Sun Art Retail Group Limited (6808) Earnings Call Transcript & Summary

Good morning. I'm [ Yan ], and I am the host for today's teleconference. Well, welcome to the Sun Art Retail Group Limited 2020 12-month interim results announcements. The PPT had already been uploaded on to the company's website for your reference. First of all, I would like to introduce the management from the company joining the call today. They are the Chairman and CEO, Mr. Peter.

Hello, there, everyone.

Executive Director and CEO, RT-Mart China, Kevin Lin.

Greetings, everyone.

Vice Chairman, RT-Mart China, Nelson Hsu.

Greetings, everyone.

And the CFO and -- CFO of RT-Mart China, Ms. Desory Wan.

Greetings, everyone.

And We have also Ms. Gu Xiaobei, the Investor Relations Director.

Good morning, everyone.

First of all, Mr. Peter Huang, the Chairman and CEO of Sun Art will speak to us.

Good morning, ladies and gentlemen. Good morning, friends. 2020 is destined to be remembered as a staggering year due to the outbreak of COVID-19 that resulted in a surge in cases in the cities and around the world. Fortunately, a number of countries have developed vaccines that are being launched in succession. So a majority of the economists are, therefore, optimistic about the global economic growth in 2021. And and we certainly hope that the effects of the pandemic will ease this year and, in particular, for consumer goods, going back to double digits this year. We certainly hope that the global economy will return to an upward trajectory in 2021. Despite the negative impact of the epidemic in 2020, China's GDP maintained positive growth and exports reached new highs. For our companies are not -- we are thankful that because of the good efforts of our colleagues, in 2020, both our revenue and our profit rose modestly. Over the course of 2020, the pandemic accelerated the evolution of consumers' online shopping mindset and also habit which, in turn, intensified competition between online companies, especially those engaged in community group buying. Fortunately, we were already well prepared for this digital transformation having gradually increased our online exposure, which helped to reduce the impact of lower off-line traffic. Consequently, our B2C orders grew by 60% and sales rose by 80% in 2020. Also, our like-for-like maintained positive growth. With Alibaba Group becoming the controlling shareholder of Sun Art, we will certainly be given new vitality and fresh impetus. In 2021, the company's development strategy will change from passive and cautious to proactive and dynamic. The collective growth of hypermarkets, superstores and mini stores, online and offline integration, B2C, B2B and B2B2C community group buying, multi-format and omnichannel strategic development, all these represent strategies that will be adopted in the new future. 2021 will, therefore, mark the official launch of our multi-format omni-channel development. Our multiple formats will benefit from the group's existing supply chain as well as products specifically created for each format. At the same time, the development of warehouses and logistics capabilities will be accelerated and will involve fresh food processing factories as well as initiatives for transformation moving from warehouse base to one warehouse for one city. Digitalization and development of omni-channels have already enhanced our competitiveness and flexibility. Investments in our new businesses will affect our profitability in the short term, but this is anticipated and limited and was well. We believe that today's investments will result in better and faster growth in the future. We also expect revenue will return to a high-speed upward trajectory within 2 years. Thank you, everyone.

Thank you, Mr. Huang. Next, we will have Mr. Nelson Hsu, to talk about the operating environment for us.

Greetings, everyone. First of all, I would want to talk about the operating environment. First of all, let us look at the 2020 China GDP and sales situation. And if you look at the PPT, it is 2.3% in terms of GDP growth. This is very rare among the world in terms of countries having positive GDP growth, and our total retail sales growth had a negative 3.9%. And from February to November, it has gradually increased, back to, for the entire year, negative 3.9%. And here, in the next slide, let us look at the CPI for 2020. It was up by 2.5% year-on-year, of which food CPI was up 10.6%. Non-food CPI was up 0.4%. And for what is relevant to the supermarkets would be meat CPI, which was up 38.4%. Pork CPI was up 49.7% at its highest. Beef CPI, up 14.4%. Lamb CPI, up 8.5%. And fresh fruit, negative 11.4%. Eggs negative 9.4%. And non-food CPI, up 0.4%. Let's now look at the next PPT, the CCI. It is an upward trend in the second half of 2020. And for the first half, it was a negative trend. At the end of the year, it had already come back up to what it was before the epidemic. And next, PPT, let us look at the online physical product sales. The -- as the total of retail sales in 2020, it is up by 14.8% because the base is large, therefore, the annual growth has been downward trending. And the overall physical product sales was 24.8%. So we can see that online physical product sales is a new trend. It is 20.7% to close to 25% in 2020, as shown in the PPT. Let us now look at the next PPT, which is about our expansion status. In the year, the group has opened 4 hypermarkets, 3 superstores, and 24 mini stores and 3 closures. And before CNY of this year, we will open 6 further hypermarkets and a few more mini stores. So we have attained our target of store opening. As of the end of 2020, the group had 484 hypermarkets, 6 superstores, and 24 mini stores. So overall, we are already in 232 cities across 29 provinces, autonomous regions, and municipalities. And we have secured 26 sites to open hypermarkets, of which 23 were under construction. Of all the 514 stores that we have, the total GFA in square meters is 13.078 million. For GFA breakdown, our self-owned is 29.6%, close to 30% and leased is 70.4%. As store number breakdown, self-owned is 22.7% and leased is 77.3%. And this does not include the small stores or our mini stores. Next, we'll have the business review by Mr. Huang.

