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

Investors and analysts, welcome to Sun Art Retail Group Limited's 2021-'22 Full Year Results Announcement. This is a webcast session for investors and analysts. The full year results PPT has been uploaded to Sun Art's official website, Investor Relations page. Now I would like to introduce our management in attendance. They are, CEO and Executive Director, Mr. Kevin Lin.

Good morning, everyone.

CFO, Ms. Desory Wan.

Good morning, everyone.

Head of Investor Relations, Ms. Xiaobei Gu.

Good morning, everyone.

First of all, we will invite the CEO and Executive Director, Mr. Kevin Lin, to deliver opening remarks. Please.

Good morning, everyone. Thank you very much, analysts and investors for the support for Sun Art and thank you for your trust and support for -- and guidance for the management's work. In the past fiscal year, in 2022, the external environment was full of challenge. And it is also a critical year for our company. We have achieved a stable handover of the old and new management, and we have formed a high degree of trust and also a management team with good leadership. In the past year, we had already nurtured 1,160 executives for future management. And we explored new business model, 5 hypermarkets, and also a number of superstores and mini stores are opened. And for our online business, we achieved double-digit growth and we successfully started some new channels. And also, incorporated some new service providers. In this year, the external environment is still full of uncertainty. But comparing with our competitors, our cash flow is very healthy and adequate. We have the capability to face up challenge in the market. At the same time, we will expand and -- accelerate and strengthen the building of our supply chain, especially for harsh products. We are full of confidence in our future development. We adhere to the strategy of multi-format and omni-channel development. For off-line, we will focus on the major demand of those with kids and also the aging people. And we want to make sure that we can have off-line experience center. And then at the same time, for online, we will focus on the working cooperation. And we hope that we will also work closely with TAOCAICAI so that we can become a fulfillment center. And then at the same time, we will also explore multi-format and omni-channel possibilities. We will expand the existing coverage so that scale of economies can be achieved. Recently, there is resurgence of the pandemic starting in March, the 26 RT-Mart in Shanghai had already suspended operation. However, for each store, we have 50 to 80 employees who sleep in the store who has been staying and sleeping in the store for 2 months. And then we also did a lot of work in the neighborhood operation in community. And we have achieved a peak of 150,000 units per day, and that is 3x that of the pre-pandemic level in Shanghai. During the pandemic, we covered 1,769 communities in Shanghai servicing 5.3 million people. So we are very sure that off-line retail stores with online capabilities have high value in society. We insist on quality, price, efficiency and service. And we need to understand customers need to satisfy them. And we insist on multi-format and omni-channel strategy. And we believe that we are able to create value for people who go for value, so that we can helpful in daily life and be neighborly in communities. Finally, thank you for the support for Sun Art. Thank you.

Now I will ask Ms. Desory Wan, our CFO, to go through our financial performance of Sun Art Retail Group. Thank you.

