Zhongmin Baihui Retail Group - Tayrona Financial 2020-03-18: Resilient Cash Generating Business Offers Safe Haven


Zhongmin Baihui Retail Group - Resilient Cash Generating Business Offers Safe Haven

Stores resuming operations as Fujian declared clear of COVID-19.

  • With the number of new cases in mainland China dropping to about 20 each day and Fujian province declaring itself clear of the virus in early March, we expect Zhongmin Baihui Retail Group (SGX:5SR)’s stores and its associated outlet mall in Changsha to resume normal operating hours soon.
  • We see Zhongmin Baihui Retail Group as a safe haven amidst the COVID-19 pandemic as conditions in China improve and that Zhongmin Baihui Retail Group, being a proxy to domestic consumption, will stand to benefit from the government’s stimulus measures and be shielded from lower foreign demand.
  • Finally, Zhongmin Baihui Retail Group’s cash generating supermarket business has proven its mettle during the COVID-19 outbreak in China and will likely continue to be a growth driver going forward.

Supermarket business probably gained market share.

  • Despite the shorter operating hours, Zhongmin Baihui Retail Group probably enjoyed higher direct sales in 1Q20 as consumers rushed to stock up on necessities earlier during the outbreak. Moreover, small shops were not allowed to operate during the outbreak and only large chains such as Zhongmin Baihui Retail Group were allowed to continue operation.
  • Larger stores have the resources to implement protocols such as temperature checks and routine disinfection. Hence, the Company probably gained new customers switching from m-o-m-and-pop shops to supermarkets.

Department store business is the key wildcard.

  • According to a media report, retail businesses may enjoy pent-up demand post-lockdown as consumers return to restaurants and shopping malls. During the outbreak, the Changsha outlet mall was closed, and the department section of the Group’s stores was closed or minimally manned.
  • Going ahead, we expect footfall to progressively improve at the department stores; albeit concessionaire sales will still be affected in 2020.

Company likely to exercise prudence and emphasize on profitability.

  • The Company opened its 18th store on 1 January 2020 in Quanzhou, Fujian Province. Since 2019, the Company has taken advantage of favourable rental terms to open five new stores with gross floor area of 36,400 square metres in Xiamen (1), Quanzhou (3) and Zhangzhou (1). One of the stores even enjoy no fixed rent.
  • Looking ahead, we expect the Company to continue to open new stores; albeit with a more prudent stance – i.e. optimizing store formats and product mix to match market trends.

Fair value yet to factor in full potential of mall management business.

  • In this update, we revised our FY20F forecasts to factor in the slower environment in 2020. We highlight that Zhongmin Baihui Retail Group’s mall management business is a growth opportunity that elevates the Group to a multi-province business with minimal capex and that the Group is trading at a discount to the peer median average P/E in China.

China mulls additional stimulus measures.

  • Since late January, China has been rolling out measures to mitigate against the economic impact of the COVID-19 outbreak. For instance, banks were told to extend the maturity of loans and the Central Bank has most recently reduced the reserve requirement ratio of eligible lenders in “inclusive finance”, i.e. loans to farmers, students and micro, small and medium enterprises. For qualifying firms, they may even enjoy subsidies on interest payments. Small businesses will also be able to enjoy reduced or postponed social security contributions.
  • Given the recent spate of stimulus measures globally, there is the possibility of China embarking on even more stimulus to buttress domestic demand as the COVID-19 pandemic starts to affect aggregate demand in Europe, United States and other markets that China exports to.

Domestic situation appears to be stabilizing.

  • China reported only 16 newly confirmed COVID-19 cases on Sunday (down from 20 cases on Saturday). On the same day, 838 patients were discharged from hospitals, bringing the total number of recovered cases to 67,749 out of 80,860 cases. 1 Over the last two weeks, several provinces have already declared themselves clear of COVID-19 infections, including Chongqing, Hunan, Fujian, Jiangsu, Jiangxi and Anhui. Media reports also suggest that stores are gradually being reopened in China; albeit with some measures still in place such as temperature checks.

Fujian provincial government has rolled out its own measures.

  • At the provincial level, various governments have implemented their own measures to stimulate the resumption of economic activity. On 6 February 2020, the Fujian government issued a set of 24 measures to support enterprises in resuming production and operation. Among these measures, businesses with difficulty in paying property and land taxes may apply for reduced rates or exemption.
  • The government will also be reducing or exempting tenants from rental for three months and it is encouraging private property owners to follow suit.

Forecasts and Valuation

Direct sales revised higher to reflect gains in supermarket business.

  • See previous report: Zhongmin Baihui Retail Group - Tayrona Financial 2019-12-09: Swings Back To Growth Mode. In this update, we revised FY20F direct sales per square metre from RMB456 to RMB486 (from RMB447 for FY19). The implicit assumption is that 1Q20F sales will grow by 20% while that of the rest of the year will grow by 5%, thus resulting in the assumption of RMB486 per sq. m.
  • For FY21F, we assumed that direct sales per square metre will grow by 5% over that of FY19F. Hence, we have factored in higher supermarket sales in 1Q20F.
  • On a full year basis, we still expect direct sales to grow by 18% in FY20F due to the opening of new stores.
  • Click view full report button below to see attached PDF for details on revenue and other forecasting assumptions.

