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

Investors, analysts, good morning to you. Welcome to the Sun Art Retail Limited 15 months' report of results ending 31st of March 2020. In the past 15 months of the reporting period, there is information on the highlights in the company's website. And together with us today from the company are Mr. Kevin Lin, the CEO and Executive Director.

Greetings. Greetings.

And Ms. Desory Wan, CFO.

Greetings, everyone.

And also the Head of Investor Relations, Ms. Gu Xiaobei. And first of all, we will have Mr. Kevin Lin to speak to us.

Ladies and gentlemen, shareholders, investors, first of all, I would like to thank the Directors' trust and Mr. Huang's trust in giving me this very important position. And it was in May that I started to come and learn at the company. And it was in November, I took up the present Executive Director position. And in the period of time, Mr. Huang, and also the senior management have provided me with a very good overview of the company. I've been to many of the stores, over 100 of them. And I have -- in the past year, I have understood the RT mission, and that is to provide a convenient and fresh and attractive shopping experience for our customers. And also the spirit of pursuit of excellence is also something that I admire and will continue with and also continuous innovation as well. And we will continue to innovate. And as we know, there is more competition in the industry, and there will be reform in the industry. And also because of the RT innovation and also its positioning, we are in a very good and strong position, and we will continue to move into the future confidently. The core assets are still our stores, and RT will become an experience center off-line and will be a reason for our customers to come to RT stores. And also, we will be the first tier of fresh products online provider, providing to our customers, rapid delivery. And at the same time, we are also experimenting with the mini store RT business. And also, we are increasing our catchment area and our coverage in the different living circles. And Alibaba, having become the controlling shareholder, and also with the spirit of independent development, we will deepen the cooperation between Sun Art and Alibaba. Alibaba will be different because of Sun Art. And Sun Art's supply chain would also be different because of Alibaba, leveraging on the latter's capabilities. So Alibaba will be different because of the excellence of Sun Art. And Sun Art because of the logistics and also the online capabilities of Alibaba will be different. We will be true to the values of our retail chain. So we will be investing into the future, in particular, in rapid growth in multi-format and omnichannel. And in the first quarter this year, we have faced the biggest challenge ever, but we are very confident that in this particular position, Sun Art will continue to go back to single-digit growth and, in the next financial year, to reach double-digit growth. We look forward to your continuous support. Thank you.

Thank you, Mr. Lin. Next, we will have Desory Wan to take us through the past year in its operation.

Please go to Page 5 of your PPT, everyone, operating environment. In the upper left chart, you are able to see the growth of GDP and the total retail sales of consumer goods. As of March, you can see the trend of the GDP growth. And you can see that there has been a growth of 18.3% for GDP growth. And for TTL retail sales growth, it had been a 25.8% -- online physical product sales growth has been 25.8%. TTL retail sales growth, 33.9%. So this goes to show that after the COVID situation, there is this new retail pickup. And now let us have a look at the different items. First of all, for consumer confidence index, the CCI, we are able to see from the right-hand side chart, the trend. And the CPI, on the bottom left-hand side chart, we are able to see the 21.9 peak for the period that was achieved in February of the year. And you're able to see the CPI coming back down again. And on the right-hand side, bottom chart, you're able to see the CPI trends of fresh products. In the past 6 months, the fresh products price has driven the lowering of the prices of fresh products. And because of the fluctuation of fresh products, it is very difficult for us to compare the same period because of the fluctuation in pricing. Page 7, expansion status, covering 234 cities and across 29 provinces and autonomous regions, our hypermarkets, which is 27 sites, of which 22 were under construction. And also, as of the end of the period, that is 31st of March 2021, the group has 490 hypermarkets and 6 supermarkets and 32 mini stores. And there are a total of 528 stores in China, mostly in Eastern China region. And in terms of GFA, there is 13,220 square meters as of the end of the financial year. The breakdown is about 30% self-owned and 70% leased. As for the store number breakdown, about 23% is self-owned and 77% leased.

Thank you. Next, we will have Mr. Lin to us about the business review.

