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Morningstar | Suning Yigou Acquired 80% of Carrefour China; Stronger Competition in the New Retail Spaces

As operating costs continue to rise and the offline retail sector faces ongoing challenges from the e-commerce sector, one of no-moat Sun Art’s hypermarket competitors, Carrefour, made the headlines after selling 80% of its Carrefour China business. We see this strategy as a small threat to Sun Art, given the latter is backed by the much larger Internet giant Alibaba and the transformation of Sun Art has been progressing well. According to online media, after Taoxianda launched in Sun Art’s RT-Mart, the online order volumes at the stores increased. We maintain Sun Art’s fair value estimate at HKD 8.00 per share.

Suning Yigou is planning to acquire 80% of Carrefour China, the fourth-largest hypermarket chain in China with a 4.6% market share. We think the acquisition will increase the product offerings, especially in fast-moving consumer goods of Suning, to complement Suning’s strong positions in home appliances and 3C. Suning will digitalize the offline stores, with details yet to be disclosed for small stores, and Carrefour’s 210 large stores and 24 convenience stores can be the delivery hubs for consumers who shop online and offline, similar to that which RT-Mart is adopting. Taobao and Suning Holdings each hold 20% and Suning Holdings founder Zhang Jindong holds 21% of Suning Yighou.

Carrefour China has not been performing well, with sales down 10% in 2018 year over year, while the company’s reported return on investment is only 0.8% for the Asia segment, which should be mostly China. It was previously in discussions with Tencent and Yonghui supermarket over an equity investment in Carrefour China.