 2014, 2.4x and 1.8x of the company

blended 7.1% OP margin; ASP of Rmb3,341/KL in Beijing and Rmb2,979/KL in Guangxi

was 39% and 24% higher than the company blended ASP of Rmb2,398/KL. Inner

Mongolia had relatively lower ASP of Rmb2,038/KL, mainly due to local consumption

pattern, and hence lower OP margins, which, however, is still better than other highly

competitive markets.

In 1H15, weak demand and rainy weather in Southwest dragged down the overall industry

growth, and Yanjing saw a 10.15% revenue drop in beer, with 12.10% YoY revenue

decrease in Beijing, a moderate 0.98% growth in Guangxi and a sharp 15.25% decline in

26 October 2015


other regions. Nevertheless, we also saw some positive signs such as gross margin

improvement. In 1H15, GPM expanded 4.02 pp from 1H14 to 50.11% (before sales tax);

GPM in Guangxi climbed 2.62 pp to 48.46%, other regions also improved 2.60 pp to

43.82%, and overall beer GPM increased 2.98 pp to 47.19%. In 1H15, Beijing and

Guangxi combined contributed c.53.2% of total revenue compared with 51.9% in 2014.

Amid gradually slowing industry volume growth, we expect further gains in market share

and increase in ASP in its strongholds. Yanjing has accelerated premiumisation in recent

years. In 2013 and 2014, the company launched mid- to high-end products, such as draft

beer and can-packaged beer, which recorded 27.4% and >30% YoY growth, respectively,

far above the industry growth rate . In 2014, its high-end "origin white beer" was also

launched in the Beijing market. During 2011-14, Yanjing recorded a 4.7% ASP CAGR

compared with 1.6% over 2008-11, and we expect the product mix upgrade trend to

continue in the near future.

Figure 89: 2014 revenue mix – by region Figure 90: 2014 operation comparison – by region

Guangxi29%

Beijing23%

South China18%

Inner Mongolia11%

North China10%

Central & East China

9%

17.3%

13.0%

7.1%

5.2%4.0%

-2.8%

-7.2% -

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Beijing Guangxi Blended InnerMongolia

SouthChina

Central &East

China

NorthChina

OP Margin ASP (Rmb/KL)

Source: Company Data, BPC, Credit Suisse Estimates Source: Company data, BPC, Credit Suisse estimates

Pressure remains in highly competitive regions

Unlike the regions where it has strong presence, Yanjing faces pressure in both sales and

earnings in other markets where competition is high or where competitors have an upper

hand. South China is another growing market for Yanjing, as it steps into Guangdong,

Sichuan and Yunnan on the back of its strong position in Guangxi. In 2014 we saw 18%

revenue from South with Rmb2,595/KL ASP and 4.0% OP margin. But challenges exist in

this region, as Sichuan is well penetrated by CRB which directly competes with Yanjing at

this price level. Fujian showed a -0.5% OP margin in 2014 suffering from ABI's

competition, while the Guangdong and Yunnan markets lack a strong regional leader, and

we expect Yanjing remains conservative here given foreign brands' willingness to expand.

Besides, earnings have suffered in North, Central and East China. Xinjiang, Jiangxi, Hebei

and Zhejiang made positive contributions in 2014, while Liaoning, Shanxi, Shandong and

Hubei came in with large losses (-29% to -110% OP margin); Hunan is also loss-making.

Generally, it is painful to maintain presence in competitors' base markets due to high

channel costs; however, an effective solution to such problems under the current

competitive landscape is lacking. Moving onwards, we see little chance of an earnings

turnaround in these markets; headwinds are still strong to sales growth as industry

demand is weakening, and ASP increase is unlikely due to a weak pricing power.

26 October 2015


Possible SOE reform may improve profitability

Beijing government is the largest shareholder in Yanjing with a 59.45% stake, while

management only has a 0.02% stake. Following the SOE reform trend, possible reform

plans to diversify stake holdings and potential management/employee incentives could be

a catalyst to improve profitability and the company's performance.

Figure 91: Yanjing shareholding structure

Source: Company data, Credit Suisse

Valuation

Our target price of Rmb8.7 is based on 12.0x 2016E EV/EBITDA, implying an 8% upside.

Yanjing trades at 11.4x 16E EV/EBITDA, compared with Tsingtao's 12.7x, CRB's 11.8x,

Heineken's 10.6X and Carlsberg's 8.3X.


Slowdown in industry demand

China's population growth, especially young generation and adults, has slowed down in

the recent years; per capita consumption of beer in China is also higher than the world

average. In a weak macroeconomic environment, beer industry demand is slowing down

and may adversely affect the company's sales growth.

Transition in consumers' preference away from alcoholic drinks

The young generation has grown up with a preference for healthy lifestyle, and it prefers

healthy drinks to alcoholic beverages. The transition in consumers' preferences may

influence the industry demand and the company's performance.

