After six years' marathon preparation, Shanghai-based Bailian Group, the largest retailer in China, has taken the first steps towards a major restructuring of its supermarket business.

The Hong Kong-listed Lianhua Supermarket Holdings, which is the fourth-tier subsidiary of Bailian, announced on Wednesday in Hong Kong that it had got approval from shareholders to acquire a 100 percent equity interest in Hualian Supermarket Co from the Bailian Group at a consideration of 492 million yuan in cash.

This move is widely considered by industry analysts as an important step taken by Bailian to strengthen its competitiveness in the domestic market.

The deal is also seen as a good opportunity for the Hong Kong-listed Lianhua to launch a public listing in the domestic A share market, according to a recent report written by Wu Hongjun, analyst, United Securities.

Luo Kuangyi, analyst from Finance and Industry Institution of Northeast Securities, said Lianhua might seek a mainland IPO in view of its undervalued share prices in Hong Kong.

"The PE ratio for major retail companies in the A share market is more than 30 but in Hong Kong market, it only hovers around 20," said Luo, adding that the 429-million yuan paid by Lianhua for the deal should be deemed "relatively low".

"Hualian Supermarket reported a net income of 32.83 million yuan in 2008 and the price paid is 15 times over the earnings, much less than the average P/E ratio of 30," added Luo.

Upon the deal's completion, Lianhua will have a total of 5,268 chain stores under management by absorbing the 3,993 stores from Hualian, among which 3,184 stores are classified as supermarkets.

Lianhua said it would retain the Hualian brand and adopt a dual-brand strategy after the merger.

The new firm will get on with its sales network expansion and increase the amount of direct managed chain stores, franchise stores and restructuring existing stores in the next few years, according to the report by Shanghai-based Oriental Morning Post yesterday.

Once the deal is clinched, Bailian will seek to further boost the market share of its core supermarkets and chain store businesses, to vie with foreign rivals such as Wal-Mart in China, the Shanghai-based China Business News reported yesterday.

However, Luo holds a different view on that by saying Bailian, which mainly focuses on medium-sized supermarket and smaller chain stores, are different from megastore operators such as Wal-Mart.

"So I don't think there is any competition between them," he said.

(China Daily September 4, 2009)