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Sun Art Retail Group Ltd. is an investment holding company principally engaged in the operation of hypermarkets and e-commerce platforms in China. The Company operates its hypermarket business by two recognized banners, namely Auchan and RT-Mart. The Company's subsidiaries include RT-MART Holdings Limited, Concord Investment (China) Co., Ltd. and RT-MART Limited Shanghai. Through its subsidiaries, the Company is also engaged in property development, leasing and retailing business.
Investment Overview
Omni-channel strategy. As the largest hypermarket operator in China, Sun Art positions its hypermarkets as community centres to meet consumer needs, with superstores deepening market penetration by focusing more on lifestyle products. Online channels (currently contributing c.30% of sales) continue to outperform, achieving mid-single digit SSSG in 1H FY25, aided by self-operated app and third-party platforms like Meituan, JD and Douyin.
Private label is the key. Private label strategy with low- to mid-end offerings like "Super Savers" and "Must Buy," has started to yield results, with overall SSSG turning positive at 0.3% in 1H FY25 supported by improved ticket size. Product differentiation continues to be the key driver for future market share gains. Effective cost control in staff structure and store operations should continue to support earnings recovery, as evidenced by a 2.3ppt decline in the selling expense ratio to 22.1%. Gross margin is expected to remain stable in the near term with room for further expansion upon product mix improvement. The negative impact of store closures may significantly diminish this year (compared to FY24 impairment loss of RMB1.3bn).
Membership expansion. Sun Art opened six stores in 1H FY25 in Jiangsu and Zhejiang provinces, with another store in Jiangyin opening this month. So far, the total number of M-Club members has exceeded 360,000, up from just over 60,000 in May for the first store, generating RMB14mn in membership fee income during 1H FY25. Product differentiation is seeing progress, with private labels contributing >30% of total sales. We believe that establishing a robust supply chain and maintaining product differentiation are crucial to the long-term success of the business model.
Maintain BUY; HKD3.10 TP. We maintain BUY given the gradual recovery in offline sales (supported by successful private labels) and effective cost management. A potential takeover (with potential buyers such as Hillhouse, KKR, and Ruentex according to latest news) should continue to serve as a share price catalyst, as there could be further share price upside from the fair value of owned properties while Sun Art is only trading at c.1x forward P/B. Our new TP of HKD3.10 (previous TP: HKD2.60) is pegged to 31x PE on a rolling basis (previously 26x), 1 S.D. above its historical average given better prospects for sector leaders like Sun Art.
Key risks:
Food safety issues, catastrophic events, better-than-expected sales growth, etc.
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