BDA-老虎基金华润雪花啤酒研究报告EN-2015 05 27

BDAReportonCRESnowBeer(0291.HK)May27th,2015ForTigerGlobalManagement©BDA20152TableofContentsExecutiveSummarySnapshotofSnowBeerChinaBeerMarketDynamicsSnowBeerCompetitiveEdgeSnowBeer’sGrowthPotentialOtherQuestionsIsCRESnowabletoimprovemarginswhenscaledup?Asconsolidationgoeson,globalbenchmarkingshowedthatindustrymarginwillfurtherimprove,targetingat>10%inlong-term(vs.4-6%in2014)Snowcanimprovemarginby~6%throughmixtradingupandcutinmarketinginput.TogainaclearvisionofCRE’sbeerbusiness,ourresearchfirstevaluatedthesectorattractivenessandthetarget’scompetitiveedge,thenupdatedourunderstandingofthetarget’sgrowthpotentialKeyQuestionsToAnswer3Isbeerbrewerystillanattractivesector?Whatisthebeermarket’slong-termgrowthpotential?Howmuchcanthemarketfurtherconsolidates?Willfurtherconsolidationbringnoticeableeconomyofscale?DoesCRESnowhaveaclearcompetitiveedge?DoCRESnowhascompetitiveedgeinthecompetition?Whatisitslong-termgrowthpotential?Themarkethasbeenstagnantingrowthgivenlimitedpotentialinvolumeconsumption.Weestimatea5%yoyin2015Fanda7%CAGRforthenext5years(vol:2%;ASP:5%)Themarkethasbeenapproachingtheendgameofconsolidation(CR3=57%),andtherearethreeavailableM&Atargets,accountingfor17%ofmarketshare,includingYanjing.SnowissaidtobestrongpotentialbuyerKeyFindingsCurrentlyfiveplayerscompetenationwideandCREhasanarrowlead.WebelieveCRESnowisabletostandoutinthelongterm,benefitingfromitsstrongfinancialstrength,thekeytoitsstrongchannelcontrol;Snowhaspositioneditselfwellintradingup,andkeptgainingshareinstrongregionsLookingforward,Snowcanfurtherraiseitssharetoatleast30%(vs.24%m/sin2014);andSnowcangetanother10%m/sifmergedwithYanjingLongTermShortTermIsCRESnowrightonthetrackin2015?Asregards2015,weestimateSnowcanachieve3.5%YoYgrowthinvolumeand4%YoYgrowthinASP,meaning7-8%YoYgrowthoftotalrevenue,generallyinlinewithwhatthemarketexpectsAndforprofitability,its2014netmargindippedfrom5.6%to4.3%,mostlybecauseoftheheaviermarketingofstandardbeerandgreaterdepreciationcostscausedbythepurchaseofKingway;its2015netmarginisexpectedtoriseby~1ppt.WebelieveASPriseswillbethekeylong-termdriverforthemarket,aimingat7%CAGRthrough2019;intheshortterm,themarketwillstayflatinvolume,whiletheASPriseslinkedtotradingupwillfuelmarketgrowthin2015,5%yoyexpected4YoYGrowthrateKeyDriversLongTerm(2019E)NearTerm(2015E)Vol.:Growthpotentialinvolumeislimitedasahighpenetrationrateandpercapitaconsumptionhavealreadybeenreached,andareatsimilarlevelstothoseindevelopedmarketsASP:Itrises,basedonpriceadjustmentsandtradingup,willbethekeydriverofmarketgrowthVol.:VolumesufferedaLSDdeclineduetounfavorableweatherandanti-corruptionmeasures(fewerbanquets)in2014,andisexpectedtostayflatin2015ASP:ASPriseslinkedtotradinguphasbeenthedriverofmarketgrowthin2014,andwillalsofuelmarketgrowthin2015ASPVolume0%ValueASPVolume2%ValueThesectorisregionaldividedbynature,causedbybarriersbuiltupthroughchannelcontrolandlocalcapacityexpansion;inrecentyears,morecross-regionoperationshaveloweredbarrierswiththehelpofcapitalinvestment5Fewtechnicalentrybarriers:majorbeerbrandscanmakediversifiedbeerproductscateringforvarioustastesWiththesupportoflocalgovernment,eachregionhistoricallyhashaditslocalbeerbrand,anddrinkershavelargelygotusedtoitstasteandsohaveformedtheirconsumptionhabitsLocalBrewingandOperationsCross-RegionBrewingandOperationsSocial-drivenchoice:Beerismostlydrunkinrestaurantswhereguestsalldrinkonesinglebrandtogether.ThisphenomenonislikelytoresultinadominantlocalbrandthathasbrandawarenessandloyaltyadvantagesoverlatecomersUnlikethemoderntrade,restaurantsandtraditionalretailersareindependentbusinessesscatteredacrosslocalmarkets,solatecomershavetoinvesttime,moneyandlabortorolloutsalesBottlerecycling,wherebeermanufacturersrecyclebottlesfromdistributors,meanshighlogisticcosts,especiallyforcross-regionaltransportationCross-regionoperatorsusuallyhavetobuildtheirownbreweriesinnewareastoreducecosts

enoughtocompetewithlocalbrewersSincethereisadominantlocalbrandineachregion,itcantakealongtimefornon-localbrandstoenhancetheirbrandawarenessamongconsumersNationalnamessuchasTsingtaoandSnowtakelesstimetoattractnewcustomersbecauseofthehighbrandawarenesstheyenjoynationwideProductBrandChannelCostIngeneralitistechnicallyfeasiblefornon-localbrandstoreplicatelocaltastesMajorbrands,suchasSnowandTsingtao,mostlymakeuseofintensivemarketingandpromotionstoattractconsumers,ratherthanmakingbigchangestotheirmainstreamproductsKeyFactorsLeadingtoRegionalSegmentationChannel-drivensales:Thediningchannelaccountsfor45%oftotalbeervolumewhile40%isfromtraditionaltrade.Another5%comesfromnightbarsandclubs.TherangeofSKUsoldinthesechannelsislimited,thereforedominantbrandsareabletocontrolthechannelsandfurthersolidifytheirmarketsharesthroughrestaurantbuyoutsandminimumsalesrequirements.Limitedmanufacturingcoverage:Thetransportationcostofbeerarehighgiventheweightofbottles.Ourresearchfoundthatsalesareaslessthan50kmawayfromthebreweryhavesignificantcostadvantages,andareaslessthan300kmawayarealsocostefficient.

Thatiswhybuildingbreweryfacilitiesinlocalmarketsleadstosignificantcostadvantages.FinancialstrengthistheKSFinthebeerindustryasmassivecapitalinvestmentiscrucialtoovercomingregionaldivisions,especiallybreakingchannelbarriers6ProductBrandChannelCostExtensivecapitalinvestmentiscrucialtoovercomingthehurdleswhichcauseregionallydividedmarketsM&AisthemostefficientwaytoenteranewregiongiventhattheycanfullyuseexistingcapacityandchannelresourcesAsonlyafewpotentialM&Atargetsareleft,theacquisitioncosthasrisenbecauseofthefiercecompetitionbetweentopplayers.Thereforecapitalplaysanimportantroleinacquisition.Itisquitecostlytocontrolthediningchannel,themajorchannelforbeersales,asonlyafewSKUsaremadeavailableandbrandshavetostageverylarge-scaletradingpromotionstoachievebuyoutsorminimumvolumequotas.Asregardsotherdiversechannels,heavyinputswillhelpacceleratethepaceofdistributorexpansionMarketingknow-howisoflowerimportanceinbeersectorthaninotherFMCGsectorsgiventhesalesismainlydrivenbythechannelsratherthantheconsumersthemselves.Nosignificantdifferenceinvalue&standardproductandleadingplayerscaneasilycopytheflavorandpackaging.IntensivecapitalisrequiredChina’sbeermarkethasbecomemoreconsolidatedrecently(CR3=57%),withthreepotentialM&Atargetsleft,i.e.the4thlargestbrand“Yanjing”,andtwomid-sizedbrewers7StrongRegionsTotalM/SPotentialBuyerPossibilityAnalysisInnerMongolia(83%m/s)Guangxi(~80%m/s)Beijing(75-80%m/s)Henan