Concessionaire sales, rental income and other revenue to drop.

  • However, we assumed that FY20F concessionaire sales per square metre will decline by 25% after factoring in 2% inflation. This is to factor in the closure of the department store sections in 1Q20F.
  • For rental income and managed rental revenue, we assumed that they would drop by 15% in FY20F, i.e. two months of zero revenue.

New store openings mitigate lower sales per square metre.

  • These revisions led us to expect FY20F revenue to remain substantially unchanged with sales catching up over the rest of the year. However, the change in revenue mix to incorporate more direct sales led us to project lower gross profit of RMB290.5m compared to RMB327m previously. Consequently, we now expect net profit of RMB45.63m for FY20F, predicting a decline of 34% year-on-year from FY19F.

To rebound strongly in FY21F.

  • Keeping the bulk of our assumptions for FY21F – FY24F unchanged, we continue to expect net profit of approximately RMB74m in FY21F and derived an unchanged free cash flow valuation of S$1.01.
  • We had previously assumed a SGDCNY rate of 5. In this update, we assumed a SGDCNY rate of 4.928, which raised the Singapore Dollar value per share. See latest SGD FX rates.

Assumptions do not factor subsidies from government and potential gains from higher selling prices.

  • Overall, our analysis indicate that the upside provided by the Company’s shares remain intact. We have not made any revision to our cost assumptions. Rightfully, the Company should enjoy cost savings from government measures such as the reduction in social security contribution, as well as lower rental rates.
  • We also argue that Zhongmin Baihui Retail Group probably deserves a lower cost of capital now given the defensive nature of its supermarkets business and its strong balance sheet amidst the COVID-19 pandemic.


Share prices of peers in China have recovered.

  • We filtered a list of 54 China and Hong Kong listed department store and supermarket companies from Bloomberg. Weighting their share prices by their market capitalization as at 13 March, we found that the share prices of these companies have recovered from by 10.7% from the trough on 3 February. Hence, Zhongmin Baihui Retail Group is a laggard compared to these companies.

Currently trading at attractive P/E multiple.

  • Based on the current share price of S$0.590, the Company currently trades at a low multiple of 8.1x FY19F earnings or 12.4x FY20F earnings. Among the 54 comparable companies, we further filtered a list of some 40 companies with available price-to-earnings data and derived a peer median P/E of 16.3x. Hence, Zhongmin Baihui Retail Group is comparatively undervalued.
  • Moreover, our valuation works out to 13.7x/20.9x/12.8x FY19F/FY20F/FY21F earnings. Hence, our valuation has factored in the post outbreak recovery of earnings and does not come across as overly aggressive given the peer median of 16.3x.

Key risks.

  • The key risk against our investment thesis is if the Chinese economy enters a prolonged slump whereby income is impaired, leading to lower consumer spending.
  • Forecasting risk is heightened given the large fluctuation in revenue and earnings during the first quarter of 2020.
  • Our forecasts assume that demand will recover during 2Q20. Should the COVID-19 outbreak last beyond 1Q20, there may be downside risks against our forecasts.

Investment merits.

  • In summary, we like Zhongmin Baihui Retail Group for its
    • Resilient strong cash generating supermarket business. Whilst concessionaire sales may take a hit due to the COVID-19 outbreak, sales are likely to improve as the situation in China stabilizes and crowds gradually return.
    • As at 30 September 2019, the Company had cash of RMB247.2m on its balance sheet. The Company would have been in a net cash position, if not for RMB303.2m of lease liabilities that arose out of the implementation of SFRS(I) 16 Leases, which led to the recognition of right-of-use assets and a corresponding lease liability. The Company has no bank borrowings.
    • Prudent management. Zhongmin Baihui Retail Group has previously resisted opening new stores until 2019 when landlords started to give preferential terms. On hindsight, its controlled pace of expansion reduced the downside risk of the Company during the outbreak. While the Company still plans to open more new stores, we reckon that a prudent stance will be adopted whereby each store’s format and product mix will be optimized to match market conditions.
    • new mall management business provides upside. Whereas Zhongmin Baihui Retail Group had previously focused on the operation of supermarkets and department stores, the mall management business with plans to manage malls in Shanghai, Shandong and Sichuan elevate the group to a nationwide business without having to incur capital expenditures. These mall management deals are predominantly joint ventures with the property owner whereby the Group earns management fees and does not have to pay rental charges.
  • See Zhongmin Baihui Retail Share Price; Zhongmin Baihui Retail Target Price; Zhongmin Baihui Retail Analyst Reports; Zhongmin Baihui Retail Dividend History; Zhongmin Baihui Retail Announcements; Zhongmin Baihui Retail Latest News.
  • On balance, we maintain our Overweight rating on Zhongmin Baihui Retail Group.

Liu Jinshu Tayrona Financial Research | http://www.tayronafinancial.com/ 2020-03-18