Deutsche Bank Markets Research

Asia Industry Date China 2 March 2017 Consumer China Consumer Initiation of Coverage

Charlie Chen Research Analyst Dawn of a new golden age (+852 ) 2203 6178 [email protected]

Positive view on Chinese brewers at the beginning of a recovery Key Changes We believe that Chinese brewers are at the beginning of a multi-year period of Company Target Price Rating profit growth, and CR Beer is our preferred pick. Since the last upcycle that 0291.HK 21.05 Buy ended in 2008, Chinese brewers have been struggling with excess capacity, 600600.SS 24.21 Sell falling demand, and weak profitability. Having experienced ineffective intense 0168.HK 27.22 Sell price competition after the GFC, starting in 2014, brewers have changed their strategy toward driving profitability instead of volume. Given higher market Source: Deutsche Bank concentration, we expect competition to be more rational, and combined with Top picks a premiumization of consumer taste, we forecast rising trends in margins and China Resources Beer Buy cash flow over the next five years. (0291.HK),HKD17.70 Driver 1: Sustainable secular ASP growth lifts profitability Source: Deutsche Bank Despite an expected muted volume CAGR of 1.9% for the next five years, we Companies Featured forecast an average net profit CAGR of 10% for Tsingtao Brewery (TB) and China Resources Beer Buy 18.7% for CR Beer, driven by secular ASP posting a 3% CAGR and further (0291.HK),HKD17.70 leverage on economies of scale. This ASP growth will likely be driven by Tsingtao Brewery-A Sell product mix change toward premium and specialty products, as well as (600600.SS),CNY33.31 continued shifts in product packaging to smaller but more expensive SKUs. Tsingtao Brewery-H (0168.HK),HKD35.10 Sell Driver 2: Consolidation opportunities Source: Deutsche Bank In addition, we believe that large-scale M&A is likely to materialize in the next three years, which also offers investment opportunities. While we suggest that investors take long positions on high-quality brewers such as CRB, investors could also trade around M&A news to take short-term returns. Going long on long-term winner CRB We believe that the large national players are better positioned to benefit from this secular uptrend. CRB stands out, with the largest market share and proven execution capability. We forecast its net profit to post a 22% 2016-2019 CAGR, driven by a 7.1% revenue CAGR and net margin expansion from 6.2% to 8.9%. We have a Buy rating on CRB and a Sell rating on TB We initiate coverage of CRB with a Buy rating and TB with a Sell recommendation on both A- and H-listed shares. CRB is currently trading at 23x FY17E P/E, with a stronger growth outlook and better execution capability, while TB is trading at 33x FY17E P/E (48x if we strip out subsidies). We believe that CRB is undervalued, as the market underestimates the strength of the recovery in the Chinese beer market and the competitive advantages of CRB. In our view, TB is overvalued given its lower growth profile, and recent M&A scenarios have further inflated valuation. Based on DCF valuation, we derive our target price of HKD21.05 for CRB (8.9% WACC, 2% terminal growth) and HKD27.22 for TB-H (RMB24.22 for TB-A, both 8.8% WACC, 2% terminal growth). Main downside risk for CRB is raw material prices rising too quickly hurting its margins, and main upside risk for TB is potential investor buying 20% shareholding in TB from Asahi at premium to current market price.

______Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Distributed on: 01/03/2017 23:55:29 GMT

2 March 2017

Consumer China Consumer

Investment summary

A good time to buy to benefit from a turnaround

We believe we are at the beginning of a new bull market for the Chinese beer industry and suggest that investors buy high-quality brewers, benefiting from the coming recovery cycle. In our opinion, beer industry profitability will grow strongly, driven by revenue growth (~5% CAGR for the industry) and margin expansion. In particular, we forecast China Resources Beer (CRB) and Tsingtao Brewery (TB) to deliver 22% and 9.8% adjusted net profit CAGRs in 2016-2019.

The Chinese beer market hit a temporary setback in 2013-2016, after per capita consumption peaked in 2013 at 37.2 liters (33% above the global average). Total market volume dropped 7% in three years, which was caused by multiple factors, including a surge in imported products, short-lived but explosive performance of pre-mixed cocktails, and overall de-stocking in an economic downturn. As these factors are fading out, we believe that a strong recovery of the Chinese beer market is just ahead of us.

We prefer large players; focus on profitability improvement

As the Chinese beer market becomes more product and brand driven, the gap between large, national players and their followers is likely to widen, as large players with national coverage can leverage their strengths in media coverage, distribution network, and product innovation. There are three brewers in China with over 15% market share, i.e., CRB, TB, and ABInBev. We like CRB the best out of the two Hong Kong-/China-listed companies for its better upside potential in ASP increase and cost saving and its superior management team.

Further consolidation likely

We believe large brewers in China, in particular CRB, are seeking acquisition targets in both domestic and international markets. In our previous discussion, some SOE breweries in China have good brands and good balance sheets but are experiencing margin deterioration due to poor management. While we like CRB, we believe smaller players such as Yanjing may be further marginalized. Consolidation in the Chinese beer market seems unavoidable, and we see a high chance that the current Big 5 may eventually become a Big 3.

High earnings growth for CRB (Buy), TB overvalued (Sell)

We rate CRB as Buy and TB as Sell. CRB should benefit from overall market recovery and margin improvement, with its relentless efforts on product upgrading and optimizing operations. We forecast a 7% revenue CAGR and a 22% net profit CAGR in 2016-2019 for CRB, barring any potential acquisition. We use DCF valuation to derive a target price of HKD21.05 for CRB. TB’s share price has been inflated by recent news that Asahi may consider disposing its 20% stake in TB. While we believe it is unlikely that TB could reach any meaningful cooperation agreement with the new buyer, TB’s market share loss trend will not likely change in the near term. Our DCF model suggests a target price of HKD27.22 for TB-H shares (RMB24.22 for TB-A shares).

Page 2 Deutsche Bank AG/Hong Kong

2 March 2017 Consumer China Consumer

Vol.:1.9% 2016-2020 CAGR Penetration almost hitting a ceiling

A mature market with high penetration per capita The Chinese beer market has developed from almost zero in 1980 (well below Useful conversion rates: 1m tons) to a mature market with nearly 50m tons these days, driven mainly 1 ton/1,000 liters/10 HL by penetration (per capita consumption). In 2015, each Chinese person on = 126 24x12 fl. oz. case average consumed 35 liters of beer (or just a little more than 100 standard = 8.52 US beer barrels (bbl) 330ml/12oz bottles). Although this amount is still far below some developed markets such as North America and Western Europe, it is already higher than the global average and other nearby markets such as Hong Kong and Taiwan. Considering Chinese consumers also drink a significant amount of other alcoholic beverages (mainly Chinese baijiu, a kind of hard liquor), the 35-liter average reflects a highly developed market by volume, in our opinion.

Figure 1: Total beer consumption in Figure 2: Per capita consumption of Figure 3: Per capita consumption of million tons in China, 2001-2020E beer in China in liters, 2001-2020E beer in liters in main markets, 2015 million tons liter liter 60 40 37.4 37.0 90 50.6 52.0 34.7 80 47.4 35 50 45.4 70 30 60 50 40 35.2 25 40 26.3 30 30 20 17.9 22.7 20 10 20 15 0 10 10 5 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2016E 2017E 2018E 2019E 2020E Source: Euromonitor; Deutsche Bank Source: Euromonitor; Deutsche Bank Source: Euromonitor; Deutsche Bank

On-trade highly penetrated, limited upside potential for off-trade A somewhat surprising finding is that, on average, a Chinese person drinks An average Chinese person almost as much beer as an American consumer in on-trade channels (18 liters already drinks almost as vs. 20 liters in 2015), which suggests that the volume potential for beer in on- much beer as a US consumer trade channels is limited. Although the off-trade channel seems more in on-trade channels promising, we believe that this off-trade upside may be difficult to achieve due to drinking habits (mostly dominated by Chinese baijiu).

Figure 4: Per capita consumption of Figure 5: Per capita consumption of Figure 6: On-/off-trade channel beer beer in liters, on-/off-trade split, 2015 beer in USD, on-/off-trade split, 2015 volume split, 2010-2015, China

liter 52.0% USDbn 51.5% 90 350 51.5% 80 51.1% On Trade 70 300 51.0% 20.2 60 250 50.5% 175.1 50 On Trade 200 40 50.0% Off Trade On Trade 30 150 17.9 56.6 Off Trade 49.5% 20 100 49.0% 10 16.8 151.4 48.9% Off Trade 0 50 48.5% 38.9 China US 48.5% 0 20.0 48.0% China US 2010 2011 2012 2013 2014 2015

Source: Deutsche Bank, Euromonitor Source: Deutsche Bank, Euromonitor Source: Deutsche Bank, Euromonitor

Figure 7 shows the main problem for beer in off-trade channels. First of all, Chinese consumers have yet to develop a culture of at-home leisure drinking – Chinese people do not have as many parties at home as westerners, and Chinese consumers do not drink as much alcohol without food at home.

Deutsche Bank AG/Hong Kong Page 3

2 March 2017

Consumer China Consumer

Secondly, the main drinking occasion at home is dining, when Chinese baijiu has a very important role and squeezes the space for beer and wine. As these two issues are more culture related, we believe it will take quite some time for Chinese consumers to lift at-home, i.e., off-trade, beer consumption from current levels.

Figure 7: Drinking occasion analysis Channel Occasions China US On-trade Out dining Mainly beer and Chinese baijiu, some wine, very little western spirits Mainly beer and wine, some western spirits Night outlets Mainly beer, some western spirits and wine, little baijiu Beer and western spirits, some wine Total on-trade 67% beer, 21% Chinese baijiu, 11% wine and 2% western spirits 53% beer, 35% western spirits and 12% wine Off-trade At home dining Lots of baijiu, some beer, and little wine Mainly beer and wine At home leisure Mainly beer Lots of beer and western spirits, some wine Total off-trade 63% baijiu, 27% beer, 10% wine, nearly zero western spirits 44% beer, 37% western spirits, and 19% wine Source: Euromonitor, Deutsche Bank Note: Consumption percentage is calculated based on pure alcohol consumption using the following conversion rate: 1 liter beer = 0.04 liter alcohol, 1 liter western spirit = 0.4 liter alcohol, 1 liter wine = 0.12 liter alcohol, 1 liter baijiu = 0.45 liter alcohol

Figure 8: On-/off-trade channel split Figure 9: On-trade channel volume Figure 10: Off-trade channel volume by beer volume, China vs. US split by pure alcohol content split by pure alcohol content 100% 100% 100% 90% 90% 20.9% 90% 26.4% 80% 80% 1.7% 49.8% 80% 36.6% 51.5% 10.9% 70% 70% 70% 62.6% 60% 60% 17.7% Chinese Spirits 60% Chinese Spirits 19.1% 50% On Trade 50% Western Spirits 50% Western Spirits 40% Off Trade 40% Wine 40% 0.3% Wine 73.6% 66.6% 30% 30% Beer 30% 10.5% Beer 48.5% 75.5% 20% 20% 20% 44.3% 26.6% 10% 10% 10% 0% 0% 0% China US China US China US Source: Euromonitor, Deutsche Bank Source: Euromonitor, Deutsche Bank Source: Euromonitor, Deutsche Bank

Growth in economy and population drives beer volume up

Volume growth potential: 1.9% annually in 2016-2020 (Deutsche Bank forecasts) There are three main factors defining total beer consumption volume: first, the legal drinking age (LDA) population, which is the addressable customer base; second, economic development that defines how much alcohol consumers can afford (or are willing to consume) in a market; and third, population demographic shifts that change the weighted average consumption per capita, as young and old consumers have different drinking habits.

LDA population growth slowed to 0.9% per annum in 2015 from over 3% in Slow population growth is a the 1980s. China does not have an official LDA requirement by law, and we slight positive for beer use the population aged 20 and above as a proxy. Due to China’s one-child consumption policy starting at the end of the 1970s, 20+ population growth has slowed from c.3% in the 1980s to below 1% in 2015. In particular, since 2010, the 20+ age group population growth has dropped from 1.7% to 0.9%. We forecast that this group’s population growth will further decelerate to a CAGR of 0.5% from 2015 to 2020. Barring other impacts such as economic or demographic factors, total beer consumption volume should grow at the same pace as LDA population growth.