Good morning. I am Desory Wan of Sun Art Retail. Now I'm going to report to you our operating environment, expansion phases and financial highlights in the year 2022. Let's take a look at the external environment. In the past year, starting second half of last year, there were both opportunities and threats. Under the pandemic, I think for CCI, it is coming down. So if you look at the bottom right, sales growth -- of China top 100 key retailers. And also, if you look at Consumer Confidence Index, the 2 trends fluctuate together. So this shows that for the external environment past year, a lot of challenges were posed to retail. So now let's take look at expansion status of Sun Art on next page. In the year 2022, there is a new opening of 5 hypermarkets, 3 superstores and 73 mini stores. When the external environment is not certain, we're still able to sign new contracts. And up till now, we have already got -- or secured 22 hypermarket sites, 19 superstore sites and covering 239 cities. For existing stores, the area is at 32.6%. That is owned stores accounting for 33% of the total. So -- then let's look at financial highlights. Next page, please. In FY '22, Sun Art Retail achieved revenue of RMB 88.134 billion, and it came down 5.3% year-on-year; same-store sales growth was negative 6.7%. Within the fiscal year, gross profit was RMB 21.473 billion. Comparing with last fiscal year, we are down 11% year-on-year. GP margin, 24.4%, down 1.5 percentage points from last year. EBIT RMB 18 million. So with the threat from the external environment this fiscal year, the group actually made small provision of RMB 1.875 billion. So if we add this influence, our operating profit should be in RMB 1.89 billion. So here, you can see that we are negative -- we are in the negative range. However, if we add that influence back, our operating profit should be RMB 580 million. Okay. Let's take a look at revenue. In the first half of the year, that was strengthen the market and the pandemic was very volatile. So revenue growth comparing with last year was down 5.3%. In the second half of the year, revenue was negative 5.6% year-on-year, so a bigger negative trend from the first half. In December, all the way to February and during the pandemic, if we -- that was a one-off impact on the revenue. Especially in February and March this year, under the pandemic -- there were anti-epidemic measures, so revenue also came down as a result. That was also impact on one-off provision. So if we look at same-store sales growth, negative 6.7%. In the first half, same-store sales growth was negative 7.4%; in the second half, negative 6.1%. So same-store sales declined, the decline was narrowing. This is because of increase in ticket price and also upgrading of our product mix. And in FY 2022, these moves were effective. So we have seen some income enhancements. Overall ticket size was on the rise. In terms of channel structure, after the pandemic, there was change in shopping habits and there is development of omni-channel, and there is 13.4% growth. Online accounted for 30% share. So comparing with the last FY, online share increased by about 5 percentage points. In the second half, B2C ticket size, exceeded RMB 70. So ticket size increased 6.5% for B2C business. It is already profitable in our group. At the same time, we successfully took over the core supply of Alibaba Group, and that accounted for 3.7% of total revenue. If you look at GP margin and gross profit for our omni-channel's overall gross margin kept changing. For the 2-year gross margin, there is a difference of 1.5%. But then we are still leading in terms of gross margin in the industry. Gross profit came down by RMB 2.6-odd billion. That is because of a decrease of revenue under the pandemic and structural change. Next page, let's take look at operating profit. Gross profit came down. And just now I said that there was a special provision. So operating profit was RMB 18 million. If we do not include the impact from the provisioning, we can see that operating profit should be RMB 1.89 billion, 2.1% was the operating profit margin. Then next, let's take a look at expenses. In FY 2022, expenses ratio was 26%. If we exclude the provision, then you can see the bottom line, that's the expenses ratio without including the provision, 24%. So comparing with the last FY, there is a reduction by RMB 760 million. So you can see the change in our expense structure. And then on the right, you can see the cost of capital, 1.1%. That's operating lease charges, and it's down 0.2 percentage points year-on-year, and this is because of a reduction of opening lease charges of RMB 240 million. Because in our operation, we reduced our product for short-term warehouse, and we optimized our warehousing structure. We lowered costs. And so as a result, there is a good foundation for future operating lease rentals. Next page, please. Overall speaking, we have staff costs, in FY 2022, staff cost was RMB 10.023 billion. There is social security reduction. So it came down by RMB 543 million, comparing with 2019 staff cost, it came down about RMB 274 million. In the past 2 years, online business, in 2019, was 15%, it grew to 30% now. And DOPS increased from 600-odd to almost 1,200-odd, 100% growth. So in the past 2 years, you can see that we invested in digitalization and automation of stores, and this has been effective. And then we also shared the use of quick-picking warehouses. So we are able to enhance efficiency and lower costs. So we have already broken through the breakeven point in the second half. We continue to enhance experience. So for our B2C experience, when ticket size increased, we're able to see profitability and we can also effectively lower cost and improve efficiency. Next page, working capital days. So we changed our year-end from 31st December to 31st March. So here, you can see inventory turnover days and trade payable turnover days that I mentioned is different from the previous year quite significantly. And the difference is based on seasonal factor. So if we compare on the same dimension for this FY with our effective product strategy, our inventory turnover days and trade payable turnover days improved. Our product and operation efficiency was -- were both enhanced. Net cash position at the end of March, RMB 18.659 billion, down RMB 1.54 billion from last year. Our daily cash was around RMB 19.2 billion. And together with our credit facility, overall cash is still very adequate. We have net cash of RMB 18.69 billion. We have around RMB 4 billion of self-owned cash. And then we have also prepaid card increase. So this means that we are able to lock in future income. Next page, then CapEx. In FY 2022, CapEx was RMB 1.9 billion, mainly used in store expansion fresh food or fresh products processing center construction. Our yield was 2.2%. So this is the estimated results after deduction of provisions. If we exclude one-off impacts, our performance is still leading in the industry. Into FY 2023, actually in March, we already achieved a positive growth of same-store sales growth. In April, same-store sales growth is positive 5.7%. If we exclude Shanghai and Chilean area, pandemic impact, same-store sales growth already reached 11.3%. Now with the zero-COVID strategy, I think we still face a lot of challenge in our business. We will capitalize on our near-field advantage. And we believe that there would be revenue growth from superstores and mini stores, but the channels will continue to change. Referring to new business, we will continue our multi-format development model. And we will accelerate our investment into fresh product processing center. The external environment is not certain, but we are confident that in the new FY, we will be able to narrow our loss from the previous year. We have adequate cash flow. We have around RMB 40 billion [ surplus ] capital, so we are still leading in the industry. We have confidence that we can adhere to the multi-format and omni-channel development model. And then we can narrow our distance with competitors. After the past few years, we hope that we are able to go back to a growth trajectory. That's our financial performance report. Now I will invite Mr. Lin to talk about our strategies for 2023.

