1H20 NP +17% and 3% above consensus. Sun Art will accelerate its expansion by opening multi-format stores. Through in-depth cooperation with Alibaba, the Company will explore community group purchase with Cainiao. We raised FY20-22E NP estimates by 1-4% and lifted TP from HK$15.32 to HK$15.60, still at 35x FY21E P/E, at the high-end of forward P/E band. Maintain Buy.
- 1H20 results above. NP +17% to RMB2,062mn, representing 64% of FY20 NP (62-63% during past three years) and 3% above consensus. Revenue increased 5% to RMB53.2bn, and outperformed China’ retail sales (11% drop) and sales of 50 key retailers. The revenue growth was led by 5.7% SSSG arising from strong B2C growth and 16.2% food CPI, but partly offset by 19% drop of rental income due to waive of rental to certain tenants. Now more than 97% tenants resumed operations. GPM narrowed 1.5ppt to 24.6% because of rental income decline (1ppt) and increase of low-margin fresh food sales mix (0.5ppt). SG&A expenses ratio reduced 1.7ppt to 20.0% driven by decrease in social welfare costs and savings from integration between two banners.
- Strong B2C growth. Due to COVID-19 and changing consumers’ behavior, daily orders per store increased from 640 in 2019 to >750 in 1Q20 and >950 in 2Q20. Management expects DOPS to reach 1,200 at end of 2020. Ticket size jumped to >RMB85 in 1Q20 (vs RMB64 in FY19) because consumers reduced shopping frequencies amid pandemic. 2Q20 ticket size fell to >RMB68. Management expects RMB65-67 is normal level.
- Kick off multi-format expansion. The Company plans to develop multi-format by opening supermarkets (3,000 – 5,000 sq m) and mini-marts (200-500 sq m) to gain market share. Compared to hypermarkets, such stores are located in community, which better serve consumers’ convenient shopping needs. The Company plans to open 2-3/30-50 supermarkets/mini-marts in 2H20E and 30-50/200 supermarkets/mini-marts in FY21E. The three supermarkets opened in 1H20 were profitable in the first month.
- Other growth initiatives. (1) Community group purchase: The Company leverages the warehouse function of its nationwide hypermarket network to provide a new shopping way. More than 3,000 Cainiao pick-up stations (out of 50,000 stations) and more than 5,000 directly developed outlets have rolled out this service. (2) Tmall supermarket inventory sharing: Now all stores provide 1-hour-delivery service and 180 stores provide half-day-delivery service. The project is still at pilot stage. (3) Store remodeling: The Company keeps its plan to renovate 50 stores in FY20E (vs 5 in 1H20).
- Revised up earnings. We lifted FY20-22E NP estimates by 1-4% to factor in stronger expansion plan. Catalysts: Revenue and margins beat; Risk: keen competition.