LDA population continues to age, with senior population (60+) growing faster. Aging population is a negative Not all LDA customers have the same drinking habits. The metabolism of old for beer consumption people becomes slow, and the water level in their bodies drops, making senior

Page 4 Deutsche Bank AG/Hong Kong

2 March 2017 Consumer China Consumer

people less tolerant to alcohol as alcohol content stays in their blood and bodies longer. Senior people also drink less beer because beer is the most popular drink at casual social events where younger customers gather more. Therefore, senior people are more likely to drink wine and spirits instead of beer. While the LDA population in China will keep rising until 2040, the 20-59 age group population actually peaked in 2015 and will decrease by 1% over the course of 2015 to 2020 (0.2% per year). This slide will accelerate. By 2030, the 20-59 age group population will drop from the current 851m to 765m, a whopping 10% drop. While it is difficult to find a formula to calculate the exact quantitative negative impact on beer consumption from demographic change, we assume the impact ratio at 50%, meaning every 1% decrease in the 20-59 age group will have a 0.5% negative impact on beer consumption.

Figure 11: China population growth Figure 12: 20+ age population Figure 13: Population by age growth, 2015-2020E 4.0% million million 1,150 LDA 3.5% 1,400 CAGR = 0.5% 1,100 LDA-59 3.0% 1,300 1,050 1,000 2.5% 1,200 79 950 2.0% 1,100 -51 900 1.5% 1,000 850 Total 0.9% 1,060 1,088 1.0% 900 800 20+ 750 0.5% 800 0.5% 20+ Pop, 2015 15-19 Pop, 2015 Death of 20+ 20+ Pop, 2020 700 0.0% 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 during 2015-2020 20102015202020252030 Source: Deutsche Bank, United Nations Source: NBS, Deutsche Bank, United Nations Source: Deutsche Bank, United Nations

Slight increase in per capita beer consumption as economy grows. In our Economic growth is a positive thematic report, Baijiu: Keep out the cold, published on 20 September 2016, we to beer consumption stated that forecasting consumption of beer or any other single kind of alcoholic beverage should be put into the context of consumption of all alcoholic beverages, i.e., beer, wine, spirits, and local drinks. Consumption of total alcoholic beverages tends to grow with economic development.

Figure 14: Per capita alcohol Figure 15: Average per capita Figure 16: Alcoholic beverage consumption vs. per capita GDP alcohol consumption of market volume CAGR from now to when groups by per capita GDP level China hits per cap GDP of USD20k

7.0 Pure alcohol, 6.5 China's GDP CAGR 4.5% 5.0% 5.5% 6.0% Pure alcohol, 6.3 12 litres Implied Years 20.8 18.8 17.1 15.7 litres 6.0 5.8 5.0 1.7% 1.9% 2.1% 2.3% 10 5.0 5.1 1.8% 2.0% 2.2% 2.4% y = 1.4261ln(x) + 0.821 8 5.2 1.9% 2.1% 2.3% 2.5% R² = 0.5684 4.0 3.7 Alcoholic 5.3 2.0% 2.2% 2.5% 2.7% 6 3.0 Consumption per 5.4 2.1% 2.3% 2.6% 2.8% capita when Chinese 5.5 2.2% 2.4% 2.7% 2.9% 4 2.0 1.5 1.1 per cap GDP reaches 5.6 2.3% 2.5% 2.8% 3.0% 2 1.0 0.4 US$20k 5.7 2.4% 2.6% 2.9% 3.2% Per capita GDP, thousand US$ - 5.8 2.5% 2.7% 3.0% 3.3% 0 0-1000 1000-3000 3000-5000 5000-10000 10000-20000 20000-40000 40000+ 5.9 2.5% 2.8% 3.1% 3.4% 0.0 20.0 40.0 60.0 80.0 100.0 Per capita GDP, in USD 6.0 2.6% 2.9% 3.2% 3.5% Source: Deutsche Bank, Euromonitor Source: Deutsche Bank, Euromonitor Source: Deutsche Bank, NBS

We show a scenario analysis in Figure 16. First of all, we set Chinese per capita GDP CAGR at 4.5% to 6%, at 0.5ppt intervals. Based on different GDP CAGRs, we calculated the number of years to get USD20k per capita GDP from current levels (shown in the second row with the heading “Implied Years”). When China hits per capita GDP of USD20k, we assume that per capita alcohol consumption in China to be five to six liters. Based on different alcohol consumption targets and various timeframes to get there, we calculate the volume CAGRs of alcohol consumption in different scenarios. For example, If China per capita GDP posts at a 4.5% CAGR, it would take 21

Deutsche Bank AG/Hong Kong Page 5

2 March 2017

Consumer China Consumer

years to reach per capita GDP of USD20k, and alcohol consumption needs to post a 1.7% volume CAGR in these 21 years to reach a total consumption of five liters by then.

In our scenario analysis, our base case is that Chinese per capita GDP can maintain a 5% CAGR, which suggests that it will take China 18.8 years to reach per capita GDP of USD20k. If Chinese per capita consumption of alcohol is to reach 5.5L in that time, it requires a 2.4% volume CAGR.

We highlight that this 2.4% volume CAGR is for all alcoholic beverages, and we are almost certain that western spirits and wine should outperform due to a low base. Chinese baijiu and beer are likely to underperform given high penetration. Currently, wine and spirits account for c.10% of total alcoholic beverage consumption by volume in China. Assuming that this category is delivering a 7.5% CAGR (1.5x our base-case GDP growth), that leaves beer and Chinese baijiu to post a 1.3% CAGR to arrive at the weighted average growth of 2.4%.

Figure 17: Alcoholic beverage Figure 18: Alcoholic beverage volume share by category volume CAGR, 2016-2035

0.6% 0.9% 0.7% Total: 7.4m tons 100% Total CAGR = 2.4% 5.5% 9.0% 9.9% Western Spirits Avg. 5.5L per cap 90% Total:Total: 4.714m 4.7m tons tons KT Avg.Avg. 3.5L 3.5 per L p. cap. c. 80% 32.3% Western 8,000 139 CAGR = 7.5% 70% Wine Spirits 47.5% 41.0% 7,000 60% 1,836 6,000 CAGR = 7.5% Wine 50% Beer 5,000 35 465 40% 4,000 2,491 CAGR = 1.3% Beer 30% 61.7% 3,000 1,934 48.4% Baijiu 20% 42.6% 2,000 2,936 10% 1,000 2,280 CAGR = 1.3% Baijiu 0% 0 2001 2010 2016 2016 2035 Source: Euromonitor, Deutsche Bank Source: Euromonitor, Deutsche Bank estimates

Figure 19: Estimation of beer consumption growth in China, 2015-2025 Factors Trend and impact to beer consumption Contribution to beer consumption p.a. LDA population Positive. LDA population should grow at around 0.5% per year in the next +0.5% (2015-2020), +0.3% (2020-2025) five years, then slow to 0.3% per year until 2030. LDA demographics Negative. 20-59 population should decrease 0.2% per year in the next five -0.1% (2015-2020), -0.3% (2020-2025) years, with the decline accelerating to 0.7% per year in the five years thereafter and 1.1% in 2025-2030. Per capita consumption of beer Positive. Total alcohol consumption should grow around 2.4% in the next 1.5% (2015-2020), 1.3% (2020-2025) 19 years. Beer is likely to underperform due to high penetration. We estimate a per capita beer volume CAGR of 1.3% in the next 20 years Total 1.9% (2015-2020), 1.3% (2020-2025) Source: Deutsche Bank estimates

Based on this analysis, in the next five years, we forecast a contribution of 0.5% beer volume growth per year from LDA population increase, a negative 0.1% impact per year from demographic change, and 1.5% growth due to economic development, totaling a 1.9% beer volume CAGR from 2016 to 2020. This is slightly below Euromonitor’s 2% CAGR forecasts.

We believe that the volume decline in the Chinese beer market over the past few years is a result of multiple factors, with some of them being one-off, such as the anti-corruption movement eliminating a lot of dining out by government officials and some pre-mixed alcoholic beverage companies’ big push on bottled cocktail drinks taking market share from beer. As the Chinese beer market seemingly resumes its normal situation, we believe that our forecast 1.9% volume CAGR is achievable in the next five years. Our market visits in the Chinese beer industry suggest that 2017 is off to a very strong start, and there is upside risk to our 1.9% volume growth forecast in this year, probably due to a low base.

Page 6 Deutsche Bank AG/Hong Kong

2 March 2017 Consumer China Consumer

ASP: 3% 2016-20 CAGR No longer a volume game

In the following paragraphs, we detail the experience of the last downturn, as this is the crucial factor to why we do not expect the sector to enter into another volume competition. Price was not a focus for brewers in China until recently. In fact, product prices were artificially depressed by brewers trying to grab market share in the early days. In the first five years of this century, beer prices at both the ex-factory and retail levels had remained stagnant.

We highlight two triggers for brewers in China to switch their strategic focus from volume to price. The first one happened in 2008. An overheating economy and high inflation in 2007 made Chinese consumers much less price sensitive. Price competition became less effective; thus, brewers raised prices and turned to other marketing activities such as event sponsorship and new product launches to gain market share. However, the global financial crisis in 2008 forced brewers to pull back any planned price hikes, and they turned to price competition to maintain sales.

The second and more important trigger happened in 2013, when Chinese beer Examples of strategy shift: market growth turned negative for the first time. Since then, brewers have Tsingtao Brewery, 2011: awakened to the fact of sustained muted volume growth; hence, a change in Announced annual strategy away from market share grab is necessary to sustain profitability. production target of 10m tons Unlike the time in 2008 when brewers took a price hike opportunistically, the by 2014, abandoned this in price increase in 2013 was more of a long-term strategic shift, and the “price focus” has completely replaced the old creed of scale expansion. For example, 2013 Tsingtao Brewery announced in 2011 a new target of production volume Yanjing Brewery, 2011: to reaching 10m tons in 2014, but it has not mentioned this target since 2013. reach annual production Similarly, Yanjing Brewery also declared a target in 2011 to achieve production target of 8m tons by 2015, no volume of 8m tons in 2015, and it also ditched this target in 2013. mention of this after 2013

Figure 20: Average retail price of Figure 21: Growth of average beer Figure 22: Ex-factory price of CRB, in beer in RMB, per 330ml retail price, 2001-2020E RMB per ton

Stick to new strategy, RMB/330ml 12.0% RMB/ton Increase for sustained long price on high 6.00 5.60 2,700 term price increase 10.0% inflation 5.00 2,500 8.0% 2,300 4.00 3.53 6.0% 2,100 3.00 Price war in early 2.35 4.0% 1,900 days 1.87 1.88 2.00 2.0% 1,700 Try to keep price 1.00 unchanged and 1,500 increase vol., 0.0% unsucessful - 1,300

2001 2005 2010 2015 2020E 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 -2.0% 2016E 2017E 2018E 2019E Source: Euromonitor; Deutsche Bank Source: Euromonitor; Deutsche Bank Source: Deutsche Bank, Company Data

Deutsche Bank AG/Hong Kong Page 7

2 March 2017

Consumer China Consumer

ASP driver 1: specialty/imported beer replacing domestic

According to Euromonitor, domestic economy lager (or to put it simply, cheap Lager is a type of beer which beer) is still the vast majority of the Chinese beer market, with 77% volume is made in bottom-fermented share. Domestic mid-priced lager takes 15%, and the remaining share largely technique and conditioned at goes to premium lager (7%). In general, the price range for “Economy” is a low temperature. It is also retail price below RMB7 per liter; “Mid-priced” is RMB7-14 per liter; and often called pilsner, or just “Premium” is over RMB14 per liter. In all statistics, “domestic” means “domestically produced,” which includes international brands that are beer. Most of mass produced produced locally. “Imported” means products made outside of China. beer including Snow, Tsingtao, Budweiser are Although the Chinese beer market is still dominated by the economy segment, lager. Different from lager, there is an obvious trend of segment shifting. From 2010 to 2015, volume other beer types include ale, share of the Mid-priced and Premium segments gained 7.2 percentage points stout, wheat, etc, which are at the expense of the Economy segment. In particular, the market share of the included in “Dark beer” in Premium segment has more than doubled to 6.6% from 2.6%. Euromonitor following discussion. Usually, expects this trend to continue and forecasts the total market share for dark beer is more expensive. Premium and Mid-priced beer will reach 30% by 2020.

Figure 27 shows that, even though the US is a much more developed beer market than China, those sophisticated beer connoisseurs have not stopped chasing better products. With economy lager taking only 21% volume share in 2015, this segment will continue to lose market share to more expensive products, according to Euromonitor estimates.

