In early trade the Broo Ltd (ASX: BEE) share price has been one of the biggest movers on the market with a sensational move higher.
At the time of writing the small-cap beer producer's shares are up over 52% to 45 cents.
Why are its shares higher?
This morning Broo announced a major binding agreement with Beijing Jihua Information Consultant Ltd to exclusively market and distribute its premium lager beer products in China for a period of seven years.
According to the release, management believes the exclusive distribution arrangement will accelerate the expansion of its beer products sales and distribution in the lucrative Chinese beer market.
This is largely due to Beijing Jihua's interests in a wide variety of industries in China and its established supply and distribution channels with major Chinese organisations across multiple market segments.
These include hypermarkets, supermarkets, convenience stores, and hotel and restaurant chains.
As per the agreement, Beijing Jihua will fund the marketing and promotional costs associated with the brand in China, meaning Broo will be given the platform to compete with major international beer brands with minimal implementation overheads.
The agreement is binding on a take or pay basis for 1.5 billion litres of Broo Premium Lager beer products over the seven year period with Beijing Jihua paying a fixed rate per litre. Management estimates the agreement to be worth RMB602 million (A$120 million) in total over the seven years.
However, it hasn't specified the full terms of the take or pay agreement. Traditionally a take or pay agreement means that the buyer either takes the product from the supplier or pays the supplier a penalty.
If this penalty payment is minimal then it would be very easy for Beijing Jihua to back out of the agreement should sales not grow as intended.
In light of this, I would suggest investors hold off an investment for now and wait to see how sales develop over the next 12 months.
In the meantime I think investors ought to consider Treasury Wine Estates Ltd (ASX: TWE), Gage Roads Brewing Co Limited (ASX: GRB), or even Coca-Cola Amatil Ltd (ASX: CCL) instead. The latter has exposure to the growing alcoholic beverage industry through the Jim Beam brand.
