20140321-Maybank_KERPL-Correction_done_but_HOLD_for_now_12页_257kb

China Resources Enterprise (291 HK) Summary

Core Content

China Resources Enterprise (291 HK) is a major player in the consumer staples sector, with a current share price of HKD19.76 and a target price of HKD18.75 (-5%). The company's market capitalization is USD6.1B, and the average daily trading volume (ADTV) is USD10M. The stock is currently rated as "HOLD" following an upgrade from a contrarian "SELL" due to its proximity to the target price. The company is trading at 1x book value (ex-Tesco), indicating limited downside potential.

Key Information

• Share Price: HKD19.76
• Target Price: HKD18.75 (-5%)
• Market Cap (USD): 6.1B
• ADTV (USD): 10M
• Sector: Consumer Staples
• Rating: HOLD (from SELL)
• Stock Performance:
  • 1 Month: -14.1%
  • 3 Months: -23.0%
  • 12 Months: -19.2%
• Market Performance Relative to Country:
  • 1 Month: -9.2%
  • 3 Months: -17.0%
  • 12 Months: -15.1%

Management and Business Performance

• Management has provided upbeat guidance on Tesco, which may positively influence the stock.
• CRE has experienced a ~30% decline since 4Q13 due to concerns over Tesco's earnings drag.
• The company is working on product portfolio optimization and integration, which is expected to narrow Kingsway's losses.
• A one-off restructuring loss of HKD100m was booked in 4Q13.

Financial Forecast

• Core NPAT Growth (FY14-16F): 21.6% three-year CAGR (ex-Tesco)
• Core Net Profit (ex-Tesco):
  • FY14E: HKD1,875m
  • FY15E: HKD2,378m
  • FY16E: HKD2,948m
• Core EPS (ex-Tesco):
  • FY14E: HKD0.78
  • FY15E: HKD0.99
  • FY16E: HKD1.23
• Core EPS Growth (%):
  • FY14E: 14.2%
  • FY15E: 26.8%
  • FY16E: 24.0%
• Net Dividend Yield (%):
  • FY14E: 1.6%
  • FY15E: 2.0%
  • FY16E: 2.5%
• ROAE (%):
  • FY14E: 3.1%
  • FY15E: 3.8%
  • FY16E: 4.4%
• ROAA (%):
  • FY14E: 1.2%
  • FY15E: 1.3%
  • FY16E: 1.5%
• EV/EBITDA (x):
  • FY14E: 7.5
  • FY15E: 6.0
  • FY16E: 4.9
• Core P/E (x):
  • FY14E: 25.3
  • FY15E: 20.0
  • FY16E: 16.1
• P/BV (x):
  • FY14E: 1.0
  • FY15E: 1.0
  • FY16E: 1.0

Target Price and Valuation

• The target price of HKD18.75 is based on a 24x FY14F P/E.
• SOTP valuation suggests a fair value of HKD18.7/share, with the following components:
  • Retail: 0.2x P/Sales (~10% of Sun Art's)
  • Beer: 27x Fwd PER (at par to Tsingtao)
  • Beverage: 18x Fwd PER (25% discount to market leaders)
  • Food Processing: 12x Fwd PER (low-end range of global peers)
• NAV per Share (HKD): 20.9
• Net Debt/Equity (%): 0.1 (net cash)

About the JV and Tesco China

• The 80/20 CRE/Tesco JV is pending regulatory approval.
• Tesco China operates 134 stores in 11 provinces, with a focus on Shanghai, Tianjin, and Liaoning.
• Tesco China's net loss for 1HFY2/14 and FY2/13 was CNY778m and CNY2,397m, respectively.
• The retail business of Tesco China was the primary source of loss, with property-related losses also contributing.

Base Case Scenario

• Retail Segment Net Profit (FY14-16F):
  • FY14E: HKD839m
  • FY15E: HKD989m
  • FY16E: HKD1,280m
• Core Net Margin (%):
  • FY14E: 0.8%
  • FY15E: 0.8%
  • FY16E: 0.9%
• Tesco Retail Loss (FY2/14-16F):
  • FY2/14F: CNY1,590m
  • FY2/15F: CNY1,503m
• The company estimates that Tesco's losses will impact CRE's NPAT by 22.0% in FY14F and 55.0% in FY15F.

Peer Valuation Comparison

• Breweries:
  • AB-InBev: 11.1x 2013 PER, 18.6x 2014F PER
  • Beijing Yanjing Brewery: 22.1x 2013 PER, 19.1x 2014F PER
  • Carlsberg: 14.6x 2013 PER, 13.1x 2014F PER
  • Heineken: 19.4x 2013 PER, 15.5x 2014F PER
  • Tingyi: 37.4x 2013 PER, 34.0x 2014F PER
  • Vitasoy: 36.5x 2013 PER, 34.2x 2014F PER
  • PepsiCo: 18.6x 2013 PER, 18.0x 2014F PER
• Food Retailers:
  • Sun Art: 24.7x 2013 PER, 22.8x 2014F PER
  • Carrefour: 19.9x 2013 PER, 17.3x 2014F PER
  • Tingyi: 37.4x 2013 PER, 34.0x 2014F PER
• Food Processing:
  • China Yurun: 24.6x 2013 P/BV
  • Henan Shuanghui: 22.0x 2013 PER, 17.5x 2014F PER
  • Nippon Meat: 16.6x 2013 PER, 14.8x 2014F PER
  • China Huiyuan Juice: 36.4x 2013 PER, 33.4x 2014F PER

Conclusion

The company is cautiously optimistic about its ability to turn around Tesco within three years, despite the current earnings drag. The stock is trading close to the target price, and management's guidance may provide a positive catalyst. While the retail segment faces challenges, the broader business segments show growth potential. The SOTP valuation suggests a fair value close to the target price, and the company is currently trading at a reasonable valuation level.