Bottles of China Resources' Snow are for sale next to Kirin beer in Beijing. The two companies announced a joint venture Monday to make non-alcoholic drinks. Nelson Ching / Bloomberg

Mainland consumer conglomerate China Resources Enterprise (CRE) said on Monday it has agreed to establish a joint venture with Japanese brewer Kirin Holdings to produce and distribute non-alcoholic beverages in the Greater China market.

CRE will hold a 60 percent stake in the new joint venture while Kirin will hold the remaining 40 percent stake by contributing $400 million capital to the joint venture, according to the joint statement issued by CRE and Kirin.

Trading of CRE shares was suspended Monday pending the announcement. It last closed at HK$30.7 per share January 21.

At Monday's press conference, Frank Lai, CRE chief financial officer, did not disclose the exact investment amount contributed by CRE into the joint venture.

"CRE will inject the assets, intellectual property rights and research capabilities of its existing non-alcoholic drink business to this joint venture, and I can assure you the total investment amount will be substantial," Lai said.

"As CRE's non-alcoholic drink business is cash-flow generating, CRE does not need to inject additional capital to the new joint venture."

Looking ahead, Lai said that the new business will leverage the existing international expertise, extensive product portfolio and establish product development capabilities of CRE and Kirin to expand the non-alcoholic beverage business, adding that the joint venture can contribute 6 billion yuan of revenue in the next five years.

Lai added that the joint venture's future revenue will be split 60 percent to CRE and 40 percent to Kirin.

"The joint venture formation with Kirin is a mainstream strategy of CRE to reinforce its core consumer business," said Kenny Tang, executive director at Redford Asset Manager. "Though it is not known how the new joint venture can contribute to its core earnings, it definitively can boost the long term development of the company."

"I predict this news may boost the share price to HK$32 per share in the short run as CRE's share price has been sluggish in recent times as its valuation level is quite high," Tang said. CRE shares are trading at a price-to-earnings ratio of more than 20 times, he said.

CRE had already been aggressively expanding its business footprint in the non-alcoholic beverage business before the Monday deal. The company also utilized HK$326 million to acquire an 80 percent stake in Pacific Coffee from Chevalier in June 2010. The company hopes that the move can help tap the enormous potential of the mainland coffee beverage consumption market.

Besides its non-alcoholic beverage business, CRE - which produces China's top beer brand, Snow, with SABMiller Plc - is working to expand its retail network and buy more brewery assets on the mainland.

In November, CRE said it would buy a 45 percent stake in Hangzhou Xihi Beer, as it works to strengthen its position in the mainland market amid growing competition from other brands including Tsingtao Brewery Co Ltd.

Reuters contributed to this story.

China Daily

(HK Edition 01/25/2011 page3)