Would you please turn to Page 9 of the PPT, ladies and gentlemen, I would like to talk about the business review, Page 9. The B2C business is promoted by the epidemic. And online order and performance grows rapidly. Registered B2C users was over 69 million, among which the active users exceeded 16.5 million. Since May, the group's online daily order per store, DOPS, exceeded 1,000 and average DOPS in first Tier cities was more than 2,000. We set a new DOPS record, exceeding 2,900 for the first time on double 11 day in 2020. For the B2C ticket size in the second half, despite significant decrease compared with that in the first half, it still increased by 5.7% over the same period last year, reaching net amount after tax of RMB 66 per order. Average DOPS in the year increased by more than 60%, and sales of B2C business increased by more than 80% over the same period last year. Next page, Page 10. Development of new business format. First of all, let us look at superstores. The group opened 3 superstores and have 3 superstores renovated in the year. As of the 31st of December, in the year, the group had 6 superstores. For the superstores with an operating area of approximately 3,000 to 5,000 square meters is named as RT-Super. RT-Super provides around 15,000 SKU. According to the differentiation of catchment areas and customer positioning, each RT-Super can feature different offerings suitable for customers. The Jiuzhou Store, the first renovated superstore, is already profitable. So the business model of RT-Super is practically mature. In 2021, RT-Super will enhance the scale expansion by focusing on second and third tier cities and build fresh superstores, which are closer to young consumers through the construction of core categories such as fresh foods. Next page, Page 11, the mini store model. The concept of mini store is to create close-to-home RT-Mart, aiming to satisfy customers' demand for daily meals, and fresh food and dairy products accounted for more than 70% of the revenue. The operating area of each mini store was about 200 to 500 square meters. And the processing centers of fresh products can be built for many stores in each city. Mini store also shares FMCG product pool with hypermarkets and designs, different display models and offerings to build good foundation for accelerating expansion in the future. As of the end of the year, the group opened 24 RT mini stores, of which 20 were located in Nantong City, Jiangsu Province and four in Taizhou City, Jiangsu Province. And the expansion of mini stores is expected to speed up in 2021. Page 12, it is about the community group buying, which is a business strategy of community group buying to synchronize with our Feiniu group buying and Cainiao group buying. Community group buying strengthened its business synergy with Feiniu pickup station with more than 100 stores located in over 36 cities. The number of active stations reached nearly 8,000. And stations for Feiniu group buying were also launched in 125 cities with more than 220 stores starting the community group buying business. The group actively calls on employees to become community group buying initiators. They are the group's unique buying initiator resource and features with high stickiness in their nature. Community group buying not only leverages hypermarkets, supply chains and stores advantages for its products, but also has dedicated procurement teams and ability to organize products. Page 13. Pilot warehouse-based store model, giving support to omnichannel through one warehouse for one city. In the pilot stores, the nonfood operating area was reduced but the warehouse area was increased significantly, aiming to create a warehouse-based model. And after renovation, the warehouse-based door will not only meet the needs of the store itself, but also support half day delivery, community group buying, and B2B business of the city. This renovation means each city will have its own city warehouse. Product efficiency is significantly enhanced, and logistics costs are greatly reduced thus meeting the shopping needs of different customers at different time and anywhere, any time. Next, we will have the financial review by Ms. Wan.

Greetings everyone. In 2021 for all retail industry, it had been challenging. In the first half of the year, and also in the past period of time in renovating our stores and in developing our new mode of business, we have been very successful. And also, it had increased our omnichannel capabilities. And with the fierce competition and the unpredictability of the operating environment, in 2020, we have been satisfactory in terms of our performance because of the hard work of all our colleagues. If we look at the financial highlights on Page 15, the revenue had been a 0.1% positive change, RMB 95,486 million, total. Same-store sales growth was 1%, and gross profit was negative 5.4%, RMB 24,343 million. And gross profit margin had been 1.5% drop. And also, the first half, it had been 5.4% in gross profit. And in the third quarter, there had been various influence, including the DOPS, et cetera. And in the fourth quarter, we see that there had been a rewarming and returning of our sales compared to the previous quarters. And in October and November, we were already back to before the epidemic situation. And also, the CPI had also dropped significantly. And also the DOPS had also picked up. And online sales had significantly offset the impact of lack of traffic offline. And the orders increased by 80%. And overall, there had been an increase of 20% in this last quarter. And this is the main reason why we have been able to have an increase in revenue overall for the year. And for the gross profit, the drop is because of the cost of the commodities that had been because of the change in the channel mix and also of our product mix. And also rentals had decreased by 5.4%. And as of January of this year, the vacancy had been 1.6%. And we are perhaps the best within the industry. And the gross profit had been a drop of 5.4%. And in the period, we have continued to cut our costs. And in -- and also, there had been a RMB 700 million drop in terms of costs, partly because of the social welfare subsidies. And for the double brands integration, it had been an optimization. And from January to November, it had dropped to 26%. And also for the net profit margin, had been 3.2%. And therefore, profit attributable to equity shareholders had been an up of 1.3% to RMB 2,872 million. Earnings per share, RMB 0.3 per share. For financial highlights, Page 16. The revenue also shows that our rentals income had been RMB 3,502 million. In the past years, it had been growing in terms of rentals. And also the sales of goods had also been increasing. Even though 2020, there was this onetime impact, but overall speaking, we see that the vacancies have been gradually lowering. And the 5 years in terms of gross profit and gross profit margin had been rising. But for 2020, there had been a slight decrease of 1.5%. Rentals had been a 0.6%, and sales of goods had been 0.9%. And now let's look at Page 17, the financial highlights for operating profit for 2020, even though there had been impact of COVID. But overall speaking, we have been able to offset the offline traffic decrease from online customers. And we have had new channel and new format investments. And also with government subsidy and also with our cost conservation, we have been able to reach EBIT margin of 4.9%, and this is relatively high in the past 5 years. And also, our net profit margin had been 3.2%, which is also high. So next page, for our expenses. Since our [ '02 ] coming online, our total OpEx as a percentage of revenue had been 22.6%. And it is a 0.8% drop for our administrative expenses, amounting to RMB 2,480 million for admin expenses and also RMB 19,118 million for our store operation cost. For operating lease charges, it is more or less the same as a percentage of the revenue, standing at 1.3%. And the -- but for the 2 years, for the inventory, it is 20% less than last year because of the different states of the CNY. And next, let us look at the working capital days and again, because of the 2 years difference in the date of the CNY and also with fresh products increase, which has a lower cycle that has impacted our working capital days from 65 to 70 -- from 87 trade payable turnover days to 78 trade payable turnover days. And net financial position and net cash position is at a very good position. It will continue to be our foundation for investment in our multiformat, multichannel model. Next, let us look at Page 20, investment return. In 2020, our CapEx had been RMB 2,044 million. Most of the CapEx had been in the second half of the year, including in the hypermarket, 40; digitalization, 185 and shops and opening of new stores. And the ROE for this year had been 11.2%. And because of the highly unpredictable and challenging external environment, we have been able to increase our same-store sales by over 1 point -- 1 percentage points. And we have been able to reach a very good revenue growth overall. And this is the performance for financials in the past year. And next, we will have Mr. Li Sahai -- Kevin Lin, CEO of RT-Mart China and Executive Director, to talk about our business strategy for us.