(~25%m/s):ThirdlargestplayerafterSnow(27%)andAB(27%)Guangdong(~20%m/s):secondlargestplayerafterTsingtao(38%);ABisthird(19%)10.8%3.3%2.4%SnowTsingtaoABCarlsbergABCarlsbergABCarlsbergFromourresearchwebelieveSnowhasthebestchanceofacquiringYanjingSnowisthemostactiveplayer,evenhavingapresenceatYanjing’sinvestor’sconf.meetingABandCarlsbergmightnotgetapprovalfromauthoritiesconsideringthegov.isunlikelytoallowforeigncapitaltoachieveadominantshareinthelocalsector.Tsingtaomightnotbeenthusiasticaboutthedealgiventheircautiousandstate-ownedmanagementstyleYanjing’sPresidentLiFucheng,whobelievesYanjingshouldstaystate-owned,recentlyretired,removingonepotentialbarriertoamergerItissaidthatKingstarhasbeennegotiatingwithABandCarlsbergregardingtheM&Adeal,butnodetailshaveyetbeendisclosedButABdoeshaveabetterchanceasithasbeennegotiatingwiththetargetforalongtimewhileCarlsberghasonlyjustconsidereditABalreadyholdsastakeofabout26%inPearlRiverHowever,GuangzhouZhujiangBreweryGroup,thecontrollingshareholderwhichowns52%ofPearlRiverBeer,is100%heldbyGuangzhouSASAC1SASACmighthavesomeconcernsaboutaninternationalbrandhavingfullcontroloverPearlRiverbeerNote1:SASACisshortforState-ownedAssetsSupervisionandAdministrationCommission.GreatestchancetoacquirethetargetLeastchancetoacquirethetargetIfSnowsucceededinacquiringYanjing,Snowwouldenjoyadistantleadingposition(35%m/s),andeasecompetitioninafewmoreregions8MarketShareChangesUndertheMostLikelyScenario(Top4)ImpactontheMarketOthersYanjingABTsingtaoSnowAfterM&A15%19%35%BeforeM&A15%19%24%AfterM&A18%19%24%BeforeM&A15%19%24%AfterM&A17%19%24%BeforeM&A15%19%24%SnowacquiringYanjing:Itwouldbecomethedistantleaderinthemarket,andeasecompetitioninregionslikeBeijingandGuangdongwhereitwillassumedominantsharethroughtheacquisition(reaching35%)ABacquiringKingstar:Itwouldbreaktheneck-and-neckcompetitionbetweenABandSnow,andhelpABestablishaleadingpositioninHenan(52%)ABacquiringPearlRiver:NowTsingtaoistheleadingplayerinGuangdong;thepotentialacquisitionwillbringABbacktoneck-and-neckcompetitionwithTsingtao(39%vs.Tsingtao’s38%),andcompetitionintheregionwillbemoreintenseRegardlessofM&A,webelievethatSnowcanalsofurtherincreaseitsmarketshare,benefitingfromitsfinancialstrengthandstrongexecutioninchannelcontrol9Fromtheaspectofchannelcoverage,Snowenjoysthehighestpenetration;Fromtheaspectofchannelcontrol,Snowisalsoinagoodposition,thankstoitsgreatcapitalstrengthSource:BDAinterviewsandanalysisBrandingMarketingAbilityR&DCapabilityChannelMgmt.AdvantageAnalysisStrongWeakIntermsofR&D,Snowisabletoproduceafullrangeofcategoriesandtastes,andthereisnocleardifferencefromcompetitorsAsregardsbrandimage,Snow’sbrandawarenessisinferiortoforeignbrands,butbrandloyaltyishighinitsdominantmarkets,givingSnowasignificantpricingpowerintheseareasSnowhasalsocarriedoutabundantadvertisingtopromoteitsYCTYbrandEvaluationof

