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UPDATE 1-China Resources buys HK coffee chain for $42 mln

* Buys 80 pct stake in Pacific Coffee from Chevalier

* Shares down 3 pct, underperforming Hang Seng Index

* Hopes to open an outlet in each of its 200 key stores (Adds quote from company, analyst quotes, share price)

HONG KONG, June 29 (Reuters) - China Resources Enterprise has bought an 80 percent stake in Hong Kong coffee chain Pacific Coffee for HK$326.6 million ($41.97 million), in a move by the retail firm to enter the coffee store business in the mainland that is now dominated by U.S. chains. China Resources 0291.HK said in a statement it aims to "build Pacific Coffee into the No.1 coffeehouse brand in China," which is now packed with around 700 stores from U.S. coffee chain Starbucks SBX.O, and McCafe stores owned by McDonald's Corp MCD.N.

“Chinese consumers have experienced many years of economic growth and have proven that their acceptance of coffee is very strong,” Frank Lai, deputy managing director of China Resources Enterprise, told reporters at a briefing after the announcement.

“The growth is very rapid, so we think that this is a good opportunity for us to enter China,” Lai said.

Lai expects the deal to generate profits after three years.

By 0656 GMT, shares in China Resources were down 3.3 percent, while Hong Kong's benchmark Hang Seng Index .HSI fell 2.2 percent.

“We do not expect the acquisition to have a major impact on earnings in the short term,” JP Morgan analyst Ebru Kurumlu said in a report.

The deal would be valued at 25 times earnings, assuming that the China business is just break-even and Hong Kong stores generate $0.5 million sales per store per year, with an average of 5 percent net margin, Kurumlu said.

The remaining 20 percent of Pacific Coffee, which has 95 stores mostly in Hong Kong, would be held by investment holding firm Chevalier Pacific Holdings 0508.HK.

China Resources has a network of around 2,900 retail stores in the mainland. Lai declined to give a target on the number of Pacific Coffee stores, but he hopes to open a Pacific Coffee outlet in each of China Resources’ 200 key retail stores.

Starbucks said recently that it could in the future have “thousands of stores” in Greater China, up from around 700 now. [ID:nTOE63C04J] ($1=7.781 Hong Kong Dollar) (Writing by Sui-Lee Wee, Editing by Muralikumar Anantharaman)

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