Yes. Ladies and gentlemen, now I would like to report to you our progress in the past fiscal year. We had 3 strategies. First, we want to become customers shopping client become off-line experience centers. So we continue to refine more than 70 hypermarkets. Last year, in the second half, Jiangxi, Changzhou, we focused on remodeling version 2.0. The first store of version 2.0, comparing with version 1.0 was even more successful. In the second half, same-store sales growth already achieved positive growth -- positive revenue growth more than 10%. Comparing with other stores in the same city, we surpassed the performance. For remodeling 2.0, comparing with 1.0, there are a few differences. The first, scenario. We connected displays and themes from perspective of customers. We also created large display themes and extended secondary aisle to improve shopping experience. And the second difference is about products. We made a lot of adjustment. We highlighted core categories. We enhanced frozen foods, hot foods and fresh products that cannot be replaced by online channel. And we introduced new products as well as eliminated long-term products and operated products according to customers' hierarchy. Number three, we do not only revamp the internal of the stores. We also made adjustments in terms of gallery. We adjusted tenant structure, and we increased merchants, which can attract traffic. Finally, we brought in more new services. We create a neighborhood centers and community with diversified services. The second strategy is to optimize store warehouses and become online fulfillment centers. In the past year, we continued to enhance fulfillment of our stores, and we made more investment. Up until now. we've had industry-leading digital fulfillment capabilities. More than 80% of RT-Mart have installed the automated consumer belt system. For all stores, we have already built quick-picking warehouses. More than half of the stores are equipped with omni-channel shared quick-picking warehouses. So this can enhance fulfillment. In FY 2022, average DOPS exceeded 1,250. In the second half, ticket size was more than RMB 70 per order, up 6.5% year-on-year. For the whole year, online B2C business achieved revenue growth of 12.5%. Accelerated growth of several ATP businesses has laid the foundation for digital operation of customers. In the past year, we undertook the core supply of Alibaba community group buying business and deeply cooperated with the central warehouses of TAOCAICAI business across the country with a support team of more than 250 employees. With once, just now, that this contributed 3.7% of our results. Besides, we started construction of fresh product processing centers. Vegetables and fruits have realized classification and packaging standardization. And the fresh product processing centers in Eastern China have covered more than 60% of the stores. Finally, let's take a look at our multi-format and omni-channel development. For multi-format, it is mainly for RT-Super and RT-Mini. I think for RT-Mini, 2/3 of the stores have achieved breakeven or profitability. Now -- well, this is about RT-Super. And we have explored a low-cost low-investment expansion model and starting lasting last year, we collected new store sites for future expansion. Then for RT-Mini, we are still exploring and developing this model. But right now, if you look at RT-Mini with a full year operation, there are 30 stores with same-store data. For these 30 stores, we have already achieved breakeven in terms of cash flow. So for RT-Mini model in the FY, we are full of confidence that it will succeed. Next, let's take a look at strategies for FY '23. We will adhere to the multi-format and omni-channel development strategy, the big direction has not changed. Last year, based on our strategy foundation, we introduced some changes. First, our pricing. We hope to stay helpful in daily life and be neighborly and communities. So this is our main user and customer value. For off-line, we hope to create incentives for customers to shop in store become off-line experience centers for the getting-old group and families with kids. In the past few years, the main difference is that we -- is in the choice of our target customers. That's the first strategy. Our second strategy is to leverage the near field advantages of store warehouses and become online fulfillment centers for the working person. So for online, our main targets are working persons. So with online and off-line channels, we'll focus on different targets. The third strategy is to continue to explore new business formats of superstores and mini stores. On this basis, no matter whether we're talking about multi-format or omni-channel, we need to develop fresh product supply chain capabilities. We will invest more in the new FY in this regard. Let me elaborate. So let's take a look at off-line experience center. Comparing with last year, our biggest test is we will focus on the off-line getting-old group and families with kids who have rigid demand. Besides, we redefine customer value of shopping experience, services and social. We hope to establish digital precision operation of customers. In terms of products, we hope to reduce homogeneous products and expand category and improve quality. Last year, regarding remodeling version 2.0, where it was successful, we hope that in the new FY, it will become modular and theme-based. For online fulfillment center, we will focus on busy working persons, and we will expand near-field categories, separate offerings arrangement of omni-channel for customers. In the past, so multichannel and one set of products, but now we will be having separate offerings for omni-channels. We will leverage near-field advantages of stores deepen online cooperation with Alibaba and improve supply chain efficiency and service capabilities. For multi-format and omni-channel, we will combine expansion of RT-Mart, RT-Super and RT-Mini and achieve economic scale with regional coverage. For RT-Super, we'll accelerate accumulation of sites for expansion. For RT-Mini, we will continue to develop store pattern and community economy. Then for fresh product supply chain capabilities starting last year, we started the building of processing center for fresh product. We hope that we can cover more stores. And with the infrastructure, construction of fresh product processing center network, well, we hope to strengthen construction of supply network including near-field, far-fields and wholesale markets. At the same time, we will establish buyer and seller teams with digital capabilities and enhanced product quality and variety to form competitiveness and differentiation. So that's my report and a review of FY 2022 and strategies of FY '23.

Thank you, management. [Operator Instructions] Operator, please give instructions.

[Operator Instructions] First question is from Dustin of Morgan Stanley.

First, I want to ask about short-term trends. Just now, I heard Ms. Wan saying that in April, same-store sales growth became positive. This is a very good trend. And we know that in April -- in the month of April, some stores were closed and you were dealt a heavy blow. And this is very different from the year 2020. So can you elaborate on footfall, same-store sales and also store closing situation under the pandemic? And based on the trends now, in the coming few months or seasons, given the current operating and competitive environment and also change, what do you think will be the change in same-store sales growth in 2023? And concerning FY '23, can some profit guidance? Ms. Wan said that you will reduce loss, but you want to also achieve positive profit as soon as possible. If you cannot achieve positive profit within a short period of time, then what are the determining factors? My last question is about digital. So based on different BUs, like B2C, B2B, TAOCAICAI, in FY 2022 and '23, what is the share of their sales and a breakdown profit margin and so on? Can you give more detailed review and outlook?

Okay. Desory, can you first answer the questions?

Okay, let me comment on April and May. In April and May, just now we said that in the second half of the year, of last year, the pandemic started in December. And in December, all the way to February and March, the pandemic was volatile. So there is impact on our rental income and off-line footfall. In December and February and March, there is store opening and -- before profit, there is rental impact of RMB 150 million. In February and March, for off-line customer number, there is a decrease by 20-odd percent. But if you look at ticket size, in February and March, ticket size reached 25% roughly. So there is increase in ticket size because consumers wanted to stock our products. And so this can offset some of the impact. And of course, different regions performed differently. In Eastern China and also Northeastern China, the impact was to a different degree. So if we look at April to May business, in April, our same-store growth was 5.7%. And for Shanghai and [ Jialing ] and neighboring area, if we exclude the store closing, same store growth was 11.3%. So if you consider temporary store closing and also the impact on rental income, then the under the zero-COVID strategy, there is, of course, impact from the stores. And then in May this year, overall speaking, pandemic control, we such that May was a very stable Golden Week. And for Golden Week in May, I think, well, that has given us a positive growth in May. If we look at May, our forecast would be negative 1% to 2% same-store sales growth for the whole month of May. And this year, if we look at our forecast of same-store sales growth, I think we have to look at future development of the pandemic and anti-epidemic measures of the states. If the pandemic is such that there are strict anti-epidemic measures, then for footfall, off-line and rental income, that would be quite a big impact. However, if the pandemic in the coming period is relatively stable and anti-epidemic measures can be more reasonable and favorable, then the impact to us will be smaller. For this fiscal year, the biggest risk is off-line footfall, off-line number of customers and also impact on rental income. So if you look at self-operation, by such as now and also, as Mr. Lin said, in Shanghai, we fought the successful battle. We accumulated many capabilities. So if you look at Sun Art Retail internally, we are able to adjust ourselves based on the pandemic situation in different regions. So actually, we are able to replenish in terms of our fresh food business. So if you talk about the worst-case scenario, on the existing pandemic control measures, we still have the opportunity to make use of online growth and to offset the loss of customers off-line. So comparing with the large FY, in terms of reported loss, we will be definitely improving. In the future, in the coming period, if the pandemic is controlled in a better way, and if the measures can be more favorable, so that less impact is caused to us, then we hope that within this FY, we can achieve a close-to-breakeven situation. Within this FY, there are a few things that we will definitely do. As said as now, we will invest more into the Super and Mini stores and also fresh food supply chain. At the same time, we believe that at present, given the development trends, our online share in this FY will reach 35% plus. And channel structural role change and also change in our profit structure, will continue to arise. But then impact of channel structure change will not be as large FY. Because so far, if you look at ticket size, for B2C ticket size, in April to May, there is around an increase by 20%. So this is an opportunity. The third point is we believe that if you look at rental income, there would still be some threats. So overall speaking, if the situation stabilizes, our rental income compared with last year will be down by within 5 percentage points. So then with that basis, if we do not consider provisioning, we still have the opportunity to achieve a near breakeven status. Then if you look at the channel end, in the new FY, there are 2 things. Just now I talked about B2C business. We target as a growth of 20% or even higher. Besides, we will continue to deepen cooperation with community Alibaba Group buying. So the share of our sales is still at around 5%. So I will pause here, and let's see what Mr. Lin would like to supplement.

