Zhongmin Baihui Retail Group - Tayrona Financial 2019-12-09: Swings Back To Growth Mode


Zhongmin Baihui Retail Group - Swings Back To Growth Mode

  • 9M19 financials indicate better times for Zhongmin Baihui Retail Group.
  • For 9M19 ended September 2019, Zhongmin Baihui Retail Group reported revenue growth of 7.9% year-on-year (“y-o-y”) to RMB786.65m. Excluding RMB4.2m of one-off items (RMB6m of write-back of lease liabilities and write-back of impairment x 70%), net profit still grew by 12.8% y-o-y.
  • The growth delivered in 2019 is encouraging as revenue and net profit both contracted in 2018.

Company Background

  • Zhongmin Baihui Retail Group (SGX:5SR) was started in 1997 and is principally engaged in the ownership, operation and management of department stores and supermarkets in Xiamen, Quanzhou and Zhangzhou cities of Fujian, PRC. The Group also has a 24.225% interest in the management of a mall known as “SASSEUR Changsha (Zhongmin Baihui) Outlets” in Changsha, Hunan.

New outlet mall business will be significant growth driver.

  • The mall opened only in late December 2018 and Zhongmin Baihui Retail Group has recognized RMB4.0m of share of profit of associates in 9M19. The Company plans to manage another four malls with its partners, including malls in Wuxi, Shanghai, Sichuan and Shandong, based on agreements entered into to-date.
  • All in, the five malls can generate as much as RMB25m of net profit per year for Zhongmin Baihui Retail Group based on the performance of the Changsha JV in 2019.

Market Overview

Targeting Tier 2 and Tier 3 districts in Quanzhou.

  • Quanzhou city had a population of 7.55m people with a gross domestic product per capita of RMB112,000 at the end of 2018. Its economy grew by 8.9% in 2018 and slowed to 8% in 9M19. Zhongmin Baihui Retail Group has a total of 12 stores in Quanzhou, of which 2 are managed stores. The Company collects (relatively fixed) management fees recorded as other income from managed stores. These managed stores are inherited from prior the listing of the Company. All subsequent stores are self-owned.
  • Zhongmin Baihui Retail Group’s stores are mainly located in higher income districts whereby the GDP per capita is more than RMB100,000. However, store openings since November 2016 were in the Yongchun, Nan’an and Anxi districts where the GDP per capita ranged from RMB47,000 to RM70,000. Hence, we can infer that the Company is targeting less competitive markets, having established its presence in city centre districts such as Licheng and Fengze.
  • Drilling deeper, there is scope for the Company to open more new stores in Quanzhou, such as in locations like Shishi, Luojiang and Dehua, especially smaller supermarket stores.

Focusing on core urban areas in other cities.

  • In Zhangzhou and Xiamen, Zhongmin Baihui Retail Group has focused on opening stores in the city centre areas where income levels are relatively higher and urbanisation is higher. To manage risk, new stores are supermarkets that are smaller in size (and costs), although a larger store of 15,100 sqm is being planned for in Zhangzhou.

Revenue sharing reduces risk of new stores.

  • The slew of new store openings in 2019 come about after direct sales started to improve in 2H18. Secondly, we understand that Zhongmin Baihui Retail Group’s store openings have been partly opportunistic in nature. Rather than paying premium rent for mature locations, the Company would reduce its risk by negotiating with landlords for variable rent that is locked in through long leases. Hence, the Company retains the flexibility of closing underperforming stores after a few years of investment.
  • Zhongmin Baihui Retail Group would run the supermarket section (“Direct Sales) while renting out space to brands that sell apparel, cosmetics and other consumer products. In turn, Zhongmin Baihui Retail Group collects commission and managed rental income from these tenants.
  • Zhongmin Baihui Retail Group does not formally differentiate between supermarkets and department stores. However, we generally regard smaller stores with no or small concessionaire sections as supermarkets for the purpose of forecasting various revenue streams.

Results Review and Forecasts

Direct sales have been growing steadily.

