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. Last Updated: 07/27/2016

Foreigners Eye China's Beer Market

SHANGHAI, China -- Factory foreman Ye Jianchun grins widely as he downs his third can of Bud.

"This is the first time I'm trying Budweiser. It's good, I might switch."

Good news for Anheuser-Busch, SABMiller and Interbrew as they gun for the world's fastest-growing beer market, sinking hundreds of millions of dollars to chase demand climbing at 6 percent annually.

The bad news: Analysts say those yet to secure a partner like Yanjing Brewery risk missing the boat because the crop of brewers with strong brands and distribution is shrinking.

The race is on to find a partner that can slice through protectionist barriers, control wide distribution networks and understand the local market. Beer made at local factories would also be exempt from tariffs now imposed on nonlocal brands.

"There aren't that many good ones left. One that comes to mind is Yanjing. I still can't believe no one's approached them," Sun Hung Kai Securities analyst Maggie Choi said.

It was not that long ago that industry analysts were placing bets on who would be the last one standing in a cutthroat market.

A slew of players from Denmark's Carlsberg Breweries to Foster's Brewing Group Ltd. were forced to scale back in the 1990s, frustrated by difficulties in penetrating inland markets and discouraged by a sea of red ink.

"Foreign companies failed then because they came in alone with no market knowledge. Things are different now," said Phoebe Wong, an analyst with Nomura International. "They partner local brewers, who may not have the technical expertise but have intimate knowledge of the industry."

At the opening of the 17-day Qingdao Beer Festival last week, Anheuser-Busch chief executive Patrick Stokes pushed all that out of his mind, backed by his recent $182 million investment in the country's premier brewer, Tsingtao Brewery.

"China is our fastest growing market and our focus right now," the towering executive said in the coastal city of Qingdao.

Stokes's enthusiasm is understandable, analysts say. Faced with stagnating sales at home, brewers are charging into a market with annual per capita consumption at 18 liters versus 50 in Japan, 84 in the United States and 100 in Europe.

Foreign beer now has as much as a 25 percent market share in the cities, but remains almost unheard of in the hinterland.

But analysts say the fragmented industry of 500-odd brewers suffers from overcapacity and margin-gutting competition, where a 640-millilter bottle can sell for just above one yuan ($0.12).

China now brews 237 million hectoliters of beer per year, about 60 percent of the country's capacity, after a haphazard expansion and acquisition spree over the past two years.

"The market still is very fragmented and consolidation will go on for another few years," said Nomura's Wong. "Brand loyalty is significant: 47.2 percent of Chinese customers choose beers out of loyalty," Choi said.

Some are cutting across borders. Yanjing, China's No. 3 has aggressively expanded market share through 14 acquisitions over the past four years. Analysts said Guangdong Brewery Holdings Ltd. could be another prospect.

Valuations for most listed brewers are acceptable, with Guangdong Brewery trading at 20 times earnings and China's fourth largest, Harbin Brewery Group Ltd., at 12 -- roughly in line with Hong Kong's average of 14-15 times.

But finding a solid partner may be tough, analysts say. Haitong Securities' Jiang Jian sees Yanjing posting a sharp earnings slide because of Severe Acute Respiratory Syndrome. Choi sees Harbin's earnings slipping 23 percent to $14.6 million, and maintains a "sell" rating on the stock.