Just now, Mr. Hsu had talked about the financials and also Ms. Wan, had talked about the -- Mr. Hsu had talked about the operating review, and Ms. Wan had talked about the financial review. Now let us look at the business strategy, how we will be accelerated in terms of our growth by our developments. Overall speaking, for our strategy, it will change from its conservative and defensive and passive to a dynamic and proactive mode. And, in particular, with the change in terms of the consumers' habits and behavior change, we'll accelerate the expansion of our online business and also expand our RT-Super nationwide and also to build our customer base. First of all, let me talk about the multiformat and omnichannel development. In the past year, in terms of our superstore, mini store and also our community group buy, we have been putting in a lot of efforts and exploration. And today, I would say that we have reached our goal for development for this period. And on the basis of our existing hypermarket's supply chain, we will further develop our RT-Super. As for our RT mini stores, in January, we have already been able to set up the Nantong store. And also, we have had 4 such stores, which have been in Nantong and around the Nantong area already established. And next year, in the second tier, third year, city customers, we will be developing regionally for our stores. And also for community group buy, last year, it had been a hot channel for the industry. For Sun Art, we have the Cainiao [indiscernible] pickup stations and also our e Lu Fa, Feiniu B2B platforms. So for our community group buys, we already have the Cainiao pickup channel and also the e Lu Fa stations and also our overall supply chain, leveraging on our hypermarkets, et cetera. So we were able to develop ourselves to a new platform. And then next year, for Feiniu and [indiscernible], on these basis, we will continue to develop our community group buy. We redefined hypermarket's positioning. In the future, for our hypermarkets, it will be on more core categories and the scenario for purchase would be different. And we will be positioning ourselves as such. So cold, hot products, live products, heavy products, all these which are very, very difficult to purchase online will be focused for the hypermarkets. And also, we will be increasing the range of our categories and also raising the quality of our products. And also the experience of shopping in the store would also be enhanced. There'll be scenarios, which will be attractive to the customers. And also with these scenario of shopping changes and the range of product changes, we will also enhance our galleries. For the galleries because of offline traffic decrease, it has been very difficult. Last year, the rental income has been decreasing in galleries. And the major direction is clear. So in the coming year, for the galleries, in terms of the categories, we'll enhance them. We will develop the galleries to service, entertainment, catering, and these are services and products, which will have to be physically present for the customers to come to the galleries physically to the hypermarkets. In the past, they had been -- customers have been coming to hypermarkets to buy things. And then, by the way, this is the galleries. It will be reversed in the future. And also, we have a very good B2C business on the other markets. And then we will be for C2 -- B2C business, we will be changing and optimizing our stores to warehouse stores for all the cities. So for the stores, we'll be increasing the warehouse portion of the stores so as to develop this part of our business, including B2B. And also, we'll be enhancing our core categories. And for our multichannel operation model, we will be increasing our competitiveness in the different channels by positioning our categories of products accurately.

Next, we will have our Q&A session. Would you please ask your questions. Thank you very much. Would you please ask the questions now.

This is Bank of America, Luo Chen. I'm Bank of America, Luo Chen. I have a few questions for you. First of all, about the management. First of all, I would want to congratulate the new senior managers, including Mr. Lin joining, and we are concerned about Mr. Huang, the Chairman and CEO, and there is rumor that Mr. Huang is going to retire at some time soon. And so far, in the market, over the many years, we have equated Mr. Huang with Sun Art. Can you talk about the changes in personnel going forward, how we will be able to attain stability in the operation of the company, please, Mr. Huang.

To answer your question, concerning retirement, there is no decision yet. It is uncertain. The Board of Directors will have to approve any retirement for me. So far, there had not been any discussion at the Board. Well, for the CEO of RT-Mart China, it is Kevin Lin. I'm sure he will be putting in a lot of good efforts in the future. And also the senior management of RT-Mart China, they all have good succession plan. So it will not be because of one retirement, that there will be major changes. We have already planned for succession very well. So please be assured. And also, Kevin Lin, just now, had already talked about the future development plans. So you can be assured, it will not be because of personal change that there would be any impact on the company. Rather, it would be better even. So that is my way of answer to your question.

Next question, a question for Mr. Lin. Ali is now the controlling shareholder of the company, and congratulations for coming on board. For the omnichannel, multiformats, this would be the strategic change after becoming controlling shareholder of Ali. And market is concerned that this is now -- Ali is now the controlling shareholder when it was not so in the past. In the future, what is the cooperation in terms of the depth of cooperation between Ali and Sun Art? And what is the support to Sun Art in terms of resources? How would it be different from before, before being a controlling shareholder?

