By Donny Kwok
HONG KONG (Reuters) - Retail conglomerate China Resources Enterprise Ltd (HK:0291) (CRE) said mainland China's slowing economy means it will take three to five years, longer than expected, to turn around a loss-making tieup with British supermarket firm Tesco (L:TSCO).
Posting an 8.7 percent drop in first-half net profit on Thursday, CRE said the joint venture it formed with Tesco last May won't now turn profitable within two to three years, as originally forecast.
CRE, which has a market value of $7.4 billion (4.46 billion pounds), said last October it was joining forces with Tesco in the hope of reducing costs and tapping its international expertise, although some investors expressed concern about losses at the China unit.
"We have seen signs of a slowing mainland economy. It is a prudent approach to estimate a little longer for the turnaround time of three to five years, rather than two to three years," chief financial officer Frank Lai said at an earnings briefing.
"We are not very optimistic on the overall China retail market, but definitely not pessimistic," Lai said.
Government-backed CRE, which has interests ranging from beverages to supermarket chains, said net profit fell to HK$929 million ($119.87 million) for the January-to-June period, from HK$1.02 billion in the same period a year earlier.
Revenue rose to HK$83.51 billion from HK$71.86 billion yuan in the year earlier period.
"Looking forward into the second half of 2014, the continuation of the Chinese government's anti-extravagance policy, the accelerated competition from the e-commerce industry and the consolidation of the loss from Tesco stores in China ... are likely to affect the performance of the retail business," chairman Chen Lang said in a filing to the Hong Kong bourse.
The conglomerate, which posted a 30 percent drop in first-quarter profit, saw its April-June quarter net profit total HK$573 million, up from HK$506 million in the same quarter a year ago, according to Reuters' calculations.
Shares of CRE closed down 2.9 percent after the earnings were released, lagging a 0.7 percent decline in the benchmark Hang Seng Index (HSI).
TESCO JV TO HURT EARNINGS
CRE, which owns China's top beer brand "Snow", said it expected there will be a significant drop in its overall profitability as it needs time to turn around the performance of the Tesco stores in China, which are currently making losses.
"We remain optimistic about the long-term development of the group's retail business after forming an alliance with Tesco," Chen said. "We believe the immense synergies of the joint venture have yet to be tapped."
The venture competes with the country's hypermarket leader Sun Art Retail Group Ltd (HK:6808) and foreign player Wal-Mart (N:WMT).
"Leveraging Tesco's worldwide experience, the retail business will create ample synergies upon integration and ensure the sound development of its e-commerce and global sourcing," Chen said.
Tesco will assist in funding of the group's restructuring cost by injecting HK$4.33 billion in aggregate, CRE said.
Last week, rival Sun Art posted an 8.5 percent increase in first-half net profit as it continued to expand into lower-tier cities though same-store sales in the period were flat. It said will continue to maintain a strong pace of expansion to lower tier cities.
(Reporting by Donny Kwok and Anne Marie Roantree; Editing by Matt Driskill and Kenneth Maxwell)