The Motley Fool

Better Buy: Budweiser Asia vs. Tsingtao Brewery

Many Western brands have long been associated with high quality and status in China. The brands of Budweiser Brewing Co APAC (SEHK: 1876) are no exception.

The company, also known as Budweiser Asia, has several leading premium beer brands in the country including Corona, Budweiser, and Stella Artois.

Although it leads, Budweiser Asia isn’t alone in the premium segment of China.

Given that it is an upper-middle-income country according to the World Bank, China is quickly moving towards a consumption-led economy and the country has developed its own indigenous brands.

Among China’s many domestic beer companies, Tsingtao Brewery Company Limited (SEHK: 168) is arguably among the two strongest.

Tsingtao Brewery’s lead beer brand, “Tsingtao Beer”, is very well known in China. Given the brand, Tsingtao Brewery is also among the leaders in China’s lucrative premium beer market.

Given the two companies’ similarities, which is the better bet for long-term investors between Budweiser Asia and Tsingtao Brewery?

Growth

Although growth is hard to come by now given Covid-19, there is a lot of growth potential in China’s premium beer industry.

According to Budweiser Asia’s estimates, the premium market of China currently accounts for approximately 16% of the total market, versus around 40% in many developed Western nations.

As China’s economy continues to develop, more people will have more disposable income, and the premium end of the market could make a larger percentage of the overall market.

If China’s premium beer market ends up being like the West, it could be 2.5 times bigger just in terms of percentage relative to the overall market.

Given the market is all about expectations of the future, the market has priced in some of the future premium market growth, but arguably not all. As a result, Tsingtao Brewery and Budweiser Asia trade at a pretty cheap price relative to their potential.

Typically, companies that grow pretty quickly have more momentum than companies that grow more slowly.

In terms of past growth, Tsingtao Brewery has done better than Budweiser Asia.

For the most recent year (unaffected by Covid-19 of 2019), Tsingtao Brewery’s high-end beer product volume rose 7.08% year-on-year. Total sales volume of the core Tsingtao Beer brand rose 3.49% year-on-year.

For FY19, Budweiser Asia disclosed that its “premium portfolio in China led by Budweiser experienced a low single-digit volume decline”. Budweiser Asia’s total volumes decreased 3% year-on-year.

Although Budweiser Asia’s premium portfolio in China will rebound to growth at some point, there is no guarantee that it can beat Tsingtao Brewery’s growth.

Winner: Tsingtao Brewery

M&A potential

I think Budweiser Asia and Tsingtao Brewery could both be M&A players, with the former likely being an acquirer and the latter being the acquisition if a merger deal is done between the two.

For Budweiser Asia, it could make a lot of sense to do a deal with Tsingtao Brewery at the right price.

Although Tsingtao Brewery looks pretty expensive on a forward price-to-earnings (PE) valuation metric currently of around 43x according to Morningstar, a merger between the two could yield substantial pricing and supply chain synergies.

Because Tsingtao Brewery isn’t in a position to fire-sell its assets and the acquirer of a deal typically pays a premium to buy a company, Tsingtao Brewery would likely gain more of the benefits in the short term in the event of M&A between the two companies.

Winner: Tsingtao Brewery

Post-Covid-19 rebound

The coronavirus has undoubtedly been a big negative for both companies. While there is a worry of a second wave in China and Covid-19 continues to spread internationally, the coronavirus outbreak will eventually come under control.

Analysts are optimistic about a potential vaccine. Recently, a study showed that a drug, dexamethasone, reduced deaths by up to 33% for patients with severe Covid-19.

Consumer behaviour will rebound, and when it does, business for Budweiser Asia and Tsingtao Brewery will very likely normalise.

With higher demand could come higher profits and better sentiment.

Given that Budweiser Asia’s stock has fallen a lot more than Tsingtao Brewery (which has actually rallied) in 2020, the company’s stock could potentially climb higher due to the “return to normal” trend.

According to Yahoo Finance, Budweiser Asia stock has fallen around 11.79% year-to-date while Tsingtao Brewery is actually up around 5.35% year-to-date.

Winner: Budweiser Asia

Foolish conclusion

Although Budweiser Asia and Tsingtao Brewery both have potential upside, Tsingtao Brewery might be the better bet due to faster premium China growth and an arguably more advantageous M&A position.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.