Heineken Puts China On Tap

Summary

• Heineken purchases a $3.1 billion stake in the world's largest beer distributor, China Resources Beer Holdings Co (CRB).
• In 2017, Heineken took up 1% of beer volume in China compared to rival Anheuser-Busch's 16%.
• Premiumization is a growing market trend in China, as the middle class expands and expects more luxury goods.

Heineken N.V. (EPA: HEIA) is trading up today following news of the beer-maker’s $3.1 billion stake in China’s top brewer: China Resources Beer Holdings Co. This is a huge move as CR Beer is the undisputed market leader in China with a strong portfolio of national beers.

In 2017, Heineken was responsible for less than 1% of total beer produced in China. This will give the Dutch company about a 40% stake in China’s largest brewer. This move is almost stunning as it comes on the tailwinds of a $60 billion tariff on U.S. goods by China. Obviously, Heineken is a global company and this move solidifies their plans to plant their footprint in the world’s largest beer market. Per Euromonitor, China is the world’s biggest beer market with $83.3 billion last year in world sales.

Source: New York Times

While Heineken was responsible for less than 1% of beer sales in China in 2017, rival competitor Anheuser-Busch InBev (NYSE: BUD) was responsible for 16%. This acquired stake of China Resources will help Heineken catch up with its competitor and cut into that enormous difference in market capitalization. 2 years ago, Anheuser-Busch struck a deal with China Resources to sell SABMiller’s stake in its Chinese beer joint venture – a venture that SABMiller and China Resources had been a part of since 1994. Then, of course, Anheuser-Busch would buy SABMiller and have an excellent working relation with the large Chinese beer provider.Now, Heineken and CRB are teaming up to challenge the presence of AB’s brand, Budweiser, within the country.

In a statement, Heineken said, “Profitability of the Chinese beer market is expected to improve significantly, driven by premiumization, demand for international beer brands, and cost optimization.”

Premiumization has been no more evident than in the beer industry. A more localized example of this fact might be in the ubiquity of expensive craft brewery’s and their growing national prominence. CR Beer has been immensely successful in becoming China’s market leader with their Snow brand, but would benefit greatly from an influx in international premium brands. Heineken’s brand-building abilities with a robust international brand portfolio can help advance CR Beer’s premiumization strategy in the long run. Heineken’s global presence can also be used to globalize the Snow beer brand that has mostly found its success within China’s borders.

Heineken and its investors are excited about this move because it seems like they are buying low into a successful company that has room to grow. Historically, Heineken has struggled to sell their products in China but by partnering with the big fish of Asia, the profits will be endless.

Throughout the next four years, the total market capitalization of the beer industry is expected to expand by 21%. While CRB lacks a premium brand and international portfolio, Heineken lacks the Asian distribution reach that CRB has a stronghold on. The Chinese market for beer has shrunk 7% in volume since 2012 although the value has shifted inversely 42%. The middle class in China are rising and demanding more expensive imported goods – and this effect is being felt in the beer industry.

This was a very smart move by Heineken to strengthen their presence across the Pacific Ocean. While many American companies are growing weary of China’s policies and American tariffs, Heineken exemplified its international expansion with this latest move.

Financials

Source: TheHeinekenCompany

On July 30^th, Heineken released their half year financial results for investors. Before this stake was acquired in CRB, Heineken volume was up +7.5%, organic revenue was up +5.6%, and diluted EPS went from €1.82 in 2017 to €1.89. The Heineken brand growing 7.5% is perhaps the most impressive statistic that management can boast. In the second half of the year, management plans to invest behind existing and upcoming brands, as well as accelerate their business exploits in Brazil.

Until now, the Dutch brewer has had such a minimal presence in the largest market for its products: China. Now, it almost has exclusive distribution access to CRB’s products and networks. There is a lot of ground to make up in terms of market cap in China, but Heineken has chosen a worthy business partner. Go long on Heineken as premiumization extends its presence in China and the Dutch company reaps the benefits.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.