March 26, 2014 / 12:51 AM / 4 years ago

China Resources Enterprise leans on Tesco as profit slumps to nine-year low

(Corrects story from March 20 to fix company name to Tesco Plc, not Tesco Corp)

By Donny Kwok

HONG KONG (Reuters) - China Resources Enterprise Ltd (0291.HK) (CRE), the country’s No.2 supermarket chain, said it will expand in smaller cities and lean on its joint venture with Tesco Plc (TSCO.L) to turn around a business that posted its lowest profit in nine years.

Hypermarket operators in China including Hong Kong-listed CRE and market leader Sun Art Retail Group Ltd (6808.HK) have been pressured by competition from a growing online foods market and a slower Chinese economy.

In October, CRE said it was joining forces with Tesco’s China unit in the hopes of cutting costs and tapping the British supermarket operator’s international expertise. But some CRE investors dumped its shares after the tie-up, concerned that the Tesco unit had been making losses.

CRE said it expects the joint venture to turn profitable in two to three years.

“We are not a miracle worker. I cannot turn it from loss to profit overnight. That is why we have that HK$4.3 billion ($553.77 million) cash to help us to cushion this,” CRE Chief Financial Officer Frank Lai told reporters on Thursday.

“This HK$4.3 billion cushion plus two years’ time, we are very comfortable it will become a very valuable asset,” Lai said. “We can book in the sales from the JV in the third or fourth quarter this year.”

Lai expects the Tesco joint venture will eventually get approval from Chinese authorities.

“I expected them to be approved by May or June,” he said.


CRE on Thursday said full-year net profit fell to HK$1.91 billion ($246 million), the lowest since 2004, from HK$3.95 billion a year earlier. That was below a forecast of HK$2.11 billion from Thomson Reuters’ Starmine SmartEstimate.

The company, which has a market value of $6 billion, said it would step up expansion into smaller mainland cities after its 2013 profit from retail operations fell 65.2 percent from a year earlier, with its food business down 84 percent.

Sun Art had earlier in March reported a 15.2 percent rise in net profit for 2013, with an expanding store network helping it to shrug off an economic slowdown.

    CRE posted a loss of HK$30 million for the fourth quarter, compared with a HK$572 million profit in 2012, according to Reuters’ calculations.

    The company, which has interests from beverage making to operating supermarket chains, said its turnover for 2013 rose 16 percent to HK$146.4 billion.

    CRE, which owns China’s top beer brand Snow, said beer remained its major earnings contributor, with profit rising 14.6 percent to HK$943 million and beverages profit up 23.3 percent to HK$106 million. The Snow brand has a market share of 23 percent in volume terms.

    Rival Tsingtao Brewery Co Ltd (600600.SS)(0168.HK) is due to announce its 2013 earnings next week.

    CRE shares ended up 1.2 percent after the earnings announcement, outpacing a 1.8 percent fall in the Hang Seng Index .HSI.

    For additional detail on the company's results, please see:

    ($1 = 7.7649 Hong Kong Dollars)

    Reporting by Donny Kwok; Editing by Anne Marie Roantree, Stephen Coates and Ryan Woo

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