China Resources to Acquire Smaller Brewers as Retail Causes Loss

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China Resources Enterprise Ltd. wants to grow its beer venture with SABMiller Plc by buying up regional brewers in the country after the company sold its assets to focus on the alcoholic beverage.

“We see great opportunities in enhancing our presence by acquiring regional small companies that make up 29 percent of the Chinese beer market,” Chief Financial Officer Frank Lai said at a briefing in Hong Kong Friday.

The Hong Kong-based company compared the strategy to how the company strengthened its position in southern China by buying Kingway Brewery Holdings Ltd.’s assets in 2013.

To focus on the beer business, China Resources has sold to its state-owned parent its asset including the loss-making retail venture with Tesco Plc that’s been hurt by China’s economic slowdown and austerity measures.

The company earlier posted a first-half underlying loss of HK$4.41 billion ($569 million), compared with a HK$668m profit a year earlier, due to goodwill impairment on its disposed retail venture. The underlying figure excludes asset revaluation and major disposals. Sales rose 13 percent to HK$94.7 billion.

The beer unit, China’s largest brewer by sales volume which produces Snow Beer, saw underlying profit rise 30 percent to HK$544 million.

Retail Challenges

China Resources shares were unchanged by the close of trading in Hong Kong, after slumping as much as 2.1 percent earlier. The benchmark Hang Seng Index plunged 1.5 percent.

Discontinued operations -- which also include a food and beverage unit -- posted a HK$4.9 billion net loss. The businesses were “still affected by the slowdown in economic growth, integration, as well as ongoing investment for business transition and nationwide expansion,” the company said.

In collaboration with SABMiller, China Resources aims to upgrade its product mix and step up its regional presence from both organic growth and acquisitions, it said.

The retail division, which posted an underlying loss of HK$2.8 billion, made a provision for goodwill impairment of HK$2 billion as it’s “faced with challenges and an uncertain short-term outlook,” the company said.

Its disposed food unit posted a HK$15 million underlying loss while the beverage division reported a HK$194 million profit.

China Resources will complete the disposal of those non-beer assets on Sept. 1, Lai said. The company won’t declare an interim dividend for the first half as the proceeds from its asset disposal to its parent “will largely be distributed as a special dividend,” it said.

Beer Saturation

Snow Beer was China’s best-selling beer with a 21 percent market share last year, followed by brands from Tsingtao Brewery Co. and Beijing Yanjing Brewery Co., according to data from market researcher Euromonitor International Plc.

The low brand position for Snow Beer, along with aggressive peer competition and high channel costs caused by fast expansion, will weigh on the company’s earnings in the near term, Industrial & Commercial Bank of China Ltd. analysts led by Mark Yuan wrote in a note before the results.

China’s beer market has reached a saturation point and brewers should adapt to changing consumer tastes and produce high-end products to drive further growth, Guotai Junan International Holdings Ltd. analyst Sunny Kwok said on Friday.

— With assistance by Catherine Chen

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