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China Resources Enterprise Profit Falls on Slower Economy

China Resources Enterprise Ltd. (291) reported a 54 percent drop in first-half profit as weaker economic growth and a government push to curb public expenditures hurt demand at the state-backed retail and beer conglomerate.

Net income dropped to HK$1.02 billion ($131 million) for the six months ended June from HK$2.24 billion a year earlier, the company said in a statement to Hong Kong’s stock exchange today.

Profit to shareholders excluding asset revaluations and major disposals dropped 11 percent to HK$1.01 billion. This compares with an average HK$1.07 billion estimate by seven analysts compiled by Bloomberg.

China Resources, which also runs beer, beverage and food businesses, has said sales of pricey items such as liquor and high-end cigarettes were hurt by a government campaign to stamp out gifting and extravagant official spending. China’s economy expanded 7.5 percent in the second quarter from a year earlier, the second straight deceleration.

“Looking forward to the second half of 2013, the short-term operating environment and consumer sentiment are both likely to be affected by the volatile global economy,” the company said in today’s statement.

The Hong Kong-listed company fell 2.1 percent to HK$22.85 as of 1:09 p.m. local time. The stock has declined 18 percent this year, compared with a 4 percent drop for the benchmark Hang Seng Index.

Anti-extravagance

“The overall economy is not good and consumer price index has been pretty low and that hurt their retail business,” said Charlie Chen, Hong Kong-based analyst at BNP Paribas Securities Asia.

Profit in the retail division, which includes hypermarkets and coffee shops and accounts for more than half of the company’s earnings in the period, dropped 64 percent to HK$637 million amid a government crackdown on lavish spending and slow growth in the world’s second-largest economy.

The beer division, which makes China’s best-selling Snow brand with SABMiller Plc (SAB), posted a 4.5 percent decline in profit to HK$358 million. An increased investment in some of its promotions and marketing activities amid rising competition have hindered growth in the unit’s operating profit, the company said.

Fierce Competition

Snow beer had a 20 percent share of the Chinese market in 2012, the largest in the country, followed by Tsingtao Brewery Co. (600600) with 10 percent, according to Euromonitor International, a London-based research company. China Resources’ venture agreed to buy Guangdong-based Kingway Brewery Holdings Ltd. (124)’s beer-making assets in February to boost its market share.

Tough competition in the retail and beer segments will continue to weigh on China Resources earnings going forward, with promotions, rather than demand, boosting sales, Kenny Wu, Hong Kong-based analyst at JI-Asia Research Ltd., wrote in a report this month.

China Resources operated 4,448 retail stores ranging from hypermarkets to wine cellars as of March 31, according to the company.

The company this month announced a joint venture with Tesco Plc (TSCO), the U.K.’s biggest retailer that will run supermarkets, convenience stores, and other outlets in China, Hong Kong and Macau. Tesco will merge its 131 stores in China with China Resources which will hold a 80 percent stake in the new tie-up, the companies said.

China Resources and Wal-Mart Stores Inc. (WMT) are tied for second place in the country’s hypermarket industry with an 11 percent share each last year. That lags the 14 percent share by Sun Art Retail Group Ltd. (6808), backed by France’s Groupe Auchan, according to Euromonitor International.

Profit at its food unit, which sells products including rice and frozen items, dropped by 51 percent to HK$71 million. Profit at the beverage unit rose 30 percent to HK$39 million.

To contact Bloomberg News staff for this story: Liza Lin in Shanghai at llin15@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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