MajorBrands’CapabilitiesFromalong-termperspective,weexpectSnow’srevenuetogrowtoRMB47BNin2019,givenastagnantmarket,sharegainandaMSDASPgrowth…10Unit:RMBBNUnit:MNtonsCAGR:2%Longterm(2019E)2014BeerMarketSize,2014-2019ESnow’sSalesVolume,2014-2019EBasedonourinterviewsandanalysis,anannualpriceinflationof5%takesboththepriceriseandproductmixupgradeeffectsintoaccount.+6pptsLongterm(2019E)30%201424%Snow’sMarketShare,2014-2019ECAGR:7%Longterm(2019E)2014Unit:MNtonsCAGR:5%Longterm(2019E)2,97320142,329Unit:RMB/tonSnow’sASP,2014-2019ECAGR:12%Longterm(2019E)2014Snow’sRevenue,2014-2019EXX…andwhenSnowbecomesthemarketleader,itimprovesprofitabilitybymeansofproductmixupgrades,pricehikesandreducedmarketingspending;thelong-termnetmarginislikelytogobeyond10%11MarketFeatureSolutionsCommentsbyIndustryExpertsProductMixUpgradePriceHikeMarketingSpendingReductionDominantMarkets(Snow>=60%)“Ifabeercompanycontrols60%+ofthemarket,itcanusemanymethodstoimprovemargin,specificallyincreasingprices,upgradingtheproductmixandcuttingdownmarketingcosts.”----IndustryExpertsMediumMarkets(Noplayer>=60%)“Snowplaysanactiveroleinconsumptionupgradesbyallocatingsalesandmarketingbudgetstodistributorsandadvertisingitsstandardbeerproducts.Butitsbargainingpowerisnotdominantenoughtoraiseprices.”----IndustryExpertsWeakMarkets(Competitor>=60%)“Cuttingpricesorreducingmarketingspendingarenotfeasibleinweakmarkets.Onthecontrary,Snowhastoinvestmoreinsellingtochannelsandmarketingtoimproveitsproductmixbypromotingstandardproductsasconsumptionupgradesbecomethemarkettrend.”----IndustryExpertsüüüûûüüûFeasibleSolutionInfeasibleSolutionûûüABCSnow’sLong-termEstimatedNetProfitMarginIllustrative10-11%NM(Long-Term)4%NM(2014)3%3%GMImprovementS&MExp.ReductionAsregards2015,ourchannelcheckfoundthatSnowcanachieve3.5%YoYgrowthinvolumeand4%YoYgrowthinASP,meaning7-8%YoYgrowthoftotalrevenue,generallyinlinewithwhatthemarketexpectsSnow’ssalesvolumegrewby3-4%YoYinJan.andFeb.,andindustryexpertsestimateasimilarratefor2015BDAexpects3.5%YoYgrowthinSnow’svolumein2014-15,inlinewithmarketestimates12+3.5%+1%Snow’ssalesvolume,2013–2015ESnow’spriceperton,2013–2015ESnow’sbeersectorrevenue,2013–2015E+8%+4%2015E20142013Unit:RMBBNUnit:RMB/tonUnit:MNtons+4%+3%2015E20142013AsforSnow’sprice,ourresearchledustobelievethatthegrowingpaceislikelykeepitsLSDlevel,inlinewithsectorASPgrowth.Asregardsprofitability,its2014netmargindippedfrom5.6%to4.3%,mostlybecauseoftheheaviermarketingofstandardbeerandgreaterdepreciationcostscausedbythepurchaseofKingway;its2015netmarginisexpectedtoriseby~1percentagepoint2014:Snow’snetmargindeclinedby~1.5percentagepointsbecause:Snowhassteppedupmarketinputssince2014topromoteitsstandardproductssuchasYCTYTheM&AdealwithKingway,finalizedin2014,increaseddepreciation2015:BDAexpectsSnow’snetmargintoincreaseby~1pointbecause:Productpricehikesandtradingupwillresume,improvingSnow’sgrossmarginTherearenomajorexpansionplansfor2015andthelevelofdepreciationwillnotchangemuch13Snow’sBeerSector:GM&NM,2011-2015EGM38%4%5%6%38%6%NM6%Allinall,ourmatrixanalysisledustobelievethatSnow’sGMwillrisebythreepercentagepoints,from38%to41%,whenproductmixtradingupiscompleted14Snow’smarketstatusMarketStructure(standardbeer’sshare)AnhuiSichuanHubeiJiangsuHenanOthersLiaoningGuangdongShandongBeijingGuizhouHeilongjiangZhejiangJilinTianjin(45%,40%)

