October 11, 2016 ACTION Buy China Resources (0291.HK)

Return Potential: 20% Equity Research Leading China beer play, share and margin upside; reinstate at Buy

Source of opportunity Investment Profile We remove the Rating Suspended designation from Low High (CRB) following the conclusion of the ABI-SAB deal. Despite CRB’s 35% rally Growth Growth Returns * Returns * since March (vs. HSI’s 24%), we see further upside on 1) stronger market Multiple Multiple position in China as CRB looks well positioned to gain share by 200bps Volatility Volatility given its strategy to penetrate the mid end; 2) margin upside from mix Percentile 20th 40th 60th 80th 100th upgrade in dominant regions and contained mainstream competition; and China Resources Beer (0291.HK) 3) sufficient capital for M&A – we estimate CRB has capital of US$6.8bn Asia Pacific Consumer Peer Group Average for potential M&A to support its premium strategy or materially expand * Returns = Return on Capital For a complete description of the investment profile measures please refer to the domestic share. We thus assign a Buy rating with a 12-m TP of HK$20.5. disclosure section of this document.

Key data Current Catalyst Price (HK$) 17.08 Post CRB’s purchase of SAB’s 49% stake related to ABI’s acquisition 12 month price target (HK$) 20.50 Market cap (HK$ mn / US$ mn) 55,410.5 / 7,142.4 of SAB, we believe the competitive landscape is largely unchanged. Even Foreign ownership (%) -- so, we still see CRB as an attractive China beer play on: 1) above market volume/ASP growth: We expect CRB to deliver 3.5% ASP and 4% volume 12/15 12/16E 12/17E 12/18E EPS (Rmb) New 0.28 0.22 0.60 0.70 CAGR in 2016E-18E. CRB is now focusing on both premiumization and EPS revision (%)NMNMNMNM EPS growth (%) 15.8 (22.1) 178.4 16.3 gaining market share vs. more volume-driven before. We see the company EPS (dil) (Rmb) New 0.28 0.22 0.60 0.70 as well positioned to roll out market initiatives to gain mid-end share. This P/E (X) 31.9 68.0 24.4 21.0 P/B (X) 2.1 2.5 2.3 2.2 compares to Tsingtao directly competing with ABI in the premium segment. EV/EBITDA (X) 9.4 12.5 11.2 10.0 Dividend yield (%) 112.7 1.3 1.6 2.1 2) 100bps OPM expansion in 2016E-18E: We expect continued product ROE (%) 2.8 4.9 9.9 10.6 mix upgrades, especially in seven provinces where CRB dominates, to CROCI (%) 6.0 8.1 8.2 8.5 further drive up margins. We also see contained mainstream competition as Price performance chart regional players control A&P spending. 3) Peers’ 3Q result in end-Oct: We 19 11,500 expect a positive read-across from peers ABI and Tsingtao’s result on 18 11,000 recovering industry sales and better margins. We expect CRB to see 7% 17 10,500 16 10,000 sales and 14% OP CAGR in 2016E-18E and ROE to improve by 100bp. 15 9,500 14 9,000 Valuation 13 8,500 12 8,000 We value CRB on 13X avg. 2017E-18E EV/EBITDA, higher than Tsingtao’s 11 7,500 12X and global peers’ 10-13X given its strong earnings growth potential. Oct-15 Jan-16 Apr-16 Jul-16 Key risks China Resources Beer (L) Hang Seng China Ent. Index (R) Weaker-than-expected ASP growth, intense competition, over-priced M&A. INVESTMENT LIST MEMBERSHIP Share price performance (%) 3 month 6 month 12 month Absolute 8.3 27.1 34.6 Asia Pacific Buy List Rel. to Hang Seng China Ent. Index (3.8) 14.2 42.9

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 10/11/2016 close.

Coverage View: Neutral

Lincoln Kong, CFA +852-2978-6603 [email protected] Goldman Sachs (Asia) L.L.C. Goldman Sachs does and seeks to do business with companies Joshua Lu covered in its research reports. As a result, investors should be +852-2978-1024 [email protected] Goldman Sachs (Asia) L.L.C. aware that the firm may have a conflict of interest that could Kevin Li affect the objectivity of this report. Investors should consider +65-6654-5190 [email protected] Goldman Sachs (Singapore) Pte this report as only a single factor in making their investment

decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research October 11, 2016 China Resources Beer (0291.HK)

China Resources Beer: Summary Financials

Profit model (Rmb mn) 12/15 12/16E 12/17E 12/18E Balance sheet (Rmb mn) 12/15 12/16E 12/17E 12/18E

Total revenue 28,309.8 28,764.4 30,639.6 33,051.2 Cash & equivalents 2,802.0 3,691.9 5,150.3 6,802.9 Cost of goods sold (19,513.8) (19,642.0) (20,722.6) (22,044.1) Accounts receivable 1,531.0 1,476.8 1,573.1 1,696.9 SG&A (6,962.6) (6,786.8) (7,305.8) (7,996.5) Inventory 6,488.0 6,068.2 6,288.5 6,689.5 R&D ------Other current assets 215.0 215.0 215.0 215.0 Other operating profit/(expense) 0.0 0.0 0.0 0.0 Total current assets 11,036.0 11,451.9 13,226.8 15,404.3 EBITDA 3,584.6 4,097.4 4,416.7 4,815.4 Net PP&E 21,389.9 22,051.7 22,469.8 22,738.6 Depreciation & amortization (1,751.2) (1,761.8) (1,805.4) (1,804.8) Net intangibles 8,302.4 8,705.1 8,681.5 8,657.9 EBIT 1,833.3 2,335.6 2,611.2 3,010.6 Total investments 0.0 0.0 0.0 0.0 Interest income 163.4 63.0 86.8 123.3 Other long-term assets 2,039.7 2,040.6 2,040.6 2,040.6 Interest expense (230.9) (125.0) (134.0) (132.4) Total assets 42,768.0 44,249.3 46,418.7 48,841.4 Income/(loss) from uncons. subs. 0.0 0.0 0.0 0.0 Others (21.1) 0.0 0.0 0.0 Accounts payable 16,778.0 17,088.7 17,744.9 18,574.5 Pretax profits 1,744.7 2,273.7 2,564.0 3,001.4 Short-term debt 1,778.0 1,725.2 1,725.2 1,725.2 Income tax (399.2) (536.0) (604.4) (722.6) Other current liabilities 194.0 194.0 194.0 194.0 Minorities (669.9) (1,033.9) 0.0 0.0 Total current liabilities 18,750.0 19,007.9 19,664.1 20,493.7 Long-term debt 3,839.0 5,425.2 5,225.2 5,225.2 Net income pre-preferred dividends 675.6 703.7 1,959.6 2,278.9 Other long-term liabilities 859.0 859.0 859.0 859.0 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 4,698.0 6,284.2 6,084.2 6,084.2 Net income (pre-exceptionals) 675.6 703.7 1,959.6 2,278.9 Total liabilities 23,448.0 25,292.1 25,748.3 26,577.9 Post-tax exceptionals 0.0 0.0 0.0 0.0 Net income 675.6 703.7 1,959.6 2,278.9 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 10,056.0 18,957.2 20,670.4 22,263.5 EPS (basic, pre-except) (Rmb) 0.28 0.22 0.60 0.70 Minority interest 9,264.0 0.0 0.0 0.0 EPS (basic, post-except) (Rmb) 0.28 0.22 0.60 0.70 EPS (diluted, post-except) (Rmb) 0.28 0.22 0.60 0.70 Total liabilities & equity 42,768.0 44,249.3 46,418.7 48,841.4 DPS (Rmb) 10.00 0.19 0.24 0.32 Dividend payout ratio (%) 3,592.3 86.4 40.0 45.0 BVPS (Rmb) 4.14 5.84 6.37 6.86 Free cash flow yield (%) (0.2) 3.9 4.0 4.9

