Analysis: With China dream shattered over missile land deal, Lotte faces costly overhaul

Lotte

25/10/2017 24:00

* Korea retail giant Lotte dealt setback in China over 
missile row 
    * Lotte to sell China hypermarkets, restructure loss-making 
units 
    * China a tough market to replace, challenges elsewhere - 
analysts 
 
    By Cynthia Kim and Hyunjoo Jin 
    SEOUL, Oct 25 (Reuters) - Pressed by Seoul into a land swap 
deal needed for a controversial new missile defence system 
earlier this year, South Korean conglomerate Lotte Group had 
good reason to be sceptical. 
    Just eight months after reluctantly agreeing to exchange a 
golf course in the country's south for a piece of land near 
Seoul, Lotte's decade-long strategic push into China is now in 
tatters, raising major doubts about its growth prospects.     
    The retail-to-chemicals giant is the highest profile 
corporate casualty of a diplomatic spat between Beijing and 
Seoul over the U.S. THAAD missile defence system.  urn:newsml:reuters.com:*:nL3N1GC2QR 
    Now shunned in China because of the golf course deal, Lotte 
is expected to sell its Chinese hypermarket stores for a 
fraction of what it invested. Its plans for mega shopping 
complexes are indefinitely suspended and its businesses in South 
Korea that counted on big-spending Chinese customers, from ice 
cream to tourism, are struggling, officials and investors say. 
 urn:newsml:reuters.com:*:nL4N1MN1AO 
    One Lotte executive said South Korea's fifth largest 
conglomerate is now looking for acquisition opportunities such 
as food companies in emerging markets including India and 
Myanmar.  
    But investors and corporate experts say no other market can 
easily replace China or the promise it once held. 
    "This is one in the eye for Lotte," said Park Ju-gun, 
president of corporate watchdog CEO Score in Seoul. "The group 
needs to revamp its strategy. It could squeak through by doing 
more in Southeast Asia, but China is a tough market to replace 
for a retailer." 
     
    CAN'T SAY NO 
    Another Lotte official said the group was trying to boost 
its chemicals business which currently accounts for a quarter of 
group sales. 
    But investing heavily on chemicals will make Lotte's 
earnings much less predictable given the volatility of global 
commodity prices, said Heo Pil-seok, chief executive officer of 
Midas International Asset Management Ltd, whose firm manages 9.4 
trillion won ($8.32 billion). 
    Embroiled in a high-profile family succession feud and a 
corruption probe, Lotte agreed to a government proposal in 
February to provide land for the installation of the Terminal 
High Altitude Area Defense (THAAD) system. 
    "We agonized over whether to accept the government's 
proposal," another Lotte official told Reuters on condition of 
anonymity because of the sensitivity of the matter.  
    "But we were not able to say 'No' because it was related to 
national security. If we say no to the government, we can't do 
business in Korea."  
    A Defense Ministry spokesman said the land deal was done 
within a legal framework and in consultation with Lotte. 
     
    WIDENING LOSSES 
    THAAD was installed to counter the missile threat from North 
Korea but angered Beijing, which says it upsets the regional 
security balance. 
    Since the THAAD deployment, tour operators say China has  
banned groups travelling to South Korea, while cruises have 
erased Korean ports from their trips and some flights have been 
cut. 
    Nearly all of the 112 Lotte Mart stores in China were shut 
for much of the year over alleged fire safety issues, and the 
group has now put the business on the block.  
    Bankers say it is likely to fetch only a couple of hundred 
million dollars, a fraction of some 1.9 trillion won ($1.68 
billion) Lotte invested in the business. 
    Lotte's construction and financing arms also took a hit 
after building was indefinitely suspended on multi-billion 
dollar shopping and entertainment complexes in Shenyang and 
Chengdu in China.  
    Hotel Lotte, whose mainstay duty free business suffered from 
a plunge in the number of Chinese travelers, posted its first 
operating loss in the first half since earnings data was first 
publicly available in 2008.  
    Plans for an IPO of Hotel Lotte have been delayed 
indefinitely, partly due to the THAAD fallout, although a 
restructuring of Lotte's four retail and food affiliates into 
one holding company, which includes a stock market re-listing on 
Oct. 30, is going ahead. 
    Kim Ho-seop, an analyst at Korea Investors Service, the 
Korean branch of Moody's, cautioned that the new holding 
company, Lotte Corp, would face headwinds from deteriorating 
China business as well as falling profitability at home. 
    In the long term, Lotte is still hoping its China business 
will rebound, and the decision to sell its hypermarkets there 
doesn't mean it is quitting the market, spokesman Lee Byung-hee 
said. 
     
    LITTLE HELP 
    The government of President Moon Jae-in in September allowed 
companies hit by the THAAD backlash to defer their taxes but no 
assistance to restart crippled China businesses was provided.  
    And while Seoul boosted funds at policy banks to help 
affected auto parts suppliers, no additional financing was 
offered to Lotte.  urn:newsml:reuters.com:*:nL4N1M9053 
    "The government may announce additional measures to ease the 
pain later on, but it would be unrealistic to expect relief for 
a specific company," said a government official who declined to 
be identified.  
    Investors are losing confidence, with shares in Lotte 
affiliates under-performing the wider market. 
    While pulling back from China will cap losses in the short 
term, Lotte's plan to break into other markets could prove as 
challenging, according to some investors.  
    "For retailers like Lotte, expanding its Indonesia and other 
Southeast Asia business carries risks that are just as big," 
said Heo at Midas International. "Many tend to underestimate 
cultural differences and other social differences unique to each 
country." 
($1 = 1,133.3000 won) 
 
 (Additional reporting by Haejin Choi, Dahee Kim; Editing by 
Soyoung Kim and Lincoln Feast) 
 ((Cynthia.Kim@thomsonreuters.com; 822 3704 5654; Reuters 
Messaging: cynthia.kim.thomsonreuters.com@reuters.net)) 
 
Keywords: LOTTE CHINA/