Figure 23: Chinese beer market Figure 24: Chinese beer market Figure 25: Retail price of Chinese share by volume, 2015 share by volume, 2010-2020 beer (in USD per liter)

0.2 0.3 0.4 0.5 0.7 1.0 1.3 1.6 2.1 2.5 100% 3.0 90% Others Beer Overall 1.70 80%

Domestic 70% Economy Lager 1.00 Others Economy Economy Lager 1% 73.8 71.9 69.7 67.3 Imported 60% 81.5 79.9 77.1 75.6 77% 85.0 83.9 82.9 Mid-Priced Lager 3.04 Premium Lager 50% 1% Domestic 40% Mid-priced Domestic Premium Lager 4.78 Premium Lager 30% Domestic Mid- 6% Imported Premium Lager 13.11 16.3 16.6 priced Lager 20% 15.8 16.0 15.3 15.5 15% 14.0 Premium 10% 12.1 12.8 12.9 13.5 Dark Beer 11.59 7.6 8.8 10.0 11.5 13.1 USD/liter 0% 2.6 3.1 3.8 4.6 5.4 6.6 0.00 5.00 10.00 15.00 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Euromonitor, Deutsche Bank Source: Euromonitor, Deutsche Bank Source: Deutsche Bank, Euromonitor

Figure 26: US beer market share by Figure 27: US beer market share by Figure 28: US beer market share by volume, 2015 volume, 2010-2020 value, 2010-2015

Others Dark Beer 100% 2.8 2.7 2.7 2.6 2.7 2.8 2.9 2.9 2.9 2.9 3.0 3% 9% 90% Beer Overall 4.25 Domestic 20.8 19.8 18.9 18.2 17.5 16.9 Others 25.5 24.8 23.8 23.0 22.0 Premium Lager 80% Economy Lager Economy Lager 3.00 9% 21% 70% Economy Mid-Priced Lager 3.34 60% 39.4 38.5 37.6 41.6 40.5 44.2 42.8 50% 46.6 45.6 Imported 48.4 47.9 Domestic Premium Lager 5.32 Premium Lager 40% 15% Mid-priced Imported Premium Lager 5.53 Domestic Mid- 30% priced Lager 20% 41.1 42.5 35.7 37.7 39.5 31.1 33.5 Dark Beer 7.76 43% 26.9 28.8 Premium 10% 23.3 24.6 USD/liter 0.00 2.00 4.00 6.00 8.00 10.00 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Deutsche Bank, Euromonitor Source: Deutsche Bank, Euromonitor Source: Deutsche Bank, Euromonitor

Figure 23 through Figure 28 show an interesting phenomenon that, even though China is not as developed a beer market as the US (77% of Chinese beer consumption by volume is local Economy beer), a certain segment of Chinese consumers can afford expensive premium beer (average retail prices

Page 8 Deutsche Bank AG/Hong Kong

2 March 2017 Consumer China Consumer

of Dark Beer and Imported Premium Lager are higher in China than in the US). The positive thing is that we have identified a group of beer consumers in China who are willing pay a premium for high-quality beer. We also expect this consumer segment to expand with growth in personal disposable income as the broader economy continues to grow. Over the next five years, we expect the price segmentation of the Chinese beer market to develop toward the US market model. According to Euromonitor estimates, the market share of Premium and Mid-priced beer combined will gain 10ppt to 30% from 2016 to 2020, at the expense of Economy lager (market share dropping to 67% from 77% during the same period).

ASP driver 2: new products in specialty/craft beer

Some beer connoisseurs said that craft beer is the jewel in the crown of the Figure 29: Imported beer volume beer industry, with craft beer using carefully selected raw materials, tailor- growth made brewing technology and being brewed in small quantities. With this 100.0 understanding, it is not surprising to see retail prices of Dark Beer (Euromonitor 90.0 85.8 80.0 categorization, including ale, stout, wheat, and all craft beer) in both China and 71.4 70.0 65.6 59.4 the US spiking out. 60.0 50.0 37.4 40.0 Product upgrading involves a shift in consumer preference toward premium 30.0 20.1 products and further expansion of the entire premium segment, which includes 20.0 10.0 craft/specialty beer. In China, craft beer takes only 1% of the market, way 0.0 behind the US market’s 12%. However, this situation is changing. Since 2013, 2011 2012 2013 2014 2015 2016 skyrocketing imported beer volume growth of 60-80% and the emergence of Source: Deutsche Bank, NBS craft beer bars point to the beginning of craft beer culture in China. Both multinational companies and local entrepreneurs have taken the lead in educating Chinese beer drinkers about craft/specialty beer. Carlsberg introduced Kronenbourg 1664 to the Chinese market in 2013 to test the water of market acceptance of specialty beer. Big success followed. ABInBev has also acquired a few local craft brewers globally and is working with its 30% controlled local partner Zhujiang Brewery to develop Chinese craft beer. In addition, both ABInBev and Carlsberg have other craft beer that can be introduced into the Chinese market.

Aside from the multinational brewers, local entrepreneurs have also come up with brew pubs to sell their own craft beer. For instance, Panda Brew in Beijing and Reberg Brewery and Boxing Cat Brewery in Shanghai are three craft brewers that have attracted both consumers and the capital markets. Although these local breweries are not directly or indirectly owned by large players, the development of local craft beer will likely drive Chinese consumers’ overall recognition of craft beer and develop a craft beer culture, which would also help drive overall price increases in the Chinese beer market.

Figure 30: Sampling of craft brewers in China Panda Brew (Beijing) Reberg Brewery (Shanghai) Boxing Cat Brew Pub (Shanghai) Business Model Brew pub + outsourcing Self-owned brewery Brew pub Products Ale, IPA, Wheat Beer, Honey Beer, Porter, Pilsner, Lager, IPA, Stout, Wheat Beer Lager, IPA, Porter, Ale Cider, and seasonal Specialty Products feature raw material from China, Fresh, many products are packaged in Brewing authentic European and using craft beer techniques to make craft stainless steel bottles American craft beer in Shanghai beer with Chinese characteristics Est. volume 2016 1,000 tons 1,500 tons N/A Source: Deutsche Bank

Deutsche Bank AG/Hong Kong Page 9

2 March 2017

Consumer China Consumer

Figure 31 lists the main products of major brewers in China, and there are only a few selections in the craft/specialty beer segment. With combined efforts from international giants and local entrepreneurs, the craft/specialty beer segment saw tremendous 60% volume growth in 2015 (Euromonitor data) off a small base, and we believe this segment will maintain its high growth in the future and drive the overall beer market’s ASP growth.

Figure 31: Product segmentation in Chinese beer market Retail price in on-trade CRB Tsingtao ABI Carlsberg channel (RMB) Specialty/International >RMB10 Special Brew Augerta Hoegaarden 1664 Superpremium Snow Dark Beer Tsingtao Dark Beer Leff

Tsingtao Weissbier International Premium RMB6-10 Face Mask Tsingtao Gold Budweiser Carlsberg Stella Artois Corona Domestic Premium RMB4-6 Snow Pure Draft Tsingtao Harbin Tuborg Tsingtao Pure Draft Domestic Sub EMB3-5 Snow Mountain Climb Laoshan Sedrin Chongqing Premium Hans Dali Wusu Domestic Economy

ASP driver 3: Packaging mix change

Owing partly to low aluminum prices in recent years, Chinese brewers started to shift from glass bottles to aluminum cans to save costs. With the big push from brewers, Chinese consumers have also been increasingly receptive of beer in cans. Meanwhile, Chinese brewers have been altering the size of the packaging in the past two decades, which has also increased sales contribution per unit volume. Although aluminum prices have been rebounding, the cost of metal packaging remains below glass packaging, and the “canning” trend is likely to continue.

Figure 32: Packaging change of beer in Chinese market Packaging Packaging Volume in early Volume now Market share trend Overall trend material 2000's Glass Quart (big bottle) 630ml/635ml Mainly 500ml, other volume includes 550ml/600ml Decreasing Packaging becoming smaller, large packages Glass Pint (small bottle) 330ml 330ml Increasing losing market share to Aluminum Big can N/A 500ml Increasing small packages Aluminum Small can 355ml 330ml Increasing Source: Deutsche Bank

Page 10 Deutsche Bank AG/Hong Kong

2 March 2017 Consumer China Consumer

Figure 33: Ex-factory price of an Figure 34: Ex-factory price per ton of Figure 35: Packaging market share international beer brand in China an international beer brand in China in beer markets, US vs. China (VAT included), 2016 (VAT excluded) RMB RMB/ton 100% 5 160 18,000 10 148 15,972 90% 16,000 Draft 140 80% 14,000 120 12,536 70% 35 108 11,655 12,000 60% 100 88 10,000 80 78 8,818 50% Bottle 80 8,000 40% 60 6,000 30% 55 40 4,000 20% Can 10% 20 2,000 15 0 - 0% 630mlx12 bottle 500mlx12 can 330mlx24 can 330mlx24 bottle 630mlx12 bottle 500mlx12 can 330mlx24 can 330mlx24 bottle US China Source: Deutsche Bank, Company Data Source: Deutsche Bank, Company Data Source: Deutsche Bank estimates

Figure 32 shows that the volume content of large glass bottles in the Chinese beer market has already reduced by 21% (from 630ml to 500ml) in the past decade and a half, and the packaging mix has been changing toward high unit price products such as small bottles and cans. While the volume content reduction may be over, the shift to smaller cans and glasses will remain a primary task for brewers in China. Based on our estimates, the Chinese beer market is still underdeveloped in terms of packaging premiumization, with only around 15% in cans and 80% in bottles (mostly big bottles). Compared with the US, which has 55% in cans and 35% in bottles (mostly small bottles), Chinese brewers still have a long way to go.

Estimated ASP CAGR: 3%

Quantitatively forecasting the magnitude of industry ASP growth in the Chinese beer market is difficult. While we are positive that the ASP increase trend is secular and noticeable, quantifying the contribution of the previously discussed three ASP drivers is not as easy as it was for volume growth modeling. Instead, we use other approach to calculate the beer market’s ASP growth rate.

Cost-plus approach: 3% One assumption we make is that major players in the current Chinese beer For a large brewer in China: market are no longer interested in price competition; thus, they will try to pass COGS = 65%-70% of revenue through all cost increases to customers. As raw material prices are rebounding, Raw Material = 60% of COGS we assume a 5% CAGR in raw material price in the next five years. For Chinese Raw Material = ~40% of Rev. brewers, raw material is roughly 60% of total COGS, and the current prevailing

GP margin for Chinese breweries is around 30-35%, meaning raw material cost is 39-42% of revenue. In order to pass through all raw material cost increases to customers, a 5% increase in raw material price requires a 2% increase in ASP.

This 2% increase in ASP can barely cover the increase in raw material cost. Considering there is also product upgrading, as well as a reduction in price promotion, an extra 1% ASP increase does not seem to be an aggressive assumption. A 3% ASP increase per year thus becomes our base case.

Projection based on historical data: We also reviewed ASP increases of major brewers in China to calculate the weighted average ASP increase of the total beer market. We found ASP increase data for CRB, TB, ABInBev, and Carlsberg in China from 2013 to 2016, and we assigned a weighting to each of them based on their volume share in

Deutsche Bank AG/Hong Kong Page 11

2 March 2017

Consumer China Consumer

China. These four brewers already take c.60% of the Chinese beer market. Given the high growth of imported beer in the past several years, we assign 2% ASP growth per year for the rest of the market. Our calculation shows that, from 2013 to 2016, weighted average ASP growth in the Chinese beer market has already been higher than CPI by 60-280bps. Deutsche Bank forecasts China CPI to rebound to 2.5% in 2017. We believe it is very likely that the Chinese beer market should maintain ASP growth at least 50bps higher than CPI, which would also equal 3%.

Figure 36: ASP growth of major brewers in China Figure 37: Weighted average ASP growth and CPI

12.0 ABI CRB TB Carlsberg Others ASP Growth, total beer market CPI 10.0 4.5 4.0 8.0 3.5 6.0 3.0 4.0 2.5

2.0 2.0 1.5 0.0 1.0 -2.0 0.5 -4.0 0.0 2013 2014 2015 2016 2013 2014 2015 2016

Source: Deutsche Bank, Company Data Source: Deutsche Bank, Company Data, NBS

With our 1.9% volume CAGR and 3% ASP CAGR assumptions, we believe that the overall Chinese beer market size will expand at a 4.9% CAGR in the next five years.

Page 12 Deutsche Bank AG/Hong Kong

2 March 2017 Consumer China Consumer

Competition: Inequality worsens A consolidated market, with the top five taking 75% volume share

Market concentration continues to develop The Chinese beer market has experienced significant consolidation over the past 10 years, with the top five brewers commanding 75% market share, making China one of the most consolidated beer markets in the world. In 2005, the top five brewers had only 47% market share. However, we do not view the current market share concentration as a state of equilibrium. In our view, China’s beer market is likely to evolve to a situation similar to that in the US, where only two or three players dominate the market. Figure 41 details major market trends in the Chinese beer industry and why these trends favor the development of large players.

