AB InBev’s China Slump Wipes Out $20 Billion in Market Value

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(Bloomberg) — The Asian unit that Anheuser Busch Inbev SA NV (BR:) partially spun off to investors last month with the promise of tapping into China’s growth is now weighing on performance of the world’s largest brewer.

AB InBev fell as much as 11% in early European trading, lopping off more than $20 billion of market value, after a drop in beer shipments in China and the U.S. caused profit growth to stumble in the third quarter. The Budweiser brewer lowered its full-year earnings forecast, saying Friday that it expects “moderate” gains, down from “strong” previously.

The results paint a souring picture of Asian consumer confidence and could signal bigger trouble ahead after China’s economy slowed to the weakest pace since the 1990s. Chief Executive Officer Carlos Brito has reported earnings below analysts’ estimates in four of the past eight quarters, and last year he cut the brewer’s dividend payout in half amid sluggish progress in debt reduction.

AB InBev’s report underlines a recent pattern, with Chinese demand weakening for drinks like Pernod Ricard’s (PA:) Cognac and mass-market consumer items from Nestle (SIX:) and Unilever (LON:), while fashion giants Hermes International (PA:) and LVMH (PA:) are still enjoying strong growth in the world’s key luxury market.

AB InBev’s earnings were flat on an adjusted basis, missing analysts’ estimates for 3% growth.

New restrictions in China curbing the sale of alcoholic drinks after 2 a.m. have weighed on the industry. AB InBev’s earnings growth in that market slowed to 11% from 24% in the second quarter. Last month, the company raised $5.8 billion selling a stake in its Asian business, Budweiser Brewing Company APAC Ltd.

The company said the picture isn’t so bleak, as its highest-priced beers in China, which include Corona, had shipment growth that exceeded 10%.

‘Growth Is There’

“Our China business remains intact,” Chief Financial Officer Felipe Dutra said on a call with reporters. “Growth is there.”

Last year, Heineken (AS:) bought a $3.1 billion stake in the parent of China Resources Beer Holdings Co., the maker of the country’s best-selling Snow brand. Carlsberg (CSE:) has also been performing well in China, where its revenue rose 19% in the first half even as the overall market shrank.

In the U.S., the emergence of hard seltzers is eroding consumption of beer, so the company is expanding in that segment with brands such as Bon & Viv and an upcoming Bud Light Seltzer.

What Bloomberg Intelligence Says:

“AB InBev’s volume collapse shows the inherent risk of its business model, with a focus on higher prices and margin allowing competition a chance to flourish.”

— Duncan Fox, BI consumer-staples analyst

AB InBev Asian Volume Collapse a Concern If M&A a Goal: React

Other factors that hit the brewer in the quarter were higher raw-material costs, the timing of shipments, adverse currency swings and declines in volume in South Korea and Brazil. The brewer reversed price increases in the Asian country after they drove consumers away. Earnings in Brazil dropped 17%.

AB InBev said that the second half of 2019 poses more challenging comparisons. Last year, most marketing spending occurred in the first half, linked to the World Cup soccer games, while this year it’s more spread out.

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