May 7, 2014 / 9:00 PM / in 4 years

Sinopec faces inconvenient truth in retail business stake sale

HONG KONG, May 8 (Reuters) - 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 or Europe.

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.”


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 forecast earnings.

“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 Richardson)

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