First-half earnings at China Paradise Electronics Retail Ltd plummeted nearly 90 percent, highlighting management and cost problems and shedding light on last month's Gome takeover deal, analysts said.

 

The earnings slump could see Gome putting more resources into streamlining China Paradise businesses in the future.

 

China Paradise, the mainland's third-largest electrical home appliance retailer, yesterday posted an 89 percent slump in its net profit from January to June to reach 15 million yuan (US$1.875 million).

 

The poor performance comes despite its turnover increasing 35.5 percent to 7.72 billion yuan (US$965 million).

 

It was attributed to an increase in operating costs, which amounted to 7.1 billion yuan (US$887.5 million), up from 5.3 billion yuan (US$662.5 million) a year ago.

 

China Paradise officials in Shanghai declined to comment.

 

But "it's clear the retailer has a lot to do to contain its swelling costs and to improve its management," said Andes Cheng, associate director of Hong Kong-based South China Research Ltd, who described the profit drop as "surprising."

 

The Shanghai-based retailer has stepped up efforts to open more stores outside its base in recent years, as bigger rivals Gome and Suning forge ahead with national expansions.

 

China Paradise had 231 stores in 76 cities by the end of July, more than 70 of them in Shanghai, according to its website.

 

But its operation outside Shanghai was loss-making due to a lack of synergy and resources integration, posing a "to-expand or not-to-expand" dilemma for the retailer.

 

"Years of expansion saw it overlook management improvement," said Jin Zefei, an analyst with Shanghai-based Shenyin & Waiguo Securities.

 

China Paradise last month accepted a US$680-million buyout offer from the country's top player Gome, which appeared to be a rescue deal. The largest merger in China's white-goods retail sector, the deal is expected to have an impact on the landscape of the sector.

 

"Now the focus is on how China Paradise will perform under the Gome umbrella and how long before the two can achieve synergy," said Cheng.

 

Judging from the current situation, however, "the sluggishness (of China Paradise) will not be largely improved in the second half of this year," said Jin.

 

Investors reacted by selling Hong Kong-traded shares in Gome and China Paradise after the results were made public yesterday.

 

Shares in China Paradise plunged as much as 14.5 percent yesterday to HK$1.71 (22 US cents) before it regained ground to finish the day at HK$1.81 (23.2 US cents).

 

Gome's shares were down 5.75 percent to close at HK$5.9 (75.6 US cents).

 

The performances are in sharp contrast to the rally of the two stocks after they announced the buyout deal.

 

Gome is scheduled to announce its first-half results on Thursday.

 

(China Daily August 15, 2006)