* 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
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.
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.
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 governments 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 cant do business in Korea."
A Defense Ministry spokesman said the land deal was done within a legal framework and in consultation with Lotte.
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.
Lottes 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.
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.
"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)