To answer your question, I think on becoming controlling shareholder, it would not change the development strategy of Sun Art. In the annual meeting, I have also told our staff the same. For RT-Mart, the mission and the vision will not change. And RT-Mart, we will have to go back to our fundamentals, and that is providing affordable, convenient, and also good experience of shopping for our customers. So that is consistent. Mr. Huang, in the past many years, leading the team at RT-Mart and building our core competitiveness, raising the quality of our categories and products that have been very good and commendable, and this has to be sustained. And, at the same time, for the consumers' behavior change and market change and competition change, we also need to be innovating all the time. And in the past 1 year, this is the reason why we are putting so much time and efforts in the superstores, mini stores and also in community group buys, we have been innovating significantly. And now I think we have reached a sustainable growth model. So next year, it will be to increase innovation in these areas. So this will be the first year of innovation. And next year will be the development year for innovation. In the past few years, we have already been working deeply with Ali on B2C. And also for Tao Xian Da, we have also been working with them and also in logistics, working with Feiniu, deep cooperation in all these areas. And going forward, we will continue to be integrating well with Sun Art in a number of areas, including community group buy, and we will be leveraging on the Cainia facilities and channel, which is already very established, we will leverage on that capability of Cainia to provide a strong, strong alliance. And also, Ali has digital and technology advantage. And we will be working with Sun Art in its retail to bring digitalization and data to Sun Art so that there can be further impetus for the growth of revenue and also efficiency for Sun Art Retail.

Last question. Just now, there had been a message mentioned, and that is, this is the year of investment, 2021. It had also been mentioned that the revenue will go back to high-speed upward trajectory within 2 years. So my question to you is in 2021, for profits -- profitability, what is it? It was 4.9% net profit rate last year. For 2021, how much would it decrease? And with this profitability decreasing, how long would this last fall. Is it by 2022? Or would it be longer that there will be this kind of major investments and lowering of profit margins? And also, can you also share with us for 2021 and 2022, what do you think about sales growth, and also same-store sales growth and also with the new channels, contribution, including community group buys, what are your projections, please?

To answer your question -- I'm Mr. Huang, I'll answer the question first, and then Mr. Lin can complement. Well, in 2022, we will be able to go back to our high-speed upward trajectory for our revenue. And just now, you -- in your question, you mentioned the investments period. Yes, this is investment for building future competitiveness. And also, Mr. Lin had mentioned just now that we will be changing our development strategy from a defensive one to a proactive and more aggressive one, proactive and dynamic. Next year, we will have investments. And the major investments will be in 3 areas. First of all, community group buy, that will be the major areas and also superstores and mini stores. These will be the 3 areas, which will be about RMB 300 million to RMB 500 million in terms of total impact. And also for our sales revenue, we will also be increasing. And also online channel, we will be increasing our investment and also our cost for -- online investments basically, will be increasing. And total would be about RMB 500 million to RMB 600 million in terms of the investment here. Now the -- as for the gross profit's margin and gross profit's decrease, it is because for offline traffic, it has been decreasing. And online, we have been increasing our revenue but, in particular, for fresh foods and also FMCG compared to the other product ranges, they are lower in terms of profit -- gross profit margin. And if there is no change, we think that for the categories, for the channels and also the types of customers, we have to innovate because things are changing in all these 3 areas. So in face of these -- this customer categories and channel change, we have to put in more investments in these innovations, in superstores, mini stores and community group buys. With this innovation, we will be giving impetus to faster growth for the company. For the growth profit margin, we want that to increase, but all the more, we want to be increasing our overall sales revenue so as to bring on better profits. Next year, I think it will be controllable in the sense that the industry, I think, would be, even though we will be in an investing stage, but we will be in positive revenue and profit area. And the year after, it will increase in terms of our higher trajectory or high-speed upward trajectory by the year after. And the returns or profits will be higher than before.

Linda Huang, Macquarie, next.

I have a few questions to ask. First of all, just now, the management had mentioned the catchment areas. I would like to know -- the tenant's mix, may I know about the tenant's mix? And what will be the future tenant mix? And when we will be going back to our 2019 levels? And next is about cash. Last year, we see that it had been RMB 17.5 billion in terms of cash on hand, but there had not been a lot of dividends payout. What is our projection for the future? We will be having higher investments in the period. So what will be the policy going forward?

Let me answer the question, first of all, on rentals. Our galleries will be adjusted. And in particular, we'll be putting in more experiential and service elements into our galleries. In the past, they have been attracted by -- or customers have been attracted to the galleries by the stores. And last year, because of the epidemic, the galleries have been under pressure for rentals decrease. And this year, the target is to return to 2019 levels. And at least, we would be able to go back to over 95%. If we are able to go back to the levels by 100% of 2019, that will be even better for rentals.

Right. The cash on hand is RMB 17.4 billion, and much of it is prepaid card from customers. And it is RMB 5.6 billion in terms of free cash flow. And the regulators or the ministry has very clear controls on prepaid card cash. We cannot use that by the company. So we have looked at this in -- we have singled out the prepaid card portion of cash. As for the RMB 5.6 billion free cash, there will be CapEx for this next year and also the year after. It will be over RMB 3 billion for each year. So that's the first point. And secondly, there are some M&A possibilities in the market, and we'll be looking at them. So this free cash flow for us will be to sustain the future developments of the company. But at listing, we did commit to no less than 30% dividend payout. In the future, the Board will continue to decide the dividend payout.

Now let me just supplement. Our shareholders, our controlling shareholder will be supportive and therefore, in M&A opportunities in the future, it would be a high possibility. And for our galleries, do you need to supplement Mr. Lin?

