Soft Drinks in China Q1 2015 Produced by: Any redistribution of this information is strictly prohibited. Copyright © 2015 EMIS, all rights reserved. - 1 - Table of Contents I. Industry Overview III. Regulation Overview 1. Industry Highlights 1. Government Policy 2. Investment Opportunities 3. Key Industry Indicators IV. Regional Overview 1. Soft Drinks Regional Distribution 4. Industry Forecasts 2. Soft Drinks Production, Distribution and Growth in 2013 5. Industry Drivers 3. Industrial Financial Data by Province 6. Industry Inhibitors 4. Industrial Financial Data by Province (cont’d) 7. Sales Revenue and Cost 8. Output and Retail Sales V. Companies Overview 9. Industry Globalisation 1. Top Listed Companies 10. Imports and Exports 2. Top Industry Deals 11. Exports by Product 3. Top Industry Deals (cont’d) 12. Imports by Product VI. Company Profiles II. Competition Overview 1. Uni-President China Holdings Ltd. 1. Competition Landscape 2. Tingyi (Cayman Islands) Holdings Corp. 2. Industry Concentration 3. V V Food & Beverage Co., Ltd. 3. Top Groups 4. Hebei Cheng De Lolo Co., Ltd. 4. Foreign Players 5. China Huiyuan Juice Group Ltd. 5. Top Players 6. Blackcow Food Co., Ltd. 6. Competition Elements 7. Cost Analysis 8. Profitability 9. Price Indices Any redistribution of this information is strictly prohibited. Copyright © 2015 EMIS, all rights reserved. - 2 - I. Industry Overview Any redistribution of this information is strictly prohibited. Copyright © 2015 EMIS, all rights reserved. - 3 - Industry Highlights Annual Overview China's soft drinks industry had full-year revenues of RMB 578bn in 2014, up 9.5% y/y. The rise was driven by a combination of higher income levels among the country's residents, product innovation, continuing urbanisation and government support. However, the growth rate of the industry's revenues has slowed down in the last three years, along with lower growth of the Chinese economy and falling export of fruit juices. Food safety was a major focus of public attention throughout 2014 and the government continued imposing new safety and quality requirements, adding to the huge number of compulsory food safety criteria in place - which had already exceeded 5,000. This posed a certain challenge to industry players, who also saw slightly declining profit rates in 2014. The milk & vegetable protein drinks segment registered the fastest annual growth of 16.1% in 2014, followed by tea beverages with 12% and bottled water with 11%. The concentrated juice and carbonated soft drinks segments had the lowest growth rates of 2.3% and 2.6%, respectively. Quarterly Performance The growth of the revenues of China's soft drinks industry decreased gradually from 11.7% in Q1 2014, to 10.1% in Q2 and to 9.5% at the end of 2014, compared to a revenue growth rate of 12.8% at the end of 2013. The gross profit rate of the industry dropped from 23.7% in Q1 2014 to 22.6% in Q2 and remained relatively flat throughout the rest of the year. The net profit rate decreased from 6.3% in Q1 to 6.1% in Q2 and 5.9% in Q3 of 2014. Declining profitability was attributable mostly to rising operating costs. Development Trend China's soft drinks industry is expected to maintain an annual growth rate of around 9-11% in the next two to three years, appreciably lower than the average annual growth rate of over 18% in 2009-2013. The government is expected to continue to impose stricter requirements on product quality and safety. The average price of soft drinks is expected to rise. Despite intense competition, the rising costs of raw materials, labour and logistics are bound to push prices up eventually. Digital advertising platforms are expected to attract a greater share of firms’ investment expenditure in 2015, with budgets shifting away from traditional advertising media such as television and print. Any redistribution of this information is strictly prohibited. Copyright © 2015 EMIS, all rights reserved. - 4 - Investment Opportunities China's soft drinks market has significant potential, given the country's large population and relatively stable economic growth. The promising growth opportunities have so far attracted over 1,790 enterprises and many foreign investors to the industry. As the industry has developed, manufacturing requirements have grown stricter and competition has become more intense. Overview Mergers and acquisitions (M&As) have become more frequent and industry concentration is increasing. This will limit investment opportunities in the next 1-3 years to a certain extent, as the industry's growth rate is slowing down and the ongoing consolidation process will be most