Growth & margins (%) 12/15 12/16E 12/17E 12/18E Ratios 12/15 12/16E 12/17E 12/18E Sales growth 3.4 1.6 6.5 7.9 CROCI (%) 6.0 8.1 8.2 8.5 EBITDA growth 3.8 14.3 7.8 9.0 ROE (%) 2.8 4.9 9.9 10.6 EBIT growth 5.0 27.4 11.8 15.3 ROA (%) 0.7 1.6 4.3 4.8 Net income growth 16.6 4.2 178.4 16.3 ROACE (%) 3.3 8.0 8.9 10.2 EPS growth 15.8 (22.1) 178.4 16.3 Inventory days 266.2 116.7 108.8 107.4 Gross margin 31.1 31.7 32.4 33.3 Receivables days 94.6 19.1 18.2 18.1 EBITDA margin 12.7 14.2 14.4 14.6 Payable days 723.0 314.7 306.8 300.7 EBIT margin 6.5 8.1 8.5 9.1 Net debt/equity (%) 14.6 18.2 8.7 0.7 Interest cover - EBIT (X) 27.2 37.7 55.3 328.2

Cash flow statement (Rmb mn) 12/15 12/16E 12/17E 12/18E Valuation 12/15 12/16E 12/17E 12/18E Net income pre-preferred dividends 675.6 703.7 1,959.6 2,278.9 D&A add-back 1,751.2 1,761.8 1,805.4 1,804.8 P/E (analyst) (X) 31.9 68.0 24.4 21.0 Minorities interests add-back 669.9 1,033.9 0.0 0.0 P/B (X) 2.1 2.5 2.3 2.2 Net (inc)/dec working capital 723.6 784.7 339.7 304.8 EV/EBITDA (X) 9.4 12.5 11.2 10.0 Other operating cash flow 926.0 0.0 0.0 0.0 EV/GCI (X) 0.8 1.1 1.0 1.0 Cash flow from operations 4,746.3 4,284.1 4,104.7 4,388.5 Dividend yield (%) 112.7 1.3 1.6 2.1

Capital expenditures (4,816.3) (2,400.0) (2,200.0) (2,050.0) Acquisitions 0.0 (10,724.1) 0.0 0.0 Divestitures 1,929.3 0.0 0.0 0.0 Others 769.1 0.0 0.0 0.0 Cash flow from investments (2,117.9) (13,124.1) (2,200.0) (2,050.0)

Dividends paid (common & pref) (13,911.4) 0.0 (246.3) (685.8) Inc/(dec) in debt (3,304.9) 1,533.4 (200.0) 0.0 Common stock issuance (repurchase) 0.0 8,781.5 (187.2) (229.3) Other financing cash flows 1,003.3 (584.9) 187.2 229.3 Cash flow from financing (16,213.0) 9,730.0 (446.3) (685.8) Total cash flow (13,584.5) 889.9 1,458.4 1,652.7 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.

Analyst Contributors

Lincoln Kong, CFA [email protected]

Joshua Lu [email protected]

Kevin Li [email protected]

Goldman Sachs Global Investment Research 2 October 11, 2016 China Resources Beer (0291.HK)

Thesis in six charts: Share gain, ASP increase, stronger earnings

Exhibit 1: CRB now holds 100% of CR Snow; ownership Exhibit 2: We expect CRB to further gain share over next of listco has not changed three years vs. Tsingtao losing share Pre and post CRB’s acquisition of SAB’s Snow stake China beer market share

Pre-Deal Post- Deal Other Carlsberg Yanjing Tsingtao ABI CR Beer

CR Public CR Public 100% Holdings Investors Holdings Investors 10% 90% 5% 25% CR Beer, 27% 80% 13% 52% 48% 52% 48% 70% 9% 19% 0% ABI, 21% 60% CRB CRB SAB Miller 50% (0291.HK) (0291.HK) 18% Tsingtao, 17% 40% 10% 30% 63% Yanjing, 8% 51% 49% 100% 5% 20% Carlsberg, 5%

10% 24% Other, 21% CR Snow CR Snow 0% 2003 2015 2019E

Source: Company data Source: Company data, Wind, Goldman Sachs Global Investment Research

Exhibit 3: We expect premiumization to drive strong ASP Exhibit 4: Larger share, higher margin – we est. CRB’s 7 growth for CRB, shrinking the gap vs. Tsingtao dominant provinces to account for >60% of profit Sales per litre for ABI, Tsingtao and CRB CRB’s dominant, leading and competitive region comparison

Sales/litre Profit contribution to Group (2016E, LHS) OPM (RHS) Rmb/Litre 70% 15% 16% CRB Tsingtao ABI (China) 3.8 14% 3.61 60% 3.6 12% 3.36 50% 3.4 10% 3.15 10% 3.2 3.35 40% 3.25 3.30 3.19 3.21 3.0 3.12 8% 30% 63% 2.8 6% 20% 2.6 3% 4% 2.61 2.4 2.52 2.42 2.45 10% 19% 18% 2% 2.2 2.31 2.23 2.0 0% 0% Dominant Leading Competitive 2013 2014 2015 2016E 2017E 2018E *See definition of dominant and leading on page 10.

Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research

Exhibit 5: We see 100bps margin expansion over 2016E- Exhibit 6: …driving 15% average earnings growth and 18E… strong RMB2bn FCF over next two years CRB OPM NPAT growth yoy and FCF

Operating profit margin FCF (RMB mn, RHS) NPAT yoy growth 9.5% 9.1% 9.0% 30% 29% 3,000 9.0% 8.4% 8.5% 8.1% 16% 8.5% 8.1% 20% 15% 14% 13% 2,000 7.8% 8.0% 2,339 7.4% 10% 1,884 1,905 1,000 7.5%

7.0% 6.5% 0% 0 6.4% 6.4% -70 6.5% -10% -1,000 6.0% -2,967 5.5% -20% -2,000 -19% 5.0% -30% -3,000 2013 2014 2015 2016E 2017E 2018E

Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research 3 October 11, 2016 China Resources Beer (0291.HK)

Overview: CRB – Leading China beer play

Refer to Global We remove the Rating Suspended designation on China Resources Beer (CRB) and assign Handbook: A glass half a Buy rating with our 12-month target price of HK$20.5 implying 20% upside. full as consolidation benefits offset weaker To recap, CRB is the largest beer producer in China with 25% market share as of 2015. Post volumes and AB Inbev Anheuser-Busch InBev‘s (ABI) acquisition of SABMiller (SAB), CRB bought a 49% stake in (ABI.BR): Faster, higher, CR Snow from SAB and now wholly owns CR Snow (in our view, SAB was largely a stronger: Reinstating passive investor with no other investments in China before this – in other words, with SAB rating as Buy, Oct 10, now part of ABI, competition remains largely unchanged). 2016 for a detailed overview of the global Our thesis before the ABI-SAB transaction was that CRB will see strong margin expansion beer market and ASP growth from potential consolidation. While consolidation in the China beer market is yet to happen, we still believe CRB is strongly positioned as a China beer play on: 1) Market share gain in mid-end market

We think the current landscape with ABI focusing on the premium market (ASP +11% in the last 2 years and now a 11% premium to Tsingtao and 49% premium to CRB’s products) and competing against Tsingtao means CRB is well-positioned to shift from the mainstream to the mid end. We expect CRB to grow its market share from 25% in 2015 to 27.5% in 2019 (over the last 15 years, CRB gained 15% market share vs 5% for Tsingtao.) 2) Margin upside from ASP growth in dominant regions, contained mainstream competition

We see potential for CRB to grow OPM by 100bps in 2016E-2018E. CRB’s OPM was only 6- 8% over the past couple of years compared to the global average of c.20%. CRB is dominant in 7 provinces vs. 3-4 for Tsingtao/ABI, which should allow the company to further increase ASP through mix upgrades. Also, we expect competition in the mainstream segment to be contained as regional players focus more on core markets rather than chase volume-driven share gains. We estimate ASP increases for CRB will have a much higher impact on margins than volume growth – every 1% increase in ASP would lead to a 70bp rise in OPM, whereas every 1% increase in volume would increase OPM by 20bp. 3) Strong B/S and cash flow for future M&A

CRB has a stable mgmt. team and a strong B/S supported by robust cash flows. We estimate the company will have only 18% net gearing post the acquisition of the 49% stake in its JV with SABMiller and generate Rmb2bn in FCF each year for 2016E-18E. We estimate CRB could potentially have US$6.8bn in capital to leverage for future potential M&A. We believe any potential M&A by CRB will be in line with its strategy to either support its premium strategy or help materially expand its domestic share.

