What the Broker Said
China Resources Enterprise is the second-largest member of the red-chip index and one of only a handful of mainland constituents on the Hang Seng Index. Its interests range from property to supermarkets and food distribution.
One year ago, Prudential-Bache Securities put a sell on the stock, saying the share price had run far ahead of its fair valuation of the company.
'While we are comfortable with the fundamentals of China Resources, the share price has run ahead of current prospects. The stock we believe is now overvalued,' the brokerage wrote in its report last year.
This proved to be sound advice as the stock brought negative returns of 15 per cent in the past year while the Hang Seng Index produced positive returns of 43 per cent.
At the time of the report the stock was trading at a premium to Pru-Bache's estimated free operating cash flow value of $7.95 per share.
Pru-Bache had welcomed the conditions of the deal to increase China Resources' stake in red-chip foods conglomerate Ng Fung Hong, but had said it would do little to enhance earnings per share growth. China Resources was one of several red-chips downgraded by Pru-Bache last year.
'With the red-chip run-up . . . we have become more cautious concerning valuations of many of the stocks and we reverse our call on the sector, changing it to sell,' Pru-Bache said.