Owens-Illinois Expands in China - Analyst Blog

Owens-Illinois Inc. (OI) has entered into an agreement to acquire the glass container manufacturing business of Hebei Rixin Glass Group Co. Ltd. in northern China, which includes two plants. This deal, on closing, will more than double Owens-Illinois' capacity in China, catapulting it to the second position in the country among the glass container manufacturers. 

The newly acquired plants located in the fast-growing Beijing/Tianjin region of China's Hebei province, can produce 270,000 tons of glass containers per year. The plants cater to China's domestic beer market. The Hebei province is the third largest glass market in China and represents approximately 10% of the total Chinese market. By 2015, China's domestic beer market is estimated to reach 573 million hectoliters – more than twice the size of the U.S. beer market, which is the world's second largest.

The acquisition will strengthen the company's customer base among China's leading breweries, such as Tsingtao, Yanjing and CRB (China) Co. Ltd., owner of the world's largest beer brand, Snow. Further, the newly acquired plants have lower cost profiles than its existing operations in China. 

Owens-Illinois is particularly focused on entering or expanding its presence in rapidly growing markets with existing preferences for glass. The company concentrates more on Asia Pacific and Latin America given these markets collectively represents more than 50% of global glass consumption.

In particular, Owens-Illinois commands a leading position in four countries in the Asia-Pacific region — Australia, New Zealand, Indonesia and China. Owens-Illinois' operations in China now include eight glass manufacturing plants, as well as a plant in Tianjin that produces moulds for glass manufacturing. During the third quarter of fiscal 2010, the Asia-Pacific region contributed 14% to Owens-Illinois' total revenue growth.

Given the high demand and the growth seen in the Asia-Pacific region, we hold a positive view on Owens-Illinois' move to expand in these markets. However, the company's substantial debt is a matter of concern. Further, the company has asbestos liabilities and may record additional charges, in the future, for estimated asbestos-related costs. Overall, we believe Owens-Illinois' low near-term revenue visibility, competitive environment and continued weakness in some end markets would continue to undermine the company's growth prospects and profitability. We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.

Perrysburg, Ohio-based Owens-Illinois is the world's largest glass container manufacturer for food and beverage products, including beer, wine, spirits and non-alcoholic drinks. The company commands market leadership in each of its four operating regions  -- Asia Pacific, Europe, Latin America and North America. Owens-Illinois competes with Silgan Holdings Inc. (SLGN) and privately held Anchor Glass Container Corporation and Compagnie de Saint-Gobain.

 
OWENS-ILLINOIS (OI): Free Stock Analysis Report
 
SILGAN HOLDINGS (SLGN): Free Stock Analysis Report
 
Zacks Investment Research