A bottle of Swellfun liquor is displayed in a department store. Swellfun is a Chinese premium liquor producer with a profit ratio of around 40 percent. [China Daily]
Diageo, the world's leading premium drink provider, may soon purchase Sichuan Swellfun Co Ltd, a premium Chinese liquor producer by snapping up additional shares in parent company Sichuan Quanxing Group, analysts said yesterday.Sichuan Swellfun announced that its shares were suspended from trading yesterday as the two major shareholders of Sichuan Quanxing Group, Swellfun's largest investor discuss further cooperation. The two stakeholders are Diageo and Chengdu Yingsheng Investment, owning 49 and 51 percent respectively.
"Since this cooperation would directly impact Swellfun's business, we have suspended share trading to avoid possible price turbulence," said the corporate statement on the Shanghai Stock Exchange. The company's shares will resume trading next Tuesday at the latest.
Swellfun refused to elaborate on the possible cooperation, and Diageo China unavailable for comment yesterday.
Since late 2008, rumors have been circulating over Diageo's alleged plan to become the largest shareholder in Swellfun by gaining a majority share of the liquor producer's parent company, Sichuan Quanxing.
In September 2009, Swellfun shares were suspended for a week after the company said Diageo and Yingsheng were discussing enhanced cooperation, but no progress was reported.
"Further cooperation means Diageo would very likely buy up more shares to become the largest shareholder of Sichuan Quanxing," said Huang Wei, a beverage analyst at China Jianyin Investment Securities.
Teng Wenfei, a beverage analyst from Shanghai Securities, agreed. "China is such an attractive market for Diageo as the consumption of liquor in many other markets worldwide has not recovered (after the financial crisis)," he said.
In December 2006, Diageo entered China's liquor market by purchasing a 43 percent share in Quanxing from Chengdu Yingsheng, the first overseas company to do so. In August 2008, Diageo snapped up another 6 percent.
Diageo entered China in 1995, and its business grew steadily even during the financial crisis when overseas sales were declining.
China's liquor market will see a "20 to 25 percent rise" in 2010, and China's high-end liquor consumption will surge by more than "30 percent", said a report from China Jianyin Investment Securities.
"It's a nice deal for Diageo to get involved in the market when it has a bigger voice in Swellfun,"said Teng.
In China, the profit ratio for high-end liquor producers such as Moutai and Wuliangye, China's top two players, is 85 to 90 percent, he said.
Swellfun is a major Chinese medium- and high-end liquor producer, and its profit ratio is around 40 percent. During the third quarter of 2009, Swellfun's sales grew by 23.2 percent to 400 million yuan, but its profits slid 51 percent to 48.69 million.
However, analysts questioned whether the government would approve the deal even if the two sides reach an agreement given the huge potential of the liquor market - and its fat profits.
Last March, the Chinese government gave the thumbs down to a proposed bid by CocaCola for Huiyuan Juice, China's leading fruit juice maker, citing anti-monopoly laws.
