Cheers! Slainte! Gan Bei!

We have not been enamoured by consumer staples companies. Although the fund had a large exposure to this sector at launch in 2011, it fell to around 5% in 2015/16 after valuations extended. The trade-off between risk return became poor versus alternatives.

The sector subsequently underperformed the global index by a wide margin, with a return of just under 4% over the past ten years versus just over 10% for the MSCI World.

We thought this might create new opportunities and revisited many old holdings. Diageo, which was one, has seen earnings downgrades for the last three years.

However, we believe some aspects of alcohol consumption are changing. Pricing and premiumisation can offset this, but in some spirits categories, this was pushed too far and backfired.

The conclusion for Western beer companies was similar. Valuations may appear attractive compared to recent history. But not when looking at how the future is shaping up.

It took some time, but we identified a company that meets our investment criteria: China Resources Beer (CR Beer), the largest brewery in China. These are the differences that we think make CR Beer an attractive investment today:

1.Immature premiumisation

China’s premiumisation is only in its infancy. The trend started in the late teens, about 15-20 years after the rise of craft and super premium brands in developed markets¹. We expect the shift from quantity to quality to continue. In fact, over the last five years the overall beer volume consumption in China has declined while premium beer volumes increased by over 4% in 2024.²

In 2017, CR Beer partnered with Heineken to distribute brands like Heineken, Moretti, Amstel, Sol, Tiger, Paulaner, Edelweiss and Strongbow in China. These are all part of CR Beer’s Premium portfolio, which has grown volumes 16% CAGR in 2021-24 and gained market share. In 2024 the company’s mid and high-end portfolio sales made up over 50% of group sales, up from just 11.5% in 2019.³

The partnership brings together well recognised brands, which are tailored locally and then fed into CR Beer’s extensive distribution network. As the sales distribution tilts more towards premium beers, we expect to see continued volume outperformance and margin improvement.

2.Growing Middle Class

Both alcohol consumption and premiumisation benefit from a growing middle class. The middle-class population in developed markets is getting smaller and being squeezed financially. In China however, the equivalent population is expected to grow, with high accumulated savings and new purchasing power.

3.Margin enhancement

In 2017 CR Beer initiated a multiyear efficiency plan which included

• The rationalisation of breweries (from 72 in 2020 to 60 today)
• An increase in utilisation rates (from 50% in 2016 to 58% in 2025)
• Digital transformation of the supply chain and marketing

Consequently, beer operating margins have increased from 7% in 2019 to over 21% in 2025. We believe they can go higher still.

4.Cash generation

CR Beer is already net cash positive and despite increased investments and restructuring has a free cash flow yield of 6.5%. After an acquisition in 2022 the cash has been building up again. The company is now looking to return more to shareholders by increasing its dividend payout ratio to above 70% by 2028 from the current 55% level, and only 40% pre-Covid. We estimate that the dividend will grow at an 18% rate over the next 4 years.

5.Valuation

We like to invest in companies that can grow their sales, earnings, cash and dividend. We also want a valuation that can expand rather than contract. CR Beer is currently trading on 13.5x 1Y FWD PE vs the MSCI World Staples Index on 20.5x⁴. The dividend yield is 4.3%, and we think it can get to 6% in the next 3 years. We believe the company can deliver similar if not better earnings growth compared to the 6% expected for that global consumer staples index⁴.

We haven’t had many Chinese holdings in our fund since it was launched in 2011. Part of the challenge has been corporate governance and the ability to speak to companies. CR Beer proved to be an exception. With Heineken as a significant shareholder and partner for almost 10 years, the corporate governance, disclosure and shareholder friendliness have all improved.

We believe CR Beer combines Quality, Growth and Value. An ironically sober mix of ingredients in a global market drunk on more dangerous hangover-inducing recipes.

Sources:

1 Premiumization, Prices, and Positioning - Brewers Association

China’s Beer Market Overview [Insights & New Trends]

China is tapping into growing craft beer trend - Chinadaily.com.cn

2 China Beer and Cider Market Analysis by Category and Segment, Company and Brand, Price, Packaging and Consumer Insights

3 China Resource Beer company information

4 Bloomberg

KEY RISKS

The value of investments and any income generated may go down as well as up in response to general market conditions and the performance of the assets held, and is not guaranteed. An investor may not get back the amount originally invested.

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This document has been prepared and issued by River Global Investors LLP (“RGI”). RGI is authorised and regulated in the United Kingdom by the Financial Conduct Authority (Firm Reference No. 453087) and is registered in England (Company No. OC317647), with its registered office at 30 Coleman Street, London EC2R 5AL. It  does not constitute an investment recommendation or advice and should not be used as the basis for any investment decision. Opinions, estimates and projections in this article constitute the current judgement of the author as of the date of this article.

The value of investments and any income generated may go down as well as up and is not guaranteed. An investor may not get back the amount originally invested. Past performance is not a reliable guide to future results. Changes in exchange rates may have an adverse effect on the value, price or income of investments.

Please note that individual securities named in this article may be held by the Portfolio Manager or persons closely associated with them and/or other members of the Investment Team personally for their own accounts. The interests of clients are protected by operation of a conflicts of interest policy and associated systems and controls which prevent personal dealing in situations which would lead to any detriment to a client.

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