20141107-大和证券-Downgrading_to_Hold__drag_from_Tesco_joint_venture_11页_307kb

China Resources Enterprise (291 HK) Summary

Core Content

China Resources Enterprise (CRE) is a subsidiary of China Resources National Corporation (CRNC), a state-owned enterprise. It operates in consumer businesses including retail, brewery, beverage, and food distribution. The company's retail segment, particularly its joint venture with Tesco (CR-Tesco), is facing significant challenges, leading to a substantial drop in net profit. CRE's 2014-16E EPS has been cut by 34-44%, and the target price has been reduced to HKD18.70 from HKD25.06, resulting in a downgrade to "Hold" from "Outperform." The company is expected to trade close to its 2014E book value, with the brewery segment remaining strong.

Main Points

• Retail Segment Decline:

  • CRE expects a net profit decline of HKD810m YoY for 3Q14, implying a segmental loss.
  • The decline is attributed to weak operations and higher integration costs from the Tesco joint venture.
  • The company previously estimated monthly losses of about HKD100m from the joint venture, but now expects losses of about HKD120m per month.
  • The retail segment's EBITDA margin has been reduced, leading to a forecast of net losses of HKD300-450m per year for 2014-16.

• Brewery Segment Performance:

  • The brewery segment is still strong, with a forecasted recurrent net profit CAGR of 17% for 2013-16.
  • Sales volume growth for the brewery segment has been slightly reduced to 5-10% YoY from 7-12%.
  • The segment is expected to benefit from the Kingway Brewery acquisition and new product launches.

• Earnings Forecast Revisions:

  • Revenue and EBITDA margin assumptions for the retail and brewery segments have been revised downward.
  • The revised EPS forecasts for 2014, 2015, and 2016 are 33.5%, 43.8%, and 43.0% lower than previous estimates, respectively.

• Valuation and Target Price:

  • The 6-month target price has been lowered to HKD18.70, reflecting reduced earnings forecasts and lower EV/EBITDA and PER multiples.
  • The current share price is close to the 2014E book value, which provides some share-price support.
  • The SOTP-based valuation for 2015E is HKD18.70, with the retail segment valued at 7.0x EV/EBITDA and the brewery at 11.0x EV/EBITDA.

Key Information

• Target Price: HKD18.70 (from HKD25.06)
• Upside: 4.5%
• 7 Nov Price: HKD17.90
• EPS Forecast (2014-16E):
  • 2014E: 0.379 (from 0.532)
  • 2015E: 0.499 (from 0.781)
  • 2016E: 0.613 (from 0.787)
• Net Profit (2014-16E):
  • 2014E: HKD910m (from HKD1,272m)
  • 2015E: HKD1,198m (from HKD1,873m)
  • 2016E: HKD1,472m (from HKD1,889m)
• Dividend Yield:
  • 2014E: 0.8%
  • 2015E: 1.1%
  • 2016E: 1.4%
• DPS:
  • 2014E: HKD0.150
  • 2015E: HKD0.197
  • 2016E: HKD0.242
• PBR:
  • 2014E: 1.0x
  • 2015E: 0.9x
  • 2016E: 0.9x
• EV/EBITDA:
  • 2014E: 7.9x
  • 2015E: 7.4x
  • 2016E: 6.5x
• ROE:
  • 2014E: 2.1%
  • 2015E: 2.7%
  • 2016E: 3.2%
• Major Shareholder: CRNC (51.0%)

Financial Summary Highlights

Segment	2014E Revenue (HKDm)	2014E Operating Profit (HKDm)	2014E Net Profit (HKDm)	2014E Core EPS (fully-diluted)
Retail	107,107	3,405	910	0.379
Beer	37,453	4,060	1,198	0.499
Other Revenue	23,049	-	-	-

Earnings Forecast Revisions

Segment	2014E Sales Volume (000 hl)	2014E YoY %	2014E ASP (HKD/hl)	2014E EBITDA Margin %	2014E Net Profit (HKDm)	2014E Net Margin %
Brewery	12,894	10.0%	2,905	14.0%	2,096	5.6%
Retail	4,964	12.7%	2,905	1.5%	-302	-0.3%

Valuation Table

Segment	Multiple	Valuation Basis	2015E (HKDm)	HKD/share	% of NAV
Retail	7.0x	2015EV/EBITDA	9,426	3.93	21%
Brewery	11.0x	2015EV/EBITDA	32,274	13.41	72%
Beverage	18.0x	2015PER	3,543	1.48	8%
Food	8.0x	2015PER	467	0.19	1%
Net Cash	-	-	-729	-0.30	-2%
NAV	-	-	44,981	18.70	100%

Key Risks and Upsides

• Downside Risks:

  • Execution risks at the Tesco joint venture and Kingway Brewery.
  • Continued pressure from the anti-extravagance policy and e-commerce competition.

• Upside Risks:

  • An earlier-than-expected turnaround of the Tesco joint venture.
  • Potential synergies from the joint venture that could improve profitability mid-to-longer term.

Company Profile

• CRE is a subsidiary of CRNC.
• It operates in retail, brewery, beverage, and food distribution.
• Its 51% owned joint venture with SABMiller, CRE-Snow, is the largest beer maker in China with a 23% market share by volume in 2013.
• CRE runs supermarkets and hypermarkets under brands such as blt, CR Vanguard, and Ole, as well as coffee shops and specialty stores.

Conclusion

The downgrade to "Hold" reflects the greater-than-expected drag from the Tesco joint venture on CRE's retail segment. Despite this, the brewery segment remains strong, and the company is expected to see modest market share gains. The new target price is based on revised earnings forecasts and lower valuation multiples. The main risks are execution challenges at the joint venture and continued competition, while the main upside is a potential turnaround of the Tesco JV.