By Park Hyong-ki
Staff Reporter
Although high inflation in China is weighing down purchasing power among its consumers and its overheating economy is a concern, the country still remains attractive for Korean retail companies to expand into.
Woori Investment & Securities recommended ``buy'' on stocks such as Shinsegae and LG Household & Healthcare (H&H) after a team of its analysts made a week-long visit to their units in China and assessed their business operations.
The brokerage's senior analyst Jean Park said that although Korean companies operating in China are barely breaking even, they will eventually prosper as China's retail market is expected to rapidly grow on rising consumption.
``China is moving to lessen its dependence on trade as it sees a limit to growth. Instead, it has been rigorously aiming to make consumption its main driving force in the economy,'' said Park.
He noted that the retail industry, consisting of department stores, supermarkets and discount chains, is scaled at around 1,144 trillion won, compared with 169 trillion won in Korea. China's retail market is expected to grow 2.4-fold by 2015, widening the gap with Korea.
The analyst noted Shinsegae, which holds a great interest in discount stores through E-Mart in China, is likely to benefit. Although it is under staggering debt because of relentless expansion, its discount business will gradually pick up steam to offset any losses.
Its profit margin on sales currently records 19 percent, but this is higher than that of other big players such as Carrefour and Wal-Mart in China at 15 percent on average, Woori Investment noted.
``The retail chain operator has set out an ambitious plan to expand the number of discount stores to 70 with sales of 2 trillion won by 2012. I believe this is possible on various factors ― growth in retail and direct sourcing in China,'' said Park.
He added that it will be more profitable to set up chain stores in China rather than Korea as it offers cheaper land and rental prices.
Woori Investment also projects that LG H&H will likely win in China by targeting high-end consumers of cosmetics. China's make-up industry is expected to grow 20 percent on average, mostly concentrated in Beijing and Shanghai.
Park said its focus on marketing premium products and expanding at department stores will boost its balance sheet in the long-run.
phk@koreatimes.co.kr