CHINA Resources Enterprises (CRE) is mainly engaged in warehouse and cold-storage operations and property development in the SAR and mainland. Merrill Lynch recently downgraded the stock to neutral from accumulate and to long-term accumulate from buy due to concerns about its recent acquisition of its parent company's retail business in Hong Kong and further restructuring of the group. Restructuring will leave CRE mainly holding the group's property interests, where it is overvalued relative to larger property counters. The brokerage believes CRE's value and growth will be driven to the lower-level listed affiliates, which investors can buy directly. CRE's increase in Hong Kong exposure does not fit in with mainland reflation, which will drive China plays. Although first-half results were better than expected, the brokerage did not change its earnings forecasts because earnings were expected to decline due to its mainland property exposure. First-half results were due to income from the Hong Kong property development arm being underestimated. Stephen Seawright