In the past 15 months, the group has done the following. First of all, remodeling of hypermarkets, there is initial success. And also, there are some restructuring functions, including the store warehouse remodeling to meet the needs of online and off-line customers from B2B and B2C. Now let us first look at the remodeling of our hypermarket. We continued to increase our fresh products offering. And also our supermarkets, there are 3 new supermarkets and currently, 6 in total. And the model is -- remodeling of the supermarket is basically to provide an off-line B2B logistics center. And also, we have remodeled our B2C business. And with this strategy, all our stores are now fast picking -- have fast picking backyards. And we have 360 stores, which have already completed their automation remodeling, making them a lot more efficient. And the per square meter efficiency and productivity are greatly improved. And we will continue to remodel 40 to 50 hypermarkets per year. And at the same time, we have confirmed that the superstore model is feasible, and multi-formats and community group buying businesses will develop in parallel. The superstore model is basically mature, and the expansion will be accelerated. And we will continue to remodel the superstores. And nationwide, we are already looking for spots and sites to continue to develop these superstores. And for the mini stores, there are 32 new mini stores, and we continue to look for the right model for our mini stores, which is continuingly improving. And we will soon be able to reach a model for mini stores. And what is important to mention is that we also have a center built. This center has been established for fresh products processing. And it has begun to serve the regional and multi-format and the CGB businesses. Now for Feiniu and [ Cainiao ], there is already differentiation between them. And they are very active. And the number of existing pickup stations is more than 50,000 and the average ticket size is also very encouraging at RMB 65 per ticket. And next, let us look at our B2C business on Page 11. During the COVID period last year, it is very fortunate that we have started early with a development of our B2C business. In the reporting period, the B2C revenue and total order volume increased by around 64% and 60% compared to the previous period, respectively. And the ticket size was RMB 70, increased by 2.3% compared to previous period. The ticket size can increase steadily. And in the first quarter of 2021, the daily order per store, DOPS, of 1-hour-delivery business was nearly 1,100, an increase of more than 40% from the same period. And the ratio of on-time delivery, that is within 1 hour, was more than 99%. And average lead time was about 45 minutes. Next, on Page 12, we will be talking about our structure. We will accelerate our talents cultivation in the future and enhance our efficiency supported by our HR organization. What is very important is that there had been smooth transition of senior management and all our core regional positions, including in our different categories, in our different lines of management, there has been a very good transition to the new team. And also, we have established an innovation department for our superstore, mini store, CGB business and B2B business with more innovative exploration of models. And also, we have built up flexible store organizations. As of the end of the reporting period, the average head count per store reduced by approximately 10% over the same period last year. And also, there will be a [ logo ], which is an IP image that we have created for RT-Mart, which will become a new member of the Alibaba IP animal family. So that was the review for you.

Thank you, Mr. Lin. And next, we will have the financial review. Would you please turn to Page 14, the financial highlights. It had been a financially challenging year because of the business and because of the COVID situation, mainly. And in the second half of the reporting period, the consumer confidence came back, but there was fierce competition. And also there had been -- in the omnichannel business, there has been major impacts on competition. And also, there have been major fluctuations in terms of the prices. So it is not a comparable period. So for the 15 months ended 31st of March 2021, the revenue had been RMB 124,334 million, which is a drop of 2%. And gross profit is a drop of 5.7%, and gross profit margin is a drop of 1% at 25%. And the profit attributable to equity shareholders is a drop of 15% to RMB 3,572 million. Earnings per share, RMB 0.37. And for the calendar year, it is basically flat. And the only difference is because of a RMB 200 million one-off item, and that is because of the depreciation of the projects. And with this -- taking off this one-off item, the profit compared to the previous year is down by RMB 200 million approximately. Next, let us look at the financial highlights. The next page, Page 15, the revenue. The revenue is, for the reporting period, RMB 124,334 million. And for gross profit, revenue, for the first quarter, it had dropped by 9% because of the CPI fluctuation. And for the 15 months, the gross profit has been a drop of 5.7%. And the gross profit margin, a 1% drop, it is because of the rapid growth of our off-line business. And the past 15 months, there had been a 9.1% decrease because of the cash flow, partly because during the COVID period, there has been this incentive for the customers. And also at the end of the financial period, we have already come back to 95% of that of 2019 in terms of our gross profit. Now for the operating profit, because of our gross profit drop, it has impacted our operating profit as well. It is 1% drop from the previous period standing at 4.9% of operating profit margin. And also, there is a tax difference, dropping from 28% tax rate to 25.7%. And the net profit and the margin is at RMB 3,771 million, which is 3% net profit margin. For Page 17, the financial highlights for expenses. Because of the cost compression and also because of the assets, there had been -- and the change to the stores, as a result, there has been a change in the expenses. And the next page. For working capital days, there is a 9 days decrease of working capital days compared to the previous period because of the suppliers' change in terms of fresh food supplies. And for the calendar year compared to last year, there has also been a drop for working capital days as shown. And for the net financial position, it stands at RMB 20,116 million, which is RMB 280 million higher than the year before. And the cash on hand is an increase of over RMB 700 million from the year before. Let us turn to the next page, Page 19, investment return. CapEx, the CapEx had been the remodeling of the hypermarkets and also digitalization and also remodeling of some of the stores. So the CapEx stands at RMB 2,918 million, and the ROE is 13.5%. This is a year of a lot of challenges because of COVID, and this is a year of remodeling. And also, we have been enhancing customer experience, and there has been a lot of investment in that. And also there has been remodeling of our stores. The high quality of our assets, our stores, will be a very good position. And the direction and mission of the company will also bring us back to an even healthier and profitable trend. Let us have Mr. Lin talk to us about the business strategy and outlook.