In terms of our operation under the pandemic in Shanghai, we still will be able to offset the balance and threat to off-line business, right? If you look at the pandemic and pandemic control policies, of course, there is a negative impact on retail industry on Sun Art. Comparing with other industries like fashion industry and other industries, we are better, but we still experienced quite big pressure. So I don't -- I won't say that our business results will be very good. But comparing with our competitors, under the pandemic outbreak and pandemic control measures, we enjoy the biggest advantage. Why? First, our stores are big. Now in each city, when there is pandemic outbreak, the government will ask the stores to be managed in a closed loop. So that means employees have to live in the stores, but our stores are big. So each store can accommodate 100 employees or above. Of course, well, employees have to sleep on the ground, but we can accommodate 100 people. And for other competitors, their stores are not big enough to accommodate so many people. Now our stores are big. So during the pandemic, we are able to -- well, logistics are not very smooth, but then our stores are big, so they can also serve as warehouses. We can stock a huge amount of inventory. So we have products available and people available. Besides, we have good management capability. In Shanghai, in a number of stores, well, there were employees who resumed positive COVID results. And then we put in place some measures so that there was no longer repeat positive results. Now during the pandemic control stage, well, we are not worried about demand. Your amount of business depends on how fast and how many products you can deliver. So if we look at our off-line capabilities, we are #1, RT-Mart is #1. And we are far ahead of the second competitor. So when we face pandemic outbreak and also sudden surge in off-line demand, we are still able to satisfy the demand. In Shanghai, under the pandemic, in April, well, of course, in the first few days, we had no good solution. But within a short period of time, we are able to put together our teams. Then in the first 8 days, every day, there were only a few hundred orders or 1,000 orders. Deliveries can't be made to the smaller communities because there were no people. But after the adjustment in our team, we were able to achieve at its peak, 150,000 orders delivery. So in Shanghai, comparing with the same period of last year, we are down 40% in Shanghai but then in May, we were up 25% in terms of DOPS. There are still 5 more days to go, and we will continue to open some off-line stores. 18 off-line stores, 18 out of 26 off-line stores already reopened. And every day, off-line business could reach 3 to 5x that of the pre-pandemic level. And our target -- and our order volume, the number of orders has already increased. So we believe that our Shanghai business results can remain flat as last year. So I think our performance is best among competitors. In Shanghai, we had very close relationship with the local government. We took up a lot of business from local government, and we successfully entered the small property owners' groups in the neighborhood. For each store, there are 70 small communities in which we can enter the property owner's group. And we have also accumulated a very effective fulfillment capability. And when off-line stores can be opened, then we would be able to make delivery within a very short period of time. So such capabilities can be extended all over China. And now we are more flexible in order arrangement and delivery. So under the pandemic, I believe that Sun Art Retail as compared to competitors can perform the best. I think this is an opportunity for us to build our capability and for us to widen the distance or the difference from competitors.

One follow-up question, which is related to profit. If you look at FY 2022, there is a provision of RMB 1.4 billion. So if we exclude that, there is profit of RMB 500 million to RMB 600 million. And Ms. Wan just said that in terms of profits, if we do not consider provisioning, you may be able to achieve breakeven, but that is only a conservative guidance. If you compare on a like-for-like basis, in FY '23, profit pressure may even be bigger than FY '22. And just now, you talked about the [ add for ] in Shanghai and also in Q1, the performance, it seems that things look good. And are you worried about other risks?

Overall, speaking for this FY, well, it has just started under the pandemic this year. The determination for zero-COVID is still big in Beijing and other regions, there is still outbreak. There are still new cases. So this is an uncertainty. In my presentation, I said that for off-line, for the off-line gap, well, the epidemic was the biggest risk. That is uncertain. And there is the overall pandemic policy and also impact on rental income and impact on off-line. All are uncertain. In order to identify certainty out of uncertainty, we think that we should insist on our multi-format investment and also fresh product supply chain investment. Secondly, in terms of our product mix upgrading and superstore and mini store business, I think we can continue to extend the model of RT-Mart and RT-Store (sic) [RT-Super]. I think overall speaking, this will be helpful. Number three, channel mix. So in the future, there is growth of 20%, and we hope that it will grow by 30%, 40% in the future, and there would be some upside in ticket size, but there is still uncertainty. There are different scenarios. If we do not consider provisioning, then we may be able to achieve close to breakeven status. If the pandemic builds a bigger impact in the future, well, still, we are confident that we can reduce the loss of last year.

