China State-Backed Retailer Posts 32% Profit Decline

China Resources Enterprise Ltd. (291), the company that makes the country’s best-selling beer with SABMiller Plc (SAB), said first-quarter earnings declined 32 percent as a slowing economy damped consumer spending. The shares fell.

Underlying profit in the three months ended March dropped to HK$349 million ($45 million) from HK$512 million a year earlier, the state-backed company said in a statement to the city’s stock exchange. The underlying figure excludes the effect of asset revaluation and major disposals. Sales rose 16 percent to HK$41.8 billion during the period.

China’s economic growth slowed to the weakest pace in six quarters in the first three months of 2014. The country’s retail market was affected by “continuous pressure from the slowdown in domestic macro-economic growth,” according to China Resources, which runs hypermarkets in the Asian nation. A government frugality campaign also weighed on sales of high-end products, it said in today’s statement.

China Resources fell 4 percent to close at HK$22.95, its biggest decline since April 22, in Hong Kong trading. The stock has slumped 11 percent this year, compared with a 1.5 percent drop for the benchmark Hang Seng Index.

China’s gross domestic product slowed to a 7.4 percent pace in the January-to-March period from 7.7 percent in the previous quarter.

Largest Hypermarket Operator

The company’s retail unit, which accounted for almost 70 percent of its sales in the quarter, posted a 12 percent decline in underlying profit to HK$464 million. Rising wages weighed on profitability, it said. The company plans to speed up its expansion into third-to-fourth tier cities, as well as into towns and villages.

As of March, the Chinese company operated more than 4,600 outlets including hypermarkets, supermarkets and beauty stores.

China Resources tied with Groupe Auchan SA for the position of China’s largest hypermarket operator last year with 14 percent market share each, according to industry researcher Euromonitor International. Wal-Mart Stores Inc. ranked second place with a 10 percent share. Auchan backs Hong Kong-listed hypermarket operator Sun Art Retail Group Ltd.

Tesco Agreement

China Resources agreed last year it would combine its hypermarket operations with those of Tesco Plc’s China business. The deal with Tesco adds the U.K.-based retailer’s 134 outlets and shopping-mall businesses to China Resources’ stores.

Tesco will pay HK$4.33 billion for 20 percent of the venture, with the Hong Kong-based group owning the rest, according to their agreement. The hypermarket chain will be renamed CR Vanguard gradually within two to three years and the tie-up is expected to break even in three years, China Resources Chief Financial Officer Frank Lai said in March.

The beer division reported an underlying profit of HK$6 million in the quarter, reversing a year-ago loss of HK$23 million. The company, which makes Snow Beer, China’s biggest-selling beer, got about a fifth of its sales from beer.

China Resources’ food operations reported a loss of HK$50 million, compared with an underlying profit of HK$57 million a year earlier, as it incurred high marketing expenses to foster rice distribution and other new businesses, it said.

China’s anti-corruption agency is probing Song Lin, the former chairman of China Resources Holdings Co., the parent of China Resources Enterprise, for “suspected disciplinary violations,” the Chinese Communist Party’s Central Commission for Discipline Inspection said last month using language that signals a corruption probe amid President Xi Jinping’s campaign to eradicate graft.

To contact Bloomberg News staff for this story: Liza Lin in Shanghai at llin15@bloomberg.net

To contact the editors responsible for this story: Stephanie Wong at swong139@bloomberg.net Subramaniam Sharma

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