In the opening, I have already mentioned that even though in the past 15 months, there has been a lot of challenges, but we believe that our quality and the experience is tantamount to our business. And we continue to be steadfast in our core competitiveness, in our RT positioning, in particular, in the following 4 points. First of all, we will continue to keep remodeling our hypermarkets to become the customers' off-line experience centers. On the basis of that, we will develop our 2.0 version. And the 2.0 version will focus on areas and categories which cannot be taken up in the online format. And also, we will be increasing more interaction and experience -- or scenario-based experience for the shoppers. Hence, this will be improving our store warehouse and building the warehouse-based stores to form online logistics fulfillment centers. And we want the galleries, merchants in the future to be focusing on customer experience. That is to say, to attract the customers to the sites for and the stores for experience and also for service. So an experience center is the new model for RT. And another point is that we will continue to develop our B2C so that we are able to increase our effectiveness in fulfilling the stores through our fulfillment centers. And then the different cities, there will be store warehouses as well as warehouse-based stores. They are different. So for the cities, there will be warehouses which will feed the city stores. And for Alibaba, there will be sharing of assets, including warehousing or online experience. And the third point is that we will be accelerating the development of multi-format and omnichannel. We have already mobilized all the staff of the company, and everybody is pitched into this. And at the same time, we are working together with the real estate companies so as to find the right sites, the optimal sites, to increase our assets and continue to provide this omnichannel, multi-format. And also, for the mini stores, as we mature its model, we will be moving into the different community circles. And a fourth point is to deepen the cooperation with the Group of Alibaba to form cross-era capabilities. RT-Mart is different because of Alibaba and Alibaba is different because of RT-Mart. With the Alibaba technology support, we will increase our pace of digitalization. And Alibaba -- because of RT-Mart's retail capabilities, we will be able to increase Alibaba Group's capabilities as well in providing the experience for our customers.

Next is the Q&A session. Thank you.

Ladies and gentlemen, this is the Q&A session. Wei Xiaopo of Citibank.

Can you hear me?

Yes.

I have a couple of questions. The first question, on CGB. There have been certain new regulatory opinions that have been made known actually very recently concerning CGB. So I would like to know, with the smooth transition of the management from the old to the new, for Sun Art, how do you see CGB going forward? And also, in March, we see that Alibaba, for the CGBs under its group, has integrated the different CGB branches. So how should we understand this? So is this a new integration? And how would Sun Art's CGB be developing in this overall situation? The third question is that you have talked about the galleries remodeling. We think that this is a reform. So from what we see that the investors have been very focused on this. In the first quarter, for that particular quarter, we have come back to 2019 95% levels. So you said that there will be an upgrade of this model. So how would we be seeing the revenue going forward? Let's say, if we use 2019 revenue as a base, how do you see lease income, rental income for your galleries? So going forward, what is your major emphasis? Is it through sales? Or is it through rental increase for your galleries? What is your focus, please?

