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

Investors, analysts, good morning to you. Welcome to the Sun Art Retail Group Limited 2022-'23 Annual Results Announcement. Before we start, we will have simultaneous interpretation, just to let everybody know. If you need the interpretation service, we'll have a headset delivered to you. First of all, I would like to introduce to you the management on the stage. First of all, the CEO and Executive Director, Kevin Lin; the CFO, Ms. Desory Wan; and the Head of Investor Relations of the company, Ms. Gu Xiaobei. First of all, Desory will be going through with us the operating environment and also store extension and the expansion status. Ms. Wan?

Good morning, everyone. In the past 3 years, the management had been meeting you online, and this is a very happy occasion whereby we are able to meet face-to-face. First of all, I would want to introduce to you the operating environment. First of all, some macro figures for you. In the past 1 year, it had been a challenging environment in terms of retail. And in the past 2 to 3 years, the consumers' online behavior had been, in particular, in the last year, online and offline, overall growth rate for retail sales had been a huge difference in particular, for pork prices have been great fluctuations. And as a result, the food CPI had been drastically being affected from January to March, which is the fourth quarter of our financial year, even though macro speaking, consumption and retail have been rising. However, it is mainly coming from our overall consumers going out for entertainment and going for our F&B eating out. And therefore, in terms of consumer confidence index, it is simply still slowly rising. And in that process for supermarket sector, there had been in the past year some depression pressures. And for our company in our many years of accumulated capability online operation and also in our supply chain capability and size. In the past 1 year, we have been able to -- to a great extent, lower the impact from lease expenses and charges and also the depression from the consumer market. Now let us look at the extension of shops. In the past year, there had been new opening of 1 hypermarket, 5 superstores new opening and 21 mini stores opening. And as of 31st of March '23, we have altogether a number of these hypermarkets and supermarkets, and we have opened our MStore in Yangzhou this year as well. And for the number of stores, hypermarkets, 486; superstores, 12; and mini stores 84. For financial highlights, we -- for the 12 months ended 31st of March 2022, same-store sales growth had been a negative 4% and gross profit was RMB 20,581 million and gross profit margin was 24.6%. EBIT was RMB 1,177 million, EBIT margin 1.4% and profit for the period was RMB 78 million. For net profit margin, it was 0.1% and profit attributable to equity shareholders, RMB 109 million. Now if you look at the revenue, the revenue is RMB 83,662 million and this is a RMB 4,000 million drop from the previous year. And this is because of our customers. Online was 33% for the last year and it had increased 3.8% from that basis. From this online, our B2C business and we are talking about our self-owned and self-operated multichannel B2C business, it was some 20% increase from the year before. And this largely decreased our offline impact. And in the pace of our development, even though in the past 1 year, it was negative for, for same-store sales growth. But for Q1 to Q3, our same-store sales have been more or less the same as the previous year. The main pressure had come in the fourth quarter. In the fourth quarter, it was negative 12%, and it was because during -- at the time of the New Year and also the Chinese New Year around that time there had been seasonal impact and also the opening up impact and also the March same-store sales impact. But apart from such impact in the entire year, online and offline, it is a double-digit growth in terms of our sales. And at the same time, it includes in the past, the company had been raising our standards and also accumulating our capabilities. Now for the revenue, rental income had been RMB 3,127 million, which is a small decrease. And apart from the impact, as mentioned just now, 80% of our stores had been closed temporarily in the past year, and that had impacted the revenue. So for the entire year, the company had done a lot of support to the stores and also given some concessions for the galleries. But at the same time, we have been optimizing the tenant mix for our galleries, and it is lower than 5% in terms of vacancy, which is the best in the industry. Let us look at the gross profit and the margin. Gross profit, even though it is a decrease of about RMB 800 million. But as mentioned, it is because of our rental income. However, there is an increase otherwise of 0.7%, and it is because of our digitalized operation, and it had -- it also includes the investment we have made in this area and also the increase in gross profit as we operate in the year with further normalization. For expenses, if we take out the 2 years of impairment, our overall expenses decrease is RMB 1 billion, and that would include a number of areas include -- including in staff cost, you can see CNY 300 million staff cost decrease as well as other operating expenses decreased. So our OP margin is at [ 110,000, ] and our OP margin, apart from if we take in the impairment, it would be RMB 320 million, and that includes the optimization of expenses, the drop in profit margin and also in the new financial year compared to last year, there have been more higher investment of CNY 200 million. So net profit is 0.1%. And the operating profit is RMB 1,177 million. So compared to last year, it is better by RMB 200 million compared with last year. And for working capital days in the entire year for our inventory turnover days and trade payable turnover days, they have both decreased. And the net cash on hand is RMB 19,449 million. And