The company turned losses into profits, yet was severely cleared out by Alibaba at a Low Stock Price, with the maximum drop of nearly 30% on the next trading day, and a further drop of over 8% on the second trading day. Why is the supermarket leader SUNART RETAIL (06808) not considered Bullish?

According to ZhuiTong Finance APP, on December 31, Alibaba announced the sale of all shares of SUNART RETAIL held by its subsidiary to DHEA Capital, including 73.66% held by Jixin and Taobao, as well as 5.04% held by New Retail, totaling up to 7.5077 billion shares; on January 1, SUNART RETAIL issued a statement saying the acquirer would buy over 7.5077 billion shares, accounting for about 78.7% of the issued shares, and the acquirer would make a cash offer for all issued shares at a price of HKD 1.38 per share and proposed a stock option offer.

The offer price represents a discount of 44.4% compared to the closing price before the announcement. Affected by this information, SUNART RETAIL opened sharply lower on January 2, with a minimum price of HKD 1.6, down 35.5%, and the closing decline still reached 20%, continuing to decline significantly on the next trading day. Alibaba's low-price clearance sale caused block orders to flee, and after changing the controlling shareholder, the management would face a possible 'blood transfusion' issue, which could affect business operation.

However, why is Alibaba selling SUNART RETAIL in a clearance sale, and has there been a change in SUNART RETAIL's fundamentals? Let's analyze this in depth.

Behind the clearance: industry malaise and business strategy adjustment.

Zhuitong Finance APP has learned that Alibaba has recently continued to sell non-core assets, offloading two major retail operation entities within a month, including the clearance sale of Intime Department Store to a buyer consortium composed of Youngor Group and Yintai management team members for a total price of 7.4 billion Yuan in December 2024, along with the sale of SUNART RETAIL, totaling nearly 20 billion Yuan in recovery. However, selling SUNART RETAIL may result in a significant accounting loss.

According to reports, Alibaba first invested approximately 22.4 billion HKD in 2017, acquiring a 36.16% stake in SUNART RETAIL, and spent an additional 28 billion HKD in 2020 to increase its shareholding, holding about 72% of SUNART RETAIL in total, with a total expenditure of 50.4 billion HKD; the loss from this sale exceeds 37 billion HKD. Why would Alibaba opt to incur such a significant loss to liquidate its Retail Trade sector?

If one looks closely, it is not hard to find that the retail industry has entered a recession phase, with a sluggish macro economy and weak consumer sentiment leading to a slowdown in social retail growth, declining real estate prices also affecting the demand for department stores and supermarkets. In the first three quarters of 2024, China's fast-moving consumer goods market saw overall growth slow down, achieving only a mild growth of 0.8%, with hypermarkets continuing to decline. On the other hand, the valuation of the retail sector has been falling dramatically; for example, SUNART RETAIL's market cap has shrunk by 80% since 2020.

Alibaba's performance growth has been relatively stable, with an 8.9% revenue increase and a 56% rise in shareholder net income in the first three quarters of this year, but it has encountered growth bottlenecks and needs to seek new growth points. The AI big model has permeated various industries, and the development trend is clear; Alibaba is actively adjusting its operational strategy, aligning itself to establish 'user first, AI-driven' as the two main strategic focuses, reshaping business strategy priorities, potentially restoring its core business through AI.

Image source: company announcement

Of course, where there are sellers, there are buyers; the company taking over is Dehong Capital, an international private equity investment institution focusing on investing in industry leaders, especially in the retail business sector. Over the past 30 years, it has invested in numerous leading enterprises, including MENGNIU DAIRY, Haier, COFCO Meat, Fujian Sunner Development, and Belle International. As this is PE investment, it is more of a financial nature and it is expected that there will not be major changes in the management of SUNART RETAIL.

The low price is likely a core reason for Dehong Capital's acquisition; the purchase price of SUNART RETAIL is far below the stock price, and the PB ratio is less than 0.7 times, equivalent to a premium of over 30% even with the sale of all assets. Even without asset sales, the dividend yield reaches 10%, providing good returns through dividends. Additionally, SUNART RETAIL is a market leader in supermarkets with nationwide coverage, holding strategic significance in industry chain layout.

However, as mentioned above, the retail industry is not performing well; SUNART RETAIL's performance in recent years has not been promising, with long-term low-profit margins and significant earnings volatility.

Performance decline: Cumulative loss exceeded 2 billion yuan over four fiscal years.