Thank you very much for your questions. First of all, we are very focused and concerned about the countries' regulatory opinions concerning the industry. Especially after the Chinese New Year, we felt a lot of pressure. And in our presentation just now, we have also mentioned in the past 15 months, Q1 has been where the most pressure had been. And we have also observed that the orders and also the CPI have also been fluctuating. And also, we feel for regulations, yes, the regulation will bring the market and the industry back into order. But this is, of course, something that we cannot control. We have this expectation. But on the other hand, if we do not see any further regulation, we have to be courageous in facing the future. Yes, competition is fierce, and it's getting fiercer. In our business model, in the past few months, we have been able to confirm our model. And our competitors have also been injecting more funds into the building up of CGB and also their related businesses. The demand, on the other hand, had not been increasing the same pace as supply increase. And therefore, the retail business overall has been in a state of imbalance. So in the short period of time, I think this kind of fierce competition would not change for the retail industry, even though there may be regulations coming out. But still, this competition fierceness will not change. As for RT, because the challenges that we feel are also felt by our peers in the industry -- as of now, the RT is still the best-performing within the industry -- and the challenges that we feel will be felt even more severely by our competitors. And therefore, given this remodeling and transformation, we want to be able to innovate and come up with a new model of success. Now you talked about the MNC. And basically, in the past few months, there had been some changes. And we very much emphasize [ Cainiao ] and Feiniu online. But at the same time, we will continue to develop and innovate our Feiniu. And Feiniu will be differentiated from the -- its same offerings in the industry. We want to make it into something like, as we have mentioned before, the RT-Auchan business model. So it will be a different model. But we will be relinquishing giving up on just scale because model is more important than just scale. And we will participate in Ali Group. The CGB strategy for Ali Group, we will participate in that. And the model for Ali in CGB is still innovating and also remodeled. And RT will become, for Ali CGB, part of or the most important supplier or most important partner in Ali CGB business. As for galleries, your third question, for galleries, our performance, I think, is fine. And it is less than 2% vacancy rate. And our revenue has come back to 95% of 2019 basis. I've been looking around our industry, the galleries for our competitors, vacancy rate is some 30%, 50%. So I would say, our stores having performing very well for galleries business. But on the other hand, we have to change the business model from the traffic base to an attraction of traffic. But on the other hand, for the merchants, we have a 1 to 2 years contract term. So in transforming our galleries, it will take some time. We would want to bring in more services and also experiences that will bring the customers to the galleries, for example, beauty, education, entertainment, catering, and also, for example, necessities, which will bring the customers physically to the galleries, including haircuts. And all these will bring the customers to the off-line experience that cannot be replaced by online, which would also include experiential and also like pets service is included. So this will be the positioning for the future, and we'll have to invest into the future. Galleries, together with our hypermarket, will become a community activity center. So if there is any off-line needs, the customers will first think of us. So this is our objective. So we will continue to retain the 95% revenue based on 2019 basis. But we will optimize our mix and also reduce our vacancy rate so that our vitality in the galleries would even be enhanced even more.

[ Luo Chen of Meiyin ].

First of all, congratulations, Mr. Lin, on becoming the CEO. And with your leadership there would be a lot of expectations on your remodeling and also development of CGB. And Mr. Huang, who is still the Chairman, and he's moved to the second tier now. I would like to know what Mr. Huang's position and role will be in the future? And just now, Mr. Lin had talked about the smooth transition of the teams. Can you talk about the new teams? Will you be recruiting from outside? So that's the first question. The second question, in the past 4 months, from our observation of the market, as of now, do you have any management expectations for our business? And how do you see the future? For the guidelines, if it will be one -- single-digit growth for this year and next year double-digit growth, you have mentioned that. But for new business, as we have mentioned before, there may be certain drags on it. For example, from the first quarter, you see -- what do you see in the first quarter? Can you give us more color on the revenue and profitability? And third question about CGB. Now we have to become a core supply chain supplier for Alibaba's CGB branch. So in the future, what is our supply situation? And how would it supply to CGB? For this business sector, what do you think, let's say, in 2 to 3 years, do you have a scale or a projection on the size of CGB? Can you give us more information about that? For example, would there be -- what is the relationship between Ali, for example, for profitability? What would it be like the next 2 to 3 years? And also, will there be new [ Cainiao ] and Feiniu business development? And just now you mentioned that CGB is not after scale, but after the right positioning. Can you give us more information about that, please?

Thank you very much, Luo Chen. As for Mr. Huang's role, his impact or influence on Sun Art and RT is always there. He is always a spiritual leader and thus will be perpetual, and he is still the Chairman. And we, of course, periodically report to the Board on our business development. And he is an adviser of mine. As crucial decision points, I will, of course, regularly communicate with Mr. Huang and get his advice. So this is beyond question, his position. Mr. Huang will also participate in the Ali business as an adviser. And he is a part of Ali through Sun Art. So he will continue to be concerned with the development of Sun Art. Now for CGB. If RT can -- or for our team, if we can internally train our people, we will bring these people up rather than to recruit from outside. That will be our priority. In purchasing and in a number of areas, we are promoting from within. And also for the transition of the new team, they mainly come from internal to our original team. In RT where we cannot have the core members that are nurtured internally, there will be a small quantity of that which will be recruited outside. But this number will be controlled to a very, very small number. And this is really about core positions, which RT cannot promote from within. So basically, it will still be the organization of RT bringing us into the future. As mentioned, for Q1, there have been major challenges, especially in March. And April is more or less the same as March. And for May, as of now, for the first 11 days, there is positive growth compared to 2019. And still, compared to 2020, it is a negative because of all the subsidies in 2020. But overall, for May, I think we are stable. And June, we will be back to normal development, I would say. As for new business investments, because for superstore and mini store investments, for the further investments and also investment into CGB, there was a RMB 3 billion investment in CGB, but now with the Alibaba strategy. So for Feiniu, we -- from chasing scale, we will be now chasing the business model. And therefore, the investment here in investing into CGB scale would decrease. So we don't have a specific number. But basically, we want to set the model for CGB right. And therefore, the investments this regard will significantly decrease. But overall, the investment in [ manufacturing ], and also in exploration of model of CGB and also our further extension of our superstores, mini stores and remodeling of hypermarkets, we continue to be steadfast in our investment in this very challenging environment. And so it's actually a very good time to invest in our core assets. Now just now for your other question, we are not very clear about the MNC-Alibaba future development, their scale, their specific targets. These are still being discussed and explored. Perhaps you can put this question to Ali about their plans. But I can tell you for sure that for now, we will be the major supplier and partner in the CGB. As for the exact model, we will be on a platform model. The [Foreign Language] will be the platform and also we will provide the supply service. As for the specifics, we would want to build up the cooperative relationship with them. We are still working it. We would want to provide B2B supply service. So this will be slightly different for B2B business but sharing of warehouse. And in the future, I think there will be a new business, and that is supply chain service. And this is a distribution business. Usually, the profit margin is not so high. And my past experience is that if there's 1% for distribution business, that would be very good. But for wholesale business, it is a lot more profitable. So what we expect is that for our service for supplier chain with M&G, with Tmall, such developments in the future, we can grow into B2C status of scale that is similar to our B2C business. So in the future, RT may become an off-line supplier service with our B2C business bases that is through our store warehouse and, at the same time, through our warehouse-based stores, build up our supplier service business.

