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UPDATE 1-Hypermarket chain Sun Art bets on online delivery strategy as competition mounts

competition mounts@

* Sun Art bets on Feiniu Fresh to counter e-commerce rivals

* Competition intensifying for share of China's grocery market

* Online players Alibaba, JD setting up brick-and-mortar stores (Recasts with online delivery strategy, adds details from briefing)

HONG KONG, Aug 10 (Reuters) - Sun Art Retail Group Ltd , China's No.2 hypermarket operator, on Thursday said it was betting on a new online delivery strategy to take on e-commerce players as competition hots up in the country's $700-billion grocery market.

The retailer, which posted a higher net profit for the first half of the year mainly due to gains from unused prepaid cards, has been slow in the race to go online, with its platform Feiniu falling significantly short versus that of bigger competitors like China Resources and Wal-Mart Stores Inc.

But Sun Art is looking to bridge the gap with its new online delivery service, Feiniu Fresh, that was launched in June and promises to bring grocery to the customer's doorstep within an hour from when the order is placed.

The Feiniu platform, which Sun Art sees as a key way to reinvent itself and combat declining foot traffic in stores, saw narrower losses in the first half of the year and the company hopes it will break even in 2019, Peter Huang, an executive director at the retailer said at a briefing.

Feiniu has so far been rolled out to 400 mortar stores and has contributed to a 4.2 percent rise in operating costs.

Industry experts warn cost pressures will further rise as e-commerce giants such as JD.com and Alibaba set up brick-and-mortar stores.

"Everyone is trying to compete on price and with the online players coming in the prices will become even more transparent," said Jonathan Cheng, principal at Bain in Hong Kong.

Alibaba's launch of Hema Fresh in July and JD's expansion of Yonghui's Super Species stores are already a massive threat to the offline players, said Cheng.

Sun Art - a joint venture between Taiwanese conglomerate Ruentex Group and French retailer Groupe Auchan SA - said it would continue working on unmanned convenience stores, a rising trend in China as retailers look to cut costs. It is currently testing two such stores called bingobox in Shanghai.

The group, which has a total of 446 hypermarkets in China, is planning to open 30-33 new stores in the second half year after same-store sales fell 0.9 percent during the first half, compared with a 0.3 percent decline a year ago.

On Wednesday, Sun Art reported a net profit of 1.76 billion yuan ($263.63 million) for the first half, versus 1.43 billion yuan a year ago, buoyed by income from unused prepaid cards.

"We are positive on Sun Art's new strategic direction .... We think Sun Art could potentially become the largest merchant for daily consumer goods, both online and offline in the roughly 200 cities where it operates stores," Morgan Stanley said. ($1 = 6.6760 Chinese yuan renminbi) (Reporting by Donny Kwok and Farah Master in Hong Kong and Zhang Min in Beijing,; Editing by Himani Sarkar and Susan Thomas)