Figure 38: Beer market share by Figure 39: Beer market share by Figure 40: Beer market share by volume, China 2015 volume, China 2011-2015 volume, US 2015 100% % Carlsberg 90% Others Boston Beer 5.0 29.7 28.5 26.3 Others 37.7 2% Yanjing 80% 38.5 Pabst Brewing Others 26.3 Carlsberg 13% ABInBev 10.5 70% 5.0 3% 5.3 5.0 44% 10.5 Heineken 60% 2.0 2.1 11.2 10.6 Yanjing 4% 11.5 11.0 50% 15.7 ABInBev- 13.0 14.3 Crown Imports 11.6 SABMiller 40% 11.7 ABInBev-SABMiller 8% 15.7 16.9 18.0 17.9 30% 14.9 15.9 Tsingtao 20% 23.9 23.6 24.6 10% 21.4 21.7 CR Snow MillerCoors CR Snow 26% Tsingtao 24.6 0% 17.9 2011 2012 2013 2014 2015 Source: Deutsche Bank Source: Deutsche Bank Source: Deutsche Bank

Figure 41: Competitive dynamic change favors large-scale players Market Trends National Players Local Players Raw material cost Likely to go up as global commodity prices Continue to enjoy volume discount, and Less volume discount, easier to be recover long-term contracts secure supply stability affected by market price fluctuation Transportation cost More strict regulation and ban on illegal Multiple production facilities build efficient Fewer breweries, higher transportation overload, unlicensed shipping activities logistic networks and save transportation costs costs Less compliant practices more affected by More compliant practices less affected by more stringent regulations more stringent regulations Capacity utilization Removing obsolete capacity to save costs Slowly shutting down old breweries and More difficult to optimize utilization due to moving production to nearby breweries strong local connection that usually causes much-lower utilization rates for away- from-home breweries Marketing expenses Technology helps media to cover more Easy to leverage scale to conduct Difficult to find media that cover only population and become more global worldwide/nationwide marketing regional/local markets; losing campaigns competitiveness to national players on TV and internet platforms New product Consumer preference becomes more Stronger capability of product R&A; more Failure in a new product launch my hit the launches diversified tolerance to failures of new product company’s P&L worse than it would for launches due to large scale large players, thus fewer well-prepared new products Source: Deutsche Bank

Deutsche Bank AG/Hong Kong Page 13

2 March 2017

Consumer China Consumer

Changing marketing strategy favors large players

Above-the-line: Favoring national players due to globalization of media platforms Above-the-line (ATL) is a term used in FMCG’s marketing department, which refers to “overhead marketing spending,” including media and advertisement, large event sponsorship, and other marketing expenses that are not directly linked to sales volume.

The globalization of media these days has made ATL investment less affordable by small regional players. In the past, smaller players had more choices to advertise in local and regional print media (newspaper and magazines) as well as local radio and TV channels. Regional brands tended not to spend on national media because national media covers a far wider customer base vs. regional brands’ addressable customers, and the marketing dollars would be wasted. The issue now is that local media presence is dwindling, and media channels increasingly have national/global coverage. Our market visit shows that local beer companies, or even local brands of national/global brewers, find it less affordable to invest in media advertisement – only the large brands with national or global coverage can fully leverage the benefit of the globalization of media.

Figure 42: Trend of media penetration in China Figure 43: Change of media platforms Early 2000 Now Influence TV Mostly provincial or city Almost all TV channels are level TV, very few national or international, TV Increasing national TV or satellite through satellite network TV programs or internet Internet Mostly local radios. Mostly digital or satellite Audience use stationed radios. Audience use Radio Rebounding devices to listen to the mobile devices (car radio, broadcast. mobile phones) to listen. Radio Consolidated. Multiple Fragemented, focus on Prints national news groups with Decreasing local audience. local branches 60% penetration in China, Prints Internet Almost none Increasing global platforms 1980 1990 2000 2010 Now Outdoor Less traffic More traffic Increasing

Source: Deutsche Bank Source: Deutsche Bank

Below-the-line: Less effective Below-the-line (BTL) refers to marketing expenses directly related to sales volume, such as distributors’ rebates, volume-linked retailer incentives, and giveaways. It was a very popular and powerful marketing tool a couple decades ago, but there has been a big change in that ATL expenses are taking a larger share of total marketing budgets recently, based on our interviews with industry sources. This is partly due to consumers’ increased knowledge and also partly because rising personal income has made small giveaways less attractive to consumers. It was common before, for instance, that a customer could see promotions like buy six bottles to get a free beer mug or a nice lighter. Now, major brewers have been gradually cutting this kind of marketing activity. Instead, they launch more varieties of products to capture larger shelf space and fit into different market segments. The savings in the BTL budget will then go to the ATL budget (in particular, advertisement and product innovation) to build a stronger brand image.

Page 14 Deutsche Bank AG/Hong Kong

2 March 2017 Consumer China Consumer

Although large brewers’ cuts to their BTL budgets may leave some space for small players to compete at the retailer level, the overall effectiveness of BTL is deteriorating. This trend makes it more difficult for small local players that rely heavily on BTL marketing to survive.

Evolution in consumer taste favors large players

Large players have easier access to craft/specialty beer After receiving education for two decades, we believe Chinese beer consumers are evolving into beer connoisseurs. Despite the overall declining beer market in China, two segments have seen strong growth: imported and craft beer.

Large brewers, in particular multinational companies, have better access to products in the high-growth area. Among the top five, ABInBev and Carlsberg have already made great progress in introducing international brands in China such as Budweiser, Kronenbourg 1664, Tuborg, etc. Large domestic brewers such as Snow have also launched a few premium products such as Face Mask and Snow Original Brew to compete in this fast-growing specialty area.

Small local players are at a competitive disadvantage in the area of new product development internally given the high capex or R&D investment needed. They also lack a big balance sheet to engage in M&A activities with craft breweries. In the case of a failed new product launch, small players are also more vulnerable to potential losses.

Large-scale M&A likely to increase market concentration

Consolidation within the top five players is most likely Although there is still around one-quarter of the market up for grabs, we do not believe that the top-five players are very keen to buy any of those small players. In the early 2000s, when the Chinese beer market had high volume growth, brewers focused on expanding capacity and often engaged in M&As as it was the most convenient way to take local distribution networks and to ramp up capacity quickly. However, given that the whole Chinese beer industry is running at c.60% utilization and large players have already set up almost enough production facilities in China, there is no longer the need to acquire for the purpose of capacity expansion. In this environment, we expect the smaller players to be eventually weeded out from the industry as profitability continues to decline. However, we see consolidation opportunities within the top five brewers – with CR Beer as the strongest consolidator. CR Snow, for example, has openly expressed an interest in taking over some competitors with good size. The other four of the top five brewers either have their hands tied by government policies or do not have the capacity to carry out large-scale acquisitions.

Deutsche Bank AG/Hong Kong Page 15

2 March 2017

Consumer China Consumer

Figure 44: M&A strategy of top five brewers in China Company M&A updates and comments CR Snow • Explicitly expressed an interest in buying major competitors, in particular within the top five • The company is also interested in buying brands and assets overseas; the media reported that its parentco CR Group participated in the bid for ABInBev’s central European beer assets but was outbid by Asahi • The strong parentco CR Holdings may provide financial support if needed • Given its 22% volume share, anti-trust review could be the major policy obstacle Tsingtao Brewery • Asahi still holds a 20% stake in Tsingtao Brewery, and Asahi recently mentioned the intension to consider disposal • Tsingtao has been losing market share in this downturn; the company may want to focus on internal operations instead of external acquisitions in this environment • More likely a good target instead of a buyer ABInBev-SABMiller • Just completed the mega merger and will focus on cost saving and integration globally • Recently raised stake in Zhujiang Beer (sixth largest player in China) to 29.99% • A foreign brewer becoming the No.1 player in China may raise the Chinese government’s concern; anti-trust review may not be easy • Further acquisition in China unlikely, in our opinion Yanjing Brewery • Yanjing has been losing market share in this beer market downturn; home markets in Beijing and Guangxi have been challenged by other competitors • News reports mentioned multiple times in the past two years that Yanjing is considering disposing a certain stake to strategic partners, but Yanjing’s management denied this • Becoming more and more regional; size too small to take control over the top three players • More likely a good target instead of a buyer Carlsberg • Focusing on improving EBITDA margin and ROI globally • Continuing to restructure assets in China, more on asset disposal instead of acquisitions (disposal of Eastern China assets of Chongqing Brewery in 2015 and 2016) • Main focus still on global cost saving; unlikely to carry out large-scale acquisition in China except in special situations • May be interested in taking over a 20% stake in Tsingtao from Asahi, but TB’s current share price does not seem to fit in Carlsberg’s ROIC and shareholders’ return requirement • Unlikely to withdraw from China, as its home market in western China is very strong (nearly 60% of market share) and critical to the company’s Southeast Asia strategy Source: Deutsche Bank

The analysis in Figure 44 suggests that CR Snow has very attractive fundamentals to conduct potential sizeable M&A deals, and either Tsingtao or Yanjing could be a good target. However, there are still two issues to resolve: deal price and anti-trust investigations. In our opinion, CR Snow is not in a rush, as the company has already built a good national distribution network and will likely continue to gain market share even without M&As. Tsingtao and Yanjing would face more issues. As their fundamentals have been deteriorating, their bargaining power against any potential buyers is declining. In our opinion, the longer CRB takes to finalize the deal, the higher the possibility of it making acquisitions at attractive prices.

Page 16 Deutsche Bank AG/Hong Kong

2 March 2017 Consumer China Consumer

Rising profitability Shifting focus from volume to profitability

Margin improvement becomes priority As we have discussed previously in this report, all major brewers in China have shifted their strategic focus to profitability. Figure 45 illustrates the major players’ strategies and financial highlights in China. We include only three of the top five players, as Tsingtao Brewery and Yanjing Brewery do not have as detailed corporate strategy discussions as the other three brewers.

Figure 45: Major beer companies’ strategy and performance in China 2014 2015 1H 2016 CRB Vol. +1%, ASP +4%, Rev.+5% Vol. -1%, ASP +3%, Rev. +1% Vol. -2%, ASP flat, Revenue -2% EBITDA -1%, EBITDA margin -80bps EBITDA +1%, EBITDA margin +10bps EBIT +42%, EBIT margin +340bps to 11.1% Continue to strike a balance between Further penetrate high end, on-trade, and market share and the delivery of operating modern retail channels well suited for Further penetrate high end, on-trade, and leverage premium brands modern retail channels well suited for premium brands Optimize product mix to improve brand Strengthen regional presence through value and enhance competitiveness of organic growth and acquisitions Strengthen regional presence through premium beers organic growth and acquisitions Continue to optimize utilization of existing production plants Continue to optimize utilization of existing production plants ABInBev Vol. +1.6%, ASP +9.9% Vol. +0.4, ASP +9.4% Vol. -2.3%, ASP +6.3% Focus Brands volume grew 7.8% Core+, Premium & Super Premium volume Revenue +3.9%, EBITDA +25.6%, EBITDA grew double digits margin 553bps to 32.1% Revenue +11.5%, EBITDA +29.0%, EBITDA margin +250bps to 18.5% Revenue +9.8%, EBITDA +33.7%, EBITDA Win in Core+, Premium, Super Premium margin +411bps to 22.6% Win in the fastest-growing channels Grow global brands; premiumize and Win in the fastest-growing urban centers invigorating beer, elevate the core, and develop the “near beer” segment Carlsberg Vol. -7%, ASP +10%, Rev. +3 Vol. -2%, strong growth of international Vol. -6%, ASP +6% driven by premium premium brands Tuborg (+50%) and 1664 category growth Strong growth from premium brands (~60%) EBIT margin improved over 300bps Tuborg more than tripled to 2m HL Funding the Journey strategy on track, Positive mix supported by continued Kronenbourg 1664 almost doubled closing breweries strong performance of Tuborg and 1664 Carlsberg brand high-single-digit growth Five Breweries closed in 2015 and an Blanc additional two in 2016 Focus on integration of fully acquired Strong margin improvement from Chongqing Brewery premium growth and network optimization Funding the Journey on track 17 sites closed or sold in 2015 and 2016 Source: Deutsche Bank

Figure 45 shows that all of the players are pushing for high end, premium, price increase, cost saving, and profit growth. This is almost a 180-degree turn versus just a few years back, when Tsingtao and Yanjing called for aggressive production volume targets – which Tsingtao and Yanjing no longer mention in their annual reports. The multinational companies, in particular ABInBev, have already achieved admirable margin expansion results (EBITDA margin expansion of 660bps to 22.6% in 2014 and 2015), probably due to their strong and high-end brand image. We believe margin expansion will also happen in domestic brands such as Snow in the future.

Premium products drive GP margin expansion The main driver of the beer market’s margin expansion is consumer trade-up. Premium products demand higher ASPs and take higher gross margins. The trends such as packaging change and craft beer that we have discussed

Deutsche Bank AG/Hong Kong Page 17

2 March 2017

Consumer China Consumer

previously will all likely contribute to ASP increases in the Chinese beer market. The following charts compare the ASP and GP margin of Chinese and multinational brewers. We believe product mix change should drive up major Chinese brewers’ gross margins by 0.5ppt per year in the next few years.