May I confirm that for medium- to long-term strategy, the supply chain will be 50% of our overall revenue and also for Ali CGB, it is still developing, and that's why you cannot give us a lot of specifics concerning the exact scale and role?

I think it is a supplier service role. And so I think we will be able to definitely invest in this business. But if you talk about the exact scale of the business, I cannot put a number to it because that is still being explored. 15% is our B2C business revenue share. And I think in the future, we would want to develop our supply chain service to this scale eventually. So it will further become a major business sector of our company.

Jefferies made the next question.

When we talk about our supply chain, and you say that you want to cooperate deeper with Ali, and that is why you will be developing more your warehouse-based stores, my question is for our existing hypermarkets and our existing stores, how are they different? And what about the galleries? Can you talk about this a bit further? Another question, for CGB, our model is different now. You say that we are not chasing scale anymore. Now in January of the year, we were thinking that CGB will be 3% in terms of sales. And we did not have the information that there will be a change in the positioning. And for our superstores and mini stores for this year we know about new stores opening, do you have a figure concerning the revenue for these 2 business sectors, please?

You're talking about warehouse-based stores because each store of ours is store warehouse, but our B2C business is serviced by warehouse-based stores. Our warehouse-based stores will be built into certain cities. For example, in a city, there are 5 stores. We will find one where the business is not exactly performing as well as the other 4, then we will remodel it and choose that as a warehouse-based store. We will decrease the store area for hypermarket. It is it is about 8,500 square meters as an average size of the hyper store, and we do not rule out the possibility of contracting the store to 6,000 square meters. This is not a change in the model. But perhaps some of the merchants would exit perhaps, for example, Suning. And basically, we will continue to deepen our optimization of the product mix and also giving it smaller square meterage and increasing the sales. As for galleries, we will be increasing the floorage so as to increase its service sector in the galleries. And for some of the area, we will be planning together with the warehouse so as to provide the city warehouse-based stores, as you have mentioned. Because the store warehouses are about 1,000 to 2,000 square meters in size, we will be able to support the B2B business. And now with the warehouse-based stores, we continue to sell in the hypermarkets but at the same time, we can continue to supply our B2C and our B2B business through these warehouse-based stores. For example, the mini stores, which are selling certain products, packaged products or fast-in, fast-out products, we may put them into these stores rather than to put them into the hypermarkets. And our Feiniu business or Tmall, [Foreign Language] business, all these are shared warehouses with these businesses. And in the future, they will all feed into the MNC business. So our fixed assets can be maximized in their use and also increase the effectiveness and efficiency of our stores. So this is about remodeling of our stores. In the same city multi-store situations, we are already starting this remodeling. Now where the stores are very successful, and there is no remodeling of warehouse-based stores, we may actually start another warehouse-based stores in that city. So that is our strategy. So on the one hand, RT stores will become a logistics center and also a customer experiential center. And it will help with our fulfillment of logistics targets. We will continue to strengthen this role. And on CGB business, I have already answered that question in part just now. Investing into CGB, we will decrease our chase for scale. We will decrease our investment into this area, but we will be deploying our investment elsewhere. So in that sense, our strategy has changed. But on the other hand, we will be very strong in developing this business. At least it will be 1 billion in terms of our size for CGB. But that is not important. Scale is not important. What is important is the model of CGB. For your question about extension of stores. It is not that we will not be expanding our stores, not at all, but rather for certain cities, when we go into new cities, superstores more attractive and actually more optimal than mini stores. And it is also helpful in providing us with the supply chain in that city. So that is our strategy of going into new cities. That is, we will be starting with the hypermarkets, actually. We will be starting in accessing new cities and new -- opening up new cities with our hypermarkets. As for the next level, superstores, we will be increasing the density of our service and our influence to the customers in these markets. And this will also increase our attraction to our customers. So superstores is to increase our density and attractiveness. So we will still have about 30 to 40 superstores increase. But of course, we will have to negotiate the sites, et cetera, so that will take time. And yes, 30 to 50 stores and -- but whether it's 60 or 70 or whatever store, that is not most important. It is a model that is important because we are negotiating the sites. And in the next financial year, there will be 50 to 80 superstores. And the year after, it will be an extension of 100 superstores. So what we are focused on now is the model repositioning and also talking to the real estate companies and the real estate developers nationwide working together with them. And also for the -- as I have mentioned, for mini stores, there will be still the 200 to 300 store target, but I've also been telling the team that the mini stores, the scale is not most important, but rather how do we develop into the different cities and markets. When we have set the model right for the communities in that particular new market or city, when we have found the right model, then we will be expanding in great scale. So that is the direction.