of that, CNY 150 million is prepaid card. And we also have to include the CNY 330 million credit line. So for this year, we are increasing CNY 670 million loans. And that is our credit line. That has not been included in this net cash position. And we continue to optimize the way we utilize our cash and also our credit line. For CapEx, it was mainly expanded in the second half of the year. It is about RMB 1,123 million, that is devoted into multi-format operation and our operation on a normal basis. Our ROE is at 0.3%. So for the financial year, our company had benefited from our online business. And as mentioned just now, overall speaking, our size and capacity and supply chain and also in terms of our construction in digital operation optimization in our overall operation and lowering the cost. And as a result, our net profit had been benefited. In the new financial year, in April and May, we see that there had been a normalization of ticket size and if we look at the guidance for 2024, the group will be focusing more on our focus customers to create a value for money, health, fun and service, experience for our customers. So we will focus on that, and we will be building our capabilities and also to create a new experience for our customers. And we believe for the 2024 financial year, it will be at par with 2023 for the B2B2C business, in particular for supply chain area for this particular channel, especially for our customers. For this channel, we will be investing in it. But if we look at the B2C online and offline omni-channel business that would include the online and offline for RT-Mart and our overall multichannel development, 2C will have single-digit growth. And for lease income, actually, it is still in a very challenging market. The whole atmosphere is as such. So for this year, we will be quickening our optimization of our tenants. In particular, we will be providing with more competitive rentals to our tenants and also optimizing our tenant mix and also decreasing our vacancy rate. So for this area, it will be slightly lower than 2023 for lease income. So we will continue to digitalize and optimize our operations and lower our operating costs. But at the same time, we will steadfastly invest into, as I've mentioned earlier, our differential products and also to attract more customers to our hypermarket RT-Mart to shop for their groceries and their shopping. And also for our RT supermarket and also our M club and also we will continue to put emphasis on our self-operated brands and also our fresh product processing centers. In the 2023 time, we had CNY 300 million in terms of investment. And this year, there will be continued investment. For 2024, it will be at par in terms of net profit as 2023. We will be focusing on our target customers and also to see online and offline profit increase and to pull away from our competitors. So that is for 2023 operating environment and also our outlook for 2024. Having completed that next, Mr. Lin, our CEO will be talking about the strategy, progress of the company.

Respected investors. Good morning to you. Very happy to have this opportunity to meet you physically. Just now, Desory had talked to us about the operating environment and our performance for the past year for the retail business, including our group, it had been an unusual year last year. On the one hand, we have been putting in all emphasis to increase our sales and also our net profit. And as a result, we have been able to achieve what we have achieved. But at the same time, we have not squandered away this crisis in the sense that our core capabilities had been strengthened and also our positioning had been strengthened. In the process, we have been able to pull away from our competitors in terms of capabilities. In the past 1 year, we have had a lot of core capabilities breakthroughs in a few areas and they are from 0 to 1. The first is we have built the capacity for fresh produce processing centers. If you understand the mainland market in this area for the hypermarket business, the fresh produce had been a cooperation with the smaller suppliers. But on the other hand, it is very difficult to continue and fresh produce has become a major business for the hypermarkets. So in the past half year where we had to temporarily close some of our shops, we have built 14 fresh produce processing centers, FPPCs. So we have very well-developed structures, and they basically can cover 80% of stores. And most of them can be delivered on a daily basis, especially on Eastern coastal areas where there is a density of stores, there can be 2 deliveries per day. And that goes to show that the quality of the fresh products can be high because of the frequent deliveries. And also, we have a direct sourcing from the farms. 50% of our products are direct sourced. In particular, in vegetables, for 100% of our stores, we have realized self-operations. So we do not have any service providers. So that's vegetables and fruit will follow. The next capability breakthrough is in the area of differentiation of products and our R&D capabilities to differentiate such products. And for our staff cost, it had come down. But at the same time, you will notice that we have invested into our labels, our private labels. In this area, we have also strengthened our entire chain for products differentiation and also developed our private label products. In the year, we have several hundred of differentiated products. And for most of them, they have been able to achieve top sales within their own categories during the fiscal year. A third area of capability breakthrough is in the omni-channel digital membership operation. In the past financial year, we have come up with the point system for members. In the past, there was no such point system for the customers, they have been using their cards. And this year, for all our customers, because they have these point cards, they are able to basically just use the mobile phone, QR code and be able