Figure 46: Price comparison Figure 47: GP margin comparison Figure 48: EBITDA margin comparison 5,000 70.0% 30 RMB per ton EBITDA margin 27.2 4,313 60.7% 4,500 in % 60.0% 24.3 4,000 25

3,500 3,083 50.0% 3,019 20 3,000 2,742 2,455 2,331 2,408 40.0% 34.8% 2,500 32.9% 33.1% 31.1% 15 12.6 2,000 30.0% 1,500 10 7.6 20.0% 1,000 5.8 5 500 10.0% 0 TB CRB Yanjing Zhujiang Chongqing Huiquan ABI 0.0% 0 (APAC) CRB Tsingtao Yanjing Zhujiang ABI CRB Tsingtao Yanjing ABInBev China ABInBev Europe Source: Deutsche Bank, company data Source: Deutsche Bank, company data Source: Deutsche Bank, company data

Capacity utilization reduces depreciation costs In 2016, around 40% of Chinese beer brewing capacity was unused. This over- capacity situation continues to weigh on brewers’ profitability, especially with no imminent signal of a strong volume rebound. Capacity reduction has already started for some brewers in China. For example, Carlsberg disposed of seven breweries in Guizhou and Anhui with a total capacity of 500k tons in 2015 and 2016. ABInBev also closed three breweries in 2016 and 2017, including one in Zhoushan, Zhejiang, with 150k tons of capacity. CR Snow also shut down two breweries in 2015 and 2016.

We expect that efforts aimed at capacity reduction (or optimization – meaning shifting capacity from old, obsolete breweries to new, more efficient breweries) will continue to intensify. Shutting down factories in China is usually a very sensitive issue because it involves severance compensation, local governments’ tax income, local employment rates, and local governments’ KPI on absorbing investment. Therefore, SOEs including CR Snow and Tsingtao will likely execute capacity reduction at a slower pace, while smaller foreign brewers such as Carlsberg have done it more aggressively.

Figure 49: Recent capacity reduction in beer industry Company Year Details Carlsberg 2015 Closed five breweries in Anhui Province (east China) CR Snow 2015 Closed one brewery in Shanghai, very small capacity Carlsberg 2016 Closed two breweries ABInBev 2016 Closed Zhoushan Brewery in Zhejiang, 150k ton capacity ABInBev 2016 Closed Xinxiang Brewery in Henan CR Snow 2016 Closed one brewery ABInBev 2017 Closed Luoyang Asia Brewery Carlsberg 2017 Disposed two breweries in Anhui Source: Deutsche Bank

Less price competition improves margins After several years of market development, each major brewer in China has secured certain territories as its home markets. The main focus has shifted from “taking empty space to gain market share at all costs” to “further penetrating home markets to improve operational efficiency.” Price wars in the

Page 18 Deutsche Bank AG/Hong Kong

2 March 2017 Consumer China Consumer

beer market are almost coming to an end, with marketing budgets being more allocated to brand building. Based on past experiences, increasing prices (or removing price discounts) is the easiest way to achieve operational efficiency in highly concentrated markets, as seen in the price hikes of CRB’s Snow in Liaoning and Sichuan provinces and Tsingtao in Shandong Province. Considering that major players have largely secured their main home markets, we believe removing price discounts will likely be their next approach.

Figure 50: Key markets of each brewer in China

Snow

Tsingtao

ABI

Yanjing

Carlsberg

Source: Deutsche Bank

Deutsche Bank AG/Hong Kong Page 19

2 March 2017

Consumer China Consumer

Long-term winners: CRB We analyze each brewer in China based on their scale, product, brand name, growth trends by volume and price, operations network, shareholders’ support, and government relationship. We believe that CRB and ABI are the two most promising long-term winners.

Figure 51: Operating metrics comparison and SWOT analysis of top 5 brewers in China CRB Tsingtao ABInBev China Yanjing Carlsberg China Capacity in China (mt) 22 12 9 8 4 Volume 2015 (mt) 11.7 8.5 7.4 4.8 2.4 Utilization 53% 71% 83% 60% 60% Volume growth (2016) Flat -10% Flat -10% -6% ASP growth(2016) Flat -2% 5% Flat 5% Number of breweries 98 66 40+ 41 27 Provinces covered by 27 20 16 10 8 breweries Brand management ++ + +++ + +++ Brand portfolio + ++ +++ + ++ Sales & Distribution +++ ++ +++ + ++ Support from large +++ + +++ + ++ shareholders Government +++ ++ + ++ + relationship Strengths Large, national scale Large, national scale Large, global scale Concentrated markets in Global scale and product Beijing, Guangxi, and portfolio Track record of market Very strong brand name Very strong brand image, Inner Mongolia, share gain strong product portfolio Concentrated market in dominant and strong western China with 58% Support from parentco Long term brand building market position in key market share and Chinese government for Budweiser markets Strong brand marketing skills Weaknesses Brand portfolio too Losing market share Foreign investment Smaller scale, regional Small scale, regional narrow probably due to weak background may prevent player player execution ABI from further Lack of high-end, Lost market share acquisitions in China specialty products probably due to weak execution Opportunities Growth of high-end new Distribution system Introducing overseas Partner with a major Partner with leading local products, Original Brew reform may improve its craft and specialty beer competitor to achieve players (CRB, TB) to form and Face Mask profitability products to China synergies JV in the premium/specialty beer ASP increase Partner and integrate Further consolidating and segment with a large player integrating Zhujiang Disposal of excess Brewery (anti-trust capacity to improve requirement may still margins and cash apply though) Acquisitions Threats International brands to CRB’s product upgrading CRB partners or acquires Continued market share Consolidation between compete with better continues to take market international brewers to loss may force Yanjing to top four may make products and low price share from Tsingtao strengthen its product marginalize Carlsberg a marginal portfolio to compete with player with much smaller Further market share loss ABI market share makes Tsingtao a regional player ABInBev (ABI BR) is covered by Tristan Van Strien and Constantin Hesse at Deutsche Bank London, with a Hold rating and price target of EUR100.00 Carlsberg (CARLb CO) is covered by Tristan Van Strien and Gerry Gallagher at Deutsche Bank London, with a Sell rating and price target of DKK475.00 Source: Deutsche Bank

Page 20 Deutsche Bank AG/Hong Kong

2 March 2017 Consumer China Consumer

Valuation and stock picks Initiating coverage of CRB and Tsingtao Brewery; we prefer CRB

Using DCF methodology to set targets prices at HKD21.05 for CRB and HKD27.22 for Tsingtao Brewery-H (RMB24.22for TB-A) As we have discussed in our report, we believe that the Chinese beer market is at the early stage of a margin improvement cycle. With expectations of substantial margin expansion, we believe that DCF is a better valuation methodology than P/E or EV/EBITDA, as such valuation methods over-penalize CRB for its currently low margins.

We use 8.9% WACC and 2% terminal value to derive our DCF-based target price of HKD21.05 for CRB, which implies 25x 2017E P/E and 15x 2017E EV/EBITDA, at a slight premium to global peers. We believe that the valuation premium is justified given CRB’s better growth potential, M&A upside potential, and good corporate governance history.

We use 8.8% WACC and 2% terminal value to derive our DCF-based target price of HKD27.22 for Tsingtao Brewery-H (RMB24.22 for TB-A), which implies 25.8x FY17E P/E and 9.8x FY17E EV/EBITDA, broadly in line with global peers. However, if we strip out government subsidies (we have little visibility on how long and how much this subsidy will continue in the future), our target price implies 37.0x FY17E P/E and 11.2x EV/EBITDA.

Figure 52: Valuation comp table (share prices as of 1 March 2017)

Name BBG Ticker Price Mkt cap Reported PE (x) Adjusted PE (x) EV/EBITDA (x) ROE (%) Div Yield (%) Local USDm 2016 2017 2016 2017 2016 2017 2016 2016 Tsingtao (H)* 168 HK 35.10 6,109 30.7 32.6 47.3 46.7 16.8 15.0 8.1 1.0 Tsingtao (A)* 600600 CH 33.31 6,551 32.9 32.6 50.8 50.1 18.3 16.4 8.1 0.9 CRB* 291 HK 17.70 7,397 56.9 22.8 56.9 22.8 13.0 11.2 6.2 0.0 Yanjing 000729 CH 7.52 3,080 41.8 39.4 41.8 39.4 13.3 12.7 2.7 0.9 Zhujiang 002461 CH 13.59 1,343 79.9 64.7 79.9 64.7 NA NA 3.4 0.4 Thai Beverage THBEV SP 0.95 16,913 21.6 19.9 24.4 21.6 18.5 17.2 22.1 2.5 EM average 43.97 35.34 50.18 40.88 15.98 14.50 8.44 0.95

ABInBev ABI BB 104.35 221,791 31.8 23.1 30.2 21.9 15.8 12.4 9.7 NA Carlsberg CARLB DC 622.00 13,386 18.8 17.0 18.8 17.0 9.3 8.9 9.5 1.6 Molson Coors TAP US 100.39 21,596 15.8 14.7 15.8 14.7 9.0 NA 21.4 1.6 Heineken HEIA NA 78.26 47,449 19.8 18.1 19.8 18.1 10.6 10.0 11.5 1.7 Asahi 2502 JP 3,999 16,979 17.6 16.1 17.6 16.1 10.2 9.5 5.2 1.5 Kirin Holdings 2503 JP 1,960 15,724 21.1 19.8 21.1 19.8 10.5 10.1 17.6 2.0 Suntory Beverage & Food 2587 JP 4,750 12,886 29.0 25.5 29.0 25.5 9.4 9.0 8.1 1.6 Ambev ABEV US 5.69 89,433 23.1 20.6 23.2 20.5 13.7 12.2 25.1 0.4 DM Average 22.11 19.33 21.93 19.18 11.07 10.29 13.51 1.49

Note: Companies with “*” Deutsche Bank estimates; all other companies Bloomberg Finance LP consensus estimates Source: Deutsche Bank estimates, Bloomberg Finance LP

Deutsche Bank AG/Hong Kong Page 21

2 March 2017

Consumer China Consumer

Rating Company Price at 1 Mar 2017 (HKD) 17.70 Price target - 12mth (HKD) 21.05 Buy China Resources 52-week range (HKD) 18.20 - 14.30 HANG SENG INDEX 23,741 Asia Beer China Charlie Chen

Research Analyst Consumer Reuters Bloomberg (+852 ) 2203 6178 Retail / Wholesale Trade 0291.HK 291 HK [email protected]

Price/price relative

Strategic shift from scale to 28 24 profitability 20 16 Long-term winner in Chinese beer industry 12 With the Chinese beer market set to recover in 2017, we suggest investors to 8 buy China Resources Beer (CRB) – the most promising brewer in China with 3/15 9/15 3/16 9/16 strong upside potential for margin expansion and M&A capability, in our view. China Resources Beer HANG SENG INDEX (Rebased) The Chinese beer market is entering a new era where major players turn their attention to profitability vs. low-quality price promotion. With national scale Performance (%) 1m 3m 12m and proven execution capability, we expect CRB to continue to gain market Absolute 13.5 6.8 38.5 share and benefit from this trend, driving 2016-19 net profit CAGR of 22%. HANG SENG INDEX 1.8 3.8 22.3 Net margin to almost double in four years Source: Deutsche Bank We expect CRB to have substantial margin improvement in the next three years. GP margin is likely to expand half a percentage point per year, driven by product mix change. Gradual utilization optimization and efficiency improvement through capacity disposal and upgrading should further lower operating expense ratios. Strong cash flow should reduce the interest burden after the proposed acquisition of a 49% stake in Snow Beer. We expect CRB’s net margin to improve from 4.8% in 2015 to 8.9% in 2019. Together with 7.1% revenue CAGR, we estimate 22% net profit CAGR in the next three years. Potential M&A likely to be a bonus Our current model has not built in any M&A, but we believe taking a controlling shareholding in one of the top five brewers in China is of great interest to CRB. Historically, CRB has rarely overpaid and it has a track record of successful integration of Snow Beer into the distribution network post acquisition. We believe that if CRB attempts any M&A in the future, this is likely to substantially strengthen its market position and bring good returns to shareholders. Resuming coverage with Buy and target price of HKD21.05 We use a DCF model to derive a target price of HKD21.05, implying 27x FY17E PE and 15.4x FY17E EV/EBITDA, both at a premium to peers. We believe CRB’s higher earnings growth and good corporate governance justify the premium valuation. The key downside risk is an increase in raw material prices.

Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E Sales (CNYm) 27,394.7 28,679.7 28,966.5 31,330.1 33,560.9 EBITDA (CNYm) 3,440.0 3,610.0 4,124.8 4,605.5 5,269.1 Reported NPAT (CNYm) 580.0 684.4 893.5 2,224.3 2,701.8 Reported EPS FD(CNY) 0.24 0.28 0.28 0.69 0.83 DB EPS FD(CNY) 0.24 0.28 0.28 0.69 0.83 OLD DB EPS FD(CNY) 0.30 – – – – DB EPS growth (%) -61.7 17.2 -2.3 149.0 21.5 DPS (net) (CNY) 0.21 10.13 0.00 0.14 0.17 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close

Page 22 Deutsche Bank AG/Hong Kong

2 March 2017 Consumer China Consumer

Model updated:28 February 2017 Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E

Running the numbers Financial Summary Asia DB EPS (CNY) 0.63 0.24 0.28 0.28 0.69 0.83 Reported EPS (CNY) 0.63 0.24 0.28 0.28 0.69 0.83 China DPS (CNY) 0.21 0.21 10.13 0.00 0.14 0.17 Retail / Wholesale Trade BVPS (CNY) 14.5 16.0 4.1 5.8 6.4 7.1 Weighted average shares (m) 2,403 2,410 2,427 2,703 3,244 3,244 China Resources Beer Average market cap (CNYm) 48,240 39,941 37,435 50,814 50,814 50,814 Enterprise value (CNYm) 61,313 61,956 49,504 53,768 51,442 48,416 Reuters: 0291.HK Bloomberg: 291 HK Valuation Metrics P/E (DB) (x) 32.0 68.9 54.7 56.9 22.8 18.8 Buy P/E (Reported) (x) 32.0 68.9 54.7 56.9 22.8 18.8 Price (1 Mar 17) HKD 17.70 P/BV (x) 1.41 0.81 3.26 2.72 2.45 2.21 Target Price HKD 21.05 FCF Yield (%) 6.4 nm 0.6 4.9 nm 6.9 Dividend Yield (%) 1.1 1.3 65.7 0.0 0.9 1.1 52 Week range HKD 14.30 - 18.20 EV/Sales (x) 0.5 2.3 1.7 1.9 1.6 1.4 Market Cap (m) HKDm 57,421 EV/EBITDA (x) 8.9 18.0 13.7 13.0 11.2 9.2 EV/EBIT (x) 16.2 35.8 27.0 22.3 17.4 13.4 USDm 7,397 Income Statement (CNYm) Company Profile Sales revenue 115,922 27,395 28,680 28,966 31,330 33,561 China Resources Beer owns 51% of China Resources Gross profit 29,590 9,495 8,911 9,067 9,869 10,739 Snow, which is China's largest beer brand/producer by EBITDA 6,871 3,440 3,610 4,125 4,6065,269 volume. Depreciation 3,051 1,687 1,750 1,690 1,6191,621 Amortisation 29 24 24 23 2833 EBIT 3,792 1,730 1,836 2,411 2,9583,615 Net interest income(expense) 182 86 -68 -106 7 -13 Associates/affiliates 21 0 0 0 00 Exceptionals/extraordinaries 0 0 0 0 00 Other pre-tax income/(expense) 0 0 0 0 0 0 Profit before tax 3,995 1,815 1,768 2,305 2,966 3,602 Price Performance Income tax expense 1,500 638 404 553 741 901 Minorities 985 597 679 858 00 28 Other post-tax income/(expense) 0 0 0 0 0 0 24 Net profit 1,511 580 684 893 2,224 2,702 20 DB adjustments (including dilution) 0 0 0 0 0 0 16 DB Net profit 1,511 580 684 893 2,224 2,702 12 Cash Flow (CNYm) 8 Mar 15Jun 15Sep 15Dec 15Mar 16Jun 16Sep 16Dec 16 Cash flow from operations 7,860 3,388 4,808 3,694 4,548 4,965 Net Capex -4,787 -6,067 -4,580 -1,622 -12,074 -1,443 China Resources Beer Free cash flow 3,073 -2,679 228 2,072 -7,526 3,522 HANG SENG INDEX (Rebased) Equity raised/(bought back) 861 -81 303 8,155 0 0 Margin Trends Dividends paid -631 -299 -14,093 0 -178 -483 Net inc/(dec) in borrowings 3,709 -782 -2,140 798 1,481 -797 16 Other investing/financing cash flows -3,574 3,401 2,053 -206 -93 -13 12 Net cash flow 3,438 -439 -13,648 10,819 -6,316 2,229 Change in working capital 3,165 352 758 122 684 596 8 Balance Sheet (CNYm) 4 Cash and other liquid assets 16,785 16,403 2,802 13,574 7,259 9,488 0 Tangible fixed assets 54,723 69,960 21,389 20,960 20,751 20,574 13 14 15 16E 17E 18E Goodwill/intangible assets 15,827 18,562 8,520 8,594 9,208 9,174 EBITDA Margin EBIT Margin Associates/investments 420 1,124 10 10 1010

Other assets 35,195 38,037 10,047 9,503 10,102 10,623 Growth & Profitability Total assets 122,950 144,087 42,768 52,641 47,329 49,869 Interest bearing debt 17,975 22,958 5,617 6,415 7,896 7,099 20 14 Other liabilities 57,778 65,816 17,831 17,409 18,692 19,810 0 12 Total liabilities 75,753 88,774 23,448 23,824 26,588 26,910 10 -20 Shareholders' equity 34,895 38,728 10,056 18,694 20,740 22,959 8 -40 6 Minorities 12,302 16,585 9,264 10,122 00 -60 4 Total shareholders' equity 47,197 55,313 19,320 28,816 20,740 22,959 -80 2 Net debt 1,190 6,554 2,815 -7,159 638 -2,388 -100 0 13 14 15 16E 17E 18E Key Company Metrics Sales growth (%) 13.1 -76.4 4.7 1.0 8.2 7.1 Sales growth (LHS) ROE (RHS) DB EPS growth (%) -52.9 -61.7 17.2 -2.3 149.0 21.5 Solvency EBITDA Margin (%) 5.9 12.6 12.6 14.2 14.7 15.7 EBIT Margin (%) 3.3 6.3 6.4 8.3 9.4 10.8 20 300 Payout ratio (%) 34.0 89.1 nm 0.0 20.0 20.0 10 250 ROE (%) 4.4 1.6 2.8 6.2 11.3 12.4 200 Capex/sales (%) 4.4 23.2 17.0 5.6 38.5 4.3 0 150 Capex/depreciation (x) 1.7 3.7 2.8 0.9 7.3 0.9 -10 100 Net debt/equity (%) 2.5 11.8 14.6 -24.8 3.1 -10.4 -20 50 Net interest cover (x) nm nm 26.9 22.7 nm 283.5

-30 0 Source: Company data, Deutsche Bank estimates 13 14 15 16E 17E 18E

Net debt/equity (LHS) Net interest cover (RHS)

Charlie Chen +852 2203 6178 [email protected]

Deutsche Bank AG/Hong Kong Page 23

2 March 2017

Consumer China Consumer

Rating Company Price at 1 Mar 2017 (HKD) 35.10 Price target - 12mth (HKD) 27.22 Sell Tsingtao Brewery-H 52-week range (HKD) 36.00 - 25.80 HANG SENG INDEX 23,741 Asia China Charlie Chen

Research Analyst Consumer Reuters Bloomberg (+852 ) 2203 6178 Alcohol & Tobacco 0168.HK 168 HK [email protected]

Price/price relative

An ailing giant 60 50

40 Change to survive 30 Tsingtao Beer has long been considered China’s national beer brand, selling 20 3/15 9/15 3/16 9/16 over 9m tons of beer at peak. TB has 18% market share in China, but as this Tsingtao Brewery-H market turns more sophisticated, TB is losing its competitive strength. Since HANG SENG INDEX (Rebased) 2015, it has lost market share for the first time in its history, and the trend Performance (%) 1m 3m 12m continues in 2016. As an SOE, TB is suffering chronic internal issues. Its Absolute 5.9 14.0 22.3 outlook will likely remain clouded unless some radical changes are made to its HANG SENG INDEX 1.8 3.8 22.3 operations. We resume coverage with Sell and a TP of HK$27.22. Source: Deutsche Bank Uncertainty in government subsidy a big risk

TB receives a lot of government subsidy, equal to 20-25% of its pretax income, or 40-60% of its FCF in the next three years. These subsidies (mainly special project allowance & relocation compensation) have no guarantee of continuing forever. Given its large size, subsidy discontinuation could cut our TP by 18%. Although we forecast fundamentals to improve in 2017 with Chinese beer market recovery, government subsidy uncertainty and current high PE (33/48x FY17 PE with/without subsidy) make the share price at a high risk of de-rating. Asahi’s potential disposal of stake; short-term noise We believe TB’s recent stock price strength is related to Asahi’s potential disposal of its 20% holding in TB. We believe this is only short-term noise, as: 1) it is difficult to find an investor who is willing to pay big premium; and 2) a new shareholder is unlikely to make a meaningful impact on TB’s operations, hence synergy is limited. The share price is likely to fall after this deal news settles. Resuming coverage with Sell and TP of HK$27.22 based on DCF model We use a DCF model with 8.8% WACC and 2% terminal growth to derive our TP at HK$27.22 and resume coverage with Sell. TB is trading at an expensive 47x FY17 PE (33x FY17 recurring PE), a huge premium to peers. Main upside risks include: Asahi managing to dispose TB’s stake at a premium price and weaker-than-expected raw material price increase.

Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E Sales (CNYm) 26,866.7 25,604.3 24,518.5 25,509.1 26,279.4 EBITDA (CNYm) 2,844.5 2,045.6 2,035.5 2,215.5 2,416.8 Reported NPAT (CNYm) 1,990.1 1,713.1 1,367.2 1,288.5 1,439.0 Reported EPS FD (CNY) 1.47 1.27 1.01 0.95 1.07 DB EPS FD (CNY) 1.24 0.79 0.66 0.66 0.77 DB EPS growth (%) 12.5 -35.9 -17.3 1.3 15.5 PER (x) 37.2 45.1 47.3 46.7 40.5 EV/EBITDA (x) 19.9 20.0 16.8 15.0 13.4 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close

Page 24 Deutsche Bank AG/Hong Kong

2 March 2017 Consumer China Consumer

Model updated:01 March 2017 Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E

Running the numbers Financial Summary Asia DB EPS (CNY) 1.10 1.24 0.79 0.66 0.66 0.77 Reported EPS (CNY) 1.46 1.47 1.27 1.01 0.95 1.07 China DPS (CNY) 0.31 0.31 0.31 0.31 0.31 0.31 Alcohol & Tobacco BVPS (CNY) 10.4 11.4 12.2 12.9 13.5 14.3 Weighted average shares (m) 1,351 1,351 1,351 1,351 1,351 1,351 Tsingtao Brewery-H Average market cap (CNYm) 59,619 62,188 48,304 41,964 41,964 41,964 Enterprise value (CNYm) 53,440 56,561 40,966 34,113 33,227 32,275 Reuters: 0168.HK Bloomberg: 168 HK Valuation Metrics P/E (DB) (x) 40.1 37.2 45.1 47.3 46.7 40.5 Sell P/E (Reported) (x) 30.2 31.2 28.2 30.7 32.6 29.2 Price (1 Mar 17) HKD 35.10 P/BV (x) 5.01 3.67 2.34 2.41 2.29 2.18 Target Price HKD 27.22 FCF Yield (%) 2.3 nm 2.7 2.2 3.1 3.3 Dividend Yield (%) 0.7 0.7 0.9 1.0 1.0 1.0 52 Week range HKD 25.80 - 36.00 EV/Sales (x) 2.1 2.1 1.6 1.4 1.3 1.2 Market Cap (m) HKDm 47,420 EV/EBITDA (x) 19.4 19.9 20.0 16.8 15.0 13.4 EV/EBIT (x) 28.5 29.4 37.4 30.9 28.6 24.6 USDm 6,109 Income Statement (CNYm) Company Profile Sales revenue 26,063 26,867 25,604 24,519 25,509 26,279 Tsingtao Brewery produces and distributes beer products. Gross profit 9,055 8,967 8,412 8,949 9,375 9,723 The Company markets its products throughout China and EBITDA 2,751 2,844 2,046 2,0362,215 2,417 around the world under the Tsingtao Beer brand name. Depreciation 712 731 746 733838 887 Amortisation 167 192 204 199216 215 EBIT 1,872 1,922 1,095 1,1031,161 1,314 Net interest income(expense) 251 335 300 267 284 315 Associates/affiliates 229 24 462 14020 20 Exceptionals/extraordinaries -2 4 -2 -8-8 -8 Other pre-tax income/(expense) 316 399 420 490 510 526 Profit before tax 2,667 2,683 2,275 1,993 1,967 2,166 Price Performance Income tax expense 692 663 663 598 551 585 Minorities 2 29 -101 28127 142 60 Other post-tax income/(expense) 0 0 0 0 0 0 Net profit 1,973 1,990 1,713 1,367 1,288 1,439 50 DB adjustments (including dilution) -488 -319 -641 -481 -390 -402 40 DB Net profit 1,485 1,671 1,072 886 898 1,037 30 Cash Flow (CNYm) 20 Mar 15Jun 15Sep 15Dec 15Mar 16Jun 16Sep 16Dec 16 Cash flow from operations 3,401 1,691 2,575 2,424 2,706 2,860 Net Capex -2,025 -1,943 -1,271 -1,490 -1,423 -1,466 Tsingtao Brewery-H Free cash flow 1,377 -252 1,304 934 1,283 1,394 HANG SENG INDEX (Rebased) Equity raised/(bought back) 0 0 0 0 0 0 Margin Trends Dividends paid -618 -686 -691 -420 -396 -443 Net inc/(dec) in borrowings -170 -1,477 357 0 0 0 12 Other investing/financing cash flows 537 287 1,339 0 0 0 11 Net cash flow 1,126 -2,129 2,309 513 887 952 9 Change in working capital 1,172 -681 956 86 227 171 8 6 Balance Sheet (CNYm) 5 Cash and other liquid assets 8,532 6,389 8,402 8,915 9,802 10,753 3 Tangible fixed assets 9,252 10,189 10,191 10,929 11,493 12,051 13 14 15 16E 17E 18E Goodwill/intangible assets 3,613 4,088 4,014 3,815 3,619 3,424 EBITDA Margin EBIT Margin Associates/investments 1,272 1,536 1,508 1,5081,508 1,508