We forecast 7% sales and 15% EPS CAGR in 2016E-18E. The stock now trades at 11.5X 2017E EVEBITDA vs. global peers at 9-14X. We value CRB at target 13X EV/EBITDA given its faster growth potential, improving returns and access to still one of the most important beer markets in the world.

Goldman Sachs Global Investment Research 4 October 11, 2016 China Resources Beer (0291.HK)

Strengthening market leading position in mainstream and mid-end

With China’s beer market entering the slow volume growth stage from 2H2014, we see premiumization as the key growth driver for the industry going forward till 2019E. Under the current competitive landscape, ABI has a focused strategy in the premium market and competes directly vs. Tsingtao.

That said, CR Beer (CRB) in our view has a favorable position (ASP is 26%/33% lower than Tsingtao and ABI) as it shifts from the mainstream market to the mid-end market. We expect CRB to further strengthen its leading position and increase its overall market share by 200bps to 27% in 2018E.

Industry volume slightly recovering, but unfavorable outlook in medium term China’s beer industry entered a down cycle since 2H2014 and recorded consecutive yoy declines over the past 25 months. This was impacted by the slowing economy and weaker construction/infra activities that impact blue collar consumption.

Although we saw a slight volume recovery over 3Q16 (July-Aug volume up 1.7% yoy), we believe the volume outlook will be unfavourable over the mid to long term. China’s beer per capita consumption is already above the worldwide average level, and with divergent penetration across Northern and Eastern China, penetration has surpassed that of Japan/Korea and reached c.70% of the US level. Hence, we see future growth potential from mid/western China, where beer consumption is low.

Also, the long term demographic change of an increase in aging population indicates a shrinking level of addressable consumers. We see a c.20% decline in population in their 20s over 2015-2025.

Given the factors above, we now expect only 1%-2% volume growth over the next three years. While this is better than the decline in the past three years, the growth is much slower than the 6.3% CAGR over 2000-14.

Exhibit 7: After a two year down cycle, beer volume Exhibit 8: We forecast beer volume to grow only 1-2% slightly rebounded in Aug on favorable weather over the next three years Beer industry volume monthly yoy Industry volume, 2013-2019E

Beer Volume yoy growth (%) Volume ('000 Kl) Volume growth YoY 40 50,000 3.0% 2.0% 2.0% 2.0% 30 2.0% 49,000 1.0% 1.0% 20 48,000 0.0% 10 47,000 -1.0% -2.0% -2.8% -2.0% 0 46,000 -3.0% 45,000 -4.2% -10 -4.0% 44,000 -5.0% -20 2014 2015 2016E 2017E 2018E 2019E 2020E 2001-08 2002-02 2002-08 2003-02 2003-08 2004-02 2004-08 2005-02 2005-08 2006-02 2006-08 2007-02 2007-08 2008-02 2008-08 2009-02 2009-08 2010-02 2010-08 2011-02 2011-08 2012-02 2012-08 2013-02 2013-08 2014-02 2014-08 2015-02 2015-08 2016-02 2016-08

Source: Wind Source: Wind, Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research 5 October 11, 2016 China Resources Beer (0291.HK)

Premiumization the main growth driver, expect 15% premium segment CAGR We expect premiumization to continue to be the main growth driver for the beer industry, especially for young consumers or tier 1, 2 cities where volume penetration is already high. We think consumers will start to appreciate branded and quality beer going forward.

Hence, we expect a 15% CAGR for the premium segment over the next three years and about 8% for the mid end. This compares to a 1% decline for mainstream products.

Exhibit 9: We forecast the premium segment to see a Exhibit 10: Tsingtao has been outpaced by ABI in recent 15% four-year CAGR (vs mid 8%, mainstream -1.3%) yrs on slower premium segment growth China market growth by segment Sales per litre (ABI, CRB, Tsingtao)

RMB mn Mainstream Mid Premium Sales/litre Rmb/Litre 700,000 CRB Tsingtao ABI (China) Premium: 15% 3.8 3.61 600,000 3.6 3.36 500,000 3.4 3.15 3.2 3.35 3.25 3.30 400,000 3.19 3.21 3.0 3.12

300,000 Mid: 8% 2.8 2.6 200,000 2.61 2.4 2.52 2.42 2.45 100,000 Mainstream: -1.3% 2.2 2.31 2.23 2.0 - 2013 2014 2015 2016E 2017E 2018E 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E

Source: Euromonitor, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research.

CR Beer to gain share, dominant in mainstream, increasing positioning in mid end In the current competitive landscape, the premium beer market in China is dominated by ABI’s Budweiser brand with more than 50% market share. Tsingtao as the most premium domestic brand has struggled in this segment vs. ABI. Even so, in the past three years, ABI has widened its premium positioning vs. Tsingtao with average ASP of Rmb3.6/litre currently, 10% higher than Tsingtao.

On the other hand, CRB has a more favorable positioning as it’s a dominant player in the mainstream market and now is switching quickly to the mid end by promoting its Snow YongChuangTianYa products. In the past two years, the company has rapidly increased its ASP by 10% to Rmb2.4/litre, but still about 26% lower than Tsingtao’s overall ASP. Hence we see CRB will continue to gain share in the mid-end market and record 4% volume CAGR over the next three years.

Over 2015-18E, we expect CR Beer to extend its market leading position and expand its overall volume market share to 27% vs. 25% in 2015.

Goldman Sachs Global Investment Research 6 October 11, 2016 China Resources Beer (0291.HK)

Exhibit 11: We expect 3-4% volume growth for CR Beer in Exhibit 12: ABI and Tsingtao have higher portion in 2017/18, higher than Tsingtao premium end Annual volume growth for CRB, Tsingtao, Yanjing Volume split by segment

Annual Volume growth 2015 Segment Split

Tsingtao CR Beer Yanjing Mainstream Mid end High end 15.0% 120% 10.5% 10.2% 100% 10.0% 10% 10.1% 5.2% 20% 3.9% 4.2% 35% 5.0% 3.4% 80% 5.8% 0.6% 36% -1.3% 29% 0.0% 60% 1.0% 0.4% 1.4% -5.0% -1.9% -5.0% -6.9% 40% 52% 51% 54% -10.0% -6.9% -7.4% 20% 13% -15.0% 0% 2012 2013 2014 2015 2016E 2017E 2018E ABI Tsingtao CRB

Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research

Exhibit 13: Expect CRB to further gain share over 2015-19E China annual beer market share

Other Carlsberg Yanjing Tsingtao ABI CR Beer

100% 10% 11 % 13% 15% 90% 18% 18% 20% 21% 21% 5% 22% 23% 24% 25% CR Beer 9% 27% 80% 11 % 13% 13% 13% 12% 13% 13% 13% 14% 70% 13% 14% 15% 17% 13% 19% ABI 13% 13% 21% 60% 14% 14% 15% 16% 17% 50% 19% 18% 17% Tsingtao 40%

63% 30% 57% Yanjing 52% Carlsberg 48% 45% 45% 20% 40% 39% 38% 35% 28% 25% 10% 24% 21% Others

0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2019E

Source: Wind, Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 7 October 11, 2016 China Resources Beer (0291.HK)

Margin upside from regions where CRB dominates, contained mainstream competition

CRB to see higher ASP growth through product mix upgrade China’s beer product ASP is substantially below global levels, or only 50% of the global average, due to years of volume/market share competition. The low ASP also hampered growth of profit margin in the past couple of years, as Chinese companies have only 5-7% OPM vs. global peers at 20%.

