Hong Kong's Beijing Jinkelong Company has entered into a capital increase agreement with troubled mainland retail group Shou Lian, thereby taking a 56.34% controlling stake in the group.

Jinkelong will invest CNY50m (US$6.44m) to gain new equity capital representing approximately 11.04% of the enlarged total equity of Shou Lian, the company said in a statement to the Hong Kong stock exchange yesterday (12 January).

The investment boosts Shou Lian's capital base to around CNY403.

Shou Lian operates three hypermarkets, 21 supermarkets, one discount store and 16 convenience stores in Beijing. The company posted significant losses in 2005 and 2006, when it lost about CNY100m and CNY80m respectively.

Jinkelong is a leading integrated retail and wholesale distributor with a foothold in the Greater Beijing region. It operates a network of 171 retail outlets and two retail logistics centres.

The board of Jinkelong said that increasing its stake in Shou Lian marked the beginning of its plan to expand in mainland China. Through the move, Jinkelong said it can: "expand its retail distribution network to cover other parts of the Greater Beijing Region and increase its revenue through the distribution of its products to Shou Lian."

Jinkelong believes that the integration of Shou Lian's retail network will allow it to realise various cost benefits in its distribution systems, while the economies of scale will afford the group a stronger negotiating position when it comes to sourcing capacity and bargaining power, the company said.