Yes, let me just supplement on galleries. In the future, the business model will change. As Mr. Huang had pointed out just now, in the past, it was a hypermarkets bringing in the flow. And then there will be conversion at the galleries. But now with the traffic flow uncertain, we believe that there have to be adjustment to this business model. And so we will be changing gradually the categories of the galleries. It will be more balanced in our development between service and catering and entertainment. And so these are areas, which the customers will have to come physically to the store. For example, if it is the -- your pets or dogs, you want to give it a grooming, you have to come to the shop or the children, they will have to come to the shop if you want to go for family entertainment. In the past, the galleries have been mostly in physical products such as gold products, et cetera. So those may be lowering as a mix. And hypermarkets will continue to provide us with competitive products and brands. And our development for our stores will be able to make up for the loss of rental income of the galleries. And we have a few areas. First of all, we want to have full rental for all the galleries. We need all the tenants to be there. And when you go around the galleries and the hypermarkets, if there is 20% or 30% of the stores, which are empty, vacant, it is terrible. So we need all the tenants to be there. That's the first point. And second point is that there will be optimization of the categories, as mentioned just now. The third point is that we want to be able to realize our rentals income. We'll have a few methods. First of all, we are optimizing the layout of the stores so that more floorage can be rented out. And also from our galleries, we will also be supporting the operation of our renters. So they're more integrated with the hypermarket overall strategy so that the renters themselves will also be more successful when they are in our gallery. So that they will stay as our partners, these tenants. We will raise their profitability. And also, the galleries will continue to be optimized in the future and they'll be positively affected by the hypermarket.

I just want to ask a further question. Just now, Peter had talked about the CapEx and this will be 300 billion -- RMB 300 million to RMB 500 million. What is this number? Does it also include the promotion activity? How am I supposed to understand this RMB 300 million to RMB 500 million mentioned by Peter just now? Can you please discuss a little bit further?

Let me supplement then. RMB 500 million to RMB 600 million is total. And new business is RMB 300 million or so. And marketing would be RMB 100 million or so. So together, it is about RMB 500 million or maybe RMB 600 million. And this year, we will continue to be putting in more marketing cost. And also, we have a new plan, and that is we want to raise our off-line numbers to come online. So this will also be investments for us. For new business, it is in community group buy. We believe that for community group buy, it will be RMB 300 million in terms of investments. And for the mini store, in building the warehouse and also developing in the opening of new mini stores, there will also be investment costs -- slight investment costs. For superstores, they are more -- they're closer to hypermarkets. So I believe there will be RMB 500 million in terms of investments, including for superstores. So overall speaking, the total would be RMB 500 million to RMB 600 million. So it is RMB 500 million to RMB 600 million as we grow our business.

No, the line is not clear. Your line is not clear. Can you please repeat yourself.

Overall speaking, yes, it will be a total of RMB 500 million to RMB 600 million.

Citigroup, Wei Xiaopo, next question.

Yes. I'm Wei Xiaopo. Well, thank you for your sharing. The 3 of you are all here, the senior management. I have one question for each of you. First question for Peter, Mr. Huang. Just now, Ms. Wan had mentioned about the December situation. December, it had already been going back to the -- before COVID situation. And we know that offline is doing well. So for -- we believe that for this year, there'll be more investments. But for December, the revival, is it because of the market revival or recovery? And what did you see in December? How are you able to be able to recover better than the competitors for offline in December? And then Mr. Lin had shared a lot about the strategy. According to my understanding with Ali and Mr. Lin, your participation, there will be more comprehensive cooperation with Ali. In terms of depth, of cooperation, I can understand. But in terms of breadth of cooperation, what is the situation? I know that you're also in Ling Shou Tong of Ali -- you're also responsible for Ling Shou Tong. So I do not know for community group buy, will there be synergistics with Sun Art because you have also been responsible for relevant areas at Ali as well, Mr. Lin? And last question for Ms. Wan, and that is for assets and also for capital. Mr. Huang and Mr. Lin had talked about the stores that there will be more warehouse part to the stores. And in the IPO situation, at the time, the company had a great advantage, and that is we had a lot of store assets. Now the world perhaps had changed, some of the stores may have to be optimized, and some of them will have to be changed. So for some of the stores, which are not very effective or efficient, but we have the real estate of the stores, will we be increasing our cash flow or rewarding our shareholders by selling the store real estate? In the circular, it doesn't -- we do -- we see -- the shareholders see that the revaluation of the real estate of the store is significant.

Mr. Huang will answer your first question.

First of all, for like-for-like, it is flat for December. And our traffic in the fourth quarter compared to the first 3 quarters is better -- recovered. And I would not say that this is just November and December, but for the fourth quarter, it is already coming back. For like-to-like, it is about 2% difference only. For November, there had been the double 11 event. It is not just one day, but it was from the 1st of November to the 11th of November. That contributed to the November sales. And I see for the fourth quarter -- starting fourth quarter, there had already been recovery in the domestic market. So it is not just the November. But also, in the first and second quarter 2020, there had een great impact. And starting from the third quarter, there had been some trickling back of traffic and the fourth quarter, definitely. And I believe for that this year, the trend will continue. Mr. Lin?

Right. Yes. We are changing the strategy from passive and cautious to proactive and dynamic. In fourth quarter, we have already been doing that internally. The team, in terms of the operation strategy, had also changed in Q4. And in Q4, there had been a number of developments. First of all, online business. In the past 2 years, we had accumulated fulfillment capability and store digitalization capabilities. And in Q4, online, this is great impetus. And also in terms of our products, we want them to be more attractive. So in terms of the categories, the experience, the scenarios, all these, we have plans which are already coming into play. And thirdly, for marketing in Q4, we are also calibrating that. We want to go into the community, not just sitting in the stores to wait for customers, but to go out, all these new assets. And also, I hope that there will be more like-for-like increase, offline as well, so as to the worth a while for investment. Just now you also asked a question about the cooperation with Ali. In terms of depth. Yes, it's definitely there. For breadth of cooperation, just to say that starting from the 1st of December, I am full-time on Sun Art and RT-Mart. So I am no longer the Ali's Ling Shou Tong person responsible. I've already resigned from that particular Ali position. Now in the future, will there be comprehensive cooperation with Ali? We will be looking into that. For next year, I think that there will be an extension of cooperation with Ali in a number of business areas. One is Cainiao, Cainiao [indiscernible]. And next year is a very important year for Cainiao in terms of its strategy. There'll be major developments for customer experience. And for RT-Mart and cooperation with Cainiao, which is [indiscernible]. We believe that this will be a major impetus point for community group buy for Sun Art going forward. And also for community group buy for Feiniu, for mid- to lower-tier cities, we believe that there is also major co-development opportunities. For digitalization of the hypermarkets, we believe that there will also be further opportunities of development, but we need time for these developments. So we will be focused on our B2C business now and also our group buy efforts. These will be our focuses. And in the future, we may be having more in-depth cooperation with Ali.

