[For Immediate Release]
Xinhua Far East Upgrades Tsingtao Brewery Co. Ltd to BBB+ issuer rating
HONG KONG, February 24, 2006– Xinhua Far East China Ratings today upgraded Tsingtao
Brewery Co. Ltd (“Tsingtao Brewery” or “the Company”, SH A 600600, HK0168) from BBB- to
BBB+ domestic currency issuer credit rating. Its rating outlook remains stable.
The upgrade was based on Xinhua Far East’s positive view about Tsingtao Brewery’s change in
business focus from external acquisition to internal consolidation, as well as its equity
relationship and strategic incorporation with Anheuser-Busch (“AB”), its improved cash flow
and its lower debt burden since 2002. On the other hand, Xinhua Far East recognizes that
there are risks of further profitability erosion due to intensified competition as a result of the
ever increasing beer capacity surplus in China, especially in lucrative regions, and due to the
company’s aggressive marketing strategy.
Tsingtao Brewery’s debt repayment ability has significantly improved since 2002. This, Xinhua
Far East believes, has mainly been due to constraints on capital expenditure and new shares
issued to AB. Its gross debt/ total capital fell to 18.8% in the third quarter of 2005 from 43.2%
in 2001. EBIT interest coverage increased to 6.4 ( ) in the first half of 2005 from 1.6 ( ) in
2001, while net debt/ EBITDA changed to net cash status in 2005 from 2.8 in 2001.
Xinhua Far East notes that since 2002 Tsingtao Brewery started to slow down the pace of
acquisition and its investment in new capacity as it shifted its focus from capacity expansion to
synergy improvement. In Xinhua Far East’s view, the Company is unlikely to resume its
large-scale capital expenditure because it has almost finished its nationwide capacity
allocation and secured its position as one of the big two in the domestic beer market. At the
same time, Xinhua Far East expects that the constraints on investment will continue to benefit
its cash position in the coming years. Its cash flow from operation (CFO) began to surpass
cash outflow from investment (CFI) in 2002. The surplus between CFO and CFI recorded
RMB467 million, RMB604 million, RMB1001 million and RMB1178 million from 2002 to the third
quarter of 2005.
Xinhua Far East also acknowledges the contribution from AB to the Company’s rating profile.
Tsingtao Brewery approved AB to execute conversion options on accumulatively HKD1.42
billion in convertible bonds in July 2003 and April 2005 successively; this accounted for about
50% gross debt at the end of 2002.
On the other hand, Xinhua Far East notes that there are factors that cloud Tsingtao Brewery’s
future and prevent it from obtaining a high rating:
Although Tsingtao Brewery’s EBIT margin rose to 7.2% in the third quarter of 2005 from 4.6%
in 2001, its profitability remained weak compared to its major competitors. Xinhua Far East
attributes its margin improvement to synergies gained from internal consolidation and the
introduction of a higher-end product mix, but expects these two drivers might not help to the
same degree in the future.
Firstly, Xinhua Far East believes the low-median-end products will continue to dominate the
Chinese beer market. The narrow high-end niche, which comprises less than 10% and is
slow-growing, is set to become too crowded in the near future, with more and more foreign
giants entering into China’s market and focusing first on regional and high-end markets.
Secondly, the geographic diversity of acquired targets, management discrepancies and the
residual stakes held by local governments push further synergy improvements a longer way
into the future than expected.
As competition heats up nationwide, the Company faces greater pressures in regions where it
used to have dominant power and lucrative profits. Since the profit from Guangdong Province
contributes considerably to the aggregate profit of Tsingtao Brewery, Xinhua Far East believes
that the Company’s profit margins could deteriorate once a price war is initiated in Guangdong
Province as regional supply is estimated to double the size of demand in 2007.
Xinhua Far East also believes there are somewhat higher liquidity risks for Tsingtao Brewery as
the short-term borrowing accounted for 87.7% of gross debt in the third quarter of 2005.
The rating outlook for Tsingtao Brewery remains stable.
Tsingtao Brewery is current the largest beermaker in China. As of year-end 2004, the
Company recorded 37.1 million hls in beer sales and reported turnover and EBIT of RMB7.7
billion and RMB558 million respectively. The Company has the most extensive nationwide
capacity allocation among the native players and enjoys overwhelmingly high market share in
the Qingdao region. Sales in that region and Guangdong Province accounted for 31.5% and
29.5% total sales respectively in the first half of 2005. Its brand “Tsingtao” is among the most
widely recognized in China. Being the second largest shareholder, Anheuser-Busch Group
holds a 27% stake in Tsingtao Brewery and enjoys 20% voting rights in the Company.
Tsingdao Beer (SH A 600600) is a constituent of the Xinhua/ FTSE China A50 Indices. As of
market close on February 23, 2006, its total market capitalization and investible capitalization
were RMB 6.27 billion and RMB 1.88 billion respectively.
For the rating report summary, please visit www.xinhuafinance.com/creditrating.
Joy Tsang, Corporate & Investor Communications Director, Xinhua Finance
+852-3196-3983, +8621-6113-5999, +852-9486-4364, email@example.com
Taylor Rafferty (IR/PR Contact in US)
Note to Editors:
About Xinhua FTSE China A50 Index
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About Xinhua Far East China Ratings
Xinhua Far East China Ratings (Xinhua Far East) is a pioneering venture in China that aims to
rank credit risks among corporations in China. It is a strategic alliance between Xinhua Finance
(TSE Mothers: 9399), and Shanghai Far East Credit Rating Co., Ltd. Shanghai Far East became
a Xinhua Finance partner company in 2003 and the first China member of The Association of
Credit Rating Agencies in Asia in December 2003.
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company with comprehensive business coverage in China. It is an independent agency
established by the Shanghai Academy of Social Sciences with the mission to develop
internationally accepted standards for capital market in China. The company is a pioneer in
conducting bond-rating business in China. For years, it has been authorized by the Shanghai
branch of the PBOC to undertake loan certificate credit rating.
Since establishment, it has rated over 1,000 corporate long-term bonds and commercial
papers, based on the principles of objectivity, fairness and independence. The company has
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