China Resources May Spend Up to $700 Million on Acquisitions
China Resources Enterprise Ltd., the Chinese partner of SABMiller Plc, said it may spend as much as HK$5.5 billion ($707 million) on acquisitions by the end of the year after first-half profit more than tripled. The shares slid.
“We have negotiations at the moment in all four sectors” of retail, beer, non-alcoholic beverages and food, Chief Financial Officer Frank Lai said in Hong Kong yesterday. He declined to name specific targets.
Net income for the government-backed company climbed to HK$4.24 billion in the first half from HK$1.16 billion a year earlier on surging growth at its retail division, which has 2,900 stores. China Resources said in June that it was buying control of Pacific Coffee Group, Hong Kong’s second-largest coffee chain, posing a threat to Starbucks Corp.’s leadership on the mainland.
China Resources will open coffee shops at some of its 200 5,000 square-meter (54,000 square-foot) hypermarkets, “allowing customers to relax,” Lai said. “It’s a good time to tap the China coffee market.”
Starbucks has about 380 stores in China and plans to have “thousands” there eventually, Chief Executive Officer Howard Schultz said in April.
China Resources fell 2.7 percent, the most since July 30, to close at HK$30.70 in Hong Kong trading. The stock has climbed 8.3 percent this year, compared with a 5.8 percent drop in the benchmark Hang Seng Index.
Macquarie Downgrade
The stock’s rating was cut to “neutral” from “outperform” by Macquarie Securities Ltd. analyst Leah Jiang in a note to clients. “Although we like China Resources Enterprise’s long-term growth potential, we think the valuation may limit near-term share-price upside.” Jiang has a share- price estimate of HK$31.30.
China Resources is trading at 35.7 times estimated earnings, compared with the 24 times for rival retailer Dairy Farm International Holdings Ltd. Tsingtao Brewery Co.’s Hong Kong-listed shares are trading at 29.8 times estimated earnings.
The group may spend more than HK$4 billion on acquisitions in the second half, CLSA Ltd. analysts Xiaopo Wei and Jane Wu wrote in a note to clients. They recommend buying China Resources’ stock and have a share-price estimate of HK$34.60.
China Resources’ cash and bank balances as of June 30 were at HK$14.3 billion, 68 percent higher than at the end of 2009.
Snow Beer
SABMiller and China Resources have said they will pursue acquisitions and increase production capacity in the world’s most-populous nation. The London-based maker of Miller Genuine Draft and Grolsch owns 49 percent of China Resources Snow, the Asian nation’s biggest beer brand by volume with 20 percent of the market.
Same-store sales, which strip out the effect of newly opened outlets, rose 8.4 percent at the division that runs China Resources’ supermarkets, hypermarkets, and convenience and retail stores, the biggest contributor to revenue.
While sales volume for the beer business, its second biggest, rose 4.8 percent to 4.39 million kiloliters, growth slowed in the three months ended in June because of bad weather.
“We are confident the beer sales will further improve in the second half,” Lai said.
Earnings per share rose to HK$1.77 from 48 cents a year earlier, the group said in a statement to Hong Kong’s stock exchange. Total sales rose 32 percent to HK$41.6 billion.
Chinese Arts
The company opened more supermarkets in northern and central China, boosting retail sales 50 percent to HK$26.9 billion. Its store chains include Vanguard, Chinese Arts & Crafts and Ole. Profit for the division grew 77 percent to HK$955 million.
China Resources made a gain of about HK$3 billion after it sold its entire stake in a clothing venture to partner Esprit Holdings Ltd. last year.
The company proposed an interim dividend of 14 Hong Kong cents, the same as a year earlier.
Profit from the beer division was unchanged from a year earlier at HK$258 million in the first half, while sales gained 6 percent to HK$10 billion, China Resources said yesterday.
Sales by volume of Snow beer rose 10 percent to 3.95 million kiloliters.
The beverage division’s profit declined 37 percent to HK$53 million on increased advertising and promotional costs, China Resources said. Sales rose 21 percent to HK$896 million.
Earnings at the food-processing and distribution business grew 14 percent to HK$240 million.
The company opened more than 300 supermarkets in the 12 months ended June and closed more than 100, Lai said. It will expand the business at a similar pace this year, he said.
China’s retail sales climbed 18.2 percent in the six months ended June and wages in China’s urban areas rose 13 percent in the first quarter from a year earlier.
To contact the reporter on this story: Wendy Leung in Hong Kong at wleung12@bloomberg.net
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