While a direct ASP hike on the same products is less likely in China due to intense competition, we believe product mix improvement will continue to drive up ASP growth.

CRB has consistently outpaced Tsingtao on ASP growth in the past four years and we expect the trend to continue as CRB expands its mid-end product mix from 46% in 2015 to 57% by 2018E. Per our sensitivity analysis, assuming all else equal, every 1% increase in ASP would lead to a 70bp rise in OPM, whereas every 1% increase in volume would increase OPM by 20bp.

Exhibit 14: We see room for China beer ASP to grow… Exhibit 15: …and CRB to outpace Tsingtao on ASP Global ASP vs. GDP per capita growth… ASP growth (CRB vs. Tsingtao 2013-18E)

Beer ASP (US$/litre) Beer ASP vs. GDP per capita CRB vs Tsingtao ASP growth 9.0 CRB Tsingtao 8.0 United Kingdom 8.0% 6.7% 7.0 South Korea Japan 6.0% 6.0 4.9%

3.5% 3.5% 5.0 4.0% 3.0% 1.2% 4.0 World avg. Germany USA 2.0% 2.7% 1.5% 1.5% 3.0 Brazil 1.0% India South Africa 0.0% 2.0 -0.4% China -2.0% 1.0 -2.4% GDP per capita (US$) -4.0% 0.0 0 10,000 20,000 30,000 40,000 50,000 60,000 2013 2014 2015 2016E 2017E 2018E

Source: Company data. Source: Company data, Goldman Sachs Global Investment Research

Exhibit 16: …led by mix upgrades… Exhibit 17: …thus improving margins over next three CR Beer volume split by segment years GP after selling expenses as a % of sales

low-end beer mid end high end GP - Selling exp. As % Sales

100% 17.0% 7% 10% 12% 15% 16.3% 90% 17% 16.5%

80% 16.0% 15.8% 33% 15.4% 36% 70% 38% 15.5% 40% 40% 14.8% 60% 15.0% 14.6% 50% 14.5%

40% 14.0% 13.7%

30% 60% 13.5% 54% 49% 46% 20% 43% 13.0%

10% 12.5%

0% 12.0% 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E

Source: Company data, Global Investment Research Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 8 October 11, 2016 China Resources Beer (0291.HK)

CRB margin expansion: Further strength in dominant regions The nature of beer products determines the optimum distribution distance, which is no more than 500km. Beyond that distance, truck transportation costs will be ineffective and product quality may deteriorate due to exposure to the sun for a long time. Therefore, we think comparing China as one single market will not show the full picture of competition.

We see China’s beer market as more or less split into the provincial level and competition within a province will be the key factors driving profit margin. Once a company reaches a dominant level in one province, its profit margin could increase substantially compared to a province where two or three players compete against each other.

In the map below (Exhibit 12), we define dominant as more than 50% market share and leading position as the largest share with a size 50% larger than that of the second player as of 2015. CR Beer has a dominant or leading position in seven provinces, including Sichuan, Liaoning, Anhui, Zhejiang, Tianjin, Guizhou and Shanxi. This compares to Tsingtao’s three provinces and ABI’s four provinces.

In those dominant regions, we expect CRB to be able to increase margins by 1) hiking prices (offering less distributor rebates), 2) introducing more premium products in the same channel (especially for restaurants), and 3) spending less on promotions.

Usually for the dominant regions, CRB records at least 15% OPM vs. overall average of 5- 7%. We see further room to grow given ABI China’s EBITDA margin is close to 30% and global beer companies at 20%+.

We estimate for CRB, the three most dominant regions Sichuan, Liaoning and Anhui already contributed about 35% of volume in 2015 and assuming 15% OPM, they accounted for 64% of CRB’s total operating profit. Hence we estimate a 100bps margin expansion from these three regions would drive about 4-5% OP growth for the group.

Exhibit 18: As dominant regions can reach much higher profitability, we see further upside when compared to ABI China’s 30% EBITDA margin Dominant region EBITDA margin

1H16 EBITDA Margin 35.0% 29.7% 30.0%

25.0% 24%

20.0% 16.7% 15.7% 15.0% 12.0%

10.0%

5.0%

0.0% CRB (Group) CRB (South ) Tsingtao Tsingtao ABI (China) (Group) (Shandong)

Note: Grey denotes group EBITDA

Source: Company data

Goldman Sachs Global Investment Research 9 October 11, 2016 China Resources Beer (0291.HK)

Exhibit 19: We expect better ASP/product mix from CRB’s dominant regions (Sichuan, Liaoning, Anhui, Zhejiang, Guizhou), while Jiangsu/Guangdong/Hunan remain competitive China beer map

Heilongjiang ABI

Jilin CRB, ABI

Liaoning Beijing CRB Xingjiang Yanjing Carlsberg Inner Mongolia Tianjing Gansu Yanjing Hebei CRB CRB,Carlsberg, Tsingtao Tsingtao Shanxi Shandong Ningxia CRB Tsingtao Carlsberg Qinghai Jiangsu Carlsberg Shaanxi Henan CRB, Tsingtao, ABI Tsingtao Jingxin Anhui Shanghai Tibet CRB Tsingtao Carlsberg Hubei Sichuan Chongqing ABI CRB Carlsberg Zhejiang Jiangxi CRB Hunan ABI <40% Yanjing, CRB Fujian Guizhou ABI Dominant & Leading Region CRB ABI Yunan Guangxi Guangdong CRB Carlsberg <40% Yanjing Zhujiang,/Tsingtao, / Tsingtao CRB Yanjing Carlsberg Hainan Hainan Asia Pacific Competitive Brewery

Source: Company data, Goldman Sachs Global Investment Research

Exhibit 20: We estimate the three most dominant regions will contribute more than 60% to CRB’s group profit in 2016 Dominant region volume and OP contribution

Dominant Leading Competitive CRB Regions SiChuan LiaoNing Anhui Total Zhejiang Shanxi Guizhou Tianjing Total Region volume ('000 kl) 2,277 2,721 1,355 2,675 422 786 275 CRB market share 62.0% 65.0% 65.0% 40.0% 50.0% 55.0% 40.0% Implied CRB volume ('000 kl) 1,412 1,768 881 4,061 1,070 211 432 110 1,823 5,798 As % of CRB group volume 12.1% 15.1% 7.5% 35% 9.2% 1.8% 3.7% 0.9% 16% 50% Est. full year OPM 15% 15% 15% 15% 10% 10% 10% 10% 10% 3% Est. Operaing profit (RMB mn) 513 643 320 1,476 259 51 105 27 442 418 Operaing Profit % of CRB 22% 28% 14% 63% 11% 2% 4% 1% 19% 18% Note: Dominant: market share above 60%; Leading: No.1position with 40-55% share; Competitive: no clear leader

Source: Wind, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 10 October 11, 2016 China Resources Beer (0291.HK)

More targeted A&P in mid end; contained mainstream competition CRB tends to spend less on selling expenses compared to its domestic peers. Its selling expenses per litre is 30% less than that of Tsingtao and comparable vs. Yanjing’s. We think this reflects the company’s 1) more effective use of advertising and promotional expenses, and 2) strategy of ‘on the ground’ promotions.

We agree with CRB’s strategy of doing more offline promotion in retail stores vs. deploying a large amount of online spending. This is due to its more mass market positioning; as a result, the distribution channel matters more than branding. For CRB, roughly 60% of sales are through on-premise channels and CRB’s proactive ‘route to market’ initiatives in this channel have been effective in the past few years.

