Lunchtime sell-down in China Resources Enterprise

The red-chip conglomerate holds up well after an undisclosed seller offloads $108 million worth of shares at a 4.4% discount to the latest market price.

After a couple of weaker days, the Hong Kong stockmarket was back in good form yesterday with a 4% gain, which prompted an institutional shareholder in China Resources Enterprise to reap some profits through a block trade. The HK$840.3 million ($108 million) deal was launched and completed during the lunchtime break, which could suggest that the seller felt unsure whether this latest rally was going to last.

Like many other Hong Kong-listed stocks, China Resources has been on an upward trend since early March, but it has been volatile and, before yesterday's gains, the stock had actually fallen in four of the past 14 sessions. It is also currently trading above the consensus target price of HK$16.08, based on the views of 13 analysts tracking the company, according to Bloomberg.

The undisclosed seller offered 52 million shares at a price between HK$16.06 and HK$16.40, which represented a discount of 3% to 5% versus the last traded price during the morning session (HK$16.90). The stock was already up 3.3% in morning trading, however, which meant that the top end of the price range was actually at a 0.2% premium to the previous day's close. At the bottom end the discount was a pretty tight 1.8%.

Even so, the Credit Suisse-led deal did find enough buyers after being open for a bit more than one hour. Most of the shares were taken up by hedge funds, but there were also a few long-only funds among the buyers, according to a source. In total, the deal was bought by no more than 10 to 20 investors.

The final price was fixed in the lower half of the indicated range at HK$16.16 for a 4.4% discount to the midday close.

The offering accounted for 2.2% of the company and just over five days' worth of trading volume, which would have made it pretty easy for the market to digest. Indeed, the stock held up well after the transaction was completed, dipping briefly to a low of HK$16.34 as the market reopened before resuming the upward trend. It hit an intraday high of HK$17.14 half way through the afternoon session and closed at HK$16.80 -- a mere 10 HK cents below the pre-deal level, and 4% above the placement price. The positive sentiment in the overall market no doubt contributed, but the performance was still markedly better than for some other stocks that have been subject to quick placements during the lunchtime trading break in recent months.

When the controlling shareholder in athletic shoe maker Yue Yuen Industrial sold $48 million during the lunchtime break one Friday in April, the share price tumbled in the afternoon, finishing 13.3% down on the day and 3.8% below the placement price. Renhe Commercial Holdings suffered a similar fate a couple of weeks earlier when three existing shareholders cashed in a combined $87 million of their holdings during lunch, sending the share price 11% lower in afternoon trading to finish the day 2.9% below the placement price.

A red-chip conglomerate with businesses ranging from beer, food processing and supermarkets to textile manufacturing, ports and property investments, China Resources showed a mixed performance in the first quarter. The brewery business posted 21% volume growth and the supermarket division reported a 17% increase in earnings year-on-year. At the same time though, weak export demand acted as a drag on the non-core businesses -- the textile segment reported a loss and the ports segment saw a decline in profits, while a weak logistics business led to a sharp fall in earnings for the Hong Kong retail segment. This resulted in a 29% decline in recurring earnings overall and a 35% drop in net profit from a year earlier.

In a research note issued on May 25, Macquarie analyst Leah Jiang said the bank expects China Resources' core business to improve during the rest of this year due to a low comparative base in 2008, but the non-core business may still take time to recover.

"We like CRE's long-term strategy and its consistent investments in its core business are gradually improving its earnings mix. However, in our view the recent rally has largely factored in the near-term positives," Jiang wrote. Even so, Macquarie upgraded its recommendation on the stock to neutral from underperform.

However, a few days later, Hong Kong media quoted China Resources' managing director Long Chen as saying that the company will reduce the number of supermarkets it plans to open in Hong Kong and China this year to 200 from 300 previously, because some property developers have had difficulties in obtaining financing. The company will also be cautious about acquisitions because of the "unclear" outlook for the global economy, Chen said at China Resources' annual general meeting, suggesting that the supermarket division may also be in for a lower growth period.

Aside from improving margins, the earnings growth in the supermarket segment in the first quarter was largely driven by an expansion of the store network. 

China Resources, which is part of Hong Kong's benchmark Hang Seng Index, is up 26% year-to-date compared with a 30% gain in the HSI. The stock has risen 60% from its 2009 low in early March.

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