■ CRB is the pioneer among domestic players. It closed 2/5/13 plants in 2016/17/18, respectively, and plans to close another 7-10 in 2019. After a series of shutdowns, the benefit is obvious with the utilisation rate and deprecation/PBT ratio improving to 53.7% and 48.8% in 2018, from 53.1% and 91.6% in 2015.
■ also has a clear path of capacity optimisation. The company shut down two plants located in Shanghai and Anhui in 2018 and plans to close at least 10 over the next five years (2-3 each year). As a result, its utilisation rate lift to 57% in 2018 (from 53.8% in 2017) and depreciation/PBT ratio lowered to 35.9% in 2018 (from 43.9% in 2017).
The market is concerned whether the rising malt cost will put a dampener on gross margin expansion considering the Australia barley price has been up 17% YoY in 1Q19. Webelieve this pressure is manageable for leading players thanks to their strong bargain power against suppliers, mix improvement and sufficient inventory (3-6 months). We did a sensitivity analysis of CRB and Tsingtao's gross margins, based on different assumptions of malt cost and ASP. Assuming malt cost up 15% and ASP grows 3-4%, our sensitivity analysis shows gross margin could improve to 36.3-36.9% from 35.7% for CRB and expand to 32.3-32.9% from 31.7% for Tsingtao in 2018, or 0.6-1.2 pp for both companies.