QuadrantVol.as%oftotalLong-termGMFirst16%44%Second58%42%Third25%38%Forth1%45%GM(2019E)41%GM(2014)38%+3pptsSnow’sGMImprovementfromMixTradingUp,2014-2019EWebelieveSnow’sabilitytoincreasethecontributionofstandardbeerdependson1)Snow’smarketposition;2)thelocalregion’seconomicconditions.ThemoredominantSnowis,theeasieritcanexpanditsnetworktoenableYCTYsalesThelargerthemediumbeersegmentis,theeasierSnowcanexpanditsstandardbeersales.Weusethevolumeshareofstandardbeerinthemarketasthehorizontalaxis:Weappliedalong-termproductmixstructureonceconsumptionupgradingisalmostcompleted,andtestedtheGMimprovementcausedbyitineachtypeofmarket.WefoundthatthemixtradingupwilladdthreepercentagepointstoitsoverallGM.15TableofContentsExecutiveSummarySnapshotofSnowBeerChinaBeerMarketDynamicsSnowBeerCompetitiveEdgeSnowBeer’sGrowthPotentialOtherQuestions…andhasbeenthe“Star”businessinCREOfallCREbusinesssegments,beercontributed20%oftotalrevenueand65%ofEBITDA,andhasbeenthe“Star”business16FoodBeverageBeerRetailSectorGrowth

(2014)RelativeM/S(2014)BusinessLineAnalysis(BCGMatrix)Beercontributed20%ofCRE’srevenueand65%ofEBITDA…Source:Companyinformation,BDAanalysis2014RevenueBreakdown2014EBITDABreakdownStarCashCowLeanDogQuestionMarkUnit:RMBMNBeverageRetail10%20142014133,7746%6,709Beer19%64%FoodInApril2015,CREproposedtodisposeitsnon-beerbusinessbacktoparentcompanyatHKD28BN,afterwhichCREwillbecomeapureplayinthesector17InApr.15,CREproposedtodisposenon-beerbusinesstoparentcompanyatHKD28BN,andbecomeapureplayinbeersectorCREplanstodisposeitsnon-beerbusinessestoitsparentcompanyCRHforatotalconsiderationofHKD28BNinApr.15DealStructure:CRHmadeapartialoffertoacquire10%ofCRElistcosharesatHKD12.7/shareandCREwillpayaspecialdividendofHKD11.5/share,totalingHKD24.2/shareTimeline:CREexpectstoobtainindependentshareholderapprovalinJune2015andcompletethedealin3Q15Themarketisoptimisticabouttherestructure,andbelievethatCREwillfocusonbeerbusinesstounlockitsvalueSource:Companyinformation,BDAanalysisCurrentStatusPostPossibleDisposalPostCompletionofPartialOfferCRHPublicCRESABMillerCRSnowBeverageFoodRetailCRHPublicCRESABMillerCRSnowSpecialDividend(HK$11.5pershare)CRHPublicCRESABMillerCRSnow52%48%49%51%80%60%100%52%48%49%51%62%38%49%51%CRE’sSnowcoversfullproductline,andhasbeentheNo.1inbeersectorsince200618Source:BDAinterviewsandanalysisProductRetail

PriceLevel1ValueBeerStandardBeerPremium

BeerGanpi(雪花干啤)Qingshuang(雪花清爽)IcedCool(雪花冰酷)YCTY(勇闯天涯)Lianpu(雪花脸谱)Jingzun(晶尊)Draft(雪花纯生)<RMB4RMB6-8>RMB10Note1.Pricelevelreferstosellingpriceofproductsincateringchannelswithnormalpacking.PackagingBottle500mlCan500ml330mlBottle500ml330mlCan500ml330mlBottle500ml330mlCan500ml330mlSnowBeerwasintroducedin1964whileChinaResourcesSnowBrewerieswasestablishedin1994SnowcaughtupwithTsingtaoastheNo.1beerbrandin2006Snowhasachievedthelargestscalewith98manufacturingfacilitiesandancapacityof20MNtonsasof2014Unit:RMB/tonSnow’sbeerbusinesswasworthRMB27BNin2014;ItgrewrapidlyataCAGRof10%during2009-2014;volumegrowthhasbeenthemajordrivers19Unit:RMBMN2011201320102012+10%20092014RevenueofSnowBeerBusiness,2009-20141PricepertonofSnowBeerBusiness,2009-2014Source:Companyinformation,BDAanalysisSalesvolumeofSnowBeerBusiness,2009-201420092010+3%2014201320122011+7%201420132012201120102009Unit:MNtonsNote:1.TherevenuewasbasedonARdatastatedinHKD,andwastranslatedwithitscurrent-yearexchangerate.M&Adealisthemajordriverforcapacitygrowth,regionalleadingbrandslikeKingwaywasalsoinvolvedHistoricalpathofbreweryindustryshowstop4nationalbrandsmergingregionalbrands’capacityanddistributionnetworksisthekeymethodforrapidexpansionregionbyregionwhileSnowseemsmostaggressiveIn2014,SnowfinishedtheprocessofacquiringKingway,andits1.45MNtoncapacityandmaturedistributionnetworksinShenzhenimprovedSnow’smarketshareinGuangdonginreturnSpecifically,itssignificantgrowthofvolumehasbeenbackedupbyfrequentmassM&Adeals,whichcontributed59%ofitstotalvolumegrowthduring2009-14whileorganicgrowthcontributed41%20No.ofSnow’sM&ADeals,2009-2014Source:Companyinformation,BDAanalysisSalesvolumeofSnowBeer,2009&14CAGR:+7%20142009Unit:MNtonsM&AOrganicGrowthNetAddsinVol.3.559%41%Snow’sNetAddsinVol.2009-2014Unit:MNtons2.1SalesVol.ofAcquiredCompanies,2009-2014Unit:MNtonsUnit:#…andasforASP,pricehikeandtrade-upjointlyledtoitsgrowth21YCTYandDraftwerereleasedtoimprovemarketshareinstandardandpremiummarkets,whichupgradedSnow’sproductsmixValueStandardPremium201480.4%14.2%5.5%200986.1%11.5%2.4%Source:Euromonitor,BDAanalysisProductsmixofSnow,

2009&14CAGR:+3%20142,30720091,984PricepertonofSnow,2009&14Unit:RMBSnowenjoyedsuperiorpricehikethancostriseindominantmarkets20092014CAGR:+2%Pricehikeperbottle1ofSnow,2009&14Unit:RMBNote:1.Pricehikeherereferstopriceriseofsameproducts,anddoesn’tincludeanyimpactfromproductsmixupgrade.TheweightofSnow’svolumeconsistsofbothbeerandpackages.AsSnowgainedmoreshareandtooktheleadingposition,itsstrategicfocusshiftedfrommarketshareexpansiontowardsprofitimprovement22PositioningStrategicFocusChannelOperationdataMarketsharegrowthorientedProfitgrowthorientedBrokeintothemarketwithitsvalueproducts(PriceperbottlelessthanRMB4)Followedupwithstandardproducts(YCTY)andpremiumproducts(SnowDraft)forproductsupgradeTookmarketshareimprovementaskeyKPIFrequentM&AdealsPaidmoreattentiononprofitimprovementindominantmarketsSlackenedthepaceofM&AdealsMarketexpense:majorityinchannelstograbandmaintainqualifieddistributorsandretailerswhichresultedinlowprofitmarginDistributionsystem:mostlywithKAmodel(firstdistributor&seconddistributor&retailer)foraggressiveexpansionandcomparablyweakcontrolonchannelsMarketexpense:switchexpenseinchannelstoconsumerendindominantmarkets(morethan70%marketshare)whichresultedinsignificantprofitmarginimprovementDistributionsystem:switchedfromKAmodeltoaflatterdistributionmodel(distributor-to-retailer)formoredirectcontrolonchannels2001-20051CAGRSalesVolume

28%NetProfit22%2006-2014CAGRSalesVolume12%NetProfit27%EarlyexpansionGainingleadingpositionNote:1.SnowcaughtupwithTsingtaoin2006asthemarketleaderin2006,andthereforewetook2006asthestrategyswitchingpoint.Source:Companyinformation,BDAanalysisTogainaclearvisionofCRE’sbeerbusiness,ourresearchfocusonthemarketgrowth,marketconsolidation,Snow’smarketshareandprofitabilityKeyQuestionsToAnswer23Source:BDAinterviewsandanalysisIsCRESnowabletoimprovemarginswhenscaledup?Isbeerbrewerystillanattractivesector?Whatisthebeermarket’slong-termgrowthpotential?Howmuchcanthemarketfurtherconsolidates?Willfurtherconsolidationbringnoticeableeconomyofscale?DoesCRESnowhaveaclearcompetitiveedge?DoCRESnowhascompetitiveedgeinthecompetition?Whatisitslong-termgrowthpotential?ShortTermIsCRESnowrightonthetrackin2015?LongTerm24TableofContentsExecutiveSummarySnapshotofSnowBeerChinaBeerMarketDynamicsSizeandGrowthoftheBeerMarketSnowBeerCompetitiveEdgeSnowBeer’sGrowthPotentialOtherQuestions25China’sbeermarketwasworthRMB486BNin2014;Itgrewrapidlybetween2005and2007butin2008itbegantoslowdown,andsincethenthekeygrowthdriverchangedfromvolumetoASPChina’sBeerMarket:YoYGrowth,2006-2014+16%+10%201420132012201120102009200820072006SizeofChina’sBeerMarket,2006-20141Unit:RMB

