China Resources Enterprise (CRE), a retail-focused mainland conglomerate, said net profit sank 51.6 per cent to HK$1.91 billion last year, but the management expects a promising future due to its new joint venture with British supermarket giant Tesco.
The partnership was formed last October, with Tesco injecting all of its mainland stores into the joint venture and taking a 20 per cent stake. Tesco's most recent annual pre-tax losses in China amounted to HK$3 billion.
"When we bought Home World, they were also losing 600 million [yuan]. It took us two-and-a-half years to turn it into break even. Then in the fourth year, we made a profit. So you can see the synergy definitely will come," said Frank Lai Ni-hium, CRE's chief financial officer, who added that the joint venture has put aside HK$4.3 billion to cushion Tesco's losses.
Tesco has not made any profits in China, but CRE wants to turn the situation around in three years. Net income in the retail division, CRE's biggest business, slumped 65.2 per cent to HK$1 billion owing to the mainland's economic restructuring, the company said in a report to the Hong Kong stock exchange.
"We would venture to predict that the deal will be a drag on CRE's earnings first before synergies are exploited," Vineet Sharma and James Anstead wrote in a Barclays note.
Last year, the state-backed company's revenue climbed 16 per cent year on year to HK$146 billion, marginally higher than market estimates of about HK$145 billion. Total costs increased more than 18 per cent, mainly due to acquisitions during the year.
