20150421-大和证券-Beer_business_to_be_main_focus_11页_513kb

China Resources Enterprise (CRE) Summary

Core Content

China Resources Enterprise (CRE), a subsidiary of China Resources National Corporation (CRNC), is undergoing a strategic restructuring as its parent company, China Resources Holdings (CRH), plans to acquire all of CRE's non-beer businesses for HKD28bn. This includes a cash payment of HKD13.6bn and the rest through promissory notes. Additionally, CRH intends to purchase up to 10% of CRE's issued shares at HKD12.70 per share. The transaction is expected to be completed in 3Q15 after obtaining independent shareholder approval in June 2015.

Post the transaction, CRE will focus solely on the beer business, which is operated through a 51% owned joint venture with SABMiller, known as CRE-Snow. This joint venture is the largest beer maker in China with a 23% market share by volume in 2013 and over 90% of CRE's revenue derived from its core brand, Snow.

Main Views

• Deal Impact: The restructuring is expected to clarify CRE's corporate structure, potentially leading to a long-term rerating of the stock.
• Valuation: The target price for CRE is raised to HKD22.40 from HKD15.50, based on:
  1. A special dividend of HKD11.50 per share.
  2. A 27.2x 2015E PER valuation for the beer business, in line with its closest peer, Tsingtao Brewery.
  3. The cash offer for up to 10% of CRE's shares, valued at HKD2.60 per share.
• Rating: The rating remains Hold (3), due to the moderate downside potential of about 5.5% and the potential for better or worse-than-expected product-mix upgrades.

Key Information

• Deal Structure:
  • CRE will pay a special dividend of HKD11.50/share after the deal.
  • CRH will pay HKD13.6bn in cash and the rest via promissory notes.
  • CRE will receive independent shareholder approval in June 2015 and complete the deal in 3Q15.
• Impact on CRE:
  • The deal will remove execution risks from non-beer businesses.
  • The beer business is expected to grow net profit by 22% YoY in 2015 and 9% YoY in 2016 due to product-mix upgrades.
  • A one-off, non-cash loss of HKD6.8bn is expected due to the revaluation of the disposed assets.
• Financial Highlights:
  • Revenue: Expected to grow to HKD185,618m in 2015E and HKD210,833m in 2017E.
  • Net Profit: Projected to increase to HKD784m in 2015E and HKD1,707m in 2017E.
  • Core EPS (Fully-Diluted): Expected to rise to HKD0.326 in 2015E and HKD0.711 in 2017E.
  • PER: Expected to be 72.6x in 2014 and 33.3x in 2017E.
  • PBR: Expected to be 1.2x in 2014 and 1.1x in 2017E.
• Dividend Yield: Expected to increase from 0.5% in 2014 to 1.2% in 2017E.
• DPS: Expected to rise from HKD0.129 in 2015E to HKD0.281 in 2017E.
• Free Cash Flow Yield: Expected to be 5.2% in 2014 and 16.7% in 2015E.

Financial Summary (2010–2017E)

Year to 31 Dec	2010	2011	2012	2013	2014	2015E	2016E	2017E
Revenue (m)	86,728	110,164	126,236	146,254	169,678	185,618	198,187	210,833
Operating Profit (m)	4,381	4,516	4,548	5,057	1,798	3,191	3,950	4,475
Net Profit (m)	2,652	3,013	3,945	1,908	(161)	784	1,345	1,707
Core EPS (Fully-Diluted)	1.106	1.256	1.644	0.794	(0.067)	0.326	0.560	0.711
DPS (HKD)	0.520	0.470	0.300	0.270	0.270	0.129	0.221	0.281
EBITDA (m)	6,946	7,393	7,840	8,946	6,681	7,651	8,635	9,387
ROE (%)	6.5	5.4	3.9	3.9	n.a.	1.6	2.7	3.4
Net Debt to Equity	n.a.	n.a.	3.3	2.6	16.5	n.a.	n.a.	n.a.
Effective Tax Rate	27.8	25.3	24.5	37.5	84.2	27.2	23.6	25.2
Net Interest Cover (x)	25.0	20.2	12.6	16.6	3.4	6.1	7.6	8.6
Free Cash Flow (m)	2,942	930	(566)	3,576	(6,756)	9,484	(1,744)	10,267

Beer Business

• Market Position: CRE is the largest beer company in China with a 24% market share (as of 2014).
• Volumes: 118m hectolitres in 2013, expected to grow to 12,563m hectolitres in 2016E.
• Revenue: HKD34.5bn in 2013, expected to reach HKD37.575bn in 2016E.
• EBITDA: HKD4.4bn in 2013, expected to reach HKD9.387bn in 2017E.
• EBITDA Margin: Expected to remain stable at around 12.8% in 2015E and 2016E.
• Profit After Tax: Expected to increase from HKD1,492.2m in 2014 to HKD1,986.5m in 2016E.
• Net Margin: Expected to rise from 4.3% in 2014 to 5.3% in 2016E.

Risks and Upside

• Downside Risk: If CR-Snow fails to gain significant market share in the high-end segment, the EBITDA margin may fall short of expectations.
• Upside Risk: If CR-Snow gains market share in the high-end segment faster than expected, there could be an upside to the forecasts.
• Moderate Downside Potential: The stock is expected to have a downside of about 5.5% to the revised target price.

Valuation Comparison

Company	PER (x) 2015E	EPS Growth 2015E	EBIT Margin	ROE (%)
Tsingtao Brewery-H	27.2	71.5	12.8	2.7
Yantai Changyu-A	29.6	27.1	24.8	30.7
Yantai Changyu-B	24.3	22.3	23.5	30.8
Tsingtao Brewery-A	31.4	30.2	31.6	32.9
Yanjing Brewery	32.6	32.2	4,768	32.9

Corporate Structure

• Before the Deal: CRE operated multiple businesses including retail, brewery, beverage, and food distribution.
• After the Deal: CRE will become a pure beer company, with the beer business operating through a 51% owned joint venture with SABMiller.
• Share Offer: CRH will offer up to 10% of CRE's shares at HKD12.70/share, which is expected to add HKD2.60/share to the valuation.

Conclusion

The restructuring of CRE into a pure beer company is expected to improve its valuation and long-term prospects. The target price is raised to HKD22.40, based on the special dividend, the valuation of the beer business, and the cash offer. Despite the positive outlook, the rating remains Hold due to the moderate downside potential and the risk associated with the beer business's ability to penetrate the high-end market.