I would like to supplement. Pandemic impact is different on our profits. For example, in Shanghai, if you look at vegetables and -- vegetables and fruits, well, there is a growth by 50% comparing with pre-pandemic because there is a price control by the government. There is stringent price control for these necessities. So we have not adjusted our selling price. We have reduced discount. So for fresh product, we are up 50%. Profit is flat. And number two, comparing with other business formats, we have very good results from our operating model. Well, we are still allowed to open superstores. But then for galleries, the stores have to be closed. That is insisted by the government. And we may have to offer support to merchants. So this exert pressure on our profits. If we look at April, if we look at profit in April, comparing with the budget, well, we are favorable. So of course, we hope to continue to exceed expectations, we'll continue to work hard to achieve better profitability.

Next question Lina of HSBC.

Just now you have shared with us your exploration and development of the multi-format model and also hypermarkets. So what is the existing level of hypermarkets? Based on last FY, how many hypermarkets are below cost breakeven point? Now if you look at your breakeven point, can you share with us, how is the business model like in terms of GP margin, number of employees, online, off-line split, and number of customers?

Let me first comment at present for hypermarkets in the past 2 years, we achieved digitalization and online operation. So if you look at the share of such business comparing with our competitors, we are 1 to 2 years earlier than our counterparts. After the pandemic, after the first outbreak and then last year in the first half, I think for all industries and no matter big or small merchants, they are moving operations online. It doesn't mean that they are fully digital. In the past 2 to 3 years, there is not only online operation but digitalization. So if you look at our digital capabilities, we are also -- we are already very good for 1,000 orders or above. So in the past, starting 2019 to 2020 FY, our online business grew by 10-odd percent to now 30%. So our online profit model is different from offline definitely, in our original structure. So basically, for our hypermarkets and superstores, if online accounts for 30%, then breakeven point should be at RMB 100 billion to RMB 150 million. So I think in the future, as Mr. Lin said, in the remodeling process of 2.0, well, it is important that this can enhance ticket size and ticket size will rise. And then for -- this is the online/off-line profit model. Last year, in the first half, online business was challenging. In the second half of the year, for our B2C business ticket size, it increased 6%. If we do not consider the pandemic, B2B2C ticket size increase from October last year has been significant. So in the second half, we are different from other competitors. Other competitors were at 0 to 500 orders, we are on 1,000 orders. We are working on experience. So B2C is profitable at about 1 percentage point. So if you look at off-line last year, off-line growth around 1 point. If you look at normalization of the pandemic, our off-line business should be at 1.5 point growth. I think this is a dynamic process. And just now, well, you also asked how many stores are loss-making. I think, again, this is also dynamic. In a dynamic environment, as in last year -- first half of last year, there was impact from the pandemic. And there are 30 to 40 more stores which are at a loss in terms of profit margin. In the future, when ticket size increases and with remodeling 2.0 and with upgrading of profit model of off-line and online business, we believe that we can reduce the number of loss-making stores. So that's why this year, in terms of our provision plan, well, I think we will increase more stores.

I want to follow up about your profit margin. For B2C, it's very clear there is GP margin and cost per order and then the fixed cost shared by different stores. But for online business, there's also some new business, B2B, TAOCAICAI and Alibaba business. For these new businesses, is your profit margin contribution margin concept? Or is it based on sales? And then some cost of the source will be shared, then it will be 30%. So for off-line, what will be the profitability level?

If you look at online business, definitely, it will share some of the store cost. This is for sure. Of course, if you look at different channels and the related gross profit structure, it will be different. For our full year gross profit margin, there are differences. Because there are changes in online business structure this year. Concerning Alibaba community group buying business, it is mainly for the first half, so you can see that the first half and second half consolidated gross margin is different. So as you said, different channels are different in the profit model. But if you talk about guidance, if you talk about the community group buying business, it is a trading concept. And I think you can look at net profit. The difference is in the gross profit structure.

Next question is from Xiaopo of Citi.

I have 3 questions. First, in Shanghai, after the Shanghai battle, well, Shanghai is an extreme lockdown example. So in terms of change of consumption behavior, it seems that, well, with zero-COVID policy in the whole country, things are still stringent and cautious. If the situation is more pessimistic, what will be the change in consumption behavior? What categories will be bought more? And is it true that frequency will be lower, but then ASP will be higher? And in terms of off-line, online splits, in Shanghai, well, people are now allowed to shop gradually. So in terms of the online, off-line split, what will be the situation like in bigger regions? So it will be -- this is a quantitative question. Okay. Number two, my second question, in the extreme pandemic situation in Shanghai, well, you may have gained some insights and I think you are going to adjust your strategy in 2023. And if you look at PPT, Page 20, well, these are the broad strategies. So which of the strategies are strengthened given the Shanghai situation and the future pandemic estimates? And just now, you made some remarks. And so in the future, in terms of rent decrease, especially in relation to coordination by the government, will there be some response in the future quarters?

