12MFY20 net profit rose 1% to RMB2,872mn, 12%/9% below our estimates/consensus, due to lower-than-expected revenue and GPM. The Company will invest in community group purchase, superstores and mini-stores, both offline and online traffic to accelerate sales growth. We believe the community group purchase sector’s heavy subsidy model is unsustainable. Industry landscape could be less competitive in FY22E. Maintain Buy but cut TP from HK$15.60 to HK$8.70, based on 27.7x FY21E P/E, at history average since Alibaba invested in the Company in Nov 2017.
- Accelerate community group purchase expansion… The Company has two ways to grow group purchase business. (1) Cooperate with Cainiao: The Company has a profit-sharing mechanism with Cainiao. Through more than 100 stores located in 36 cities, cooperative active pick-up stations reached around 8,000. Number of Cainiao pick-up stations is expected to double to 200,000 in 2021E. This should provide the Company with large room to expand. (2) Self-operated: Feiniu group purchase started in more than 220 stores (out of 484 hypermarkets) in 125 cities.
- … but in a controllable way. The Company will not follow some peers’ heavy subsidy strategy (even at negative GPM) to grow its group purchase business because this model is unsustainable. Instead, it will leverage on its supply chain and store network, and deeply cooperate with Alibaba, like Cainiao’s network. The Company targets to reach RMB3bn sales in 2021E and limits its loss within 10ppt.
- Multi store format. The Company plans to add 30-50 superstores and 200-300 mini-stores in 2021E. Superstores will be located to young consumers in second and third-tier cities. Mini-stores (>70% revenue from fresh food and dairy products) will satisfy consumers’ demand for daily meals. Fresh food is the key category to introduce store traffic.
- Store remodeling. It will expand lettable area and increase catering, entertainment and service tenant mix to attract store traffic and increase rental income. It also will reduce non-food operating area of under-performing store in each city in exchange for warehouse area to support online and group purchase businesses.
- Revised up earnings. We cut FY21-22E NP estimates by 35-36% to factor in lower revenue and GPM assumptions as well as start-up losses of group purchase, superstores and mini-stores. We forecast FY21E net profit to fall 13% in FY21E and then rebound 11% in FY22E on anticipation of less competitive landscape. Catalysts: Revenue and margins beat; Risk: Keen competition in community group purchase.
