Seeking Alpha: China Resources Enterprise Rebases Around Beer

Playing to your strengths is great, but most companies won't go to the lengths that China Resources Enterprise (OTCPK:CRHKY) (291.HK) is going. Recognizing that turning around the Tesco retail operations (and its own retailing business) was at best a multiyear project and one that investors largely hated, and that those efforts would limit the company's ability to build scale in food and beverages, China Resources Enterprise announced that it will exit all but its beer operations. This will come in the form of a sale to China Resources Holdings and it will leave China Resources Enterprise as a pure-play on the largest beer business in China.

This has been a lousy call for almost two years for me, so I can't pretend I'm not relieved to see the announcement. The beer business was always the primary appeal of CRE to me (though I thought there was potential in the beverages operation and long-term turnaround potential in retail) and I do still see ongoing value in the shares for that operation. That said, I only see about 10% upside from here and that's not enough compensation for the risks of fiercer competition within China, potential disappointments in demand development, and company-specific execution challenges.

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China Resources Enterprise Rebases Around Beer

Seeking Alpha: China Resources Enterprise Languishing Over Short-Term Concerns

Another six months are in the books, and little has changed for the better at China Resources Enterprise (OTCPK:CRHKY). The Chinese food retail environment continues to be a tough one, with most of the major players seeing their comps turn negative. I believe CRE remains well-placed to benefit from growth in its beer JV and beverage business, and I continue to expect management to drive better long-term results from the Tesco (OTCPK:TSCDY) joint venture. In the meantime, though, it will be hard for these shares to get ahead while the Chinese food retailing market remains weak and while investors remain concerned over the near-term losses that CRE will absorb from the Tesco JV.

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China Resources Enterprise Languishing Over Short-Term Concerns

Seeking Alpha: Amidst A Weak Chinese Consumer Market, CRE Faring Even Worse

Naming China Resource Enterprises (OTCPK:CRHKY) as a Top Pick in August of 2013 has been a lousy call so far. Down almost 20%, about the best thing I can say about that call is that most of the Chinese consumer sector has gotten hit too, with Sun Art (OTCPK:SURRY), Lianhua (OTCPK:LHUAF), and Tsingtao (OTCPK:TSGTY) down about 5% to 10% over the same period on a lot of worries (and some reality) about weaker consumer spending in China.

At the risk of doubling down on a bad call, I do believe that the market is playing up short-term risks and losing sight of what CRE can accomplish over the long term. Clearly "can accomplish" is not the same as "will accomplish", but I expect CRE to leverage leading share in Chinese food retailing and beer into a strong mix of revenue growth and higher margins down the road. I've lowered my expectations and fair value to account for the near-term softness and the earnings dilution from the Tesco JV, but I continue to believe these shares are an interesting long-term opportunity.

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Amidst A Weak Chinese Consumer Market, CRE Faring Even Worse