Golden for tourists, shoppers and – apparently – retailers too.
This month’s national holiday seems to have shaped up well at the cash till, with retail sales up 15% compared to the same period last year.
That followed a 15.4% rise in August – consistent with the average 16% growth rate of the past five years.
Such growth helps explains why South Korea’s Lotte Shopping is willing to pay a large premium to buy Times, a Hong Kong-listed operator of 55 discount stores and 13 supermarkets in mainland China.
The Korean retail chain announced on Monday that it has agreed a $629 million cash deal, after securing the support of Times chairman Kenneth Fang, whose family owns a 72.3% stake in the business.
If approved by Chinese regulators, the purchase of Times will be the largest China-based acquisition by a Korean company.
Lotte is paying 26 times forecast earnings, compared with sector average of 18 times. The offer is at a 25% premium to the pre-suspension trading price and almost double Times’ average price for the year.
Investors worry that the Koreans could be overpaying. But Lotte has less than a dozen stores on the mainland, most of which were acquired from China Trade Association Makro Commercial for $89 million in January 2008.
“Pricing came out a bit pricier than markets had expected, but Lotte’s Times deal was almost a compulsory step for Lotte Shopping, which aims for fast expansion in China,” Min Young-sang, HI Investment Securities analyst, told Reuters.
“The acquisition establishes a strong bridgehead into the Chinese retail market, and while financial costs may weigh on the company’s balance sheet, such a move is seen as positive in the longer term.”
Moreover, Times has tried to focus on untapped hinterland markets.
Early on, Fang bet on hypermarkets – the fastest growing retail format – in second and third-tier cities, many of them in more prosperous provinces. Like Jiangsu, where per capita income growth is now three or four percentage points better than the national average.
Targeting smaller cities also avoids direct competition with global retailers like Walmart and Carrefour, which have concentrated on winning customers over in first-tier cities like Beijing and Shanghai.
Times’ strategy is different. “In small cities, hypermarkets have become entertainment and leisure centres for local residents – an unique and interesting phenomenon in China,” Fang told the South China Morning Post in an interview last year.
In 2008, Times booked Rmb137.3 million ($20.1 million) of net profit on Rmb4 billion in revenue, an increase of 19% year-on-year. Earnings-per-share growth since 2004 has been more than a third better than Lotte’s.
Other investors are equally bullish about mainlanders’ growing spending power. In August, private equity firms TPG and Hony Group paid $212 million for a 10.95% stake in Wumart Store, which operates more than 426 supermarkets and convenience stores in China.
Bain Capital also paid $418 million for a 23% stake in Gome, the country’s largest electronic retailer.
Meanwhile, major global retailers including Tesco have also been stepping up their presence too.
Ken Towle, the head of Tesco’s China operations, says he expects the country will eventually overtake the UK as its largest market.
There is still some way to go. Tesco UK has over 2,300 stores (although some of these are smaller formats). Tesco has 67 stores in China and plans 10 new openings per year.
Not that Towle is discouraged. “We are here to win, but winning in China is a very long game,” he says. “There is ultimately massive potential here.”
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