* Slowing China economy extends turnaround from 2-3 years
* H1 profit drops 8.7 pct, but Q2 pickup seen
* Shares close down nearly 3 pct, lagging main index
(Adds details on impact from Tesco tie-up, updates shares)
By Donny Kwok
HONG KONG, Aug 21 Retail conglomerate China
Resources Enterprise Ltd (CRE) said mainland China's
slowing economy means it will take three to five years, longer
than expected, to turn around a loss-making tieup with British
supermarket firm Tesco.
Posting an 8.7 percent drop in first-half net profit on
Thursday, CRE said the joint venture it formed with Tesco last
May won't now turn profitable within two to three years, as
CRE, which has a market value of $7.4 billion, said last
October it was joining forces with Tesco in the hope of reducing
costs and tapping its international expertise, although some
investors expressed concern about losses at the China unit.
"We have seen signs of a slowing mainland economy. It is a
prudent approach to estimate a little longer for the turnaround
time of three to five years, rather than two to three years,"
chief financial officer Frank Lai said at an earnings briefing.
"We are not very optimistic on the overall China retail
market, but definitely not pessimistic," Lai said.
Government-backed CRE, which has interests ranging from
beverages to supermarket chains, said net profit fell to HK$929
million ($119.87 million) for the January-to-June period, from
HK$1.02 billion in the same period a year earlier.
Revenue rose to HK$83.51 billion from HK$71.86 billion yuan
in the year earlier period.
"Looking forward into the second half of 2014, the
continuation of the Chinese government's anti-extravagance
policy, the accelerated competition from the e-commerce industry
and the consolidation of the loss from Tesco stores in China ...
are likely to affect the performance of the retail business,"
chairman Chen Lang said in a filing to the Hong Kong bourse.
The conglomerate, which posted a 30 percent drop in
first-quarter profit, saw its April-June quarter net profit
total HK$573 million, up from HK$506 million in the same quarter
a year ago, according to Reuters' calculations.
Shares of CRE closed down 2.9 percent after the earnings
were released, lagging a 0.7 percent decline in the benchmark
Hang Seng Index.
TESCO JV TO HURT EARNINGS
CRE, which owns China's top beer brand "Snow", said it
expected there will be a significant drop in its overall
profitability as it needs time to turn around the performance of
the Tesco stores in China, which are currently making losses.
"We remain optimistic about the long-term development of the
group's retail business after forming an alliance with Tesco,"
Chen said. "We believe the immense synergies of the joint
venture have yet to be tapped."
The venture competes with the country's hypermarket leader
Sun Art Retail Group Ltd and foreign player Wal-Mart
"Leveraging Tesco's worldwide experience, the retail
business will create ample synergies upon integration and ensure
the sound development of its e-commerce and global sourcing,"
Tesco will assist in funding of the group's restructuring
cost by injecting HK$4.33 billion in aggregate, CRE said.
Last week, rival Sun Art posted an 8.5 percent increase in
first-half net profit as it continued to expand into lower-tier
cities though same-store sales in the period were flat. It said
will continue to maintain a strong pace of expansion to lower
(1 US dollar = 7.7503 Hong Kong dollar)
(Reporting by Donny Kwok and Anne Marie Roantree; Editing by
Matt Driskill and Kenneth Maxwell)