Beijing Jingkelong Company Limited (814:HK) is one of the largest retailer in Beijing. It currently owns about 280 retail outlets with four main kinds of format; community shopping centers, hypermarkets, supermarkets and convenience stores. Compared to Sun Art Retail Group Ltd (6808:HK), one of the largest retailer in the China, Beijing Jingkelong Company
is only 1/88th the size of Sun Art. It operates mainly in 16 districts of Beijing and the Hebei province, so we can imagine the growth potential of the company is indeed very high.
According to the company, it commented that it is currently the 2nd largest retailer in Beijing with Walmart as the leader in the city. It focuses to be the lowest cost provider in its industry and target mostly on food products. In fact, about 80% of its sales are coming from food related products. As long as it can be the lowest cost provider, there might be many growth potential for the company outside of Beijing.
However, the challenge here for the company is competition. The competition in Beijing is getting more aggressive. Furthermore, Jingkelong has to compete directly with much larger retailers which enjoys the economics of scale in the business. For example, retailers such as Sun Art is able to achieve about 2.5% to 3.5% net margin from its business. However, Beijing Jingkelong Company only managed about 0.5% to 1% net margin for the past few quarters. If the company is not able to cut down its operating cost, it might never be the low-cost provider that it wanted to be.
The company has been an investor’s nightmare. Trading at more than HK$11.00 in 2011, the share price of the company has been dropping for the past 3 years to below HK$2.00 per share. Recently, the share closed around HK$2.25 per share in the past week. Is the company set for a turnaround?
Value In Action
The retailing business is one of the most competitive industry anywhere in the world. Secondly, China is one of the most competitive places to do business in globally. Combining retailing and China together give you one of the most competitive business environment anywhere in the world. If the company is unable to operate as the lowest cost provider in its market as its plan, there might be little chance for us to expect Beijing Jingkelong Company as the next Walmart of China.Join us on Facebook for more exciting updates and discussion about value investing. Submit your email address for important market updates and FREE case studies!We will only provide you with information relevant to value investing. You can unsubscribe at any time. Your contact details will be safeguarded. The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and does not in any way represent those of his employer and other related entities. Stanley Lim does not own any shares in the companies mentioned above.