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Tingyi, Asahi, Itochu set up soft drink JV
( 2004-01-06 09:14) (China Daily by Guo Jian'er)

Tingyi (Cayman Islands) Holding Corp, China's largest instant noodle producer, announced yesterday that it would set up a soft drinks joint venture with Japan's top beer maker Asahi Breweries Ltd and trading firm Itochu Corp to further explore the country's US$14 billion beverage market.

The joint venture, Tingyi-Asahi-Itochu Beverages, with a corporate value of US$950 million, will have a 100 per cent holding in Tingyi's 13 beverage subsidiaries.

Two Japanese firms will acquire a combined 50 per cent stake in the joint venture at a cash consolidation of US$384.8 million, which represents high price/earning ratio of 20 times.

Shares of Hong Kong-listed Tingyi, one of the hottest stocks on resuming trade yesterday, soared by 47 per cent yesterday and retreated to HK$2.35, up 27.75 per cent, as the market believed the deal would boost Tingyi's competitiveness.

Analysts at Deutsche Bank said the surge on Tingyi's shares because investors may now want a "clear growth strategy" from the new link-up and the bank keeps the stock as "buy."

Sun Hung Kai Securities said that the strategic tie-up would at least strengthen Tingyi's bargaining power on the sales and procurement and that it raised Tingyi's rating from "sell" to "buy" as a result.

"Teaming up with Asahi and Itochu will help Tingyi build the required scale and strengthen our core competency in a bid to better compete in the increasingly fierce market," Tingyi's chief financial officer Frank Lin said at a news briefing in Hong Kong yesterday.

According to him, only the top three market players in China's beverage industry can make substantial profits. "Given Asahi's strong research and development capacity, the alliance with Asahi will enhance our capacity in this field, one major accelerator for our business," said Lin.

He added the new joint venture will finish restructuring the 13 beverage subsidiaries in two to three months. It is expected the joint venture would reap net profits of US$8 million this year.

Tingyi, who own the "Master Kong" household brand, reported a US$358 million revenue in 2002, and it ranked number one in China's tea market with a 44 per cent share. The company had established a large sales and distribution network covering more than 400 major cities and 700 towns in China.

On the other hand, the business deal also enables two Japanese firms, who have been running a joint beer business in China since 1994, to enhance their presence in the country's booming beverage market.

The country's beverage market has been growing at an average rate of 15 per cent per annum since the early 1990s. It is expected to maintain a double-digit growth in the following 10 years. The market reached a total sales turnover of 117 billion yuan (US$14 billion) and a total consumption of 20 million kilo-liters in 2002.

When asked whether the new joint venture with Tingyi would compete with its beer business in China, Asahi's executive officer Tsugiya Iwasaki said that the deal would not "contradict" its existing operation, rather it would only strengthen the investment portfolio.

Speaking to reporters after the briefing, Iwasaki said that Asahi would consider adding beer to the venture's product line-up, depending on market demand.

Tingyi added that it would use the proceeds from the deal to invest in its core instant noodle business and repay debts. Instant noodles are still the largest revenue contributor to the company, which accounted for 58 per cent of total revenue in 2002, followed by beverage's 32 per cent and bakery's 8 per cent.

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