Let me answer these questions. First, I think your first point is very good. In the Shanghai battle, well, we really have learned a lot. We have gained a lot. On the 1st to the 8th, there was lock down and nothing could be done by us. We could only do government business with our existing inventory, but our existing inventory in store is bigger than other counterparts. So we are still able to take on some business. But there were cases in many of our stores, COVID cases. So we need to deal with employee protection and pandemic control. After the 8th, we formed a team and there were only 8 packages. For example, vegetable pack and also not-so-noodle pack and so on, those that's our most basic, basic needs. So all those packages were sold out as soon as they were made available. So I don't know whether you have heard about the 5 churches in Shanghai, vegetable and meals and so on, 5 items. At that time, we procured a lot of onions in our storage. And in fact, the inventory was too big. We are not able to digest it. So the government has already started the guaranteed supply policy. So at that time, we made adjustments to our 8 packages. Apart from the 8 packages, our fresh products, we also added a number of new products of fast foods. And there are also products for rigid demand, diapers, pet storage (sic) [pet food] and so on. And with 20-odd products we have been doing business for 2 weeks with those. And then there is good buy-in in communities that started. So -- we increased to 30 SKUs. With 30 SKUs, we wanted to make sure that there's only one product per category. We have to consider our delivery and fulfillment capability. The volume has to be small. Weight has to be light in order to satisfy consumers' immediate demand. And when the products are delivered to small communities and to the customer's door, that has to take like 3 to 5 hours. And if we sell fresh products like low temperature milk, well, when customers get it, the products will already be bad -- the products have gone bad already. So we need to make sure that the product experience is satisfactory. So in each community, we have already built a user group. We have entered the property owners groups in communities so that we can interact them -- with understand their needs. And then right now, we have already 100 SKUs starting May. And in stores, there are 300, and we keep on changing and adjusting. Every day, we explore about customers' needs, and we hope to bring pleasant surprise to them. Of course, there are changes in customers' needs from daily necessities to demand for leisure and entertainment, recreation. And then there are other specialty products. And also, for example, demand for garbage bags, consumables and recently, there are demand for small electrical appliances like air purifiers and so on. So in the whole process, we kept on adjusting our product mix. That's for online. For off-line, when the first store was reopened, well, we were well prepared. Customers just rushed in. The government always sends a few dozen offices to maintain order whenever a store is reopened. And customers only need to queue up once at the entrance. And we kept control of 500 to 1,000 customers in the store, so that there is better shopping environment. And when they pick up products, then they can be packaged at checkout. We reduced contact between employees and customers. So when every physical store is reopened, in the store, well, we achieved a volume of RMB 1 million. Well, customers can only walk through the stores. They cannot drive. And so very often, when they pick up a lot of products, they cannot deliver them all back home. And then for those elders over 60 years, so if the ticket size exceeds RMB 600, then the products can be packed. And then we made use of our bikes to make delivery to communities. So I think Shanghai battle has actually helped us a lot. We benefited a lot.

For the strategies in the new FY, what is the impact? There are 2 points. First, strategies. I mentioned 3 main strategies and 1 capability, off-line experience center, online fulfillment center and multi-format and omni-channel. And then fresh product supply capabilities. These won't change. We just had a nationwide meeting. The more difficult the situation is, the more opportunities we'll see. Last year, the situation was difficult. However, we are able to build our capabilities. And now in Shanghai, we have many officers who have already gone to other parts of China to implement strategies. We have put in place a change in the coming half year or longer period of time, the pandemic will continue to exert impact under the zero-COVID policy. So we will enhance our capability to fight wild war. So we will implement more in our stores. And then we have the amber, orange and red light system. If it is a amber, orange and red warning signal, the authorization to stores will be different. On orange signal, the stores will be allowed to do their own store procurement. On red signal, we will make adjustment to fulfillment. So we will adjust from 1-hour delivery to half day. And if there is lockdown, then we will make further adjustments. So this kind of capability will be enhanced. We will offer more authorization to stores. And finally, you talk about the galleries. For the galleries in April, we already offered some subsidies and fee reduction to merchants. In the future, for small to medium merchants, I think there may be store closing and store opening will be very cautious. We need to retain the merchant so as to retain the galleries. So I think if there is a vacant store, then the situation will be bad. So we have to make sure that we have to maintain the occupation rate or occupancy rate. So we put in place some policies to retain merchants by means of some subsidy and fee redemption. We hope that they will close other stores, but not stores in our gallery. So we already make investment into that. We hope to recover some loss in gallery. And so in different parts of the country, apart from self-owned properties, we have also many landlords. We are working with our working partners. We have achieved some progress. We also actively apply for subsidies and remissions from the government. And Ms. Wan just gave some guidance. We have not taken into consideration extra subsidies from the government. But if there are such subsidies, then the numbers will look better. We believe there will be subsidies because in Shanghai and Pudong, around 3 stores, each getting RMB 800,000 to RMB 1 million subsidies. And if this can be extended to the whole Shanghai, then we'll be getting RMB 20 million to RMB 30 million in April. And there is no subsidy yet for May. So this is not certain. We have not included that in our financial statements.

Next question is from Christine of UBS.

I have still many questions to ask. Some are about long term, some short term. So I want to ask you management. First question, this year, the situation is still challenging because there is a guaranteed supply policy, but cost is rising. So profit margin sees big pressure. But I want to ask, Mr. Lin, for the short -- for the medium to long term and profit margin, what do you think in order to achieve the medium to long-term profit margin, what conditions are necessary? And when can you achieve a more reasonable profit margin? That's my first question for you. Second question. Choice of off-line strategy. Looking at your presentation just now, my understanding is that you still want to work on off-line experience. And you want to revamp your store based on that. However, any trend is because of the pandemic and because of changing economic development in China, if you look at consumers' income, well, I think that has suffered. So as such -- how are you going to address your revamp of offline stores? That's my second question. So since consumers' income has been affected and there may be expected downturn, so what is your plan about remodeling off-line stores? Third question. Community group buying. If you look at these platforms, well, there is quite big pressure on investors' profits. If you look at group buying, there is regional expand -- in terms of regional expansion, there is shrinkage or contraction. So what will be the impact on off-line store from that? And how will it be different from past 2 years? That's my third question for you. My fourth question, relationship with Alibaba. Starting last year, the internal organization structure of Alibaba has been adjusted. And in the future, what impact will be caused on your business? No matter whether the impact is positive or negative, arising from change of organization structure of Alibaba?

