The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Chinese oil giant Sinopec wants to sell more from its 23,000 pump-side stores. But as a new Breakingviews calculator shows, even a dramatic increase in non-fuel sales won’t do much to lift the $58 billion valuation that outside investors have put on the business.
Sinopec’s Easy Joy stores aren’t currently big money-spinners. The retail unit made almost all its revenue last year from selling fuel. Non-fuel sales amounted to just $2.17 billion. Put another way, the average store racked up sales of just $253 per day.
In an effort to accelerate sales, Sinopec has sold a 30 percent stake in the business to 25 investors for $17.5 billion. The hope seems to be that new shareholders like China Life and Haier Electronics will help to broaden its product range.
There’s a lot of room for improvement. Chinese convenience store operators average sales of $941 per day, according to the Fung Business Intelligence Centre. Overseas petrol station operators do even better, with offerings of fresh food like pizza, and added services like banking. U.S. operator CST Brands generates daily sales of around $3,500 from its forecourts. The average Japanese 7-Eleven store rings up revenue of $6,336 a day.
Offering a wider range of products, or a pickup service for e-commerce deliveries, could help Sinopec boost revenue. But given China’s lower income levels it seems hard to imagine sales reaching U.S. heights. For Sinopec Marketing, daily non-fuel sales of $1500 – about six times last year’s figure – would be an impressive result.
Selling more items should also raise Sinopec’s operating margin. Though the group doesn’t break down margins for non-fuel sales, they are unlikely to beat the 5 percent earned by experienced Chinese hypermarket group Sun Art Retail.
In this scenario, the proportion of operating profit that Sinopec Marketing gets from non-fuel products would rise to 10 percent of the total within three years, assuming fuel sales grow by 1 percent a year. Apply the same 14 times earnings multiple that investors have just valued the business at, and the unit would be worth $10 billion more than today. That’s a solid, but hardly spectacular improvement. If that’s the best Sinopec’s stores can hope for, it helps explain why foreign groups stayed away.