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AT TSINGTAO, IT'S ENOUGH TO MAKE THEM DRINK

A visit to the floor of Tsingtao Brewery Co. doesn't inspire much confidence in the quality of China's best-known beer. On a recent day, a mechanic perched on a piece of broken equipment while white-suited women on the bottling line stepped gingerly around smashed bottles lying scattered on the floor. Outside, near the original 1903 brewery building, elderly workers swept imported malted barley that had spilled onto the asphalt.

Investors don't have much reason to toast Tsingtao, either. When the brewery became the first Chinese state-owned company to list shares abroad in 1993, it appeared ready to take advantage of consolidation in the fragmented domestic market. Instead, bad investments and management inexperience led to three straight years of declining profits and a sputtering stock price. Tsingtao's travails illustrate the difficulty of turning a vehicle for state employment into a market-driven enterprise.

PREMATURE. Now, Tsingtao is attempting a comeback. Since the July 8 announcement of a restructuring plan that will hive off chronic money-losers, Tsingtao's shares have appreciated by 35% on the Hong Kong exchange. The plan's success could determine whether China, in the new climate of reform urged by the 15th Party Congress, can get serious about fixing state industries. ''Our state and our company did not have enough experience to list overseas,'' concedes Tsingtao's new vice-chairman and general manager, Peng Zuoyi.

Indeed, Tsingtao's privatization was in trouble before the IPO. The original company was slapped together with the help of Goldman, Sachs & Co. and the Bank of China a month before the shares were floated. Then, instead of using the $110 million IPO proceeds for expansion, Tsingtao lent them to other state enterprises. Many loans soured during a 1994 credit crunch, forcing Tsingtao to report losses. Management contends that most of the funds were recovered. Still, says Anthony Francis Neoh, chairman of Hong Kong's Securities & Futures Commission, ''the issue was whether they should [have told] the market.''

Misuse of funds was just the beginning. A proposed partnership with U.S. brewer Anheuser-Busch Cos. foundered. The acquisition of two local breweries has yet to pay off, and production is only half of capacity. In 1996, the government tossed out Tsingtao's management. Now, Peng wants to restore Tsingtao's fizz. By hiking capacity and buying local breweries, Tsingtao hopes to grow its way back to health. Government bailout funds, including a five-year grace period on some $18 million in outstanding loans, will support the expansion strategy. So, too, will a recently announced $120 million credit facility from the Bank of China.

Still, the stock listing has been a sobering experience. ''Hong Kong offers state-owned enterprises the ability to immerse themselves in a free market--with all the risks,'' says Neoh. That's a cautionary lesson that managers and investors must take to heart as China privatizes its economy.

By Mark L. Clifford in Qingdao


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Updated Sept. 18, 1997 by bwwebmaster
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