Thank you for your questions. For medium to long term, I am full of expectations. First of all, I think that the business model is effective. If you look at the off-line results at hypermarkets, I am full of confidence in the medium to long term. Now during this period, if you look at mobility control off-line, my view is that things will not be more stringent than now. That is my basic judgment. If the control -- if this kind of control continues like this forever, now for Sun Art Retail, I think -- and for other counterparts, I think, of course, there is a need for redesign. But then if my judgment is correct, if you look at next year or 2 years later, I think people can resume free activities and mobility. And then there would be recovery of offline uncertainties, of course. There is a decline of 20% for off-line comparing with last year, but still we are better than the counterparts because our base is higher. So many off-line stores are still able to survive. If our assumption is right, then in the coming year, we need to revamp our off-line stores when the control policy is gradually relaxed. And if things gradually resume normal, well, human beings need to move around off-line then I think our charisma and our attractiveness will be much better than our competitors'. So the first condition is that off-line business has to recover and bottom-up. So if the control can be relaxed, then from now 2,000, it can go up to 3,000. And then more -- see and small scenarios can be extended to different stores, then our footfall will increase, ticket size will also increase. So off-line business must recover. That is an essential condition for improvement of our business. Number two, online. Online growth will be faster than offline. This is for sure. For online, even though there is profit, but the profit is very thin. It's only 0 to 1. In the past, we have net profit of 3% now is different. For online, why is it the profit is so small? A few reasons. First, but let me give a few examples. If you talk about off-line supply, when you checkout, let's say, if you buy something and you checkout, you spend money on it. But then for off-line -- for online purchase, there has to be delivery. So let's say, if one unit is at 1.6, then every year, we are talking about a few hundred million. The size -- well, delivery is free of charge. Why? This is because of competition. Now we are offering convenient service. So if you charge a for off-line, then our profitability will be stronger. Number three, in the past, for off-line stores, we employ a lot of people, 200-odd people per store. And in the past, 300 to 400 employees per store. And in the future, for online business model, number of employees will decrease. I think that is because of the sales model and supply chain pattern. Organization structure and use of technology will be such that there will be a big reduction of employees. So from 200 per store, it can go down to like 150. So at that time, we can be better in cost control. The last point is efficiency. Our quick sales efficiency is the highest. For fresh food, supply chain, we only started the construction of fresh food processing center last year. After 1 to 2 years' hard work, our fresh product supply chain efficiency will go up. Quality will be stable. And when we become more competitive, then we will be better off. So in 3 to 5 years, when off-line recovers and when profitability of online improves, and if we can control the number of employees, efficiency of fresh food supply chain can go up. We can resume profitability of the past. That's my judgment of the long run. You talked about future economy. Well, I -- that is really close to my heart. Consumption upgraded in the past. And then if you look at the macro environment, there is also room for upgrading for us in the past 10-odd years, well, our business model has not changed much. 10 years ago, if you look at our product mix, it has not changed much. We kept on upgrading our products. In the new FY, we will introduce new categories and new SKUs, that would be like 15 to 20 -- an increase of 20 categories. So that is quite sure or certain strategy. We will not do away with small to medium end products. But the number may be reduced. We want to make sure that for each category, we can widen the price range for choice by consumers. So it is true that we have put in place a change. We insisted on products, upgrading and category-widening. For a certain category and for a certain single product, we will be cheapest in the industry. So we will pick this strategy up again. In the past, there are many shopping mall customers. They might come back to the hypermarkets. We have a lot of feelings in Shanghai when a store is reopened, well, one person out of each household can come out to buy. And usually, it is a man because he cannot drive, you need to carry the products back home. So when he enters the store, well, when our stores are reopened in Shanghai, there are many young customers and working persons going back to off-line. Some may be going to the hypermarket for the first time. We want them to see a different RT-Mart. So they will have the feeling that hypermarkets are very safe. The product mix is very diversified and rich. Quality is very good. When they come in, we will offer them a small cart and then we give a free apple to each customer when they checkout. We want to offer them a safe [ lesson ]. So all these will be able to move customers deeply. Of course, when they shop at shopping mall, I think ticket size will be much higher than RT-Marts, and RT-Store (sic) [RT-Super] but then we can also improve. We see upside. And then for community group buying, it was the most crazy last year. Well, people disregarded cause, I think that was against market discipline or order. But then starting later in the year, the situation, we assumed normal that was laid off, there was lowering of target and so on. And now I think the situation has stabilized. For growth in regions with more certainty and for categories with more certainty, it is one of our retail solutions. It will still exist. It is a retail format. However, it will not be a mainstream. It will not be like e-commerce becoming a mainstream. So I think the situation is very difficult. The macro economy has worsened, and we face competition from group buying. And if you look at ticket size increase for off-line, some orders came back to our mainstream channel from good buying. Finally, relationship with Alibaba. First of all, for RT-Mart and Sun Art, we are an independent company. We are responsible or accountable to our Board. Our independence is still maintained. We are very independent. We have our own audit, our own financial statements. So Alibaba is our majority shareholder, However, they give us a lot of support. They give us a lot of room for decision-making. So the independence of Sun Art is guaranteed. On this basis on independence, well, we have a higher reliance on Alibaba. Well, we have so many stores and so many cities and for medium to -- for our short-term to medium business, I think Alibaba is a very important infrastructure. Two years ago, I read from the news that Alibaba will make some layoffs in terms of near-field and medium-field, especially at Taobao. So 100 e-commerce warehouses. I think when we build our fresh product supply chain, since it's really important to Alibaba ecosystem, if you look at Taobao, they are strong in nontarget products, but for fresh products, I think e-commerce cannot solve the problem. So for fresh product, we have to rely on near-field to solve the problem. And I think Sun Art is a good solution for them as well. This year -- or last year, it's very difficult this year will be even more difficult. But the future will be brighter, I'm sure.

Next question Anne from Jefferies.

I have questions about some figures. Based on your estimate, even if we don't have COVID for online, do you think you can achieve like 30% to 35% share? My past understanding is for B2C gross margin, it is higher than off-line. But last year because of competition, margin is not as high. So last year, can you tell us the GP margin for online, off-line B2B, B2C, what's the difference and OP margin? Okay, I have your OP margin. In the future, in the coming -- in 2023, -- on a like-to-like comparison, is there a chance that gross profit can increase?