Affected by the industry, SUNART RETAIL has experienced a decline in performance for four consecutive fiscal years. In the first half of the 2025 fiscal year, revenue was 34.708 billion yuan, down 16.4% compared to the first half of the 2021 fiscal year, with shareholder net income at 0.206 billion yuan, turning from losses to profits year-on-year. However, it has oscillated between losses and profits over the past four years, and even when profitable, the profit margin is very low, less than 1%. From the 2022 fiscal year to the first half of the 2025 fiscal year, the company accumulated a shareholder net loss of 2.029 billion yuan.

The business model of SUNART RETAIL mainly operates hypermarkets, medium-sized supermarkets, and membership stores through the "RT-Mart," "RT-Mart Super," and "M Membership Store" brands. As of September 2024, the company has 466 hypermarkets, 30 medium-sized supermarkets, and 6 M membership stores, with hypermarkets and medium-sized supermarkets primarily concentrated in third- and fourth-tier cities, accounting for 67.8%. In the first half of the 2025 fiscal year, the proportions of revenue from commodity sales and rental income were 95.6% and 4.4%, respectively.

Data source: Company Earnings Reports.

In fact, in March 2024, Shen Hui took over as the CEO of the company and brought a new management team's business transformation, including the iteration of the second-generation supermarket format, some indicators turned positive and became growth drivers, and continuous refinement of the commodity supply chain for membership stores. In terms of market strategy, it continues to optimize the physical store of hypermarkets, focusing on the East China and Central China regions, increasing the proportion of stores, and significantly enhancing the number of membership stores. In the first half of the 2025 fiscal year, the number of membership stores increased to 6, an increase of 5 year-on-year.

High-end paid membership stores are an important attempt in the company's business model exploration, but the progress is relatively slow. Compared to the membership store models like Sam's Club and Costco, a longer adaptation period may be needed. However, from the performance in the first half of the year, the decline in revenue has narrowed, same-store sales recorded growth, and profitability highlights the positive effects of the transformation. This is mainly attributed to the optimization of sales expenses under the physical store strategy, with a sales expense ratio of 22.09%, a year-on-year decrease of 2.28 percentage points.

Although the new management is striving to improve the operating conditions, constrained by the industry, SUNART RETAIL's fundamentals remain in a weak development trend, with new growth points not yet formed. The membership store model needs further exploration, and under the hypermarket model, performance still needs to be driven by the recovery of the macro consumer environment. In addition, the company is continuously reducing inventory levels, increasing cash on hand, and enhancing risk defense capabilities, with cash equivalents amounting to 11.908 billion yuan as of September 2024.

Privatization expectations: significant short-term price fluctuations.

In the Capital Markets, SUNART RETAIL's continued declining performance has led to a significant drop in Market Cap, yet no buybacks have occurred to stabilize the stock price. It is worth mentioning that the company's dividend policy is largely unaffected by performance, maintaining a high dividend payout ratio each year. Even during the losses of the 2022 and 2023 fiscal years, the principle of returning to Shareholders was adhered to. According to Oriental Choice data, from 2018 to the present, the company has distributed dividends 14 times, with a payout ratio of 63.35%.

The company's dividend policy is still quite attractive to investors, and its current valuation is very low, with a dividend yield reaching 10%. Following Alibaba's divestment, the company's actual controlling shareholder has changed, leading to two major uncertainties: first, the new controlling shareholder, being a financial investor, may threaten operational stability with potential market sell-offs in the future; second, there is a possibility of being privatized and delisted, or being suspended from trading due to public Shareholders not meeting listing requirements.

SUNART RETAIL has received positive outlooks from most investment banks, for example, Macquarie's research report predicts that the company will have a net income of 0.478 billion yuan in the 2025 fiscal year, significantly reversing previous losses estimated at 0.077 billion yuan, and raising the company’s Target Price by 22%. Opinions regarding Alibaba's total divestment are mixed among investment banks; some believe that the equity transaction's settlement deadline is September 30, 2025, requiring approval from the State Administration for Market Regulation, and once realized, the company team is expected to stabilize morale and continue to promote various transformation measures, pushing profitability steadily upward.

In summary, Alibaba's total divestment from SUNART RETAIL is based on its bearish view of the Industry, along with its own focus on business and development strategy needs. The Low Stock Price from the sale affects investor sentiment and exacerbates the company's price volatility under the expectation of potential privatization and delisting. Furthermore, even though the new controlling shareholder is a Private Equity institution, uncertainty remains regarding its impact on the stability of the management team. Currently, in terms of fundamentals, the company’s performance continues to decline, with no growth points established, and the sustainability of its profitability still requires further observation. However, the company's low valuation and stable dividend policy still make it quite attractive.