favourable to the current market leaders. Acquisitions present great opportunities for companies to optimise their product structures or eliminate production bottlenecks, M&A as well as to enhance their sales advantages and enter specific segments. With the development of the various segments and opportunities with government encouragement of industry consolidation, numerous M&As have taken place over the last three years. Healthy soft drinks have become more popular recently. The popularity and wider availability of juices with added vitamins and/or other nutritional supplements have also stimulated the demand for naturally healthy ready-to-drink (RTD) tea and plant- Segments based ingredients. There is also a growing demand for so-called "super fruits" (blueberry, guava, etc). Given increasing health Opportunities awareness and a shortage of water resources, industry segments such as bottled and canned water, dairy & plant-protein and tea beverages will continue to maintain a rapid growth. The share of these segments in total sales is expected to increase. The government will continue to impose stricter food quality and safety requirements in the sector. This will result in improved industry standards and may push some low-end products and manufacturers out of the market. On the one hand, this trend Government opens up opportunities for quality suppliers, but, on the other, it may limit the market in some less developed regions. The Policy government's encouragement of industry consolidation and of M&As in the soft drinks industry is favourable to the growth of the local market leaders, and aims to strengthen their positions on both local and global markets. Any redistribution of this information is strictly prohibited. Copyright © 2015 EMIS, all rights reserved. - 5 - Key Industry Indicators Key Industry Indicators Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- 2012 2013 2013 2013 2013 2014 2014 2014 2014 Industry Revenue, RMB bn 472 117 248 396 528 132 277 436 578 Carbonated Soft Drinks 84.8 19.7 38.7 63.0 78.2 19.0 40.8 64.9 80.3 Bottled and Canned Water 82.3 19.5 45.5 72.1 101.4 24.5 55.2 85.9 113.2 Fruit ,Vegetable Juice and Syrup 107.4 22.6 51.5 80.4 111.5 24.7 55.4 87.4 121.0 Milk & Vegetable Protein Drink 74.9 21.8 43.1 69.7 89.5 25.8 48.3 75.2 103.9 Solid Beverage (concentrated juice) 44.3 12.5 23.3 34.9 48.8 12.8 23.9 36.1 49.9 Tea Beverage and Other Soft Beverage 77.9 21.1 46.3 76.4 98.4 25.3 53.5 86.4 110.2 Number of Enterprises, units 1,582 1,619 1,618 1,641 1,686 1,786 1,757 1,797 1,824 Total Profits, RMB bn 37.5 9.7 18.9 31.9 45.9 11.1 22.6 34.5 48.24 Total Assets, RMB bn 322 321 328 344 361 365 384 392 408 Soft Drinks Production, thou tonnes 130,240 32,604 70,708 113,390 149,268 36,374 83,624 130,607 - Cost of Sales, RMB bn 358.2 89.0 191.0 305.5 404.8 100.9 214.5 337.7 448 Gross profit, % 24.0 24.1 23.1 22.9 23.3 23.7 22.6 22.5 22.5 Net profit rate, % (divide net profit by industry revenue to obtain) 6.0 6.2 5.7 6.0 6.5 6.3 6.1 5.9 - Import: soft drinks, USD mn 3,087 723 1,467 2.319 3.051 666 1,423 2,288 - Export: soft drinks, USD mn 1,328 215 520 888 1,287 280 672 1,123 - Source: National Bureau of Statistics, General Administration of Customs Any redistribution of this information is strictly prohibited. Copyright © 2015 EMIS, all rights reserved. - 6 - Industry Forecasts Revenue Quarterly Forecasts, RMB bn 631 578 . The growth rate of China's soft drinks manufacturing 479 industry declined in 2014. The industry is expected to 436 continue to grow at a slower average annual rate of around 9-11%. 305 . The increase of residents' income and their growing 145 health awareness, as well as the fast urbanisation process, are the major drivers for a steady growth in the soft drinks industry. However, with China's economic slowdown, the industry's growth in 2015 is expected to Sep/14 Dec/14 Mar/15 Jun/15 Sep/15 Dec/15 be slightly slower than in 2014. Revenue Annual Forecasts, RMB bn . In future, the soft drinks industry will enter a relatively 773 mature stage. The industry's development will mainly 696 depend on product innovation and upgrading. In 2015, 633 health and wellness awareness will continue to shape 578 consumer behaviour and sales patterns. Soft drinks producers are expected to invest more heavily in advertising and new product development, relying on "healthy" concepts in both respects. Soft drinks manufacturers will still have to face issues related to strict market regulation, decreasing profitability and strong international competitors. 2014 2015 2016 2017 Source: EMIS Insight Any redistribution of this information is strictly prohibited.