The company's recent situation
We recently invited Gaoxin retail management to attend CICC's investment strategy exchange meeting for the second half of 2021 and had in-depth exchanges with investors. We believe that the cooperation between the company and Ali is expected to be further deepened, and we are optimistic about the prospects and growth space for the company's new retail business in the medium to long term.
reviews
1. The decline in same-store sales narrowed month-on-month, and is expected to be corrected in the second half of the year. Affected by the high base of 1H2020 and the intensification of competition in new business formats this year, we expect the company's same-store sales to decline year-on-year in January-May. From June until now, the company's same-store sales have increased positively year-on-year (including the impact of the Dragon Boat Festival misalignment), and the downward trend has improved month-on-month. We believe that in the second half of the year, with the reduction of the high base effect and the steady growth of homebound business, 2H2021's same-store sales growth rate is expected to gradually correct.
2. Promote new business formats such as small and medium runners and community group buying, and continue to promote online business and hypermarket restructuring.
1) “Zhongrunfa”: The business model is close to Da Runfa, and the model has basically been implemented. By the end of 2020, the number of stores was 6, and there are plans to expand the scale in the future. 2) “Little Runfa”: The business model is similar to a community supermarket. Compared with Da Runfa and Zhongrunfa, fresh products account for a higher proportion (about 60%). Currently, there are about 40 stores. We think the second half of 2021 may show stores quickly. 3) Community Group Buying: It consists of two parts. Among them, the self-operated part is mainly E-Commerce and Flying Bull Group. We think it focuses on running a profit model and is expected to increase cost investment this year under conditions that guarantee a reasonable loss rate; the supply chain part, similar to the wholesale model, supplies the community group buying business within the Ali system as an important supplier, and we think it is expected that the supply chain advantages that the company has accumulated over the years will be fully exploited. Furthermore, the company's online business is developing well. We expect the current online business to account for about 25-26%, of which B2C accounts for about 16-17%, and the latest store has an average daily order volume of about 1,300 orders. We estimate that the B2C business remains profitable even as competition intensifies. The company continues to promote hypermarket restructuring, which is expected to increase the number of visitors and improve warehouse efficiency. As of 1021, the company has completed 38 hypermarket renovations and plans to renovate 40-50 stores each year.
3. Cooperation with Ali is expected to be further deepened, and I am optimistic about the medium- to long-term development prospects of the company's new retail business. Ali supports the company's door-to-door business from various aspects such as the traffic side and logistics service side. At the same time, the company has successfully cooperated with Ali in various areas such as shared inventory and community group buying business with Maochao through its excellent supply chain capabilities. We believe that online and offline cooperation between the two sides is expected to further deepen in the future, and we are optimistic about the increasing market share and future development prospects of the company's new retail business with Ali's support in the medium to long term.
Valuation and advice
Based on fierce competition in the new business format and the company's new business investment, the profit forecast for the 2022/2023 fiscal year was lowered by 6%/5%. The current stock price corresponds to 31/25 times P/E in 2022/2023, maintaining the outperforming industry rating. Based on profit forecast adjustments, the target price was lowered 9% to HK$7.8, corresponding to 41/33 times P/E in 2022/2023. There is room for 33% increase from the current stock price.
risks
Competition in the industry intensified; growth in online delivery fell short of expectations; investment in new businesses exceeded expectations.