Kingway in sights of China Resources

PUBLISHED : Thursday, 22 March, 2012, 12:00am
UPDATED : Thursday, 22 March, 2012, 12:00am


China Resources Enterprise hopes to buy Kingway Brewery, one of Southern China's leading beer brands, as it seeks to expand its market share of the mainland beverage industry.

China Resources says its expansion plan is still on course despite a slump in profit last year on surging labour costs and higher tax expenses.

Net profit of the retail-to-beverage conglomerate nosedived 50 per cent to HK$2.8 billion which was due largely to a one-off disposal gain in 2010. Profit of its underlying business dipped 0.3 per cent to HK$1.89 billion on a 26 per cent increase in sales. It recommended a final dividend of 32 cents per share, bringing the full-year dividend to 47 cents on HK$1.18 earnings per share.

Chief financial officer Frank Lai Ni-hium said China Resources wanted to acquire the Guangdong-based, Hong Kong-listed Kingway Brewery to complement its own Snow beer brand. The acquisition could increase the company's market share in southern regions. But Lai said the negotiations were at an early stage and other rivals were also in talks with Kingway about an acquisition.

Kingway Brewery saw its net profit slip 4.2 per cent year on year to HK$34 million last year while China Resources saw its beer division's earnings rise 15 per cent to HK$785 million. Lai believes Kingway would benefit from Snow's sales network.

Snow beer has 21 per cent of the mainland beer market - its closest rival is Tsingtao, with 14 per cent - and is the world's best-selling beer. Sales of Snow Beer exceeded 10 million tonnes last year for the first time, and its annual capacity could reach 15 million tonnes.

Management believe the average selling price of Snow beer will continue to rise this year, following a 7 per cent increase last year. The price rise mainly came from growth in high-end beer sales, which account for 20 per cent of total sales.

But the company also saw its labour costs rise 40 per cent year on year and was also subject to a new tax that came to 500 million yuan (HK$613 million).

'We are pressing hard to maintain profit levels this year with rising costs,' said Lai. To do so, the company would open about 500 new shops this year, banking on economies of scale. Following last year's significant rises, Lai expected more modest wage increases this year.

Lai reduced the same-store sales growth target for the year to single-digits in light of China's slowing gross domestic product. But the company was banking on long-term growth in domestic consumption.

China Resources is jostling for the top spot in China's vastly diverse retailing market. The top five retailers on the mainland only account for 7 per cent of market share, compared with 40 per cent in Japan and 20 per cent in South Korea.

The company will invest HK$8 billion in new supermarkets, convenience stores and pharmacies and to acquire competitors. Lai said the company aimed to raise its market share of its supermarkets to 20 per cent of core mainland operators.

Shares in the company dropped 1 per cent to HK$29.45 yesterday.

We are pressing hard to maintain profit levels this year with rising costs Frank Lai, CFO, China Resources.