For your third question, it is a good question, and that is for RT-Mart, our self-owned assets in real estate. This is indeed very valuable. Overall, these self-owned real estate, what is most important is that they will allow our stores to be operating at the best locations in the best cities for the long time. This is the main point. And secondly, a lot of the real estate, it is true that they were purchased in the early days. And there may be great revaluation value. But at present, the -- for the assets or capital for these real estate. This is also a contribution to our low rental why our rentals are so low, it is exactly because we own the real estate. So this is a cost advantage. And for the other members of the industry, they do not have this cost advantage. Now for these real estates, if we -- to change them into, let's say, warehouses, then it is through just limited investment, we will be able to get very good results. And that is why we say for B2B, B2C and also for community group buy, it will be based on logistics and warehouse concepts. And this is definitely an advantage. So we are not talking or discussing about making profits from selling off of real estate. But rather for Sun Art Retail, for this kind of assets, we are not thinking that we will have an income stream from sale of real estate because we have been talking about further growth in the future, as Mr. Lin had mentioned. In our future profit growth and also sustainable growth of our profits going into the future. We are very confident. Even though for the short term, there is investment, but still we do not have to be moving our real estate to do so. So this is my way of answer to your question.

We hope that the transformation in 2021 -- starting from 2021 is smooth.

Dustin Wei, Morgan Stanley, please.

Thank you very much for sharing with us the future strategy of growth. And first of all, a question on community group buy. For 2021, 2022, what is the GMV or revenue profit contribution, what is the projection? And also for the initiators in the different cities, as mentioned by Mr. Lin, and Mr. Huang just now, there will be some new attempts in the future. So from the growth margin point of view, and how would this affect our ticket size and et cetera? Can you talk about it in a more fulsome manner? And also for our mini stores and also our superstores, basically, what are the number of stores target for you in 2021 and 2022, please?

All right. Let me answer the first question. I'm Peter Huang. Now, first of all, for -- Mr. Lin, you go first.

Now for community group buy, for 2019, we have started this effort. And this is -- and about 2 years ago, we have already started the cooperation with Cainiao. So it is not recent. It is not because of the hot trend that we are starting with this cooperation with Cainiao. There are 8,000 Cainiao pickup stations now. And it will not be like the competitors that we will have a full coverage of all cities. No. But rather, we will be following our existing stores. The facility of the -- or radius of the e Lu Fa stores, and we will be logically and methodically growing our community group buy points because the quality is very important for us. So we are not saying that overnight, we would want to build how many pick up points, et cetera. But rather, we are providing our customers with a new channel of service. Through community group buy customers, we provide them with a new service channel. And each customer, the ticket size will be over RMB 60. And this is more or less the same as the average ticket size for us now. So for B2C, this will be the situation. So we would want to be stable and strong in our building up. This is an extension of the hypermarket channel. So we will not be chasing huge numbers of stations and sudden growth in terms of profitability. We will be logical and methodical in our progression this year and next year, and for the capital investment for some of the areas and for some of the competitors will not be affected by their very aggressive moves. But, of course, for the short term, we will have our responses to some of the rather proactive investment. So that is why we will also be stepping up with our investments for community group buy in the next year. It will be increasing by about 3% for community group buy in the coming year.

Let me supplement the answer just now. 3% growth for CG -- community group buy will be about methodical growth. It will not be burning money. It will not be burning cash. So our loss will not be more than 10%. This is our internal target. And also, for Cainiao, we are already in -- working together with some 36 cities stores. And it is over 8,000 pickup stations for Cainiao. And there is a lot more way to go if we leverage with more of the Cainiao pickup stations. And we are already in 100-plus cities and 200-plus stores cooperating with Cainiao. We can easily move into 200 cities. And for mini stores, we will be opening 200 to 300 stores this year. And for superstores, it will be about 50 stores. That is our plan.

For the mini, are you saying per year, 200 to 300 mini stores?

No, for this year. For 2022 to '23, it will be even more. So for this year, it'd be 200 to 300 stores for this year.

Now for community group buy, you talked about the ticket size. Will it be 24% to 25% for B -- in B2C? And also for the initiators, would there be any share that will be given back to them, that is to say, a part, they will be sharing the profit? And also for the cash burn that you mentioned just now, can you talk about some of the details concerning the strategy.

Concerning the gross margin, it will not be as high as B2C for community group buy. It will be lower to -- lower than B2C, but higher than B2B. And the industry is still developing. And the gross margin would be relatively lower significantly to B2C because the market competition is fierce. And initiators will be incentivizing them in bringing more members. And for Cainiao cooperation, it will be profit sharing. And if there's loss, it will be sharing as well. For Feiniu stations, that is our own. Feiniu is in -- within Sun Art.

Now as for the mini stores, for the first year, the loss would be controlled in a few hundred -- a few hundred thousand loss RMB. Would it be that?

Well, for the mini stores, the loss is not bad, but rather the city headquarters. For the next quarter, there will be 3 to 4 city headquarters build. And the warehouse also, building, for each city, the cost would be about RMB 10 million or so. For the loss of the mini stores and new mini stores, it will definitely be small. Total within RMB 100 million. For superstores, as I have mentioned just now, we are profitable. And the model is already quite established. So we are already profit making. The loss for mini stores would be very limited.

So what do you think will be -- when you can break even or be profitable for superstores?

