20151005-Maybank_KERPL-华润啤酒-00291.HK-Too_early_for_happy_hour_13页_835kb

China Resources Enterprise (291 HK) Summary

Core Content

China Resources Enterprise (CRE) is a leading player in the Chinese consumer staples sector, primarily focused on beer production. The company's share price is currently HKD14.72, with a target price of HKD15.00 (+2%). Its market capitalization is USD4.6B, and average daily trading volume (ADTV) is USD22M. The company is advised to maintain a HOLD rating, and the target price has been slightly adjusted due to a special dividend.

Key Information

• Company Name: China Resources Enterprise (291 HK)
• Sector: Consumer Staples
• Rating: HOLD
• Share Price: HKD14.72
• Target Price: HKD15.00 (+2%)
• Market Cap (USD): 4.6B
• ADTV (USD): 22M
• Key Events:
  • CRE will host an EGM to seek shareholder approval for rebranding to "CR Beer."
  • It will stop quarterly reporting and distribute a special dividend by the end of October.
  • A partial cash offer will be circulated in early November, allowing shareholders to sell 41.44% of shares at HKD12.70 each to CR Group.

Main Views

• Industry Dynamics: The beer industry in China is experiencing weak volume growth and lacks pricing power. The company's mix upgrade is expected to have a positive impact, but this will slow down due to the already high proportion of mid/high-tier sales.
• Import Trends: Beer imports are growing rapidly (76% YoY in 8M15), although their share of total consumption remains low (1-2%). The average import price has fallen by -30% since March 2013, making them more attractive to consumers.
• Market Share: The combined market share of CRE and ABI is expected to be a key hurdle for regulatory approval, even if ABI completes its acquisition of SABMiller. A full divestment of the SAB-CR JV is the most likely outcome.
• Market Forecasts: The beer market is expected to grow at a 2.4% CAGR from 2014 to 2019, driven by rising per capita consumption. Per capita consumption is forecast to reach 45 litres by 2019, growing at a 2.3% CAGR.
• Financial Outlook: CRE's core EPS is expected to grow at a 2% CAGR (FY15-17F), with a slight decline in growth rate in FY16 and FY17. The company's performance is influenced by its high exposure to mature consumption regions, where per capita consumption is above the national average. Translation risk is a potential downside if the CNY weakens further.

Financial Highlights

Market Performance

• Share Price Movement: The share price has declined by 37.5% in the last month and 40.2% in the last three months.
• Relative to Index: The stock has underperformed the market by 39.4% in the last month and 27.5% in the last three months.
• Market Capitalization: HKD35.6B
• Free Float: 49.1%
• Major Shareholders:
  • China State-Owned Assets Supervision: 50.9%
  • Genesis Investment Management LLP: 5.0%
  • First State Investment Management (UK): 4.5%

Key Trends

• Beer Output: In 8M15, beer output in China fell by 6% YoY, with above-sector growth in low consumption regions.
• Import Growth: Beer imports in China grew by 76% YoY in 8M15, but their share of total consumption remains low.
• Consumption Trends: Per capita beer consumption is expected to grow at 2.3% CAGR, reaching 45 litres by 2019. However, the beer-drinking population is declining.
• Company Strategy: CRE has a significant portion (70%) of its beer production capacity in mature consumption regions, where per capita consumption is above the national average.

Risks

• Translation Risk: If the CNY weakens further, it may negatively impact the company's financial performance.
• Market Saturation: The beer market in China is already highly penetrated, making further growth difficult.
• Regulatory Hurdles: The combined market share of CRE and ABI may face anti-trust regulatory challenges.

Conclusion

CRE is expected to maintain a stable profitability with a 2% CAGR in core EPS, but its growth is limited by weak volume growth, the dominance of mid/high-tier sales, and the growing preference for imported beers. The company is undergoing rebranding and restructuring, which may impact its financial performance. Investors should consider the risks associated with translation and market saturation.