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Sun Art Tumbles After Profit Misses Estimates, Downgrade

Sun Art Retail Group Ltd., China’s largest hypermarket operator, tumbled in Hong Kong trading today after reporting lower-than-expected 2011 profit and an analyst downgraded the stock.

Net income rose 55 percent to 1.6 billion yuan ($254 million) in the year ended Dec. 31, short of the 1.65 billion yuan average estimate of four analysts surveyed by Bloomberg. Sinopac Securities Asia Ltd. downgraded the stock to “neutral” from “buy” on a weaker consumer outlook.

“The company faces weakening consumer cycle which will affect store sales in the short term,” Vivian Liu, a Shanghai-based analyst at Sinopac, said in a note to clients today. The retailer may not be able to “digest” rising operating costs incurred from its fast expansion in the short term, she said. Consumer spending is expected to weaken as economic growth slows in China.

The Shanghai-based retailer, backed by France’s Groupe Auchan SA, overtook Carrefour SA in 2007 as the biggest operator of hypermarkets in China. It saw a 31 percent increase in store operating costs to 9.52 billion yuan last year after opening 46 stores, adding new employees and amid rising wages in the world’s second-largest economy.

Sun Art dropped 6.7 percent to HK$9.93 at the close in Hong Kong trading, the largest decline since its IPO in July. The stock has climbed 2.3 percent this year, compared with a 15.4 percent gain in Hong Kong benchmark Hang Seng Index.

Slowing Growth

Sales at stores open for at least a year grew 8.8 percent in 2011, a slower pace than the 11.4 percent growth of 2010, based on the company’s presentation today.

The retailer has recorded single-digit same-store sales growth in the first quarter and that will probably continue this year, Chief Executive Officer Bruno Mercier said at a press conference in Hong Kong today. Sun Art aims to add at least 50 stores in China this year, he said.

Earnings per share climbed 5 percent to 0.20 yuan in 2011. Sales climbed 21 percent to 68.1 billion yuan in 2011. The retailer boosted second-half profit by 71 percent to 816 million yuan in the second half, according to Bloomberg calculations.

China pared the nation’s economic growth target to 7.5 percent from an 8 percent goal in place since 2005, according to a state-of-the-nation speech that Premier Wen Jiabao delivered to about 3,000 lawmakers at the annual meeting of the National People’s Congress in Beijing today.

Sun Art raised HK$9.5 billion, including an overallotment, in July as it priced a share sale at the top end of a marketed range, underscoring demand.

Sun Art had a 12.8 percent market share last year among operators of hypermarkets, whose selling space exceeds 2,500 square meters (27,000 square feet) and primarily sell groceries, according to data from London-based Euromonitor.

Wal-Mart Stores Inc. ranked second with an 11.2 percent share in 2011, while China Resources Enterprises Co. had 10.1 percent and Carrefour 8.1 percent, according to Euromonitor. China’s hypermarket sales may almost double to 973 billion yuan in 2016 from 507 billion yuan last year, Euromonitor said.

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