  • Zhongmin Baihui Retail Group’s revenue from direct sales has grown by 30% (9.1% CAGR) to RMB775.0m in FY18. Growth slowed to 0.3% in FY18 but rebounded to 10.3% in 9M19. Conversely, gross proceeds from concessionaire sales grew by only 9.4% (3.0% CAGR) from FY15 to FY18. It declined by 3.3% in FY18 and by 10.9% y-o-y in 1Q19 before rebounding in 2Q19.
  • We reckon that these trends are reflective of the Chinese market in recent years whereby demand for consumer staples continue to grow with rising income while discretionary spending has been curtained due to slowing growth and reduced consumer confidence.
  • Direct sales started to grow again in 3Q18 while gross proceeds from concessionaire sales only resumed growth in 2Q19. The bottoming out of demand also coincides with the Chinese government’s efforts to stimulate its economy in 2019. Hence, we expect direct sales to grow by 27% in 4Q19, driven by contribution from the new stores opened in 3Q19.
  • However, we expect concessionaire sales to grow by just 5.5% in 4Q19 with slower growth in retail floor area for concessionaires.

Mall Management as a New Growth Driver

Plan was first conceived in 2017.

  • Zhongmin Baihui Retail Group first announced on 25 April 2017 that it would be forming a 51%/49% JV (“JV1”) with Changsha Mingfa City Construction Development Co., Ltd. to source and manage tenants, suppliers, operate and manage the shopping mall within a development in Changsha, Hunan. The entire development comprises of 360,000 sqm, of which the shopping has 200,000 sqm gross floor area spanning five levels. This shopping mall is now known as Changsha Sasseur (ZMBH) Outlets.
  • Subsequently, Zhongmin Baihui Retail Group announced on 14 December 2017 that it would be forming a 47.5%/52.5% joint venture with Chongqing Sasseur Outlets Commercial Management Co., Ltd. This JV will in turn take over Zhongmin Baihui Retail Group’s 51% in JV1. Hence, Zhongmin Baihui Retail Group ended up with a 24.225% stake in the underlying business.
  • The mall was opened on 22 December 2018, with an occupancy rate of 94% as at mid-2019. The mall features over 500 international and domestic brands, a high-end luxury section, restaurants, cafes, a cinema etc. Within the first 36 hours of opening, the mall recorded sales of RMB38m.

Pipeline of four/five new outlet malls from now to 2022.

  • In June 2018, Zhongmin Baihui Retail Group extended its partnership with Mingfa Group by setting four more joint ventures.
    • The Shanghai JV shall manage a 90,000 sqm shopping centre expected to commence operations by end 2019.
    • The Wuxi JV will manage a 300,000 sqm shopping centre to commence operations by end 2020.
    • The Sichuan JV will manage two shopping centres of gross floor area of 40,000 and 45,000 sqm, to commence operations in 2021 and 2022 respectively.
    • Finally, there is the Shandong JV which will manage a 50,000 sqm shopping centre to be ready by 2021.


  • To value Zhongmin Baihui Retail Group, we apply the free cash flow to equity method. Based on a cost of equity of 11.5% and terminal growth rate of 2%, we value Zhongmin Baihui Retail Group at RMB968.3m or S$193.65m. On a per share basis, our valuation works out to S$1.01 per share.
  • We chose a cost of equity of 11.5% as the resultant valuation will be equivalent to 12.4x FY24F and 12.5x FY23F earnings. Zhongmin Baihui Retail Group currently trades at 12.5x trailing 12-month P/E.
  • Even at a lower multiple of 12.5x FY20F, Zhongmin Baihui Retail Group will still be worth S$182.5m or 44% upside from its current share price.
  • In our valuation model, we do NOT add back depreciation of right of use assets to free cash flows. Hence, we also not deduct or add changes in lease liabilities to free cash flows. Ultimately, free cash flows should still incorporate outflows from the payment of leases. Our forecasts have been updated to incorporate these accounting adjustments.

Recommendation and Key Risks

Liu Jinshu Tayrona Financial Research | http://www.tayronafinancial.com/ 2019-12-09