First foreign firm to buy into baijiu sector

A Chinese holding company has sold its 43 per cent share of the parent firm of Chengdu Swellfun Co Ltd yesterday to a foreign invested alcohol maker, marking the first possible foreign entry into China's spirits industry.

Chengdu Yingsheng Investment Holding Corp announced it would sell its 43 per cent stake in Chengdu Quanxing Group to the world's largest alcohol beverage manufacturer, Diageo Highlands Holding BV. Quanxing is the parent company of Swellfun, a maker of traditional Chinese liquor, or baijiu.

Neither of the companies released the price of the deal.

If approved, the deal will make Swellfun the first baijiu brand with foreign interests.

In the foreign investment industry directory released by the Ministry of Commerce, baijiu is listed in the category of "limited," which means the deal has to pass a series of examinations before final approval.

Under the agreement, Diageo will help develop the international market for Swellfun.

"Diageo will help to develop the international market for the Swellfun brand, and it will also provide technical and other support to Quanxing," said Michael Lu, a spokesman for Diageo China.

Baijiu, literally meaning "white liquor," is the most popular spirit in China. The total export value of Swellfun was 2.7 million yuan (US$344,000) in the first half of 2006. A report by the company showed it has achieved an increase as high as 180 per cent year-on-year.

"The deal, if successful, would bring benefits to both sides, especially Diageo," said Dong Junfeng, an analyst from Galaxy Securities.

London-headquartered Diageo holds over 30 per cent of the world's spirits market with over 10 brands, including Baileys, Johnnie Walker and Guinness.

Its market proportion in China, however, is lower than French alcohol maker Pernod Ricard Group.

If the acquisition succeeds, it may surpass the French firm in the Chinese market, and even compete with domestic traditional liquor manufacturers such as Wuliangye Yibin Co.

The past decade has seen a boom in baijiu sales in China. The sector has increased 20 per cent in the last 15 years, and the China Alcoholic Drinks Industry Association estimates an annual rise of 15 per cent for the next five years.

"Diageo believes that it has found the best possible partner through which to deepen its commitment to the Chinese market," spokesman Lu said in a statement.

Swellfun shares were suspended for two days by the Shanghai Stock Exchange (SSE) in early October due to rumours of a possible acquisition.

On October 17, the company announced it had been in talks with many international spirits manufacturers over its export channels.

Zhang Jie, an analyst from Xiangcai Securities said although baijiu is popular in the domestic market, it might not appeal to overseas consumers for taste reasons.

Swellfun was established in April 2000, based on the combined assets of two State-owned enterprises: Chengdu Quanxing Distillery and Sichuan Pharmaceutical Factory.

The liquor maker has targeted the high-end market since its establishment. One of its products is sold at 1,600 yuan (US$204) per bottle, 30 per cent higher than Kweichow Moutai and Wuliangye, the most well-known baijiu brands in China.

The 43 per cent share purchase "is only a start," said Wu Jianhua, an official from the China Brewing Association. "Diageo may enlarge its stake in the future."

The Economic Observer newspaper earlier quoted an expert saying that the deal might bring a major change to the baijiu sector.

"The baiju industry is the last national industry that foreign capital has not entered," the newspaper quoted a senior official from one of the major domestic alcohol makers as saying.

Leading high-end baijiu brands such as Maotai and Wuliangye enjoy a good reputation and popularity among consumers, but haven't really met competition from foreign brands.