CRE buys 80pc of Pacific Coffee
China Resources Enterprise (CRE) yesterday agreed to pay HK$326.6 million in cash to acquire 80 per cent of Pacific Coffee from Chevalier Pacific Holdings, a Hong Kong-listed investment holding company.
'Our goal is to become the number one coffee house in China,' said CRE general manager Joyce Chan.
To reach its objective, CRE, a constituent stock of the Hang Seng Index, would have to open hundreds of Pacific Coffee outlets in the mainland, where US coffee chain Starbucks has at least 376 outlets. Pacific Coffee, founded in Hong Kong in 1992, has 95 shops, including 83 in the city and only five on the mainland.
'In each of our major malls in China, we wish to have a Pacific Coffee,' said CRE chief financial officer Frank Lai.
'We have 200 major malls in China. Over the next two to three years, Pacific Coffee will be in major Chinese cities. Pacific Coffee will be well received in China's first and second-tier cities.'
Pacific Coffee's expansion effort on the mainland could benefit from access to the properties of CRE's state-owned parent, China Resources Group, and CRE's retail network, Chan said.
Investment property accounted for 42 per cent of CRE's earnings in 2009, while retail accounted for 10 per cent and beverages 22 per cent.
As for third and fourth-tier cities, CRE needed to study the market before opening Pacific outlets there, Lai said. 'In China, demand for coffee is high.'
China's retail coffee consumption is expected to grow more than 35 per cent over the next four years to 45,900 tonnes by 2014, according to market research firm Euromonitor International.
As for competition from Starbucks, Lai said: 'Competition in China is always intense. We face competition in our other businesses like supermarkets and beer. It took us 15 years to become number one in beer in China and six years to become number one in supermarkets. We use this to spur our Pacific Coffee staff.'
Pacific Coffee posted an after-tax profit of HK$17.6 million for the fiscal year ended March 31, 2010, compared with an after-tax loss of HK$20.3 million for the previous fiscal year. Its net asset value was HK$79.4 million, according to Chevalier's announcement.
The HK$326.6 million price tag is roughly 20 times the Hong Kong profits of Pacific Coffee.
'We think the valuation of the acquisition is reasonable,' said a Guotai Junan report by Julie Ke. 'We expect synergy in CRE's retail network and Pacific Coffee. However, we see limited immediate impact on the bottom line of CRE, given its HK$2 billion-plus net profit for this year.'
The Hong Kong share price of CRE fell 2.6 per cent to HK$28.00 yesterday, while the Hong Kong share price of Chevalier rose 1.6 per cent to 62 Hong Kong cents.