China Resources Profit Drops 61% on Costs, Weak Consumption

China Resources Enterprise Ltd.’s first-quarter profit fell 61 percent as the nation’s second-largest hypermarket operator was hurt by higher costs and a government push to curtail public expenditures.

Net income dropped to HK$512 million ($66 million) from HK$1.3 billion a year earlier, the company, which also runs beer, beverage and food businesses, said in a statement today. Sales rose 8.4 percent to HK$36.2 billion.

Growth in China’s gross domestic product unexpectedly weakened in the first three months of 2013 as factory output and consumption slowed. Sales of pricey items such as liquor and high-end cigarettes were hurt by a campaign by authorities to stamp out gifting and corruption among government officials, Chief Financial Officer Frank Lai said March 21.

The Chinese government’s call to curb official spending on receptions, vehicles and overseas trips, along with slowing inflation, have “adversely affected consumption expenditure in the short run,” the company said in today’s statement.

China Resources fell 0.6 percent to HK$25.35 at 1:28 p.m. in Hong Kong trading today. The stock has declined 9.3 percent this year, compared with a 1.9 percent gain for the Hang Seng Index.

Higher Raw Material Costs

The company, registered in Hong Kong, derives more than 90 percent of its revenue from China. Excluding certain asset revaluations and disposals, profit fell 8.6 percent from a year earlier.

Higher labor and raw material costs also hurt the retail and beer businesses, the company, which makes China’s best-selling Snow brand beer with SABMiller Plc, said in today’s filing.

The beer division, which makes China’s best-selling Snow brand with SABMiller, posted a loss of HK$23 million in the first three months of 2013. The company ramped up promotions and marketing during the period as competition in the beer industry intensified, it said.

China’s Number One Beer

China Resources believes its leading position in China’s beer industry isn’t “rock solid” as rivals such as Tsingtao Brewery Co. and Anheuser-Busch InBev NV seek to increase market share, Linda Huang and Terence Chang, Hong Kong-based analysts at Macquarie Equities Research, wrote in a May report.

The brewer agreed in February to buy Guangdong-based Kingway Brewery Holdings Ltd.’s beer-making assets for 5.38 billion yuan ($875 million) to boost its market share.

Snow beer had a 20 percent share of the Chinese market in 2012, making it the industry leader, followed by Tsingtao Brewery Co. with 10 percent, according to Euromonitor International, a London-based research company.

Profit in the retail division, responsible for about two-thirds of the company’s sales last year, fell 60 percent to HK$525 million amid a government crackdown on lavish spending.

Profit at its food unit, which sells products including rice and frozen items, was largely unchanged at HK$57 million. Profit at the beverage unit rose 33 percent to HK$8 million.

Growth in Asia’s largest economy was 7.7 percent in the first three months of 2013 from a year earlier, missing the 8 percent median forecast in a Bloomberg News survey. The data prompted economists including those at JPMorgan Chase & Co. to trim their forecasts for China’s economic growth this year.

— With assistance by Liza Lin

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