That said, we forecast CRB to have higher selling expenses over the next two years, with most of the incremental spending related to promotional expenses for mid-end products.

We acknowledge that if CRB plans to expand meaningfully in the premium market, then much more ‘on the air’ advertising and brand building is needed.

Exhibit 21: Tsingtao’s selling expense/litre higher Exhibit 22: We expect CRB to enjoy higher EBITDA/litre compared to local peers from 2015-18E vs. Tsingtao, but still lower than ABI Selling expenses per litre EBITDA per litre

Selling expenses/litre EBITDA/litre

Rmb/litre CRB Tsingtao Yanjing Rmb/Litre CRB Tsingtao ABI (China)

0.80 0.90 0.72 0.73 0.73 0.70 0.80 0.81 0.70 0.64 0.62 0.70 0.60 0.60 0.62 0.46 0.50 0.45 0.44 0.42 0.51 0.39 0.40 0.50 0.40 0.38 0.40 0.35 0.36 0.30 0.31 0.30 0.35 0.29 0.31 0.33 0.30 0.32 0.31 0.30 0.20 0.28 0.28 0.20 0.24 0.10 0.10

0.00 0.00 2013 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E

Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research

We visited the regional players (Yanjing and Chongqing brewery etc.) over the past few weeks and note their strategy is now more focused on their core markets and increasing profit, rather than aggressively chasing share gains. We believe this reflects a more prudent strategy after two years of volume/profit declines. We thus think mainstream segment competition will be contained, translating to a less need for CRB to increase mainstream selling expenses.

Exhibit 23: Regional players are now becoming more prudent in competition Beer peers key strategy

Market Competition Company share (2015) Key Strategy intensity CR Beer 25% Balance between premiumization and market share Unchanged ABI 19% Focus on the premium market Unchanged Tsingtao 18% Increase marketing intensity, esp. online ads Higher Yanjing 10% Re-Focus on its core market (Beijing, Guangxi etc.) Lower Carlsberg 5% Focus on profit, Closed 7 factories in China last 2yr Lower

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 11 October 11, 2016 China Resources Beer (0291.HK)

Strong FCF and B/S for potential M&A in future

After CRB disposed of its non-beer business in Sep 2015 (retail, water business, etc.), we expect it will have a much healthier balance sheet and strong free cash flow generation ability. Given its low utilization rate vs. industry average, we expect the company to slow down capacity expansion and become more prudent in capex spending (we estimate a 10% decline every year in 2015-18E). We estimate CRB will deliver FCF of Rmb1.8-2.2bn over 2016E-17E.

In order to finance the purchase of the 49% stake of SABMiller in their JV for Rmb10.2bn, CRB announced a rights issue in July this year and successfully raised Rmb8.2bn (net of expenses). Hence, we expect CRB’s net gearing ratio to only increase to 18% by end-2016. As we forecast strong FCF over the next two years, we expect its gearing ratio will sharply come down to 0%.

In our view, the strong B/S and FCF generation would equip the company with sufficient capital for potential consolidation in the next three years. CRB still has access to multiple financing facilities, including in our view the liability commitment from its parent CR Holding and potential sale of CR Snow’s minority stake offer given now it has a 100% stake. We do not take a view on the likelihood of CRB selling a minority stake and neither has CRB indicated it is looking to sell a stake. We show this option only to illustrate potential funding options should CRB choose to make acquisitions in future.

As shown in Exhibit 21, we estimate the company may have up to US$6.8bn in capital available to finance any potential acquisitions in future.

Exhibit 24: We forecast CRB to see higher FCF/FCF yield Exhibit 25: We expect CRB’s capex to decline every year from 2016E-18E post acquisition of 49% stake in JV from 2015-18E FCF and yield Capex amount and capex/sales

FCF (Rmb mn) FCF Yield (%) Capex (Rmb mn) Capex % of sales

2500.0 4.1% 4.5% 3,000.0 10.0% 8.9% 8.7% 4.0% 9.0% 2000.0 3.3% 3.4% 2,500.0 3.5% 7.5% 8.0%

3.0% 7.0% 1500.0 2,000.0 6.0% 2.5% 6.0% 2338.5 1000.0 1884.1 1904.7 2.0% 1,500.0 5.0% 1.5% 2,522.8 2,400.0 4.0% 2,200.0 500.0 1,000.0 2,050.0 1.0% 3.0%

-69.9 0.5% 2.0% 0.0 500.0 0.0% 1.0% -0.2% -500.0 -0.5% 0.0 0.0% 2015 2016E 2017E 2018E 2015 2016E 2017E 2018E

Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global investment Research

Future M&A strategy: Premium and market share

On Sep 14, 2016, Bloomberg reported that CRB is potentially interested in bidding for SABMiller’s central and eastern European assets for US$6bn. While we do not take a view on the likelihood of the deal, the potential bid is in line with CRB’s strategy of securing premium brand/assets that can help the company penetrate China’s premium market more quickly. In our view, the company could also look to join with domestic partners, i.e. the top 5 players in China, to help it materially expand its volume market share and gain synergy in selected regions.

Goldman Sachs Global Investment Research 12 October 11, 2016 China Resources Beer (0291.HK)

Exhibit 26: We expect net gearing to fall substantially Exhibit 27: We calculate that CRB could have up to from 14% in 2015 to 0.1% in 2018E US$6.8bn of financing capital to use in potential M&A Net gearing Potential war chest calculation for illustration

Net Gearing Amount 20.0% Financing tools (US$bn) Comments

18.0% Loan from parent 1.29 Parent company debt support 16.0% Up to 49% stake, based on 14.0% Minority assets 3.54 current market cap 12.0% 4X net debt/EBITDA, 5X 10.0% Net debt financing 1.95 Interest coverage 17.6% 8.0% Total 6.78 13.9% 6.0% Note: US$1.29bn loan from parent is based on a HK$10bn loan facility announced by the parent. Our assumption of 4X net debt/EBITDA and 5X 4.0% 8.1% interest coverage is based on typical debt covenants for companies in this 2.0% 0.1% space. 0.0% 2015 2016E 2017E 2018E

Source: Company data, Goldman Sachs Global investment Research Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 13 October 11, 2016 China Resources Beer (0291.HK)

Financials: We expect 7% sales and 15% EPS CAGR in 2016E-18E

We expect CRB’s sales to rebound over 2016E-18E and deliver a 7% CAGR. We expect this to be driven by a recovery of sales volume to 3-4% from 1%/-1% in 2014/2015 as the industry bottomed in 2015 and CRB continues to gain market share. Additionally, we forecast the company will further increase its ASP by 3.0-3.5% over the next three years as it improves its product mix and expands its presence in mid- to high-end products.

We expect this to drive up OPM by 100bps over 2016E-18E and deliver 15% EPS CAGR.

