TSINGDAO BREWERY COMPANY CASE STUDY.doc
Tsingdao Brewery CompanyCase StudyTsingtao Brewery Co., Ltd., one of the oldest beer makers in China, was founded in 1903 by German and British merchants under the name Nordic Brewery Co., Ltd. Tsingtao Branch. Today, Tsingtao Brewery is Chinas largest brewery and was also an Official Sponsor of the Beijing 2008 Olympic Games.On July 15, 1993, Tsingtao Brewery became the first-ever Chinese company to be listed on the Hong Kong Stock Exchange (stock code 0168). On August 27, 1993, it listed on the Shanghai Stock Exchange (stock code: 600600), making Tsingtao Brewery the first Chinese company to be listed in both Mainland China and Hong Kong.China now has about 500 breweries, nearly one for every three counties, but 80 per cent have an annual production capacity of less than 50,000 tons and most have operational difficulties. This has spelled opportunities for the three heavyweights, Tsingdao, Yanjing and China Resources. They have all pursued a domestic expansion plan through numerous strategic mergers, purchasing insolvent companies, reorganization, and joint-venture partnerships. Still, in spite of its having the second largest market in the world, China still has a long way to go because per capita beer consumption annually is only about 15 liters, compared to 84 liters in the United States.In 2007, Tsingtao Brewery achieved a total sales volume of 5.05 million kiloliters globally, with the market share of Tsingtao Beer in China reaching 13% . In that same year, World Brand Lab valued the brand at RMB 25.827 billion, placing it first in Chinas brewing industry. Tsingtao Beer is exported to 62 countries and regions, including the USA, Japan, Germany, France, UK, Italy, Canada, Brazil and Mexico. The Barth Report, the authoritative report of the global beer industry, ranked Tsingtao Brewery as the 8th-largest brewery in the world based on total yield in 2006 and 2007. Principal Tax Issues1. Unrealized tax benefitsFocus on the effective tax rate of Tsingdao and observe that at 42% it is higher than the statutory tax rate. The principal reason for this can be found in the acquisition strategy of the company. It has had to write-down the value of many acquisitions. Because these companies are not profitable, they have provided a valuation allowance against the deferred tax asset that would otherwise be created by the writedown.In addition, observe the significant tax loss carry-forwards for which no benefit has been recorded. When will these potential benefits be lost? What conditions need to exist to realize these potential benefits? Is there tax planning that should be considered?2. Read the Tsingtao Tax Issue Notice. Tsingtao was the first of nine Chinese companies listed in Hong Kong in 1993. Since these were Chinas first overseas listings, every effort was madde to make certain they were successful. They were given a preferential tax rate of 15% for five years, but continued to apply this rate after the five year period. In 2007, SAT set a directive to the provinces asking why this rate was still being used.Determine how this issue was dealt with by the company in the 2007 financial statements. What is the potential risk to the company? For what period? Can the risk be quantified? Do you agree with the companies treatment of this issue?
