Investors Clobber AB InBev as Its China Business Suddenly Goes Flat

October 25, 2019, 12:44 PM UTC

Anheuser-Busch InBev, the world’s biggest brewer, stunned investors on Friday when it revealed weak sales in China and South Korea and lowered its profit target for the year.

Shares promptly cratered 10% after it gave details of a “challenging” third quarter.

Although the brewing giant put the Chinese weakness down to temporary factors, the softness will fuel investors’ concerns that slowing Chinese retail sales growth, coupled with a drop in economic growth and the U.S.-China trade war, could hit the profits of Western consumer goods companies hoping to rack up growth away from their own slowing home markets.

AB InBev, which only a month ago floated a minority stake in its Asia-Pacific unit for $5 billion in the second-biggest IPO of the year, said its sales dropped nearly 6% by volume in China in the third quarter. The blow was slightly cushioned by higher average sales price as beer drinkers opted for more up-market brands.

The brewing behemoth, maker of Budweiser, Corona and Stella Artois, is the largest foreign brewer in China, the world’s biggest beer market.

The brewer, which took its present form following AB InBev’s $100 billion takeover of SABMiller in 2016, said its business in South Korea, another once-promising market, had a very soft quarter with declines in both revenue and volume. In Brazil, AB InBev’s beer volumes dropped by 3% after a price increase.

“Not satisfied”

The company, which makes a quarter of the world’s beer, missed profit forecasts for the quarter, with flat core earnings (EBITDA) year-on-year falling short of analysts’ expectations for a 3% rise.

And it lowered expectations for the full year, saying that while it continued to anticipate strong revenue growth, it now expected only “moderate” growth in core earnings, instead of the “strong” growth it had previously flagged. This was because it expected the “additional headwinds” in the third quarter to continue into the final quarter of the year.

“We are not satisfied with these results,” Chief Financial Officer Felipe Dutra told reporters. But he tried to put a brave face on the outlook.

He denied that the China weakness pointed to a tougher consumer environment. “I don’t feel that. We feel that the China business remains intact, growth is there, the brands are super well-positioned,” he said.

AB InBev said the decline in China sales volume was due to shipments being brought forward to earlier in the year ahead of marketing promotions as well as a quieter nightlife scene.

In South Korea, the company had faced a “challenging competitive environment” following a price increase in April to the extent that it decided recently to roll back the price increase.

Beer giants such as AB InBev are having to adapt to an increasingly complex marketplace with the growth of craft beers and a rise in demand for low-alcohol or alcohol-free drinks. Fernand De Boer, senior analyst at Belgian bank Degroof Petercam, told Fortune the China weakness was unexpected “and it remains to be seen if there is a little bit more structural element in it or not.”

Heineken, Carlsberg find China to their liking

Last year, AB InBev’s biggest rival, Dutch brewer Heineken, announced it was taking a 40% stake in the parent of China Resources Beer, China’s biggest beermaker and owner of the country’s popular Snow brand, while merging its Chinese breweries into the company.

When the Heineken deal was announced “some people were afraid that this could at some point hit the growth of AB InBev in the beer segment in China because of Heineken being in a better competitive shape teaming up with Snow,” De Boer said.

The latest developments “will feed into that fear going forward”, said De Boer, who put his “buy” rating on AB InBev under review following Friday’s results.

Heineken, the world’s number two brewer, on Wednesday reported double-digit growth in beer sales by volume in the Asia-Pacific region in the third quarter, compared with a 2.3% increase globally. The Dutch beermaker reported strong growth in beer sales in Vietnam and Cambodia, but said little about China.

Danish brewer Carlsberg enjoyed strong growth in China in the first half of the year.

AB InBev’s problems are not the first sign that multinational drinks companies are finding the going tougher in China.

Trade war hangover

French spirits group Pernod Ricard said last week that its sales growth in China had dropped to 6% in the quarter to the end of September, compared with 27% growth in the year-ago period.

There have been some fears that the trade war with the United States could lead to a backlash against U.S. brands in China.

China has been urging cities to foster the “night-time economy”, including measures such as extended opening hours for stores, in an effort to lift consumer spending. Clearly, the effort didn’t help AB InBev last quarter.

AB InBev succeeded in floating a minority stake in its Asia-Pacific unit, Budweiser Brewing Co APAC Ltd, at the second attempt last month, injecting a dose of optimism into a gloomy IPO market. AB InBev had cancelled plans for a bigger IPO in July but revived them after selling its Australian operations to Japan’s Asahi for $11 billion.

CFO Dutra said on Friday that the IPO gave AB InBev a “platform for potential M&A in the region.”

AB InBev remains burdened with debt taken on to finance its SABMiller purchase. The debt totalled $104 billion in June when the net debt to core earnings ratio stood at 4.58. The company said on Friday that after the Budweiser APAC IPO and the sale of its Australian operations, that ratio would fall to below 4 by the end of this year, a year earlier than its target.

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