Exhibit 28: We expect a rebound in sales growth in 2017E Exhibit 29: We expect ASP/volume to grow in the range to c.7% of 3-4% in 2017E-19E Sales growth yoy ASP and volume growth yoy

Sales Growth ASP (RMB/litre) Volume growth

20.0% 6% 5% 17.6% 4.2% 18.0% 5% 3.4% 4% 16.0% 14.0% 4.9% 3% 4% 12.0% 2% 10.0% 3% 3.5% 7.9% 0.6% 8.0% 6.5% 3.0% 1% 4.5% 2% 6.0% 0% 4.0% 1% -1.3% 1.0% 1.6% -1% 2.0% 1.0% 0.0% 0% -2% 2013 2014 2015 2016E 2017E 2018E 2015 2016E 2017E 2018E

Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research

Exhibit 30: We expect EBITDA/EBIT margin to be 14%/9% Exhibit 31: We see ROE improving through 2016E-18E, in 2017E, respectively reaching 10% in 2018E as net profit grows double digits EBITDA and EBIT margin Net profit yoy and ROE

EBITDA margin EBIT Margin NPAT growth ROE 16.0% 14.2% 14.4% 14.6% 40.0% 14.0% 12.7% 29.1% 30.0% 12.0% 20.0% 14.6% 16.3% 11.7% 12.8% 10.0% 9.2% 10.0% 5.5% 8.0% 3.1% 9.1% 9.5% 8.1% 8.5% 10.2% 6.0% 0.0% 7.0% 6.5% 4.0% -10.0% -19.8% 2.0% -20.0% 0.0% -30.0% 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E

Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research 14 October 11, 2016 China Resources Beer (0291.HK)

Exhibit 32: We expect NPAT to grow double digits in 2017E/18E Summary Financials –P&L China Resources Beer (0291.HK) HKD$mn HKD mn Rmb mn HKD mn Rmb mn

Divisional P/L 2013 2014 2015 2016E 2017E 2018E 15-'17 2Yr CAGR 1H14 2H14 1H15 2H15 1H16E 2H16E Total Volume ('000 kl) 11,722.0 11,842.0 11,683.0 11,753.1 12,154.7 12,668.0 2% 6,301.0 5,541.0 6,249.0 5,447.4 6,128.0 5,625.1 yoy growth 10% 1% -1% 1% 3% 4% 9% -7% -1% -2% -2% 3%

ASP (HKD/ litre) 2,815 2,912 2,811 2,814 2,899 3,000 2,932 2,889 3,051 2,893 2,880 2,795 ASP (RMB/litre) 2,234 2,311 2,423 2,447 2,521 2,609 2,480 2,352 2,483 2,409

YoY Growth (%) 2013 2014 2015 2016E 2017E 2018E 15-'17 2Yr CAGR 1H14 2H14 1H15 2H15 1H16E 2H16E

Volume 10% 1% -1% 1% 3% 4% 9% -7% -1% -2% -2% 3% ASP 7% 3% 5% 1% 3% 3% 5% 2% 4% 0% 0% 2%

Consolidated P/L 2013 2014 2015 2016E 2017E 2018E 15-'17 2Yr CAGR 1H14 2H14 1H15 2H15 1H16E 2H16E Revenue 32,994 34,482 28,310 28,764 30,640 33,051 4% 18,475 16,007 15,499 12,811 15,213 13,551 COGS (21,830) (22,530) (19,514) (19,642) (20,723) (22,044) (11,844) (10,778) (10,305) (9,209) (10,093) (9,549) Gross Profit 11,164 11,952 8,796 9,122 9,917 11,007 6% 6,631 5,229 5,194 3,602 5,120 4,002 SG&A (8,583) (9,752) (6,963) (6,787) (7,306) (7,997) 2% (5,340) (4,320) (4,012) (2,951) (3,463) (3,324) OP 2,581 2,200 1,833 2,336 2,611 3,011 1,291 909 1,182 651 1,657 679 EBIT 2,581 2,200 1,833 2,336 2,611 3,011 19% 1,291 909 1,182 651 1,657 679 D&A -1,834 -2,153 -1,751 -1,762 -1,805 -1,805 -1,000 -1,153 -877 -874 -850 -912 EBITDA 4,415 4,353 3,585 4,097 4,417 4,815 11% 2,291 2,062 2,059 1,526 2,507 1,590 Net Interest 75 108 (67) (62) (47) (9) 0 0 0 (67) (54) (8) Other non operating income/(expenses 0 (23) (21) 000 (11) 11 0 (21) 00 Share of profit/(loss) of associates000000 000000 Profit before tax 2,656 2,285 1,745 2,274 2,564 3,001 21% 1,280 920 1,182 563 1,603 671 Income taxes (807) (803) (399) (536) (604) (723) (463) (245) (346) (53) (383) (153) Profit from continuous operations 1,849 1,482 1,346 1,738 1,960 2,279 817 675 836 510 1,220 518 Minority interest (906) (752) (670) (1,034) 00 (400) (362) (410) (250) (598) (436) Attributable Beer Earnings 943 730 676 704 1,960 2,279 21% 417 313 426 260 622 82

YoY Growth % Sales 17.6% 4.5% 1.0% 1.6% 6.5% 7.9% 19% 14.9% -5.4% 3.2% -1.6% -1.8% 5.8% EBITDA 15.5% -1.3% 3.8% 14.3% 7.8% 9.0% 18.8% -17.1% 10.5% -9.0% 23.3% 2.2% EBIT 9.3% -14.8% 2.5% 27.4% 11.8% 15.3% 15.4% -9.7% 40.2% 4.2% Profit from continuous operations 14.6% -19.8% 11.7% 29.1% 12.8% 16.3% -59.0% -50.9% 28.8% 4.6% 45.9% -68.6%

Margins EBITDA 13.4% 12.6% 12.7% 14.2% 14.4% 14.6% 12.4% 12.9% 13.3% 11.9% 16.5% 11.7% EBIT 7.8% 6.4% 6.5% 8.1% 8.5% 9.1% 7.0% 5.7% 7.6% 5.1% 10.9% 5.0% Reported NPAT 5.6% 4.3% 4.8% 6.0% 6.4% 6.9% 2.3% 2.0% 2.8% 2.0% 4.1% 0.6%

Source: Company data, Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research 15 October 11, 2016 China Resources Beer (0291.HK)

Valuation: Still attractive post rally, target 13X EV/EBITDA

We value China beer companies using a target EV/EBITDA multiple. This is because 1) the D&A policy usually has a large impact as companies tend to have a low utilization rate and 2) companies have different capital structure and various non-operating incomes (govt. grants etc.) that affect net earnings growth. We thus believe EV/EBITDA is a better methodology to value beer companies and also enables like for like comparison vs. global beer peers.

After CRB announced the purchase of SABMiller’s 49% stake in their JV in Mar 2016, the stock has continued to re-rate and has rallied by more than 35% (vs. Hang Seng China Ent. Index 24%), driven in our view by strong potential earnings growth and potentially the market’s positive reaction on the low 5.7X multiple they paid for the acquisition of SAB’s stake in the JV (vs. historical global transactions of 9X-16X over the last three years).

The stock is now trading at 11.5X 2017E EV/EBITDA and slightly below global leader ABI’s 12X but above the 9-10X of other global beer companies.

We assign 13X EV/EBITDA to CRB, above global peers and China’s domestic companies given its stronger potential earnings growth (19% three-year CAGR) and improving returns (ROE to improve 100bps in 2016E-18E.)

Our EV is based on avg. 2017E-2018E EBITDA and we deduct avg. net debt of Rmb849mn, and thereby derive a 12-month TP of HK$20.5/share.

Exhibit 33: We derive our 12m TP of HK$20.5 from EV/EBITDA, using a multiple of 13X, higher than global peers TP calculation

Valuation (Rmb mn) 2017E 2018E Avg. 2017-18E EBITDA 4,417 4,815 4,616 EV/EBITDA 13 13 13 EV 57,417 62,601 60,009 Net debt 1,675 22 849 Market cap 55,742 62,578 59,160 Shares outstanding 3,244 3,244 3,244 Target price (HK$/share) 20.5

Source: Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research 16 October 11, 2016 China Resources Beer (0291.HK)

Exhibit 34: CRB rerated strongly after its buyback of SAB Exhibit 35: CRB is currently trading at c.11.5X 2017E Miller’s stake in their JV in Mar 2016 EV/EBITDA, similar to global beer companies’ range 12m fwd EVEBITDA Global beer EV/EBITDA comparison

CRB fwd 12m EV/EBITDA 2017 EV/EBITDA 16 17.0 13.7 13.4 + 2 STDV 14 12.8 12 15.0 11.5 Disposal of 12 + 1 STDV Non-Beer Business 13.0 Ex-Special 10.0 9.9 9.9 9.8 Dividend 10 9.0 11.5 11.0 Historical avg. 10X 8

