More fizz, please

Sometimes, hitting the bottle really helps. That was the lesson for shareholders at Hong Kong red-chip China Resources Enterprise (CRE) last week, when it announced plans to focus its business entirely on booze. To do so, it proposes to sell its non-beer assets to its controlling shareholder, the state-owned China Resources Holdings for HK$28 billion ($3.6 billion).

CRE made a company-wide loss of HK$161 million last year – its first since its backdoor listing in Hong Kong in 1992 – and the worst performance came from its retail division of supermarkets, drug stores and coffee shops, which posted an HK$873 million deficit. So the news that these businesses were being offloaded cheered investors. Despite the assets being sold at a slight discount to book value, the company’s stock rose by more than 50% on the day that its shares resumed trading.

Company bosses warned in March that the slowing economy and Xi Jinping’s austerity measures were restricting sales of higher-end products and pre-paid gift cards at retail outlets, and that competition from e-commerce businesses had also contributed to a 2.6% fall in same-store retail sales.

Analysts also blamed a badly timed bid to take control of Tesco’s Chinese operation, with CRE’s stock dropping 41% since the HK$22 billion deal was announced in 2013.

CRE now proposes to pay a special dividend of HK$11.50 a share, which its parent will use to purchase the supermarket assets, while Fu Yuning, chairman of China Resources Holdings, is promising a “strategic transformation of China Resources Enterprise into a beer-focused company, as the leading brewer in China”. Fu, who replaced the former chairman of China Resources Holdings last year in the wake of a corruption scandal, will be tasked with turning around the businesses that CRE is ditching too. Fortunately, he has worked on similar transformations before, says CBN, helping to guide China Merchants Group through a major overhaul of its businesses at the time of the 1997 Asian financial crisis.

The jewel in CRE’s crown is the Snow beer brand, produced in a joint venture with SAB Miller. The world’s bestseller in volume terms with about a quarter of the Chinese market, it contributed a fifth of the firm’s total revenues in 2014, as well as the large majority of its final profits.

Still, investors shouldn’t get too heady, with growth in CRE’s beer sales up just 4.5% last year, despite the acquisition of Kingway, Guangdong’s largest brewer. Partly due to the costs of absorbing Kingway, profits from the beer business fell by almost a fifth too.

Clearly the expectation is that better days are ahead, and China Resources Holdings sought to make the same point by asking to buy another 10% of CRE as part of last month’s offer (if approved, this would take its total stake to 62%). At HK$12.7 per share – more than 40 times last year’s earnings – the price for the additional equity is punchy (the top six global beer makers are trading at an average multiple of 26 times), but spurred by hopes that a newly-focused CRE will swallow up smaller brewers as its goes on a growth spurt.

Nonetheless, sending the non-beer businesses back to the state-owned parent isn’t necessarily in keeping with the political mood, which has seen other state enterprises offload stakes in their assets in the public markets in the hope that outside investors might rejuvenate them.

Last year WiC reviewed how Hong Kong-listed Citic Pacific had acquired the assets of its own parent company in a reverse takeover (see WiC232), and we also reported that refining giant Sinopec, one of the pioneers of so-called ‘mixed ownership’ reforms, was spinning off its petrol station business (see WiC230).

Citic’s parent injected $36 billion worth of assets into its Hong Kong unit, while oil refiner Sinopec raised $17.5 billion by selling a 30% stake in its retail operations.

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