26 October 2015


Companies Mentioned (Price as of 23-Oct-2015)

AGSW (600199.SS, Rmb8.9) AmBev (ABEV3.SA, R$19.66) Anheuser-Busch InBev (ABI.BR, €104.5) Asahi Group Holdings (2502.T, ¥3,825) Brown-Forman Corporation (BFb.N, $108.97) Carlsberg (CARLb.CO, Dkr532.5) China Resources Beer (Holdings) Company Limited (0291.HK, HK$14.94, NEUTRAL, TP HK$16.0) ChongqingBrewery (600132.SS, Rmb14.88) Constellation Brands Inc. (STZ.N, $137.81) Davide Campari (CPRI.MI, €7.69) Diageo (DGE.L, 1860.5p) Gu Jing (000596.SZ, Rmb30.0) Heineken (HEIN.AS, €79.21) Huangtai Wine (000995.SZ, Rmb10.04) Huiquan Brew (600573.SS, Rmb13.28) Huzhu (002646.SZ, Rmb21.07) Jiangsu Yanghe Brewery Joint-stock Co., Ltd (002304.SZ, Rmb61.4) Kirin Holdings (2503.T, ¥1,722) Kweichow Moutai Co., Ltd (600519.SS, Rmb210.98) Laobaigan Liquor (600559.SS, Rmb63.12) Luzhou Laojiao Co., Ltd (000568.SZ, Rmb22.68) Pernod-Ricard (PERP.PA, €103.65) REMY COINTREAU (RCOP.PA, €61.51) SABMiller (SAB.L, 3920.0p) Shanxi Xinghuacun Fen Wine Factory Co., Ltd (600809.SS, Rmb17.76) Thai Beverage (TBEV.SI, S$0.68) Tsingtao Brewery (0168.HK, HK$38.6, NEUTRAL, TP HK$40.0) Tsingtao Brewery (600600.SS, Rmb33.95, NEUTRAL, TP Rmb35.0) Tuopai Shede (600702.SS, Rmb15.08) Wuliangye Yibin Co., Ltd (000858.SZ, Rmb25.73) YLT (600197.SS, Rmb11.5) Yanjing Brewery (000729.SZ, Rmb8.26, NEUTRAL, TP Rmb8.7) Zhujiang Brewery (002461.SZ, Rmb14.11)

Disclosure Appendix

Important Global Disclosures

I, Simon Sun, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage uni verse which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most att ractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

26 October 2015


Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 59% (34% banking clients)

Neutral/Hold* 26% (35% banking clients)

Underperform/Sell* 13% (23% banking clients)

Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for China Resources Beer (Holdings) Company Limited (0291.HK)

Method: Our target price of HKD16 for China Resources Beer (Holdings) is based on 12.3X 2016E EV/EBITDA, comparable with peers. CRB trades at 11.8X 2016E EV/EBITDA, comparing with Tsingtao's 12.7X, Yanjing's 11.4X, and Carlsberg's 8.4X.

Risk: Risks to our HKD16 target price for China Resources Beer (Holdings) include: (1) transition of consumer behavior of alcoholic drinks; (2)food safety and unfavorable industry policies

Price Target: (12 months) for Tsingtao Brewery (0168.HK)

Method: Our target price of HK$40 for Tsingtao Brewery-A share is based on 13.3x 2016E EV/EBITDA, at its historical lower range and comparable with peers. Tsingtao is trading at 12.2x 2016E EV/EBITDA, compared with CRE's 11.7x, Yanjing's 10.9x, ABI's 13.8x, SABMiller's 16.8x, and Carlsberg's 8.3x.

Risk: Risks to our target price of HK$40 for Tsingtao Brewery-A share include: (1) changes in consumer behaviour; (2) food safety and unfavourable industry policies; and (3) industry growth slowdown.

Price Target: (12 months) for Tsingtao Brewery (600600.SS)

Method: Our target price of Rmb35.0 for Tsingtao Brewery-A share is based on 13.3x 2016E EV/EBITDA, at its historical lower range and comparable with peers. Tsingtao is trading at 12.2x 2016E EV/EBITDA, compared with CRE's 11.7x, Yanjing's 10.9x, ABI's 13.8x, SABMiller's 16.8x, and Carlsberg's 8.3x.

Risk: Risks to our target price of Rmb35.0 for Tsingtao Brewery A share include: (1) changes in consumer behaviour; (2) food safety and unfavourable industry policies; and (3) industry growth slowdown.

Price Target: (12 months) for Yanjing Brewery (000729.SZ)

Method: Our target price of Rmb8.70 for Yangjing Brewery is based on 12.0x 2016E EV/EBITDA, at its historical lower range and comparable with peers. Yanjing trades at 11.4x 2016E EV/EBITDA, compared with Tsingtao's 12.7x, CRB's 11.8x and Carlsberg's 8.3x.

Risk: Risks to our target price of Rmb8.70 for Yangjing Brewery include: (1) transition of consumer behaviour of alcoholic drinks; (2) food safety and unfavourable industry policies; and (3) slowing consumption demand.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

26 October 2015


The subject company (0291.HK, ABI.BR, SAB.L, HEIN.AS, BFb.N, 000568.SZ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (HEIN.AS, 000568.SZ) within the past 12 months.

Credit Suisse has managed or co-managed a public offering of securities for the subject company (HEIN.AS) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (HEIN.AS, 000568.SZ) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0291.HK, 600600.SS, ABI.BR, SAB.L, HEIN.AS, BFb.N, 600519.SS, 000568.SZ) within the next 3 months.

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (SAB.L).

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Important Regional Disclosures

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Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

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The following disclosed European company/ies have estimates that comply with IFRS: (ABI.BR, SAB.L, HEIN.AS, CARLb.CO).

Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (HEIN.AS) within the past 3 years.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

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To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse (Hong Kong) Limited ....................................................................................................................................... Simon Sun ; Kevin Yin

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

26 October 2015


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