9.0 6 -1 STDV

7.0 4 -2 STDV 5.0 2

0 3.0 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16

Source: Company data, Bloomberg, Goldman Sachs Global Investment Source: Goldman Sachs Global Investment Research Research

Exhibit 36: We have Buy on CRB, ABI, Ambev, Molson Coors and Heineken in the global beer space Beer global comp sheet

BBG Ticker Name Mkt Cap Last GS ListPrice EPS 15-18E PE PE PE EV/EBITDA EV/EBITDA EV/EBITDA P/B Div Yield Div Yield ROE ROE Close Rating Crncy 6M Chg CAGR CY16 CY17 CY18 CY16 CY17 CY18 CY16 CY16 CY17 CY16 CY17 US$m Price L.C. % % (X) (X) (X) (X) (X) (X) (X) % % % % China Brewers 291 HK CRB 7,284 17.3 Buy HKD 31.0 19.3 25.3 26.5 21.6 13.0 11.5 9.9 2.7 0.5 1.4 9.2 9.5 168 HK Tsingtao H 6,018 31.9 Neutral HKD 10.0 2.4 29.6 26.8 25.0 12.3 13.0 11.8 2.2 0.8 1.2 7.6 8.0 600600 CH Tsingtao A 6,018 31.8 Neutral CNY 13.0 2.4 34.2 31.0 29.0 14.8 16.0 14.2 2.5 0.9 1.0 7.6 8.0 000729 CH Beijing Yanjing 3,151 7.8 NC CNY 9.0 2.6 39.7 34.0 33.0 13.2 12.2 11.8 1.6 0.9 0.9 4.5 4.7 Average 11,632 33.5 30.0 28.3 13.5 14.0 12.7 2.2 0.9 1.0 7.0 7.3

Global Brewers ABI BB Anheuser Busch 203,130 113.3 Buy EUR 5.6 4.7 34.2 24.9 21.8 17.7 13.8 12.4 4.8 2.9 3.2 16.5 18.4 HEIA NA Heineken 49,691 77.3 Buy EUR - 10.7 20.8 18.4 16.2 10.6 10.0 9.3 3.0 1.8 2.1 13.7 14.2 CARLB DC Carlsberg 14,186 610.5 Sell DKK (0.1) 5.4 21.7 19.8 17.9 9.9 9.2 8.4 2.0 1.5 1.8 9.0 9.3 2502 JP Asahi 17,398 3,706.0 Neutral JPY 10.7 14.5 20.0 16.6 16.6 11.2 10.0 9.4 1.9 1.5 1.7 9.2 10.3 2503 JP Kirin 14,796 1,667.0 Neutral JPY 8.2 nmf 17.8 20.8 20.8 10.1 9.7 9.0 2.1 2.3 2.4 8.8 7.1 2501 JP Sapporo Holdings 1,984 2,863.0 NC JPY (1.0) 26.9 18.3 16.4 N/A 8.5 7.9 N/A 1.2 - - 6.2 6.7 TAP US Molson Coors 22,063 107.7 Buy USD 18.2 14.7 23.7 21.1 21.1 14.2 12.8 11.6 2.2 1.5 1.5 7.2 10.8 AEFES TI Efes 3,728 19.2 Sell TRY (11.0) nmf 37.0 20.5 15.7 11.3 9.5 8.1 1.4 - - 2.4 4.1 ABEV US Ambev 95,480 19.7 Buy BRL 8.6 5.8 26.7 22.6 20.8 14.3 13.2 12.1 2.7 2.8 4.6 25.0 22.0 Average 420,842 28.8 22.9 15.7 15.4 13.3 8.8 3.9 2.4 2.1 14.2 15.6

China Spirits 600519 CH 58,315 298.10 Buy CNY 20.0 16.5 21.1 17.8 15.3 12.5 10.4 8.7 5.1 2.4 2.8 25.0 25.7 000858 CH 19,085 33.36 Buy CNY 19.0 15.6 17.3 14.9 13.3 10.4 8.7 7.5 2.7 2.8 3.3 15.8 16.8 000568 CH 6,688 31.08 Neutral CNY 25.0 19.6 22.9 19.5 17.3 16.5 14.4 12.7 4.1 3.3 3.9 17.9 19.9 002304 CH Jiangsu Yanghe 15,852 67.09 Buy CNY - 12.8 17.2 15.0 13.1 11.5 9.8 8.3 3.9 2.9 3.4 24.1 24.5 600809 CH Shanxi Xinghua 2,795 19.54 Neutral CNY 6.0 23.2 25.5 20.5 17.4 15.8 12.8 10.9 3.6 2.1 2.6 14.2 16.4 Average 102,735 20.0 17.0 14.7 12.3 10.3 8.7 4.4 2.6 3.1 22.4 23.2 Note: Price as of Oct 6, 2016

Source: Bloomberg, Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research 17 October 11, 2016 China Resources Beer (0291.HK)

Appendix: Deal recap, China beer industry, brand tier, mgmt. team

Deal structure

China Resources Enterprises (291.HK) disposed of its retail business and other non-beer operations in 1H15 back to its parent China Resources Holdings in order for the listco to focus solely on the beer business. As a result the company changed its name to China Resources Beer. The rationale was that a pure-play beer company would unlock value for the listco as investors would have more clarity on the business.

CRB completed the purchase of SABMIller’s 49% stake in CR Snow, its JV with SABmiller, in Oct 2016. This followed from ABI’s announced acquisition of SAB in Oct 2015, which led to ABI/SAB divesting a number of their holdings in various breweries across the globe to help obtain regulatory approval from anti-trust authorities.

CRB announced in 1H16 it will purchase the remaining 49% stake for US$1,600mn, much less than market expectations as the implied EV/EBITDA (TTM) was 5.7X vs. historical global avg. of 9X-16X over the last three years. As per Bloomberg and other news sources, the low multiple was potentially due to ABI’s negotiations with Chinese authorities which precluded them from selling to foreign players and was also helpful to help speed up the approval process.

Exhibit 37: CR Snow was previously owned by CRE/SAB Exhibit 38: CR Snow is now owned 100% by CRB; with 51%/49% stakes ownership of the listco 291.HK is not changed Shareholding structure before CRB-SAB deal After CRB-SAB deal

CR Holdings Public Investors CR Holdings Public Investors

52% 48% 52% 48%

CRE (0291.HK) SAB Miller CRB (0291.HK)

51% 100% 49%

CR Snow CR Snow

Source: Company data Source: Company data

China’s beer industry

China’s per capita beer consumption is quite different depending on the region. For example, Northeast and East China are on par with South Korea/Japan’s consumption, while the Southwest is underpenetrated. But in comparison to the US, China overall is still underpenetrated as of 2015.

We forecast an unfavorable demographic change by 2025E as we expect the youth population (people in their 20s) to decline substantially by c.20% compared to 2015. As this is a major group in terms of consumption of beer, we see this as a headwind for the overall China beer industry.

