Anheuser-Busch InBev is the world’s largest brewery, which depends heavily on its Americas business. According to our estimates, nearly 90% of the company’s valuation comes from the Americas, while Europe and Asia-Pacific form only 6% and 5% of the net valuation respectively. The low valuation for AB InBev’s Europe business unit is mainly because of the stagnating beer markets in the region and modest growth expectations for the future due to already high beer penetration levels. Volumes in the U.S., the largest market for Anheuser, and which constituted approximately one-fourth of the net volumes through Q3, are also declining owing to falling beer consumption rates and stiff competition from smaller local craft breweries and imported beers. Amid bleak growth opportunities in the beer markets in the developed world, AB InBev has looked to draw growth from South America and Asia-Pacific. China forms about 95% of AB InBev’s Asia-Pacific volumes, and has been the growth driver for the company in its Asia business unit. The beer market in China is the largest in the world in terms of volumes and is still growing, unlike the trends seen in the U.S. and some European markets. In addition to potential volume growth, AB InBev also has the opportunity to grow its revenue per unit case in China, where the consumption of value beers is significantly higher than that of premium branded beers at present.
We have a $116 price estimate for Anheuser-Busch InBev, which is roughly 2% above the current market price.
China Beer Market- Largest By Volume But NOT Revenue
China’s beer market overtook the U.S. in terms of volume sales in 2002, and is almost twice the size presently. However, the market was still 21% smaller than the U.S. beer market in 2013 in terms of value. This is mainly because the penetration of local low-cost beers and value brands is higher in China as compared to the U.S. According to Euromonitor, while economy lager formed only 25% of the net volumes in the U.S. in 2013, this segment formed a massive 82% of the net volumes in China. High popularity of cheaper beer has kept revenue growth for the Chinese beer market in check, but with growing disposable incomes and new beer launches in the premium segment by widely available and large breweries, consumers could be persuaded to trade-up from the value beer brands. The World Bank expects China’s GDP to grow by 7.1% and 7% in 2015 and 2016 respectively, after an estimated 7.4% growth last year. Although slower than previous years’ levels, 7% and above annual economic growth in China in the next couple of years should bolster per capita income growth in the country, and in turn could boost premium beer sales. The value of the Chinese beer market is expected to rise by 45% by 2017, from 2013 levels. In doing so, China will also overtake the U.S. in terms of net beer revenues.
M&A And Premium Beer Brands Hold Key For AB InBev
Five breweries in China, namely the China Resources Enterprise, Tsingtao Brewery, Anheuser-Busch InBev, Beijing Yanjing Brewery, and Carlsberg, hold a combined volume share of 68% in the country as of 2013, which rose from 55% in 2008. Unlike in the U.S., where microbreweries pose a threat to big corporations due to novelty and innovation, the Chinese beer industry has been consolidating, owing to higher labor and raw material costs that put pressure on regional brands. Mergers and acquisitions is what AB InBev is also looking to do to extract growth in China. Acquiring local and popular beers with an already established distribution network, especially in Tier 2 and 3 cities, helps AB InBev augment its sales, leveraging the expertise, popularity, and reach of local breweries.
Anheuser bought Harbin Brewery, the maker of Harbin beer and Fujian Sedrin Brewery, the maker of Sedrin beer, in 2004 and 2006 respectively. Both Harbin and Sedrin are the focus beers for the company in China and together with Budweiser, comprise the brewer’s core focus group in the country, which accounts for approximately 75% of the company’s portfolio in the country. In April 2013, Anheuser acquired four breweries in China, with net beer capacity of roughly 9 million hectoliters, for $439 million, and also acquired Siping Ginsber last year. While organic growth for AB InBev in China stood at only 1.7% year-over-year in the first nine months of 2014, volume growth including M&A activities was approximately 9% during this period. Anheuser might look to acquire more regional brands to boost its portfolio and penetrate deeper into China. The company improved its market share in the country by 70 basis points to 15.7% through September, and if we include the recent mergers and acquisitions, the share becomes around 16.5%.
In addition to acquisitions, AB InBev will look for organic growth in China, especially in the form of growth in revenue per unit case. Given the company’s premium positioning and growing consumer purchasing power in the country, demand for higher-priced beers such as Budweiser and Harbin Ice could grow going forward. The brewer also introduced its global beer brand Corona in China in August of last year, to further strengthen its premium portfolio in the country. AB InBev will bank on organic growth in the form of higher premium beer sales and could also look to acquire more regional beer brands, in order to tap growth from the world’s largest beer market.
