The investment bank Merrill Lynch has reiterated its "sell" rating on the Chinese brewer Tsingtao despite news yesterday that the company reported a 16% increase in 2004 net profits to Y285m.

However, Merril Lynch said it had concerns about future prospects for growth and falling market share.

In a research note, the bank said Tsingtao's market share fell from 12.8% in 2003 to 12.7% in 2004 as competition intensified. It also noted that margins were falling as raw material costs increased.

The brokerage said: "With rising cost pressure and limited pricing power, we think it's hard for Tsingtao to pass on rising costs down the value chain. Therefore, margin erosion is inevitable."

Meanwhile, Morgan Stanley issued an "underweight" rating for China's largest brewer.

In a note its analyst said: "Given net profit of Y287m for nine months in 2004, the full-year implies that the company continued to have difficulty generating a profit in the slow fourth quarter."

Earlier this week, US brewer Anheuser-Busch increased its stake in Tsingtao to 27% from 9.9% by exercising its convertible bonds.