China Resources Enterprise seeks "quality" growth with HK supermarket bid

HONG KONG Wed Aug 21, 2013 6:10am EDT

HONG KONG (Reuters) - State-backed China Resources Enterprise Ltd (0291.HK) (CRE) said on Wednesday it had bid for Hong Kong's biggest supermarket chain, a move analysts said would help the beer-to-retail conglomerate expand market share through a quality brand.

China's second largest supermarket chain, which signed a joint venture with British retailer Tesco Plc (TSCO.L) earlier this month, is trying to accelerate growth at home and fend off competition from market leader Sun Art Retail Group Ltd (6808.HK).

For CRE, the appeal of Hong Kong tycoon Li Ka-shing's ParknShop chain lies in its brand-name, which is considered more trustworthy than purely mainland brands by Chinese consumers obsessed by food safety, analysts said.

ParknShop, estimated to be worth $3-4 billion, has had at least seven offers from Australian and Japanese retailers keen to expand in Hong Kong as well as mainland China, a market that has proved difficult for foreign companies.

"The ParknShop brand can raise (mainland Chinese) consumers' confidence in the merchandise they buy," said Linus Yip, chief strategist at First Shanghai Securities.

"The potential deal can make CRE the biggest player in the Hong Kong market, while at the same time CRE can, through ParknShop's sourcing network, introduce high-quality products into the mainland, in particular consumers are highly concern about food quality and safety," he added.

China's hypermarket industry is likely to grow to 863.8 billion yuan ($141 billion) by 2015, from an estimated 659.6 billion yuan in 2013, according to consultancy Euromonitor.

A slowing economy, however, has crimped the profits of supermarket operators, giving CRE an added incentive to further expand in Hong Kong, where ParknShop competes only with Singapore's Dairy Farm International Holdings Ltd (DAIR.SI).

"ParknShop is a time-honored and respected brand in Hong Kong," CRE Chief Financial Officer Frank Lai told reporters after the company posted a 54.5 percent drop in first-half net profits, in line with expectations.

"Hong Kong is a market which is not small with population of over 7 million and consumption is high," he added. "ParknShop have a solid management and have demonstrated strong earnings capability even in an open and highly competitive market."

CRE owns Hong Kong's third-biggest super market brand Vanguard and Lai did not rule out the possibility of teaming up with Tesco for the ParknShop acquisition.

"We put in a bid in accordance with our evaluation, a price which we think is fair and reasonable," he added.

China Resources has about $1.1 billion in cash flow from operations, the highest in its Chinese peer group, and a relatively low debt/equity ratio of 0.33, according to Reuters StarMine/IBES data.

Reuters had earlier named Japan's AEON Ltd (8267.T), Australia's Woolworths (WOW.AX) and equity fund KKR & Co (KKR.N) as bidders for ParknShop, which generated HK$1.4 billion ($180.1 million) in earnings before interest, tax, depreciation and amortization last year.

(Editing by Miral Fahmy)