A refreshing ale

CR Beer produces the Snow brand

With the blessing of the British government, the Communist Party of China (CPC) set up a Hong Kong office for its Eighth Route Army in 1938. Camouflaged as a trading firm called Liow & Co, the unit helped to source funds and supplies for Mao’s communist troops to fight the Japanese imperial army (war broke out the previous year when Japan began a full-scale invasion of China).

In 1948 the company was renamed as China Resources Enterprise (CRE). It continued to undertake missions on behalf of the CPC, as well as helping out with stabilisation measures in Hong Kong – for instance, it assisted efforts to improve food supply in the British colony in the early 1960s, when a famine was sweeping through mainland China.

As time went on, CRE became much more commercial in its focus. By 2014 it had emerged as retail-to-property conglomerate, despite a scandal in which its Party boss Song Lin was disgraced in an anti-graft purge (see WiC234). In an attempt to reinvent itself once more, CRE sold its main retail business to its parent group, turned its focus to brewing and renamed itself as CR Beer (see WiC279).

Investors did not buy into the group’s transformation for a while. CR Beer was kicked out of the Hang Seng Index (HSI) in early 2016 and its sister firm CR Power was also ousted in 2019. That left CR Land, a property unit, as the group’s only representative in Hong Kong’s benchmark index.

However, in an unexpected turnaround, CR Beer is set to become a Hong Kong blue-chip again, following the HSI’s latest quarterly review last week.

Along with CR Beer, the gas provider ENN Energy and the Chinese internet firms JD.com and NetEase will be newly incorporated in the HSI by early December. After the reshuffle the number of constituents in the index will have grown to 64, up from 50 in 2016.

Unsurprisingly, the index is now heavily skewed towards China-focused enterprises. But HSI Services, the compiler of the benchmark, is trying to maintain balance. It is perhaps no coincidence it has added two so-called ‘old-economy’ stocks (CR Beer and ENN) as counterwieghts to the two internet firms – a sector suffering from a spate of regulatory crackdowns.

While the inclusion of JD.com and NetEase in the reshuffle was widely anticipated (they have been two of the most traded stocks since their secondary listings in Hong Kong last year), the selection of CR Beer was more of a surprise, the Hong Kong Economic Times reckons.

Nongfu Spring, a bottled water firm, was widely regarded as having a better chance of being added to the benchmark. Investors bid up the share price by 20% in the week before the review, pushing up the company’s market value to more than HK$520 billion ($66.6 billion). The shares then fell sharply on the news that Nongfu had not been included.

CR Beer is also a consumer play that’s closely tied to the recovery in China’s domestic demand. Its main offering is the brand Snow beer, a consumer favourite (CR Beer enjoys 31.9% market share in China, according to 2020 estimates from Statista, based on sales volumes; the brewer’s website calls it the world’s best selling single beer brand).

As of this week, CR Beer was worth about HK$210 billion, or less than half of Nongfu, although its market capitalisation has grown by a factor of four since it was discarded from Hong Kong’s benchmark index five years ago. Its shares now trade at 40 times its 2020 earnings, compared with the 25 times multiple of its peer Tsingtao Brewery.

CR Beer’s shareholders probably don’t need to worry about the company being kicked out of the HSI again in the near future. HSI Services says the long-term goal is to increase the number of blue-chip constituents to 100, although it isn’t clear how quickly the additional 36 stocks will be added.

Mainland Chinese companies are expected to be the dominant choice as new joiners, however, because Hong Kong firms lack the heft to break into the top 100.

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