Hillhouse Capital has walked away from a potential buyout for Sun Art Retail [HKG:6808], the Alibaba Group [NYSE: BABA; HKEX:9988]-backed hypermarket operator under the “RT-Mart” brand, according to three sources familiar with the situation.

Hillhouse has retreated from the process due to disagreement on deal terms, one of the sources said, but declined to elaborate.

Other bidders including the PEs and strategic players are still negotiating with the seller, although the valuation gap seems to be a concern to them, said the sources.

The deal is still in the initial stage and the timeline remains fluid, said the sources. The seller is open to receiving bidder offers with more certainties and at a faster transaction speed, said the first source.

On 15 October 2024, Sun Art announced that it had received a possible pre-conditional voluntary offer from an unnamed bidder to privatize the company. Talks are ongoing for the purpose of any irrevocable undertaking. Alibaba which controls a combined 78.7% stake in the retailer, is also in discussions with several other parties.

On 27 September, Bloomberg reported that Hillhouse and DCP are interested in purchasing a portion or the whole shareholding of Alibaba in Sun Art.

Ruentex Group, and PE firm KKR [NYSE:KKR] are also reported to be among the interested bidders, according to a 17 October report by Guandian.

In March, Chinese central SOE COFCO Corp was rumored to be buying RT-Mart for CNY 10bn (USD 1.4bn).

Sun Art released a positive profit alert for the half-year ended 30 September, reversing the CNY 378m loss for 1H23. It expects to report CNY 150m-CNY 200m net profit for the latest half-year, primarily due to the stabilizing business and cost-cutting measures.

The company has been working on a turnaround in the past year and aims to achieve high-quality growth and expand its member stores and mid-size stores in 2025 fiscal year, according to its 2023/2024 annual report released on 23 July.

Alibaba made two investments in Sun Art: in 2017 at HKD 6.5 p/s and in 2020 at HKD 8.1 p/s, respectively, with a total investment amount of over HKD 50bn (USD 6bn). CICC acted as Alibaba’s advisor in those investments, according to announcements at that time.

Currently, Sun Art trades at HKD 2.09 with market cap of HKD 19.9bn. The stock price has soared 67% in the past three months.

Alibaba is resetting its strategic focus on “user-first” and “AI-driven” since its organizational restructuring and a leadership transition, with company veteran Joe Tsai taking over as chairman and Eddie Wu as CEO last year, according to its 2024 annual report.

A comparable transaction is MINISO‘s [NYSE: MNSO; HKEX: 9896] acquisition of a 29.4% stake in Yonghui Superstores [SHA: 601933] for CNY 6.3bn from DFI Retail’s Dairy Farm and JD.com [NASDAQ: JD; HKG: 9618].

The transaction is based on 11.14x EV/EBITDA multiple as of 30 June of Yonghui, which had recorded CNY 74.39bn revenues, CNY 1.91bn EBITDA and net loss of 1.43bn in the first half of this year, according to Yonghui’s 2024 interim report.

Yonghui’s stock price has doubled YTD since MINISO’s announcement. MINISO’s stock price has slumped over 16% since the announcement but still gained over 10% YTD compared to the price before the announcement. Both stocks have also benefited from China’s market rebound amid a series of stimulus policies released in the past month.

Hillhouse, Alibaba and Sun Art did not respond to requests for comment.