We initiate on Beijing Yanjing with Neutral (PT of Rmb9), upgrade CRE toOW (new PT of HK$28), and stay Neutral on Tsingtao-H (new PT ofHK$46.5) and Neutral on Tsingtao-A (new PT of Rmb40). We expect c7-8%revenue growth for China’s beer industry largely driven by ASPs. We believeCRE as the leading player will continue to consolidate the sector, paving theway for better pricing power. Yanjing, as a strong regional player, could be apotential acquisition target. Tsingtao’s execution has been weak for volumegrowth in recent years and the stock trades at higher multiples vs. peers.

ASP based on mix upgrade and some LFL driving sector growth.China’s beer market size reached 50.9mn liters, or Rmb486bn, in 2014. Weexpect c7% revenue growth with one-third growth from volume and twothirdsfrom ASP increase. We expect ASPs to continue to increase at a 4-5% CAGR largely driven by mix upgrades as China still has substantialc80% exposure to low-end products. We expect a c3% volume CAGRdriven by overall income growth, an increasing middle-income bracket, andimprovement in per-capita consumption in some regions that lag behind thecountry average.

Consolidation leads to margin expansion with better pricing power.There is a high correlation between the level of market consolidation and thelevel of EBITDA margins captured by leading players in their respectivemarkets. China is relatively fragmented vs. the major global beer marketpool; and as the China beer market continues to consolidate, we believethere is margin expansion opportunity for leading domestic beer producersthat are consolidating the market as they gain pricing power.

RE trades at a discount to peers with better execution; Yanjing apotential M&A target: We expect CRE beer to deliver 13% EBITDACAGR post FY15 (twice the level of its peers) thanks to ongoing ASPincrease and market share gains. Excluding the special dividends, the stocktrades at 13x FY15E and 11x FY16E EV/EBITDA at par with global peersand at 15% discount to Tsingtao-H. Yanjing trades at 11x FY15E and 10xFY16E EV/EBITDA (at discount to domestic peers), which we believe isfair for the fundamentals of the business as it is a regional player not likelyto be the consolidator on a nationwide scale, leading to a constrained marginexpansion path. However, given Yanjing is a potential target for leadingplayers, we believe there is downside protection.