Last year for as to second half of the year for B2C business gross profit is better than first half. Overall speaking, if we look at last year, gross profit off-line, our sales gross profit last year came down 1.5 percentage points. Within that, if we exclude the capital part, it is because of change of channel mix last year compared with the previous FY, online business increased 5 percentage points. And there is a part from Alibaba community group buying business. And in F2, (sic) [Q2,], well, that share is bigger. So that will affect my consolidated gross margin. Then if I look at our online gross profit last year in first half, online gross margin, at that time, there was competition from communities. So overall speaking, it's lower than previous year. Starting second half, B2C gross margin was still okay. So for B2C business, our existing gross margin is still at 21% to 22%. Of course, there is supply to Alibaba communities. Well, that is trading business to a service business for us. So the overall net profit is at around 1 percentage point. This shows our gross margin structure. And that will also affect our consolidated gross margin. For B2B business, it's flat with the previous year, 9.5% roughly. And then for hypermarket, off-line hypermarket gross margin comparing with the previous year, was 23.5% to 24%. Comparing with FY '21, we are short by 0.2 points. So in the past year, we came across challenge in online and also there is marketing investment there is, as a result, impact on gross profit. For the new FY, we said just now that -- under the current pandemic online business can achieve net profit of 1 percentage points. But if there is even more net profit from there, then consolidated net profit will be such that we need to -- whether we need to make further investment online. We don't want to offer more room to net profit, but then -- but we hope that online business can achieve net profit increased by 1 percentage point.

Okay. For your multi-format development, you have superstores and mini stores. For the new FY, you will also increase different types of stores. Last year, for your overall loss and investment in superstores and mini stores, how much is that? I -- in my memory, it should be like RMB 200 million to RMB 300 million. What will be future investment? And for this year, what is your estimate?

I understand that for some projects, there is a chance of breakeven. Last year, we said now that last year, if you look at RT-Mini, there are 30 stores. So cash flow is positive for this year, they can be above breakeven. For RT-Super, we have 9 RT stores -- 70% of the stores are already at a profit. So they -- well, we can see that they have already broken even. So for RT-Super and Mini, our investment will be within RMB 100 million. RMB 100 million is mainly in investment into new stores. This year, for new superstores, we want to open 10 to 15 new stores. But because of the pandemic, construction has been delayed. So there's overall delay of our store opening. So for this year, we are confident that there will be 4 to 6 new stores. For mini stores, 100 in Nantong and Nanchang and so on. So from superstore and mini store investment this year, around RMB 100 million.

Okay. My last question is your product mix. Last year, if you look at your product mix, is there a breakdown online line?

Okay. First, for our food categories, comparing with last year, the share increased by 1.1%. For fast-moving consumer products, especially for online, FMCG, I think the increase is also quite significant.

Next question from [ Caiman ] from DBS.

I have a question. I want to follow up about your superstores and mini stores. For superstores and mini stores, how big the share of the revenue of the total for mini stores? Is it true that some stores are already profitable for mini stores? What is the same-store sales growth? That's my first question.

The question for superstores and mini stores, the sales contribution is at around 0.5 points. For superstores, there are 9 mini stores. This year, many -- there are many new stores, which will be opened in the second half. So in the future, I think there would be room or upside in same-store sales growth.

Okay. Next question, just now Mr. Lin said that the pandemic has cause impact to your supply chain. How big is the cost impact? In April to May, the pandemic has improved a bit, and there is some relaxation. So in terms of cost, is it true that there is also improvement accordingly? Then if you look at the latest gross profit margin, how much is it?

Well, during the pandemic in April and May, cost in Shanghai has been greatly improved. For our employees, there are only 10% to 20% of employees working in stores, but we have to pay wages to all employees. And for those employees working in stores, we need to offer them subsidies. So definitely, cost has gone up. Well, we cannot increase selling price, but then volume sales volume has gone up. So for our fresh product cost, there is quite a big pressure in Shanghai. And in [ Jialing ] and also other places where the pandemic was more serious, the situation is like that. For the short run, well, of course, we will continue to shoulder our social responsibility, that is our responsibility and our honor. We are honored to do something for the society. We are not thinking about profit that we can make. We are thinking of how many customers we can serve and what problems can we solve for customers. We offer service to customers, hoping that they will come back to our platform in the future. For FMCG gross margin for R-Mart (sic) [RT-Mart], we are the best in this regard in the industry, and that is because of our price bargaining power and our supply chain efficiency. For FMCG, I'm happy with the gross margin. Well, it should be even higher. Actually, I don't think it should go higher because if it becomes higher, it will be like a barrier of the channel. And good-quality brands and merchants will be deferred (sic) [deterred] from joining. So I don't want to improve gross margin. I just want to adjust the structure. We hope to bring in more better categories and more competitive products and products with higher price and so on. For fresh products, I think there are opportunities. RT-Mart gross margin is very low in this area. Compared with competitors, our fresh product gross margin is different from them or short by 5% to 6%. This is because of our business model. And now we are building our fresh product warehouse and we are procuring at source. We are establishing a procurement system. And in the process, whenever there is a new model, the first half year to 1 year of investment, well, definitely, there is a lot of trial and error. There many imperfections and loopholes. So at the beginning of the first half year to 1 year, gross margin will come down. Well, the procurement cost is lower than you may not be able to control costs well or you may not be able to control wastage. After 0.5 year to 1 year, gross margin will go back up. So in the future, that will be upside by 5% to 6% in gross margin for fresh product. And in the future, the share of fresh product will go up. So in the future, I think these will be opportunities for gross margin to RT-Mart. So fresh product in the past, we did not have enough scale. So procurement is based on store. 500 stores, there won't be economies of scale, but after building the fresh product processing center, we can achieve economies of scale and better efficiency. So in terms of cost, in the long run, there will be room for a decrease. Once again, thank you all for joining Sun Art Retail's 2021-'22 Full Year Results Announcement, investor and analysts online webcast. We are sorry that we cannot meet you in person this time. If you want to communicate with us further, you are most welcome to contact our Investors Relations team. Finally, I wish you all good health. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]