| HONG KONG
HONG KONG May 8 The Easy Joy convenience store
attached to a Sinopec petrol station in China's boomtown of
Shenzhen sells everything from cookies and gum to mineral water
and cigarettes, much like any gas station in the United States
The difference is that Chinese consumers aren't buying.
"Most people come here just to pay their fuel bills after
filling up their tanks," said a blue-uniformed store assistant
in her 20s.
Five motorists did just that during a 10-minute period last
Friday morning. All left without buying anything from the store,
which also sells rice, cooking oil, dry spicy bean curd and the
fiery Chinese liquor baijiu.
Unlike in Western markets, where non-fuel businesses -
convenience stores plus things like fast food or car washing -
can account for more than half of a filling station's profits,
more than 99 percent of Sinopec's retail sales come from petrol.
The Shenzhen store, close to the Huanggang checkpoint that
marks the border with Hong Kong, is one of 23,000 in Sinopec's
retail business that the state oil
giant is partially privatizing in a deal some analysts say could
raise as much as $20 billion.
Sinopec has never quite figured out how to market to Chinese
consumers, who aren't used to shopping at filling stations. That
is one reason why it is unlikely to get a valuation on a par
with Western retailers when it sells off a 30 percent stake in
its so-called marketing and distribution division, which also
includes more than 30,000 filling stations.
But the company hopes it also means there is big potential
to release if the deal brings in much-needed retail expertise.
It has hired China International Capital Corp, Deutsche
Bank, CITIC Securities and Bank of America to handle the sale
and seek investors with Chinese retail savvy.
"The marketing segment is a bonanza whose value has yet to
be unlocked," Sinopec chairman Fu Chengyu told the firm's annual
results briefing in late March, citing the sheer size of
Sinopec's retail network that boasts 80 million membership card
holders, serves more than 20 million customers a day and has
issued 108 million top-up cards for fuel and store purchases.
"Non-fuel business has great growth potential."
REPAIRING BALANCE SHEET
Not everyone is convinced. While Sinopec boasts the world's
largest single-country retail network, analysts say the
profitability of the Chinese convenience market is hindered by
fierce competition, as well as rising labour and rental costs.
The stake sale plan has been viewed by sceptics as largely a
response to Beijing's policy drive to erode the monopolies
controlled by state-owned enterprises (SOEs) and promote private
investment in the world's second largest economy.
Some also view it as an attempt by chairman Fu to cash in on
a volume-driven, low-margin and, perhaps, deteriorating business
and raise capital to repair the firm's battered balance sheet.
Globally, some international oil majors have been shedding
their retail assets to boost investment in exploration.
Sinopec's marketing business has been a relatively stable
and major source of profit for the group. But the division has
suffered earnings declines in recent years due to slowing fuel
demand growth and cost inflation.
The division recorded operating profit of 35 billion yuan
($5.6 billion) in 2013, down 18 percent from 43 billion yuan in
2012 and 45 billion yuan a year earlier. Its gross margin shrank
to 2.3 percent from 2.9 percent in 2012 and 3.3 percent in 2011.
Shares of Sinopec, an integrated oil major that is also
involved in refining and chemical production, have gone up more
than 10 percent in Hong Kong since it announced the stake sale
on hopes of a hefty one-off gain for shareholders.
But Sinopec is unlikely to be able to sell the stake at the
earnings multiples enjoyed by Western peers, due to the big gap
in profitability and efficiency, analysts say.
U.S. gas station chains CST Brands and Murphy USA
trade at 16-18 times forecast earnings, according to
Thomson Reuters data. Sinopec as a whole trades around 8 times
"The problem is it is an SOE. They will never catch up,"
said James Hubbard, head of Asian oil and gas research at
Macquarie in Hong Kong.
Fuel retailing in China may still hold long-term growth
potential given car ownership remains much lower in the world's
largest automobile market than in developed countries, and
Sinopec might hope to further leverage its dominant refining
capacity to gain market share.
But Sinopec will have to take bold steps such as slashing
staffing and shutting poorly located petrol stations to boost
profits, industry experts say. It also needs to lessen the
division's heavy reliance on selling petrol.
Revenue for the convenience store business - launched under
the "Easy Joy" brand in 2008 - totalled 13.3 billion yuan in
2013 - less than 1 percent of the marketing business division's
total of 1.5 trillion yuan. Sales per store represented only
one-eighth of the national average for convenience stores,
according to data from BNP Paribas.
Sinopec is looking at bringing in a retailer as a business
partner or strategic investor through the stake sale to help it
improve procurement management, cost control and staff
incentives, and branch into new areas such as fast food.
A person with knowledge of Sinopec's retail strategy, and
Chinese oil industry specialists, said one option that could
make sense would be to team up with an e-commerce company such
as Alibaba, which could utilise Sinopec's vast nework of
customers and outlets that could serve as pick-up points for
goods bought online.
Sinopec did not respond to Reuters' request for comment for
this article. Alibaba declined to comment.
"They know they can't play the game themselves," the source
said. "Their people only know how to sell fuel. They have no
idea how to market small convenience items."
($1 = 6.2455 Chinese Yuan)
(Additional reporting by Chen Aizhu in BEIJING; Editing by Alex