Core views

Mingchuang Premium has successfully implemented the global layout of lifestyle goods collection stores. The company plans to become the largest shareholder of Yonghui Supermarket through an agreement transfer agreement and enter the essential goods retail circuit. The company's management is firmly optimistic about the offline retail industry, and has the determination and resources to continuously promote the transformation of offline retail channels and product strategies. Creating a comprehensive offline scenario and a global IP strategy that meets the needs of the majority of Chinese consumers for good quality, low price and quality service will give the company room for long-term growth.

occurrences

On September 23, 2024, Mingchuang Premium announced that Juncai International, its wholly-owned subsidiary, will acquire 2,668,135,376 shares of Yonghui Supermarket at a price of RMB 2.35 per share, or RMB 6.27 billion, to acquire 29.40% of Yonghui's shares held by Dairy Company, JD World Trade, and Suqian Hanbang, and become the largest shareholder.

Brief review

Yonghui Supermarket's current shareholders Milk Co., Ltd., Beijing Jingdong Century Trading Co., Ltd., and Suqian Hanbang Investment Management Co., Ltd. intend to transfer their holdings of Yonghui Supermarket Co., Ltd. (601933.SZ) 1,913,135,376 shares, 367,227,196 shares, and 387,772,804 shares to Guangdong Juncai International Trading Co., Ltd. through an agreed transfer, accounting for 21.08%, 4.05% and 4.27% of the company's total share capital, respectively. If the transfer is completed, Milk Company and Suqian Hanbang will no longer hold shares in the listed company, and JD World Trade will continue to hold 2.94% of the listed company's shares.

Mingchuang Premium is optimistic about the national practice of the Fat Donglai model and the synergy effect after the acquisition. Yonghui Supermarket's first Zhengzhou Wanxin Plaza store sold 1.88 million yuan on the day it opened on June 19 this year, which is 13.9 times the average daily sales before the adjustment; the daily passenger flow was 12,926 people, 5.3 times the average daily passenger flow before the adjustment. The heat continued to be good after that. By September, the Zhengzhou region had completed the opening of three modified stores, and Yonghui had independently applied the reform experience to other regions. On August 31, the average daily sales volume of the Xi'an China Trade Plaza store in Xi'an, Shaanxi increased from about 0.2 million to an average daily passenger flow of about 3,000 people to the day of opening. The store's customer traffic exceeded 0.014 million, with sales of 1.51 million yuan on the first day. Looking at the present, Yonghui is actively absorbing the advantages of the Fat Donglai model and is steadily advancing regulation. With its second-largest supermarket in the country and a size of 850 stores, it is currently the supermarket group most likely to take the lead in testing the Fat Donglai model and promote it throughout the country. Mingchuang Premium endorses Fat Donglai's business philosophy. Based on a judgment on the development trend of the supermarket industry, it plans to share resources after the strategic acquisition, further enhance the scale effect, optimize the cost structure, bring more value to consumers, and further enhance the return on investment of listed companies.

Optimize capital structure and spread risk. Mingchuang Premium currently has 6.5 billion yuan in cash and short-term investments, and currently has an interest-bearing debt of only over 6 million yuan. The company's operating cash flow continues to be positive, and it has sufficient strength to complete this merger and acquisition. At the same time, the company has plenty of bank credit that can be used to optimize the capital structure through low-cost debt financing. By acquiring the supermarket business that sells essential goods, it also helps the company diversify cyclical business risks.

Investment advice: Considering that the acquisition is still in its early stages and does not include its impact on the company's business and finances, we maintain profit forecasts of 2.609, 3.171, and 3.697 billion yuan, corresponding to PE of 14, 12, and 10, maintaining an “gain” rating.

Risk analysis

1. Franchisee and agent concentration risk. The concentration of franchisees is high, and the concentration of agents is higher than that of franchisees. Changes in franchise policies or agency policies may cause fluctuations in franchisees and agents, thereby affecting the company's operation and performance.

2. Agents control risk. Agents are responsible for local store operations, and the decline in the company's control over agents may damage brand image and company operations.

3. Increased store density in China may cause customer flow to be scattered, leading to a decline in store revenue. If the company's stores expand too fast, the customer flow may be scattered, causing the company's single store revenue to drop.

4. There is uncertainty about mergers and acquisitions. Mergers and acquisitions are still subject to antitrust review, and the conclusion of the deal is uncertain. At the same time, after the merger and acquisition, there is also uncertainty about the success rate of the integration of the two parts of the business and the degree of adjustment of Yonghui Supermarket.

5. Increased competition in the industry. Other domestic retailers such as Sanfu, KKV, The Green Party, Nome, etc. may seize resources with the company and increase competition in the industry.