And also, as Mr. Lin had mentioned, for hypermarkets this year, there will be a single percent -- single-digit percent contribution. So for this financial year, there will be a high single-digit growth there will be development for B2C business. And also, there will be contribution from hypermarket superstores and mini stores and also extension of these stores. And also for CGB, whether it is working together with Tmall and other CGB of the group, in the future, there will be a single-digit growth. Our team is very confident in attaining that single-digit growth.

Another follow-up question, if you will. What about same-store guidance, for example, in hypermarkets? And also, our investment is about CNY 500 million to CNY 600 million. So in taking away new format loss, what do you think is the EBIT margin?

For same-store development, for our store warehouse and warehouse-based stores, put together, it is around flat. It is plus or minus within 1%. It depends also on the next few months of progress of work. The contribution will definitely be coming from the new business, including our supply chain business. And as for our B2C and B2B business and off-line business we would want to be able to retain our -- at least retain our profitability.

Next question, Macquarie, Linda.

Mr. Lin, I have two questions. First of all, we have mentioned about the plans for our warehouse-based stores and remodeling of hypermarkets. I'm sure there has been terms of this model. Do you have some numbers to give us? After these stores have been integrated, what is the profit margin? How much would it increase? And then another question. Starting from 1st of April last year to end of March, our profit is relatively low, I noticed. It is because of same-store sales impact, and our lease revenue had not come back to normal. So from these numbers, how do you see from now to the end of the financial year next year? Because our revenue right now doesn't seem to be really normal.

In remodeling our hypermarkets, as I have mentioned, we have already completed 38 of them. The remodeling of the hypermarkets, apart from the store layout, the renovation of the stores environment, and it is also a change in the operation concept as well. So for this, it is not just about the 38 hypermarkets, but all of the hypermarkets all around the nation, we are repositioning their operation. So this is a new thinking for hypermarkets all around. Now you looked at the numbers, but it is also about the overall situation. And that is to say the -- it's about 5% to 7% in terms of our difference for the remodeled and the not yet remodeled hypermarket. And I think that it is -- in keeping with our remodeling focus on hypermarket, it is a good sign. And then there will be a 2.0 version of hypermarket. We will continue to innovate and bring in more reasons for the customers to come to our hypermarket. In this industry situation, I mean, macro situation for COVID, there is, of course, some impact but, on the other hand, we will continue to develop this asset of ours, this network asset of ours. So we will continue to increase the reason for attracting the customers to the place, to the hypermarkets, because there is more choice, more experience. Now as for store warehouse, in Qingming, we have just remodeled the store warehouse for B2B business. It is still developing for the store warehouse context, and it is increasing our efficiency of store warehouse. And the effect of that, we are already seeing. And next, going forward, in the next financial year, high single-digit growth contribution basically comes from our supply chain business. So this will be a core area of our contribution, the warehouse. And just now it has been mentioned, at the analyst meeting, we have also mentioned if we take off this one-off item, as Mr. Lin has pointed out, there will be CNY 500 million to CNY 600 million in investment into our new business, including our multi-format omnichannel customer attraction business. So for the fiscal year to the end of the year, adding back the one-off item and minus the investment, it will be our -- it will work out to be our guidance. Overall speaking, for the hypermarket, we want to be level in our revenue. As for superstores and mini stores and also some supply chain business, we are very confident that there will be high single-digit growth for these businesses. We are confident about that. And this is the first year we're adjusting our financial year, so you have to look at the quarters in this light. For the industry, it is the calendar year, the natural financial year, whole year. So if you change that to the same financial year, you would know that first quarter of last year was the best-performing year. So from the financial year point of view, we have exactly taken off the first quarter, which was the best-performing in the previous year. So if we put back the one-off item, and we go back to the CNY 2 billion, CNY 2.5 billion, we believe that this is rather reasonable for our performance. So you have to take the financial year duration into account.

