Zhongmin Baihui Retail Group - Phillip Securities 2016-11-23: The wait is over

Zhongmin Baihui Retail Group - Phillip Securities 2016-11-23: The wait is over ZHONGMIN BAIHUI RETAIL GRP LTD 5SR.SI

Zhongmin Baihui Retail Group - The wait is over

  • We are ceasing coverage on Zhongmin Baihui Retail Group (“ZBR”) due to our investment thesis did not materialise and internal resource reallocation. 
  • Our rating and forecasts on ZBR can no longer be relied upon.

Update on recent developments 

1. Clearer corporate governance by cutting off recurring interested party transactions 

  • On 27 Sep 2016, the Group proposed to acquire the currently leased retail premises located at Hui’an County, Quanxiu Street, Quanzhou City, Fujian Province, the People’s Republic of China (a.k.a. Quanzhou Hui’an Chengnan Store). The premises consist of five levels, including a basement, with an aggregate gross floor area (“GFA”) of c.25,466 sqm. The aggregate consideration for the proposed acquisition is RMB 122,236,128 (or RMB 4,800/sqm), c.11% discount to its market value derived by an independent valuer. The purchase will be funded internally and paid in three instalments over 1.25 years until Mar 2018.
  • The premises are owned by Hui’an Hongyi Property Development Co., Ltd. (“Hui’an Hongyi”), which is deemed as an associate of Mr Chen Kaitong (CEO and Executive Director of ZBR) and Mr Su Caiye (Non-Executive Director of ZBR). Hui’an Hongyi leases the premises to ZBR for its operation of a department store since 2013. ZBR’s recurring interested party transactions with Hui’an Hongyi will be terminated post-acquisition.

2. Two new self-owned stores opened; Closed a managed store; Total store count of 14 (11 self-owned stores and 3 managed stores) with GFA over 180,000 sqm (c. -8% yoy) 

  1. Opened Quanzhou Quangang Zhongxing Store on 30 Sep 2016 The store has six levels with a GFA of 16,884 sqm. Supermarket occupies the basement floor, the top floor features food and beverage (“F&B”) outlets and the rest of the store forms the department store. It is about 800 metres from the old Quangang Store. The old Quangang Store, a managed store, has ceased operations a day earlier to make way for the new Quangang Store, which is a self-owned store.
  2. Opened Quanzhou Anxi (Anxi Station) Store on 18 Nov 2016 The store has three levels with a GFA of 3,700 sqm. It features supermarket products, F&B outlets and department store products.

3. First-owned store in Zhangzhou slated to open in 2019 

  • The Group has recently signed a 15-year lease for a four-level store with a GFA of 15,152 sqm in the Zhangzhou prefecture in Fujian. It has a managed store in another part of this prefecture since 2003.

Ceasing of coverage 

  • We are ceasing coverage on ZBR due to our investment thesis did not materialise and internal resource reallocation.
  • Previously, we thought ZBR would be a potential turnaround story after the restructuring of its loss-making Nanjing Nanzhan Store.
  • However, China’s lack of centralised city planning and bureaucracy lead to poor customer footfall, high vacancies and slow progress in development works.
  • Nanjing Nanzhan Store recorded RMB6.9mn losses in 1H 2016. ZBR had to close this underperforming store to cut losses due to the slow development of its surrounding area. Closing Nanjing Nanzhan Store also means losing its online channel as it is the only store which hosts its pilot project of e-commerce.
  • Meanwhile, new store openings have/had been delayed: 
    1. Quanzhou Quangang Zhongxing was expected to open in 1Q16 but opened in 3Q16; 
    2. The two small-format stores, namely Quanzhou Wanxiang and Quanzhou Anxi (Anxi Station) were targeted to open in 1Q16 but opened in 3Q16 and 4Q16 respectively; 
    3. Quanzhou Anxi Xincheng Store (initially expected to open by 2016) has yet to open; and 
    4. Yet to receive any update on Zhangzhou Longwen and Xiamen Haicang stores.
  • Increasing competition in China and economic slowdown dampened consumer sentiment as we see retail sales growth decelerating.
  • Compounded by the intensified macro headwinds in China, ZBR logged a marginal 0.4% year-on-year (“yoy”) revenue growth in 9M16. Excluding the one-off non-cash gain from Nanjing Nanzhan Store closure, 9M16 net profit was down 12% yoy.
  • Notwithstanding that, renminbi (RMB) has weakened c.5.5% against Singapore Dollar year-to-date.
  • Nonetheless, we wish Management success in its expansion strategy to reach its targeted GFA of 300,000 sqm and riding through the tough market environment.

Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2016-11-23
Phillip Securities SGX Stock Analyst Report CEASE Maintain NEUTRAL 99998 Same 1.440