CEO partner in China has a very impressive track record
1) Russell Breweries (TSX: V.RB, Stock Forum) 3.5 cents
This is a unique small business Canadian export story and if an expansion into China is successful over the next 12 to 18 months, even a 2 cent move on a 4 cent stock generates an impressive return. Just keep in mind that risks are always higher with penny stocks trading this low and I personally never buy them unless I plan on losing half my investment – it doesn’t matter who the company is.
One of the primary risks is that the company struggles to grow top line revenue while being undercapitalized. The balance sheet is weak but nothing too worrisome “yet” (that is also why this is a 3 cent stock).
We need to keep an eye on what their financials look like from Canadian operations over the next couple of quarters and if they need to raise capital, hope they don't do it at these low levels and dramatically dilute existing shareholders. The share structure to date is good and they seem pretty smart about it. However, if we saw any big losses in a quarter or excessive dilution at these low prices, a person would have to reconsider the speculation – regardless of growth opportunities in China.
Shares Outstanding: 62 Million / Market Cap $2 Million
Year End Financials should be filed soon, so the following numbers are for the period ending March 31st. The balance sheet (both assets and liabilities) are very similar to 2011 – it is that weak balance sheet that has contributed to the poor share price. The speculation for 2013 is that China will help them fuel the growth they are missing in Canada.
Cash & Receivables: $940k / Inventory $780k / Book value of Property & Equipment $3.2M
Total Liabilities: $3.7M / Nine Month Net Revenue: $4.7M
"We are pleased with the performance of the company over the first nine months of 2012 fiscal year," says Brian Harris, chief executive officer. "We have achieved EBITDA positive of $3,266 for 2012 fiscal year to date compared to a negative EBITDA of $350,865 for the nine months ended March 31, 2011, which is a result of continued cost savings and reduction of expenses while increasing sales and margin in an extremely competitive market." [news release excerpt May 30, 2012]
The beer industry is highly competitive but the craft beers have been doing very well in North America. While overall beer consumption is down, the growth in craft beers has risen. Russell Breweries is based in Surrey (just outside Vancouver) and they have a sister brewery in Manitoba called Fort Garry Brewing, who were established in 1930 - http://www.fortgarry.com
October 9th Russell Breweries announced that they had secured a licensing agreement for China under a new company called Russell Breweries (China) Inc. or RBCI. This is a very important development for a small niche brewer. While the craft beer market in North America has done surprisingly well, the growth potential for the craft beer market in China is very large.
Of particular interest, the newly formed company would be run in China by a fellow named Mr. Wang Guodong who was former Chairman and CEO at one of the top 15 breweries in China and the largest in Western China. Over 13 years he grew revenue from $12 million to over $150 million.
Here are the terms (and plans) for China – excerpts from their October 9th news release:
The principal terms of the agreement includes use of name for the new company, an initial up-front licensing fee and ongoing royalties based on volume of beer produced and sold. In addition, RBI will subscribe for a 20% equity position in Licensee with an option to increase its position to 25%.
Mr. Wang Guodong who previously served as chairman and CEO at Xin Jiang Wusu Breweries Co. Ltd, is Managing Director of Russell Breweries (China) Inc. "We are very pleased to finalize the agreement, said Mr. Wang. By leveraging our extensive background in the Chinese brewery industry, we have been able to quickly assemble an experienced operations team. The team is currently on the ground working on setting up our brewery / brew pub in Hefei, capital city of Anhui Province in eastern China. Our existing business relationship with one of the largest, established local restaurant chain in the city allows us to kick start the business by pursuing a collocation strategy, leveraging existing customer traffic. With a young and open demographic profile, the economic boom town of Hefei provides us an ideal location to establish the base, and then expand to the densely populated surrounding areas. We currently expect the grand opening of this location to be in the first quarter of 2013".
"We are really excited about the license and joint venture we now have in China," says Brian Harris, CEO of Russell Breweries Inc. "China is now the world's largest and fastest growing beer market. If the craft beer market in China follows the trends in North America, we believe this venture could grow very rapidly and in a relatively short period of time."
CHINA GROWTH OPPORTUNITIES
1) China, at 50 billion liters last year was the world's largest consumer of beer - more than double the United States at 24 billion liters (ranked 12th globally). China accounts for 24% of all the beer consumed globally.
2) On a per capita basis there is significant room for growth in China (ranked 49th in the world on a per capita consumption basis). The U.S. consumes 74 litres annually per person (or 123 bottles on average) while China is half that. The average in Canada is 108 bottles per person.
Russell has an impressive line of unique craft beers and if they can penetrate the Chinese market over the next 12 to 18 months, we could see some very nice gains from the low pennies. The following pages on their website show all the products they produce. http://www.russellbeer.com/cream_ale.asp
The industry also has something called the World Beer Cup (the Olympics of beer). Russell’s Brewmaster Series did very well there in 2012 and they have one beer line that ranked in the high 90’s out of 100 with both Draft Magazine and Beer Advocate Magazine.
THE IMPORTANCE OF HEFEI
Russell and their highly experienced Chinese partner are setting up base in Hefei (Anhui Province). In typical Chinese fashion, Hefei is ridiculously large at 6 million people. It is also a fascinating city for a test of their craft beer market because it is a very high tech and educational city - 30 universities and 190 institutions of scientific research. Initially the new Russell venture is working with one of the largest restaurant chains in the city so they have a significant foot in the door.
After Hefei is up and running well, I believe their plan would be to expand across Anhui Province. This is where the numbers get interesting. Anhui has a population of 70 million people and to the immediate East is Shanghai - a population of 14 million and one of China's most densely populated regions.
Expansion for Russell into China will have its challenges but this fellow running the new division has a tremendous track record within that industry. Even if they were to expand the brand only in Anhui Province and Shanghai they would have access to 90 million people.
This is what makes Russell's new venture into China so interesting at this price range and valuation – but it requires patience and a high risk tolerance.
Side Note: there is also the possibility that if China becomes a success over the next year or two, a major brewer may want a piece of that action and will consider a takeover of Russell to secure the license and the brand. It’s a remote shot but no different than speculating on a gold exploration company kicking rocks in the middle of a forest.
Because the market cap on RB at 3.5 cents is only $2 million, any solid success in China will easily validate a higher valuation because RB's 20% interest alone should be worth significantly more.
Contact Information: Brian Harris, CEO - at email@example.com
DISCLOSURE: Danny Deadlock owns 250,000 shares of Russell Breweries purchased in August 2012
In addition to this weekend column and the bottom fishing research sent to paid Ticker Trax subscribers on Monday, I also provide free MicroCap alerts throughout the week. These are based upon News or Abnormal Price/Volume Activity on the several hundred stocks we track from our own research, brokerage analysts, or 3rd party newsletter writers.