China: The investment bank Merrill Lynch said on April 13 it has maintained its 'sell' recommendation for Tsingtao Brewery Co Ltd on concerns over the outlook for growth despite improved earnings last year, according to AFX News.

China's biggest brewer reported on April 12 2004 net profits of 285 million yuan, up 16.4 % over the previous year and above Merrill Lynch's estimates, but the brokerage said Tsingtao is likely to continue losing market share and feel margin pressure. Tsingtao's gross margin and operating margin also significantly decreased in the second half of last year due to surging raw material costs. That trend is likely to continue in 2005, driven by higher expenses for packaging, selling, distributing and utilities, the brokerage said. 'With rising cost pressure and limited pricing power, we think it's hard for Tsingtao to pass on rising costs down the value chain. Therefore, margin erosion is inevitable,' it said.

Tsingtao's market share dropped to 12.7 % in 2004 from 12.8 % in 2003 as competition from Yanjing Brewery and China Resources Brewery intensified, Merrill Lynch said in a research note.

US beer producer Anheuser-Busch (AB) recently raised its stake in Tsingtao to 27 % from 9.9 % by exercising its convertible bonds, but the move indicated a commitment to the Chinese market in the long-term rather than acting as a near-term catalyst for Tsingtao itself, Merrill Lynch said. 'Considering Tsingtao's origin as a state-owned enterprise, we expect AB to be very cautious in terms of any major strategic initiatives with Tsingtao.'

With estimated 2005 earnings per share (EPS) at 36 times, while comparable Chinese consumer stocks are trading at about 20 times, Tsingtao is the 'most expensive China consumer stock,' Merrill Lynch added. Tsingtao's shares were unchanged at 8.35 hkd in late morning in Hong Kong. (1 usd = 8.3 yuan) (1 usd = 7.8 hkd)

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