Dustin of Morgan Stanley.

The first question is about the guidance for same-store. Mr. Lin talked about 2022 is plus or minus, is it 2%, within that range? So whether it is supply chain and also stores, it is put into the same-store analysis. Is that right? So you can segregate that into same-store contribution and also off-store corporate contribution. For same store, it is plus or minus 2%, is that right? I just want to clarify that.

When I say same-store, it is -- I mean by saying same-store, it is our stores plus B2C and also our B2B store warehouse model. We did not include the supply chain business into the same-store business because it is a new business. So for the core contributor of growth for this year will be in supply chain business, which is new. And also B2B, B2C business together is going to be flat in contribution.

Now I get it. So in the future, when you say same-store, this will be what you mean, right? So the new business would not be included into same-store analysis, is that right, going into the future?

When we say flat, it is about hypermarket as well as online/off-line business put together. As for B2B and also sharing of warehouse, it is comparable to last year. And then for supply chain business that would be supply chain and our superstore and mini store, this will be our main contribution. So the main contribution will come from our new business of supply chain and also from our superstore and mini store business. These 3 will give us single-digit growth.

Now I understand. Just now you mentioned that in March and April, there has been major changes to business. And how does change our B2C business from orders? And also, what do you see as a change in the format?

For March and April, apart from off-line business, B2C business, online has also been impacted. Some of the customers, for example, the growth, in particular in April, had been impacted. And also for the customers, some of them had bought a card. And therefore, they do not come to make the purchase. So there has been some decrease in terms of orders. So we say, for March and April, there has been major challenges. So for the performance of March and April, we see that there are concerns. We are worried. But on the other hand, this is true for the entire industry. In the entire industry, we are the best. What challenges we feel, they feel even more. And starting from first of May, we see off-line/online, there has been a return of the market. The weather is getting warmer, hotter. And for the winter, it is -- the attractiveness of our stores are different. Because in the hot weather, it is a lot more attractive with our air conditioning, et cetera. So in order to increase our size per order, we are doing a few things. We are enriching our product mix. So for our online customers, they have more to pick from. Because this is something that CGB cannot take its place. For example, food, for example, shrimps, for example, fish, this cannot be replaced by CGB. And also our related sales, in our hypermarket, we continue to enrich its offering. So we will be increasing our related sales as well. And at the same time, we will be increasing our marketing efforts. In the second half of the year for our supply chain business, it has grown significantly. So for our marketing efforts, we'll be putting that into the first half for developing our B2C business. For RMB 65 per order size, we will be increasing that so as to increase our profitability. So far, in May, we see that the business is already coming back to stability.

And another question, we are developing our mini stores and superstores, and they're very close to the consumers. But for CGB and also the fresh products and also for -- these are very different because they're close to the communities, close to the consumers. It's a very different model from the hypermarkets. Now we're developing in big ways these small stores, and then the supply chain is also developing in great pace. Do you think that there is a risk 2 years from now, looking back, we think that we are opening too many stores and the pace had been too fast? Do you think that we should be rather putting more emphasis on the hypermarkets and also in our warehouses?

We believe that our core competitiveness is in our stores. For RT, where we differentiate is because of our store capability. And I believe in store value, and I believe the customers' pursuit for quality. And definitely, warehouse is a value added, but the store is our main asset and our main value. So in principle, we will be developing our stores. And there are shopping malls but, on the other hand, for hypermarkets, we are attracting the customers because of our own attraction, not because of anything else. But superstores are slightly different. And for the superstores that we have opened, their profitability is not any worse than the hypermarkets. And also, we will be enriching our product mix as well. And there is a lot of investment. Service is important. But on the other hand, if everything is for free, let's say, our competitors are providing a lot of things for free, this cannot persist forever. I think the market, the industry, will come back to normal. And then we will be able to come back to a satisfaction of our customers and healthy profitability. So yes, we will continue to extend our stores. Now as for mini stores, you are correct, it is even closer to the community because they are at the mouth of the community. That is why I say that in the future, we will continue with a rapid pace of extension of our mini stores. And also, we will be providing -- after we have defined the model for mini stores, we will be, first of all, developing the model thoroughly for mini stores before we pursue scale. So it will not be because the store is closest to the community. That is not sufficient to be the model or be the development direction for mini stores but rather through our distribution center and enrichment of our product mix to increase the value of our mini stores. And also we will have to provide a wider coverage and increase our efficiency. And here, we want to be able to differentiate ourselves. And definitely, this will confirm our model for mini store. So yes, it is adjacent or closest to our community. But that will definitely not be the only business reason. So we will be developing very deeply the mini store model first.

