Sun Art Retail Group Limited-1st Take: Indirectly Benefiting from Ruentex and Sinopec Strategic Agreement

RT Mart's parent company (Ruentex Group) signed a strategic cooperativeagreement with China Petroleum & Chemical Corp. (Sinopec) (0386.HK, OW,HK$7.60) to explore opportunities for the two companies to cooperate in threeaspects: 1) leverage large retail base to lower sourcing cost for both parties; 2)joint retail operations (Sinopec’s CVS stores in Shanghai the trial run); and 3)O2O business tie up. Prior to the signing of the cooperation agreement onJune 30, Sinopec announced the reform of its marketing arm.

    Background on retail operations: As of end-2013, Sinopec had 23,431convenience stores in China with total revenue of Rmb13.3bn in 2013 (77%penetration rate in its 30,351 service stations). Ruentex Group has a number ofretail investments in China, including: 1) Sun Art, which operates hypermarkets– 266 RT Mart stores and 59 Auchan stores with a total GFA of 8.98mn sqm asof 2013; 2) Convenience stores – C-Store Convenience Chain in Shanghai with~600 stores; and 3) eCommerce platform Feiniu.com, launched in January2014, by Sun Art Retail Group.

    Impact on Sun Art: We see no direct impact on Sun Art's earnings from theagreement between Sinopec and Ruentex Group (which currently directly andindirectly owns 41.3% of Sun Art). However, this is likely to be a positive toshare price sentiment. Long term, it could benefit Sun Art's Feiniu.com givenan increase in O2O service points from Sinopec (see our China Retail /Internet: Asia Insight: Dawn of O2O - Connecting the Unconnected, dated June25, 2014 link here) and potential integration with its hypermarket operation.Also, Sinopec's retail business could enjoy synergies from joint sourcing andoptimized operation from gradual integration with Runtex's retail operations.