I think within 1 to 2 years profitable. For mini stores, to 2 to 3 years breakeven. So from the model point of view compared to hypermarkets in the past, it is slightly different.

For the financials in the last year, for gross profit margin, just now, Ms. Lin had talked about the decrease is because of the products. How much is it because of fresh foods product being more of the total? Or is it because of channels such as community group buy is relatively more as a part of the whole? Or is it because of discounts? Or what is -- is it, please?

For gross profit margin, I will answer the question. Then Ms. Wan can supplement. The first is because of channel change. Online compared to last year, it is 20-something percent. Part of it is B2B, B2C and community group buy and sharing of inventory. For the EBIT margin online, gross profit margin, that is -- those are the impacts. The channel is the impact. The other is the product. Fresh foods are lower in terms of gross profit margin. So these are the 2 main reasons for lower gross profit margin. Ms. Wan?

Yes. Mr. Huang had already answered the question. But overall speaking, it is more or less the same in terms of the supplier and also the cost. So there is no change in terms of discount rates from suppliers, et cetera.

And a further question for our B2B or the Tmall, the B2B2C, their gross profit margin is lower. But before, it was indicated it is about 24% for our overall gross profit margin. Has that changed?

Well, for this year, it may be slightly by 1% to 2% from before. And this is partly because of our members. We have increased member significantly to 65 million members this year. So we will need to provide some incentive for retaining these members.

Now there's another question, and that is government subsidy, and that was RMB 700 million from social welfare concessions and subsidy for employment is RMB 200 million from the government. So total RMB 900 million contribution to your results in 2020. How much of that will be retained in 2021, please?

Well, the -- it's not announced yet. Last year's subsidy during the COVID period, there was free rental period. There was 1 to 2 months of free rental period, and there was some RMB 500 million to RMB 600 million burden that we shouldered. And the government's concession basically -- from social welfare basically just offset that. So for this year, I think the COVID effect would be quite eliminated.

Lina Yan, HSBC, next question, please.

I have the first question. Mr. Huang talked about the 2021, '22 sales growth, single-digit increase for 2021 and double-digit growth for 2022. What is the fuel for the growth? Community group buy contribution would be 3%. But what about B2C and B2B contribution and new store contribution and what is the contribution for 2021 and '22, please for all these?

I'll answer that question. Community group buy will increase by 3%. And superstore, mini store will grow by 1%. And what also important is that for our orders -- online orders, it had significantly increased. So this is an area of major growth. Like-for-like, we are positive growth. So it will be a high single-digit growth for this year. Next year, for community group buy, I would think that it will be very high-growth for 2022. This is still an initiation year. And also, mini stores are just starting. And in the second half, there will be further growth. And basically, it is just half year for the mini stores. And for 2022, I believe there will be a 5% increase from mini stores. So 2022, it will go back up to double-digit growth overall. So this is our internal projections.

40% growth for 2021. And for community B2C, there is a lowering for B2C. And what about 2022 and for the rest of this year?

For next year, there is -- biggest growth is coming from warehouse or inventory sharing, inventory sharing. And Tmall, there will be a lot of contribution or assistance to that and B2B as well as major growth. As for B2C, there will also be significant growth. So internally, our target is 4% to 5% growth for order increase.

Mr. Lin. I will answer the question about B2B. In the past year, it has fallen short of our targets in terms of growth for B2B. A few questions. First of all, for the first half of the year, a number of businesses and small stores have closed stores because of COVID. In the second half with community group buy keeping up and a lot of -- there have been some small stores and also initiators who are also purchasing online. And therefore, overall, for our B2B last year, it had not reached the expected target. And going forward, we'll continue to invest in B2B. For this traditional B2B channel, we will focus on corporate purchases and also the canteen so that -- and also, we will be leveraging on the logistics and also co-chain of RT-Mart. And also in fresh and fruits, we will also be developing majorly in that. And also for our B2B and community group buy, we may be integrating that. That is to say for Feiniu, their initiator had been from the e Lu Fa business area. And this will continue to grow our categories, mix and also our channels development. So within a team, the group -- the team heads, they become the initiators. So as for the small stores, they would also -- the mini stores, they would also help us in growing the sales as well. Next year, for B2B, business, apart from community group buy, we want to be able to have double digits or high double-digit growth, back to the growth trajectory.

And to answer your question further, let me supplement. There is RMB 100 million to RMB 200 million more of investment that will all cost, it will be put into online development. So this is slightly more aggressive than before.

So what you're saying is that for B2C, there'll be 40% increase in orders for B2C, and this does not include Tmall and also -- no, it includes everything. It includes everything, okay. As for B2B, there will be a high double-digit growth. And that also includes a Tmall part. And you have not included the offline decrease, right, in your projections for the rest of the year, next year.

Well, it's all inclusive. We cannot guess how much is online, how much is offline, the proportions because they're all our customers. So we internally, we have very clear online and offline separation. But for investors, it is all integrated.

Now another question about community group buy. There is a new trend, and that is the pricing are cutthroat and everything is 20%, 30% discount in terms of pricing from the supermarkets and the stores. So my question is for CGB, community group buy, what do you see in the future, this business model when it comes to scale. Do you think at some point, it will come back to a reasonable margin when things settle?

Just now, we have already mentioned that we will not be using the cash burning irrational model to grow our CGB. We want to build stickiness, not just number of customers. Some of the competitors are just using traffic as a major concept. They are burning money to get just quantity. And some of the -- their ticket size is but RMB 10. But our ticket size is average about RMB 50 something, at least. So this is the phenomenon now. And for regular businesses such as us, we have to see this very clearly. And our direction is all the more clear because we believe that our direction and strategy is the right one.

And another question about cooperation with Cainiao. There is loss sharing, you have -- Mr. Huang mentioned. So if it is a 10% loss, which is RMB 300 million for this year for community group buy, how much would Cainiao be shouldering?

The RMB 300 million is not shouldered by Cainiao. This is ours.