Other assets 4,696 4,803 4,386 4,134 4,222 4,290 Growth & Profitability Total assets 27,365 27,004 28,501 29,300 30,644 32,026 Interest bearing debt 2,353 762 1,065 1,065 1,065 1,065 15 20 Other liabilities 11,137 10,954 11,270 11,095 11,419 11,662 10 15 Total liabilities 13,491 11,717 12,335 12,160 12,484 12,727 5 Shareholders' equity 14,021 15,388 16,458 17,405 18,297 19,293 10 Minorities -147 -100 -292 -264-137 6 0 5 Total shareholders' equity 13,874 15,287 16,166 17,141 18,160 19,299 -5 Net debt -6,178 -5,627 -7,337 -7,850 -8,737 -9,689 -10 0 13 14 15 16E 17E 18E Key Company Metrics Sales growth (%) 10.5 3.1 -4.7 -4.2 4.0 3.0 Sales growth (LHS) ROE (RHS)

DB EPS growth (%) 5.1 12.5 -35.9 -17.3 1.3 15.5 Solvency EBITDA Margin (%) 10.6 10.6 8.0 8.3 8.7 9.2 EBIT Margin (%) 7.2 7.2 4.3 4.5 4.6 5.0 0 Payout ratio (%) 21.1 20.7 24.3 30.8 32.2 28.9 -10 ROE (%) 14.9 13.5 10.8 8.1 7.2 7.7 -20 Capex/sales (%) 7.8 7.3 5.1 6.1 5.6 5.6 -30 Capex/depreciation (x) 2.3 2.1 1.4 1.6 1.3 1.3 -40 Net debt/equity (%) -44.5 -36.8 -45.4 -45.8 -48.1 -50.2 -50 Net interest cover (x) nm nm nm nm nm nm

-60 Source: Company data, Deutsche Bank estimates 13 14 15 16E 17E 18E

Net debt/equity (LHS) Net interest cover (RHS)

Charlie Chen +852 2203 6178 [email protected]

Deutsche Bank AG/Hong Kong Page 25

2 March 2017

Consumer China Consumer

Rating Company Price at 1 Mar 2017 (CNY) 33.31 Price target - 12mth (CNY) 24.21 Sell Tsingtao Brewery-A 52-week range (CNY) 33.68 - 27.11 HANG SENG INDEX 23,741 Asia China Charlie Chen

Research Analyst Consumer Reuters Bloomberg (+852 ) 2203 6178 Alcohol & Tobacco 600600.SS 600600 CH [email protected]

Price/price relative

An ailing giant 60 50

40 Change to survive 30 Tsingtao Beer has long been considered China’s national beer brand, selling 20 3/15 9/15 3/16 9/16 over 9m tons of beer at peak. TB has 18% market share in China, but as this Tsingtao Brewery-A market turns more sophisticated, TB is losing its competitive strength. Since HANG SENG INDEX (Rebased) 2015, it has lost market share for the first time in its history, and the trend Performance (%) 1m 3m 12m continues in 2016. As an SOE, TB is suffering chronic internal issues. Its Absolute 4.2 6.2 24.9 outlook will likely remain clouded unless some radical changes are made to its HANG SENG INDEX 1.8 3.8 22.3 operations. We resume coverage with Sell and a TP of CNY24.21. Source: Deutsche Bank Uncertainty in government subsidy a big risk

TB receives a lot of government subsidy, equal to 20-25% of its pretax income, or 40-60% of its FCF in the next three years. These subsidies (mainly special project allowance & relocation compensation) have no guarantee of continuing forever. Given its large size, subsidy discontinuation could cut our TP by 18%. Although we forecast fundamentals to improve in 2017 with Chinese beer market recovery, government subsidy uncertainty and current high PE (33/48x FY17 PE with/without subsidy) make the share price at a high risk of de-rating. Asahi’s potential disposal of stake; short-term noise We believe TB’s recent stock price strength is related to Asahi’s potential disposal of its 20% holding in TB. We believe this is only short-term noise, as: 1) it is difficult to find an investor who is willing to pay big premium; and 2) a new shareholder is unlikely to make a meaningful impact on TB’s operations, hence synergy is limited. The share price is likely to fall after this deal news settles. Resuming coverage with Sell and TP of CNY24.21 based on DCF model We use a DCF model with 8.8% WACC and 2% terminal growth to derive our TP at CNY24.21 and resume coverage with Sell. TB is trading at an expensive 47x FY17 PE (33x FY17 recurring PE), a huge premium to peers. Main upside risks include: Asahi managing to dispose TB’s stake at a premium price and weaker-than-expected raw material price increase.

Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E Sales (CNYm) 26,866.7 25,604.3 24,518.5 25,509.1 26,279.4 EBITDA (CNYm) 2,844.5 2,045.6 2,035.5 2,215.5 2,416.8 Reported NPAT (CNYm) 1,990.1 1,713.1 1,367.2 1,288.5 1,439.0 Reported EPS FD (CNY) 1.47 1.27 1.01 0.95 1.07 DB EPS FD (CNY) 1.24 0.79 0.66 0.66 0.77 DB EPS growth (%) 12.5 -35.9 -17.3 1.3 15.5 PER (x) 37.2 45.1 47.3 46.7 40.5 EV/EBITDA (x) 19.9 20.0 16.8 15.0 13.4 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close

Page 26 Deutsche Bank AG/Hong Kong

2 March 2017 Consumer China Consumer

Model updated:27 February 2017 Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E

Running the numbers Financial Summary Asia DB EPS (CNY) 1.10 1.24 0.79 0.66 0.66 0.77 Reported EPS (CNY) 1.46 1.47 1.27 1.01 0.95 1.07 China DPS (CNY) 0.31 0.31 0.31 0.31 0.31 0.31 Alcohol & Tobacco BVPS (CNY) 10.4 11.4 12.2 12.9 13.5 14.3 Weighted average shares (m) 1,351 1,351 1,351 1,351 1,351 1,351 Tsingtao Brewery-A Average market cap (CNYm) 53,083 54,404 53,553 45,002 45,002 45,002 Enterprise value (CNYm) 46,904 48,777 46,216 37,151 36,265 35,313 Reuters: 600600.SS Bloomberg: 600600 CH Valuation Metrics P/E (DB) (x) 35.7 32.5 50.0 50.8 50.1 43.4 Sell P/E (Reported) (x) 26.9 27.3 31.3 32.9 34.9 31.3 Price (1 Mar 17) CNY 33.31 P/BV (x) 4.67 3.67 2.73 2.59 2.46 2.33 Target Price CNY 24.21 FCF Yield (%) 2.6 nm 2.4 2.1 2.9 3.1 Dividend Yield (%) 0.8 0.8 0.8 0.9 0.9 0.9 52 Week range CNY 27.11 - 33.68 EV/Sales (x) 1.8 1.8 1.8 1.5 1.4 1.3 Market Cap (m) CNYm 45,002 EV/EBITDA (x) 17.0 17.1 22.6 18.3 16.4 14.6 EV/EBIT (x) 25.1 25.4 42.2 33.7 31.2 26.9 USDm 6,551 Income Statement (CNYm) Company Profile Sales revenue 26,063 26,867 25,604 24,519 25,509 26,279 Tsingtao Brewery Co Ltd produces and distributes beer Gross profit 9,055 8,967 8,412 8,949 9,375 9,723 products. The company markets its products throughout EBITDA 2,751 2,844 2,046 2,0362,215 2,417 China and around the world under the Tsingtao Beer brand Depreciation 712 731 746 733838 887 name. Amortisation 167 192 204 199216 215 EBIT 1,872 1,922 1,095 1,1031,161 1,314 Net interest income(expense) 251 335 300 267 284 315 Associates/affiliates 229 24 462 14020 20 Exceptionals/extraordinaries -2 4 -2 -8-8 -8 Other pre-tax income/(expense) 316 399 420 490 510 526 Profit before tax 2,667 2,683 2,275 1,993 1,967 2,166 Price Performance Income tax expense 692 663 663 598 551 585 Minorities 2 29 -101 28127 142 60 Other post-tax income/(expense) 000 000 Net profit 1,973 1,990 1,713 1,367 1,288 1,439 50 DB adjustments (including dilution) -488 -319 -641 -481 -390 -402 40 DB Net profit 1,485 1,671 1,072 886 898 1,037 30 Cash Flow (CNYm) 20 Mar 15Jun 15Sep 15Dec 15Mar 16Jun 16Sep 16Dec 16 Cash flow from operations 3,401 1,691 2,575 2,424 2,706 2,860 Net Capex -2,025 -1,943 -1,271 -1,490 -1,423 -1,466 Tsingtao Brewery-A Free cash flow 1,377 -252 1,304 934 1,283 1,394 HANG SENG INDEX (Rebased) Equity raised/(bought back) 0 0 0 0 0 0 Margin Trends Dividends paid -618 -686 -691 -420 -396 -443 Net inc/(dec) in borrowings -170 -1,477 357 0 0 0 12 Other investing/financing cash flows 537 287 1,339 0 0 0 11 Net cash flow 1,126 -2,129 2,309 513 887 952 9 Change in working capital 1,172 -681 956 86 227 171 8 6 Balance Sheet (CNYm) 5 Cash and other liquid assets 8,532 6,389 8,402 8,915 9,802 10,753 3 Tangible fixed assets 9,252 10,189 10,191 10,929 11,493 12,051 13 14 15 16E 17E 18E Goodwill/intangible assets 3,613 4,088 4,014 3,815 3,619 3,424 EBITDA Margin EBIT Margin Associates/investments 1,272 1,536 1,508 1,5081,508 1,508

Other assets 4,696 4,803 4,386 4,134 4,222 4,290 Growth & Profitability Total assets 27,365 27,004 28,501 29,300 30,644 32,026 Interest bearing debt 2,353 762 1,065 1,065 1,065 1,065 15 20 Other liabilities 11,137 10,954 11,270 11,095 11,419 11,662 10 15 Total liabilities 13,491 11,717 12,335 12,160 12,484 12,727 5 Shareholders' equity 14,021 15,388 16,458 17,405 18,297 19,293 10 Minorities -147 -100 -292 -264-137 6 0 Total shareholders' equity 13,874 15,287 16,166 17,141 18,160 19,299 5 -5 Net debt -6,178 -5,627 -7,337 -7,850 -8,737 -9,689 -10 0 13 14 15 16E 17E 18E Key Company Metrics Sales growth (%) 10.5 3.1 -4.7 -4.2 4.0 3.0 Sales growth (LHS) ROE (RHS) DB EPS growth (%) 5.1 12.5 -35.9 -17.3 1.3 15.5 Solvency EBITDA Margin (%) 10.6 10.6 8.0 8.3 8.7 9.2 EBIT Margin (%) 7.2 7.2 4.3 4.5 4.6 5.0 0 Payout ratio (%) 21.1 20.7 24.3 30.8 32.2 28.9 -10 ROE (%) 14.9 13.5 10.8 8.1 7.2 7.7 -20 Capex/sales (%) 7.8 7.3 5.1 6.1 5.6 5.6 -30 Capex/depreciation (x) 2.3 2.1 1.4 1.6 1.3 1.3 -40 Net debt/equity (%) -44.5 -36.8 -45.4 -45.8 -48.1 -50.2 -50 Net interest cover (x) nm nm nm nm nm nm

-60 Source: Company data, Deutsche Bank estimates 13 14 15 16E 17E 18E

Net debt/equity (LHS) Net interest cover (RHS)

Charlie Chen (+852 ) 2203 6178 [email protected]

Deutsche Bank AG/Hong Kong Page 27

2 March 2017 Consumer China Consumer

Appendix 1

Important Disclosures

*Other information available upon request

Disclosure checklist Company Ticker Recent price* Disclosure China Resources Beer 0291.HK 17.70 (HKD) 1 Mar 17 1,7,13 Tsingtao Brewery-A 600600.SS 33.31 (CNY) 1 Mar 17 NA Tsingtao Brewery-H 0168.HK 35.10 (HKD) 1 Mar 17 NA Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.