BNASPVolumeValue-1%9%10%5%6%11%6%8%1%14%15%Source:Euromonitor,BDAanalysisNote:1.Themarketsizeherereferstosell-throughvalue,whichcannotbeuseddirectlyforcalculatingmarketshare.Furthermore,theEuromonitordatahereisinconsistentwithotherindustrydatasource.Forexample,accordingtoCEICdata,theCAGRofpricehikeduringthisperiodisonly3-4%,whichismoreaccuratebasedonourobservation,andisastrongerreferencetoourprojection.IllustrativeIntermsofsegmentation,beerconsumptionasaproportionoftheoverallalcoholmarkethasremainedstable,fallingslightlyfrom2005to2014,mostlybecauseofwine’sslightincreaseinshare26BeerWineChineseliquorSpiritsPremixes20146184%7%0%20136184%6%0%20074586%5%0%20064086%5%0%20055684%6%0%20117%0%0%2010537%86%7%84%85%0%58200950201286%6%0%0%20087%4786%36ChineseAlcoholConsumptionStructure,2005-2014Unit:MNtonsSource:Euromonitor,BDAanalysisLookingforward,onthebasisofexperienceindevelopedmarkets,webelievebeer’sshareinChina’salcoholmarketwillstayflatordeclineataveryslowpace277%3%90%7%3%0%201090%7%3%Premixes200990%7%3%7%89%Beer0%WineSpirits2011201489%3%8%0%201389%20120%0%10%2%201082%10%2%83%20092%9%BeerWineSpiritsPremixes201481%10%3%201380%10%3%201281%10%2%201182%HongKong’sAlcoholStructure,2009-2014USAAlcoholStructure,2009-2014201317%4%201278%17%1%201178%17%1%201078%18%0%200978%17%0%4%2014PremixesSpiritsWineBeer17%78%78%201177%9%2%2010BeerWine76%SpiritsPremixes20149%2%200977%7%3%78%9%2013201277%9%76%9%2%Germany’sAlcoholStructure,2009-2014Russia’sAlcoholStructure,2009-2014Source:Euromonitor,BDAanalysisIfwedelveintothegrowthpotentialofthebeersectoritself,aninternationalanalysisshowsthatASPmighthavegreaterpotentialinChinathanvolume=1.6xGR3.0xAU2.1xUS2.0xUK2.0xRU1.7xJP1.3xKR1.1xFR0.8xIT0.7xCN1.0x2014PerCapitaConsumptionbyVolume3.7xUK5.1xAU5.1xKR4.3xIT4.3xJP4.2xFR3.6xUS2.7xGR2.6xRU1.8xCN1.0x2014AverageSellingPriceXSource:Euromonitor,IMF,BDAinterviewsandanalysis2014BeerConsumptionperCapitabyValue5.9xAU10.7xUK10.1xGR7.8xJP5.5xKR4.8xRU3.1xIT2.9xCN1.0x5.5xUS2.8xFRASP:benchmarkedwithdevelopedcountries,China’sASPgrowthwillcomefrompricehikesparticularlyonmid-andlow-endproducts…29PriceBeerPriceComparison,2014USD/LiterPriceMultiplesRelativetoChina,2014Premium-1.9x1.5x0.7x0.9x0.8x1.3x1.7x1.3xStandard-2.0x3.2x0.9x1.1x1.3x1.4x2.4x1.8xValue-3.7x3.8x1.6x3.0x0.7x1.2x2.1x2.3xOverall-4.3x4.2x1.8x2.6x2.5x4.3x5.1x3.5xItalyGermanyUSAJapanRussiaAverageHongKongChinaUKValueStandardPremiumSource:Euromonitor,BDAanalysis…inbothon-tradeandoff-tradechannels…30Source:EuromonitordataandBDAanalysisHongKongChinaJapanAverageUKItalyN/AGermanyN/AUSARussiaValueStandardPremiumNote:1.Theon-tradechannelconsistsofbars,clubs,cafésandrestaurants.2.Theoff-tradechannelismadeupbyKAsandretailstores,etc.PriceItalyGermanyUSARussiaJapanHongKongChinaUKAveragePremiumStandardValueUSD/LiterUSD/L