China Resources Enterprise (CRE) is bracing for a challenging second half, saying it will not fully pass on higher costs to consumers. Frank Lai Ni-Hium, chief financial officer of the retail, food and beverage, and brewing group, said that from January to June, wages rose 15 per cent, rental costs increased 20 per cent on average, while raw material costs surged. That hurt CRE's profitability which has a 179,000-strong workforce and a portfolio of 3,428 shops. Profit margin in the first half was 2.25 per cent, down from 2.42 per cent from a year ago, as underlying profit rose 18 per cent to HK$1.2 billion on a 27 per cent increase in revenue to HK$53.23 billion. And as first-half earnings in 2010 included an exceptional gain of HK$3 billion from the sale of its stake in a fashion joint venture with Esprit, this year's first-half net earnings fell 63 per cent to HK$1.56 billion. 'The adverse impact of cost inflation will be fully reflected in our second-half accounts,' Lai said. 'It is socially irresponsible to pass all the higher costs on to shoppers, and we fear our customers will vote with their feet if we raise prices too much.' He denied that the mainland's National Development and Reform Commission had pressed retailers, including CRE, not to raise prices to avoid stoking inflation. 'We will spur revenue growth and increase efficiency to offset higher costs,' Lai said. The group's retail unit, which runs CR Vanguard and Suguo supermarkets and Pacific Coffee chains, generated a 23 per cent rise in first-half underlying profit to HK$674 million on a 28 per cent rise in turnover to HK$34.36 billion. On a same-store basis, the group's retail business grew 12.4 per cent, exceeding the mainland's 5.4 per cent consumer price inflation in the first half. After adding about 500 retail stores on the mainland to about 3,400 in the past year, Lai said the group aimed to open another 500 shops in the coming year. Underlying profit at the beer unit, which brews Snow beer, leapt 7.8 per cent to HK$329 million as turnover increased 28 per cent to HK$12.83 billion. Lai said premium beer products with higher selling prices were launched as the group sought to offset rising wages and higher barley prices in the first half. He said the group was hunting for acquisitions in the retail, brewing, food processing and distribution and beverage sectors after spending HK$5.5 billion on acquiring supermarket chains and breweries in the first half. As of June 20, the group had net cash of HK$3.08 billion. Christfund Securities research director Simon Lam Ka-hang said CRE's net earnings exceeded his estimate of HK$1.2 billion, and he expects the group's second-half results to be stable. 'There is a long-term hyper-inflation across the world, including the mainland,' he said. CRE raised its interim dividend by seven per cent to 15 HK cents per share. The stock fell 35 HK cents, or 1.12 per cent, to HK$30.55 after the results announcement.