Important Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.

1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.

13. As of the end of the preceding week, Deutsche Bank and/or its affiliate(s) owns one percent or more of a class of common equity securities of this company.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Charlie Chen

Page 28 Deutsche Bank AG/Hong Kong

2 March 2017 Consumer China Consumer

Historical recommendations and target price: China Resources Beer (0291.HK) (as of 3/1/2017)

30.00 Previous Recommendations

3 Strong Buy 25.00 2 Buy Market Perform Underperform Not Rated 20.00 Suspended Rating

1 5 Current Recommendations 15.00 4 Buy Hold Security Price Security 10.00 Sell Not Rated Suspended Rating

5.00 *New Recommendation Structure as of September 9,2002

**Analyst is no longer at Deutsche 0.00 Bank Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Date

1. 22/03/2015: Buy, Target Price Change HKD18.00 Anne Ling 4. 26/01/2016: Hold, Target Price Change HKD12.30 Winnie Mak** 2. 21/04/2015: Buy, Target Price Change HKD25.90 Anne Ling 5. 07/03/2016: No Recommendation, Target Price Change HKD0.00 Anne Ling 3. 20/09/2015: Downgrade to Hold, Target Price Change HKD13.60 Anne Ling

Historical recommendations and target price: Tsingtao Brewery-A (600600.SS) (as of 3/1/2017)

70.00 Previous Recommendations

Strong Buy 60.00 Buy Market Perform Underperform 50.00 Not Rated Suspended Rating 40.00 Current Recommendations 1 3 Buy 30.00 2 Hold Security Price Security Sell 20.00 Not Rated Suspended Rating

*New Recommendation Structure 10.00 as of September 9,2002

**Analyst is no longer at Deutsche 0.00 Bank Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Date

1. 16/09/2015: Upgrade to Hold, Target Price Change CNY31.40 3. 07/03/2016: No Recommendation, Target Price Change CNY0.00 Winnie Mak** Anne Ling 2. 11/02/2016: Hold, Target Price Change CNY28.30 Winnie Mak**

Deutsche Bank AG/Hong Kong Page 29

2 March 2017 Consumer China Consumer

Historical recommendations and target price: Tsingtao Brewery-H (0168.HK) (as of 3/1/2017)

60.00 Previous Recommendations

Strong Buy 1 50.00 Buy Market Perform Underperform Not Rated 40.00 2 Suspended Rating 4 3 Current Recommendations 30.00 Buy Hold Security Price Security 20.00 Sell Not Rated Suspended Rating

10.00 *New Recommendation Structure as of September 9,2002

**Analyst is no longer at Deutsche 0.00 Bank Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Date

1. 12/05/2015: Hold, Target Price Change HKD55.00 Winnie Mak** 3. 11/02/2016: Hold, Target Price Change HKD31.50 Winnie Mak** 2. 16/09/2015: Hold, Target Price Change HKD36.00 Winnie Mak** 4. 07/03/2016: No Recommendation, Target Price Change HKD0.00 Anne Ling

Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 500 54 % share-holder return (TSR = percentage change in 450 share price from current price to projected target price 400 350 36 % plus pro-jected dividend yield ) , we recommend that 300 investors buy the stock. 250 200 Sell: Based on a current 12-month view of total share- 150 18 % 10 % 100 18 % 19 % holder return, we recommend that investors sell the 50 stock 0 Buy Hold Sell Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not Companies Covered Cos. w/ Banking Relationship recommend either a Buy or Sell. Asia-Pacific Universe

Newly issued research recommendations and target prices supersede previously published research.

Page 30 Deutsche Bank AG/Hong Kong

2 March 2017 Consumer China Consumer

Additional Information

The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable, Deutsche Bank makes no representation as to its accuracy or completeness.

If you use the services of Deutsche Bank in connection with a purchase or sale of a security that is discussed in this report, or is included or discussed in another communication (oral or written) from a Deutsche Bank analyst, Deutsche Bank may act as principal for its own account or as agent for another person.

Deutsche Bank may consider this report in deciding to trade as principal. It may also engage in transactions, for its own account or with customers, in a manner inconsistent with the views taken in this research report. Others within Deutsche Bank, including strategists, sales staff and other analysts, may take views that are inconsistent with those taken in this research report. Deutsche Bank issues a variety of research products, including fundamental analysis, equity-linked analysis, quantitative analysis and trade ideas. Recommendations contained in one type of communication may differ from recommendations contained in others, whether as a result of differing time horizons, methodologies or otherwise. Deutsche Bank and/or its affiliates may also be holding debt or equity securities of the issuers it writes on. Analysts are paid in part based on the profitability of Deutsche Bank AG and its affiliates, which includes investment banking, trading and principal trading revenues.

Opinions, estimates and projections constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank provides liquidity for buyers and sellers of securities issued by the companies it covers. Deutsche Bank research analysts sometimes have shorter-term trade ideas that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. Trade ideas for equities can be found at the SOLAR link at http://gm.db.com. A SOLAR idea represents a high conviction belief by an analyst that a stock will outperform or underperform the market and/or sector delineated over a time frame of no less than two weeks. In addition to SOLAR ideas, the analysts named in this report may from time to time discuss with our clients, Deutsche Bank salespersons and Deutsche Bank traders, trading strategies or ideas that reference catalysts or events that may have a near-term or medium-term impact on the market price of the securities discussed in this report, which impact may be directionally counter to the analysts' current 12-month view of total return or investment return as described herein. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof if any opinion, forecast or estimate contained herein changes or subsequently becomes inaccurate. Coverage and the frequency of changes in market conditions and in both general and company specific economic prospects make it difficult to update research at defined intervals. Updates are at the sole discretion of the coverage analyst concerned or of the Research Department Management and as such the majority of reports are published at irregular intervals. This report is provided for informational purposes only and does not take into account the particular investment objectives, financial situations, or needs of individual clients. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst’s judgment. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed investment decisions. Prices and availability of financial instruments are subject to change without notice and investment transactions can lead to losses as a result of price fluctuations and other factors. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the investment. Past performance is not necessarily indicative of future results. Unless otherwise indicated, prices are current as of the end of the previous trading session, and are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank, subject companies, and in some cases, other parties.

The Deutsche Bank Research Department is independent of other business areas divisions of the Bank. Details regarding our organizational arrangements and information barriers we have to prevent and avoid conflicts of interest with respect to our research is available on our website under Disclaimer found on the Legal tab.

Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor who is long fixed rate instruments (thus receiving these cash

Deutsche Bank AG/Hong Kong Page 31

2 March 2017 Consumer China Consumer

flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which coupons are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.

Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk. The appropriateness or otherwise of these products for use by investors is dependent on the investors' own circumstances including their tax position, their regulatory environment and the nature of their other assets and liabilities, and as such, investors should take expert legal and financial advice before entering into any transaction similar to or inspired by the contents of this publication. The risk of loss in futures trading and options, foreign or domestic, can be substantial. As a result of the high degree of leverage obtainable in futures and options trading, losses may be incurred that are greater than the amount of funds initially deposited. Trading in options involves risk and is not suitable for all investors. Prior to buying or selling an option investors must review the "Characteristics and Risks of Standardized Options”, at http://www.optionsclearing.com/about/publications/character-risks.jsp. If you are unable to access the website please contact your Deutsche Bank representative for a copy of this important document.

Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i) exchange rates can be volatile and are subject to large fluctuations; ( ii) the value of currencies may be affected by numerous market factors, including world and national economic, political and regulatory events, events in equity and debt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or government imposed exchange controls which could affect the value of the currency. Investors in securities such as ADRs, whose values are affected by the currency of an underlying security, effectively assume currency risk.

Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

United States: Approved and/or distributed by Deutsche Bank Securities Incorporated, a member of FINRA, NFA and SIPC. Analysts located outside of the United States are employed by non-US affiliates that are not subject to FINRA regulations.

Germany: Approved and/or distributed by Deutsche Bank AG, a joint stock corporation with limited liability incorporated in the Federal Republic of Germany with its principal office in Frankfurt am Main. Deutsche Bank AG is authorized under German Banking Law and is subject to supervision by the European Central Bank and by BaFin, Germany’s Federal Financial Supervisory Authority.

United Kingdom: Approved and/or distributed by Deutsche Bank AG acting through its London Branch at Winchester House, 1 Great Winchester Street, London EC2N 2DB. Deutsche Bank AG in the United Kingdom is authorised by the Prudential Regulation Authority and is subject to limited regulation by the Prudential Regulation Authority and Financial Conduct Authority. Details about the extent of our authorisation and regulation are available on request.

Hong Kong: Distributed by Deutsche Bank AG, Hong Kong Branch.

Page 32 Deutsche Bank AG/Hong Kong

2 March 2017 Consumer China Consumer

India: Prepared by Deutsche Equities India Pvt Ltd, which is registered by the Securities and Exchange Board of India (SEBI) as a stock broker. Research Analyst SEBI Registration Number is INH000001741. DEIPL may have received administrative warnings from the SEBI for breaches of Indian regulations.

Japan: Approved and/or distributed by Deutsche Securities Inc.(DSI). Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association and The Financial Futures Association of Japan. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. We may also charge commissions and fees for certain categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless Japan or "Nippon" is specifically designated in the name of the entity. Reports on Japanese listed companies not written by analysts of DSI are written by Deutsche Bank Group's analysts with the coverage companies specified by DSI. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. Target prices set by Deutsche Bank's equity analysts are based on a 12-month forecast period.

Korea: Distributed by Deutsche Securities Korea Co.

South Africa: Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10).

Singapore: by Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch (One Raffles Quay #18-00 South Tower Singapore 048583, +65 6423 8001), which may be contacted in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), they accept legal responsibility to such person for its contents.

Taiwan: Information on securities/investments that trade in Taiwan is for your reference only. Readers should independently evaluate investment risks and are solely responsible for their investment decisions. Deutsche Bank research may not be distributed to the Taiwan public media or quoted or used by the Taiwan public media without written consent. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation to trade in such securities/instruments. Deutsche Securities Asia Limited, Taipei Branch may not execute transactions for clients in these securities/instruments.

Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial Centre Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower, West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority.

Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.

Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company, (registered no. 07073-37) is regulated by the Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya District, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia.

United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated

Deutsche Bank AG/Hong Kong Page 33

2 March 2017 Consumer China Consumer

by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority.

Australia: Retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Please refer to Australian specific research disclosures and related information at https://australia.db.com/australia/content/research-information.html

Australia and New Zealand: This research is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively.

Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published without Deutsche Bank's prior written consent. Copyright © 2017 Deutsche Bank AG

Page 34 Deutsche Bank AG/Hong Kong

David Folkerts-Landau Group Chief Economist and Global Head of Research

Raj Hindocha Michael Spencer Steve Pollard Global Chief Operating Officer Head of APAC Research Head of Americas Research Research Global Head of Economics Global Head of Equity Research

Anthony Klarman Paul Reynolds Dave Clark Pam Finelli Global Head of Head of EMEA Head of APAC Global Head of Debt Research Equity Research Equity Research Equity Derivatives Research

Andreas Neubauer Stuart Kirk Head of Research - Germany Head of Thematic Research

International locations

Deutsche Bank AG Deutsche Bank AG Deutsche Bank AG Deutsche Securities Inc. Deutsche Bank Place Große Gallusstraße 10-14 Filiale Hongkong 2-11-1 Nagatacho Level 16 60272 Frankfurt am Main International Commerce Centre, Sanno Park Tower Corner of Hunter & Phillip Streets Germany 1 Austin Road West,Kowloon, Chiyoda-ku, Tokyo 100-6171 Sydney, NSW 2000 Tel: (49) 69 910 00 Hong Kong Japan Australia Tel: (852) 2203 8888 Tel: (81) 3 5156 6770 Tel: (61) 2 8258 1234 Deutsche Bank AG London Deutsche Bank Securities Inc. 1 Great Winchester Street 60 Wall Street London EC2N 2EQ New York, NY 10005 United Kingdom United States of America Tel: (44) 20 7545 8000 Tel: (1) 212 250 2500