Last question concerning the COVID situation last year and also the rentals. There would have been a rentals concession, and the government had given us the concession. The 2 offset each other. It was mentioned just now. But if we look at the balance sheet, the lease liability, end of 2020 compared to 2019, there was a drop of 9%, and amortization had also dropped in our balance sheet. Can we talk about this a bit going into the future, for lease expense and also amortization of assets, how would the drop be? And what would be the reason of this drop?

At present, the lease for our stores is stable. We do not see that there is any increase in lease expense for now. For rentals increase, it is for the new stores. These come from the new stores. And maybe you see from the balance sheet, the lease expense is because there are certain contracts, there may be a certain percentage taken out from the lease expense. And this is amortization cost, which had been transferred to lease expense. But overall, there is no impact.

Well, my question was, overall cost, that is lease and amortization for 2021 compared to 2020, will it continue to be a drop?

It will be flat.

It will be flat. Okay. That was my question.

Now because of time, the last question, [ Goldman Sachs ], Christine Peng, please.

I'm actually from UBS. Thank you for answering the questions management. Just now, you said loss was 10% for CGB. And then Cainiao is also sustaining a loss. So this RMB 60 to RMB 70 ticket size, is it 20% loss or around that? And this is the loss, can I understand the loss this way? And that is for CGP, there are some start up companies, and this loss is because of this reason.

Well, let me answer the question for CGB, we have our own stations and our own groups. We are not saying how much we lose, means how much Cainiao lose. No. But rather, for where we cooperate with Cainiao, we will both share the loss. But we also have our own areas, which are not cooperation with Cainiao for CGB. As for the industry, the loss can be 40% or 80% from what I've gathered. But we have our own competitive advantage, i.e., Cainiao and also, we have close to 500 stores around China. So this is an advantage. We do not have to build a new -- our warehouses. That is a unique competitiveness. And also, we have huge supply chain network. And this is the reason why we're able to control the loss to such low levels despite fierce competition. And it is not true. I have to point out that we -- for all our CGB, we work together, cooperate with Cainiao, no.

So you're saying it is 10% for overall loss?

Yes. Loss from our overall CGB turnover. We have 2 channels. One is [indiscernible] and the other is Feiniu. And these are about 50-50 split between the 2. So with this channel, I wouldn't say it is loss. I would say it is investment. It is 10% in terms of investment. And Feiniu, we will sustain that investment or loss ourselves. As for the cooperation with Cainiao, we will split that loss or -- in fact, I would say it's investment with [indiscernible].

So next year, you will reap the results from your investment this year, and your profitability will increase in the next year. Do you think, therefore, that CGB will be back to more normal next year and there will be more profits next year? Is it because you think CGB overall would be coming back to a more normal level? And what is the logic for thinking so, if that is the case?

Why do we want to invest this 10% today. It is because it is an irrational market. And, of course, we cannot fold our hands and wait to parish and lose out in this market. So -- but, of course, we will not go into cutthroat pricing like some of our competitors. We have to do what we need to do. So we will have some initial investments in supply chain, in co-chain, in some initial stage investments, basically in supply chain. And this is early stage investments in the supply chain. In the future, the costs will come down. And also, we're optimizing our product mix as well because for CGB, in the early stage, there will be some consumables and small tax -- price tax products. But as it develops, there will be a maturation. And also of CBG. And also there will be a comprehensive product category. And therefore, our profitability, I'm sure, will also increase. So this is a community -- a community group buy is a new channel, and we will have to invest in it. And the year after, the investment amount would drop and how much will it drop. It depends on the competition within the market and also the speed of development of the market as well as our own development pace.

Last question about your CapEx. Your -- Ms. Wan said that for the CapEx will be RMB 3 billion per year. But your operating cash flow is such. Why can this CapEx cannot be more aggressive? Because I think you are in a rapid growth and development stage, your company. You just mentioned that in each city, you would want to build a warehouse. And also there'll be co-chain and also supply chain build-out. So in this CapEx thinking, what is your logic for planning that? From your financials, it seems that you can be more aggressive for your CapEx?

I'm Peter Huang, I'll answer the question. For superstore, mini store and also for community group buy, it is different from hypermarkets. Hypermarkets, the CapEx is different because we own our own stores and real estate. And in the future, as I have mentioned, we will also consider M&A opportunity. So we're not especially concerned about other capital.

I'm Desory Wan, let me just complement. If you look at the pace of our opening of stores, it is quite good and it can quicken. And also for each of the stores' investments, we will want to control that. We want to be able to have quality investment.

And I'm Kevin Lin. First of all, we would want to increase the number of stores. But at the same time, we want to build good stores. So on the one hand, we are pressing on the gas so that we can have more lift. And we certainly do not want to bring undue pressure for our future competitiveness in opening new stores. And we would want to build new stores but, at the same time, the capacity is an issue that we have to think about. In acquiring customers, we have a capacity consideration. We will accumulate our experience for this year. And the year after, will be, in terms of pace of opening new stores, will be a few times more than next year, I would think. So the pace will quicken for the year after in opening new stores.

I would like to know for RMB 3 billion, is it CapEx for 2021 or is it 2022? If it's 2022, is going to be double -- is it going to be double in terms of your new store opening?

Yes.

And what about processing and also supply chain? How much is that part of your CapEx, please?

The co-chain processing, we control cost. We do not want it to be over RMB 20 million.

So most of the CapEx is in opening new stores, is that true?

Yes, we modeled the hypermarkets and opening new stores. And also in -- we are invigorating our channels and also making our product ranges or categories more complete. So that will be the main areas of CapEx.

And we want to thank everyone for participating in this meeting. The Sun Art Retail Group 2020 Interim Results Announcement Meeting had ended. We are not able to do face-to-face communication this time. But if you have further questions, you can contact the IR. And I would like to wish everyone good health and good luck. [Statements in English on this transcript were spoken by an interpreter present on the live call.]