And another question, you as a CEO -- the major shareholder is Alibaba, of course. For you as a CEO, Sun Art as an independent listed company, what is the advantage of that? And for Ali, what is the advantage or flexibility for Ali given Sun Art's listed position?

I think for Sun Art core competitiveness, it is the 500-plus stores, the land network that is our main core competitiveness and also our team and our management. Our attrition level is less than 1% turnover rate. This is also an asset. Our purchasing capability, our operation capability, our IT, all these are very, very valuable indeed. This is our genes. The entire organization is built on this. So in our future business development, we will have to confirm and to retain our independence. This is important. And our future is built on the soil of the past. For the mechanism and salaries, incentives and culture of -- what we have is unique. And this is Sun Art. So we will continue with the idiosyncrasies and characteristics mentioned just now of Sun Art. Yes, we will be cooperating with Ali. We'll be using the technology of Ali. And Ali will be different because of Sun Art, because of our organization power, our network and our delivery capability, and so we will be steadfast in our listed position.

[ Oran Rung of Xinfu Investment Shanghai ]

I didn't quite get a few numbers that you have mentioned. 2021 first quarter, hypermarkets, including 2C and 2B, the same-store revenue is what? What did you say, please? And also, what is the traffic and the same-store and the orders? What were the figures?

You're asking about first quarter of 2021?

Yes.

As mentioned just now, for first quarter, compared to the previous year, it is negative 9.2%. From online business, the order is increasing by 50%. As mentioned just now, because of March and April fierce competition, March compared to January, to February, it will be worse off. And then for March to April for B2C orders, as mentioned just now, because of CGB impact, it is also worse off than the previous period. But we also see that for this year, so far in May, as far as we can see compared to 2019, we are already in a positive territory. And compared to 2020, it is a slight negative.

And you are saying because in January to March, first quarter same-store, including B2C, B2B, it is a 9.2% decrease compared to 2020. If compared to -- and this 9.2%, if we take it as a whole, for how much is customer flow part of that?

This is total. This is online and off-line total. In the analyst meeting, I've also mentioned, for 2020 third quarter because it was the COVID period, whether it is -- so it is not comparable. Compared to 2019 first quarter revenue, it is just a low single-digit drop. And as I mentioned, from net profit point of view and also taking back the CNY 200 million one-off impact, it is just a difference of CNY 200 million drop compared to 2019. And compared to last year, it is a double-digit increase. And the number of orders is -- per order size is a drop compared to 2020 because of the COVID situation. Compared to 2019, it is a single-digit increase. For January and February compared to 2019, it is good because of the timing of the Chinese New Year. That's partly the reason. So compared to 2019, we are more or less the same. For January, February, it is about 1% increase. But for March and April, because of CGB fierce competition, we were impacted negatively. It's impacted us overall. But in May, we have already come back so this is an injection of confidence for us. Looking into the future, we hope that things will continue to improve.

What I heard just now for first quarter 2021, the order size has decreased, but traffic has increased compared to 2020. Is that what you said?

Yes, that's what we said. Okay. Now that's clarified.

Jefferies.

I have a small question to ask. For B2B business, now our CGB would also relate to our B2B business. It will affect our B2B business. So how do you see this in the future?

Are you talking about B2B business?

Yes. And also, Ling Shou Tong, the retail for Ali, will there be opportunities for cooperation with retail Tong of Ali?

Yes. CGB impact is direct on B2B because there would be some small stores, which are the accumulated stores, and then sell on their platform. And therefore, we have revised down our B2B outlook for RT. For our B2B business in the future, we will focus on purchasing, focus on our special offerings and the small stores will be minimized. So this is our B2B model for the future. As for Ali's retail, Ling Shou Tong, this is basically on MNC, which has been built on the basis of Ling Shou Tong of Ali. So our cooperation with Ali-MNC, it will be key as a cooperation with Ali. This will be the critical, most important cooperation point with Ali.

Thank you very much for participating in the meeting for Sun Art Retail Group Limited's financial results announcement 15 months ended 31st of March 2021. You're welcome to contact our Investor Relations team. If you have any further questions. Good health to you. Goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]