China Resources expects drop in profitability after acquisition of Tesco stores

China Resources Enterprise, one of the largest hypermarket operators on the mainland, said consolidated net profit fell 8.7 per cent year on year to HK$929 billion in the first half of the year and it expects to see a “significant drop” in profitability this year as it turns around its acquisition of Tesco’s mainland stores.

The partnership was formed in October, with Tesco injecting all of its mainland stores into the joint venture and taking a 20 per cent stake.

“We believe the immense synergies of the joint venture have yet to be tapped,” a statement to the stock exchange said. “Although we expect there will be a significant drop in our overall profitability.”

CRE has previously said it believed it could make Tesco profitable on the mainland in three years.

Turnover was HK$83.5 billion, up 16.2 per cent year on year.

At 1.30pm, shares of CRE had fallen 1.46 per cent to HK$23.60.

An interim dividend of 11 HK cents per share was recommended.

Daiwa Capital Markets Hong Kong analyst Anson Chan said: “The loss was largely within our expectation. Recurring profit was still down 34 per cent in the second quarter but it was already down 32 per cent in the first quarter, [especially] considering they just acquired Tesco China stores in May.

“We are forecasting a more than 60 per cent drop in profitability for retail because Tesco will be a drag but the other segments won’t be too bad, particularly for brewery.”