Goldman Sachs Global Investment Research 18 October 11, 2016 China Resources Beer (0291.HK)

Exhibit 39: China is underpenetrated vs. US, but on par Exhibit 40: We forecast an unfavorable demographic and in some cases over-penetrated vs. Japan/Korea change by 2025E as the youth population declines 2015 China beer per capita penetration China demographics, 2015-2025E

China Regions Beer/Capita vs Japan/Korea

USA 76.6

South Korea 41.8

Japan 47.7

Southwest China 13.0

South China 37.8

Northwest China 16.9

North and Northeast China 55.7

Mid China 25.8

East China 47.5

0 20406080100 Litres/capita

Source: Euromonitor Source: CEIC, Goldman Sachs Global Investment Research

Exhibit 41: Industry has undergone consolidation in last Exhibit 42: CRB and Tsingtao have seen OPM declining 10+ years; top 5 now hold c.80% share vs 37% in 2003 despite higher industry consolidation China beer market share China companies OPM over 2003-2015

Other CR Snow Tsingtao ABI Yanjing Carlsberg CRB vs Tsingtao OPM 100% 0% 1% 1% 1% 2% 2% 2% 2% 2% 2% 5% 5%Carlsberg, 5% 9% 10% 2003 Top 10% 10% 10% 10% 11% 11% 11 % 11% Tsingtao CR Beer 90% Yanjing, 10% 5 share: 5% 11% 11 % 37% 9% 11% 13% 13% 12% ABI, 19% 12.0% 80% 13% 13% 13% 14% 14% 15% 17% 2016 Top 13% 5 share: 10.1% 13% 70% 13% 13% 13% 78% 9.5% 10% 14% 14% 10.0% 9.1% 15% 16% 11% 60% 17% 8.4% 7.8% 13% 19% Tsingtao, 18% 7.5% 15% 18% 18% 8.0% 6.9% 7.0% 7.2% 7.2% 9.0% 50% 20% 6.6% 21% 21% 6.5% 6.1% 8.2% 22% 7.5% 7.5% 40% 23% 6.0% 6.6% 24% CR Snow, 25% 4.8% 6.4% 6.5% 63% 30% 57% 3.6% 52% 4.0% 48% 45% 45% 20% 40% 39% 38% 35% 4.0% 28% 25% 10% Other, 24% 2.0%

0% 0.0%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Euromonitor, Company data Source: Euromonitor

Beer branding tiers

ABI has a large presence in the premium/high end beer segment (defined as >Rmb5 unit of 330ml), mainly through the Budweiser Brand. Tsingtao is heavy in the mid-end and has a presence in the high-end as well. CRB in contrast was mostly focused on the mid to mass end, but has launched new products such as LianPu that are part of the premium segment.

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Exhibit 43: CRE has started to venture into the high/mid end segment with Lian Pu/Stout Beer, a segment traditionally dominated by ABI/Tsingtao China beer brand tiering

330ml/tin (6 pack) CRE Tsingtao ABI Yanjing Carlsberg Corona Extra 7.4 Snow Lian Pu 15.0 Tsingtao Draft Beer 8° 6.5 Budweiser Beer 6.2 Original Weissbier 6.9 1604 Blanc 12.0 High-End (>RMB5/unit) Snow Stout Beer 8.8 Tsingtao Augerta 500ml 6.3 Budweiser Draft Beer 6.0 Jolly Shandy 6.9 Calsberg Beer 4.3° 5.5

Snow Jingzhi Beer (Quality) 3.8 Tsingtao Classic 11° 3.9 Sedrin 4.8 Yanjing Alcohol-free Beer 3.8 Snow Yongchuangtianya 3.2 Tsingtao Beer 3.8 Harbin 9.1° 3.9 Yanjing Draft 11° 3.8 Tuborg 4.8 Mid-End (RMB3-5/unit) Tsingtao Light 8° 3.4 Harbin 3.1 Yanjing Fresh Beer 3.3 Tsingtao Bingchun (Ice-pure) 8° 3.1 Sedrin 11° 3.1

Snow Refreshing 3.0 Tsingtao Bingchun 8° 2.6 Harbin Bingchun (Ice-pure) 3.0 Yanjing Jingpin (Fine) 11° 2.8 Snow Refined Beer 9° 2.3 Tsingtao Laoshan 10° 2.3 Harbin Xiaomaiwang (Wheat King) 2.5 Yanjing Draft Beer 10° 2.8 Chongqing 2.5 Mass (below RMB3/unit) Snow Dry Beer 2.2 Tsingtao Shanshui 1.7 Harbin Bingshuang Beer 2.1 Yanjing super pure 2.5 ShanCheng 2.4 Snow Beer 2.0 Harbin Bingshuang 2.1 Yanjing Beer (Party) 8° 2.1

Source: Taobao, Tmall, YiHaoDian

CRB management team

CEO Mr. Hou Xiaohai was appointed in April 2016, but has 10+ years of experience within the group. He was Director of sales/marketing from 2001-2007, GM of its branch in Sichuan Province in 2009-2016 and has been with China Resources Group since 2001.

Mr. Wang Qun was appointed Vice Chairman of the Board in April 2016 as well. He has spent more than 20 years with China Resources Group, holding numerous positions within the company such as Director of CRH and CRNC from 2002 to 2012, and Deputy MD of CR Snow from 2006 to 2010.

Exhibit 44: Both of CRB’s new management team members have been with China Resources Group for 10+ years and have held numerous positions within the group CRB management/board bio

CRB Management/Board Bio Name Position Bio Appointed GM of CR Snow in 2016

Director of Sales/Marketing from 2001-2007 Hou Xiaohai CEO (since April 2016) GM of Sichuan Province from 2009-2016

Joined China Resources Group in 2001

Appointed VP since 2010

Executive Director from 2000-2010, Deputy Executive Director Managing Director from 2006-2010 Wang Qun Vice Chairman of the Board (both since April 2016) Director of China Resources Holdings (CRH) and China Resources National Corporation from 2002 - 2012

Joined CRH/CRNC since 1994

Source: Company data

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Past deal comps

The global beer/liquor industry has seen a large wave of consolidation in the last few years. These include numerous cross-border transactions, such as ABI buying Oriental Brewery (Korea), Kirin acquiring Schincariol (Brazil), and more recently ABI acquiring SABmiller. In particular, the ABI/SABmiller deal has led to a spree of divestures for the deal to gain regulatory approvals; Molson Coors bought back their stake in the JV Miller Coors, CRB bought SABMiller’s 49% stake in their JV CR Snow, while Asahi acquired three large European brands (Peroni, Grolsch, and Meantime).

Exhibit 45: Global liquor industry has seen heavy consolidation in last few years Major recent M&A deals in global beer industry

Date Acquirer Acquiree Price (USD mn) EV/EBITDA Multiple Comments Apr-16 Asahi Peroni, Grolsch, Meantime (previously part of SAB) 2,900 N/A Part of ABI divesting in Europe Mar-16 CRB SAB 49% stake in CR Snow 1,600 5.7X Part of ABI divesting in China Nov-15 Molson Coors SAB 58% stake in Miller Coors 12,000 9.2X Part of ABI divesting in US Nov-15 ABI SABMiller 104,200 16.1X Nov-15 Constellation Brands Ballast Point Brewing & Spirits 1,000 mid to high teens Jan-14 Suntory Jim Beam 13,600 24.6X Jan-14 ABI Oriental Brewery 5,800 11.4X Aug-11 Kirin Schincariol 2,600 17.8X

Source: Bloomberg, Company data

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Disclosure Appendix Reg AC We, Lincoln Kong, CFA, Joshua Lu and Kevin Li, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

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Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 31% 54% 15% 66% 60% 50% As of July 1, 2016, Goldman Sachs Global Investment Research had investment ratings on 2,963 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by the FINRA Rules. See 'Ratings, Coverage groups and views and related definitions' below. The Investment Banking Relationships chart reflects the percentage of subject companies within each rating category for whom Goldman Sachs has provided investment banking services within the previous twelve months.

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Price target and rating history chart(s)

China Resources Enterprise (0291.HK) Stock Price Currency : Hong Kong Dollar Goldman Sachs rating and stock price target history 40 16,000 15,000 35 30.2 28.4 17.1 14,000 30 26.5 27.2 19.8 13,000 25 12,000 20 11,000 15 10,000 9,000 10 8,000 5 16.3 28.5 7,000 0 6,000 Apr 22 Sep 21 N B RS A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J 2013 2014 2015 2016 Index Price Stock Price Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 6/30/2016. Rating Covered by Lincoln Kong, CFA, Pric e tar get as of Mar 21, 2016 Price target at removal Not covered by current analyst Hang Seng China Ent. Index

The price targets show n should be considered in the context of all prior published Goldman Sachs research, which may or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets.

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