What's new
We recently invited Sun Art Retail’s management to attend 2021 CICC Investment Forum, where they had in-depth exchanges with investors and shared updates on the company's recent developments and future plans. We believe that the company's focus on supply chain capability and digital membership operation capability bodes well for efficiency improvement in the medium and long term.
Comments
SSS still under pressure, YoY decline in SSS narrowed in FY3Q22. The company’s same-store sales (SSS) declined 7.4% and 12% YoY in FY1H22 (April-September 2021) and FY2Q22, mainly because of a relatively sharp decrease in average ticket size due to factors such as high base amid the COVID-19 pandemic 1 year ago, intensified competition, and CPI increase. In FY3Q22, SSS declined 2.9% YoY, with the decline narrowing notably QoQ. According to our calculation, SSS recorded a low- single-digit decline YoY in October, mainly because the National Day holiday overlapped with Mid-Autumn Festival last year, leading to a high base for comparison, and SSS growth would have been basically flat in October after being adjusted for base effect. As the pandemic is gradually brought under control, and CPI gradually rises, we believe that the company's SSS growth could record a low-single decline YoY in FY2H22.
Slowing pace of store expansion and steadily developing online business. In terms of store opening, affected by fiercer omni-channel competition, the speed of mini store expansion has slowed in FY2H22 compared with the plan made at the beginning of the year, and the company raised requirements for location selection and rental costs. Sun Art continues to strengthen cooperation with Alibaba. On the one hand, its home delivery business enjoys support from Alibaba in terms of user traffic and logistics services. On the other hand, the firm also cooperates with Alibaba in inventory sharing and its community group buying business, and leverages Alibaba’s outstanding supply chain capabilities. We estimate that Sun Art’s online business contributes more than 30% of its total revenue (business-to-consumer accounts for about 20%), maintaining double-digit revenue growth, and it is contributing profit. The community group-buying business that the company develops jointly with Alibaba this year is also ramping up, and we believe the segment will make a single-digit revenue contribution. In our view, the two parties will continue to deepen cooperation in both online and offline channels, and we are optimistic about the medium- and long-term development prospects of the company's omni-channel model.
Focus on development of supply chain capacity and digital membership operation capacity. 1) Supply chain capability: In FY1H22, the firm established three fresh food processing centers. It plans to step up construction of processing centers and strengthen direct procurement at production bases so that processing centers can cover more than half of the RT-Mart stores in the next 12 months. We think if the processing center pattern works, the firm would not only be able to reduce logistics costs, but would also be able to increase the value added of its products through standardized packaging. 2) Membership operation capability: The firm has previously focused more on the operation of scenarios and merchants. It plans to ramp up investment in digital membership operation, including construction of marketing and content system. Sun Art has hired staff in relevant areas, and we believe that it could utilize the digital capabilities of Alibaba to improve the efficiency of its membership operation.
Valuation and recommendation
Considering slowdown in the pace of store expansion and intense competition, we lower our FY22 and FY23 net profit forecasts 18% and 13% to Rmb801mn and Rmb1.32bn. The stock is trading at 21x FY23e P/E. We maintain an OUTPERFORM rating. We cut our TP 13% to HK$4.76 due to earnings forecasts revisions, implying 30x FY2023e P/E with 43% upside.
Risks
Intensified competition; disappointing growth in online home delivery business; larger-than-expected investment in new businesses.