to deduct points and also pay for -- so these are digital members now. So as the members are digitalized, we will have a better profile of them. We understand them even deeper and better. And therefore, this will contribute to the value of our digital system. And basically, in the past, we have any information delivered to them, the members may not actually notice them. But on the other hand, with our content on channels such as Douyin, Xiaohongshu, Weibo, WeChat, et cetera. And in particular, for WeChat, we have 50 million friends on WeChat. So with the series of such channels digitally, it had also exponentially increased our membership operation capability. And at the same time, we have 3 core strategies. And the first one is for offline experience centers for nearly 100 of our stores we are remodeling them to become experienced centers in the last year during COVID. We have had 100 -- almost 100 of such stores featuring pleasant scenes and experiences and also we will continue to do so for the other stores. Second strategy is that during the COVID time, we had a lot of vacancy but that had provided us with an opportunity to optimize our galleries. And a result, we have been able to bring in more tenants, which are complementary and synergistic with our galleries and also they are able to bring in their own customers as well. And with such efforts in the last year, in the environment for our vacancy rate on average for the year, it was within 5%. So this is quite an achievement. And at the same time, we have worked very hard to optimize as well as to provide support for our tenants, including concessions on their lease and also certain subsidies for them so as to retain some of our quality tenants. As for fulfillment centers, we continue to enhance our capabilities in independent procurement and operations. So for Taoxianda, Eleme and also for our RT-Mart, their operation and their fulfillment are actually different. So for these 3 platforms, we have been able to develop them separately. And there is the APP, our self-operated APP for RT-Mart and the growth there had been 40%. This is the fresh APP. And for Taoxianda, we continue to operate closely with Taobao and that continued to grow steadily, especially in fresh products. And as it is a core of near-field supplier of fresh products with Taoxianda. For Eleme, we optimized our operation model, and it is a very important growth model for us. For Eleme, it is a major or the main offline provider for us. And last year, for Eleme, we have been able to optimize its operation and also drive its revenue growth as well as ticket size. For the development of multi-format for the RT-Super, we have continued to focus on the building of that. It is a low-cost version of RT-Mart. And we continue to focus on some of the dominant regions in particular, to increase its supply chain capabilities. So that is for RT-Super, we will continue to step up its growth. As for RT-Mini, as of now, we have not found a sustainable business strategy. So we have been contracting that, except for a streamlining with a focus on Nantong region, we want to put in more care and design for RT-Mini positioning. And also, we have organized something new, which is the M Club with 1 year's preparation. The first M-Club had been opened in Yangzhou area. And at the opening of M Club we had exceeded our own expectation, and we have exceeded the expectation of the Yangzhou residents. Now going into the next financial year 2024, it's going to be an even more challenging year. It's not that with spring coming, money will fall from the sky, not at all. And we have found in the past couple of months that in the past 3 years, yes, there had been multi-format, there have been small stores, et cetera, and in particular, for RT-Mini, for example, and some of the smaller stores, they have not been able to operate normally. But on the other hand, they are all coming to the market. And in particular, for the Internet companies and a few major brand names, they are all coming on to the retail market. And in the past few years, we have accumulated the basis of our strength, and we will continue to pull away and exceed our competitors. Only when we are much, much better than our competitors can we grow our market share. And what is important is that we have to focus and be precise on our preferred customers. Once the customers had been able to enjoy the online service, especially for delivery, they can really go to offline and also for 500 RT-Marts. We are able to find our value offline, and this is something that we have to really be focused on and really think about. And we will have to know our customers deeply. We have interviewed over 2,000 customers this year. And we find that we have to be more focused on those hard demand offline customers. For these customers, for -- so some of the playful and young families, that's 1 sector. And the gray hair or silver hair is another sector. For these 2 groups, there is offline solid demand. And the core customer value? What is it? Why do they come online because they have old people in their families. They have a lot of consumption needs. And so they're very sensitive to prices. But at the same time, they want good food, they want good stuff because young people and old people, they need health. And therefore, they want to eat good food, quality food. So the quality of our products is very important. It is a must to attract these sectors to our RT-Mart. So we have to be price optimal as well as quality optimal. We have to attract these people to our RT-Marts. So on the one hand, we have to focus on the health needs of the children and also the old people. And in the past 3 years, there have been even more emphasis of our customers on health. So this health is going to be our focus. And also, they want to be happy. Children, they naturally want to be happy. And those with money and retired, they look for happiness. So health and happiness is at the core of our delivery to our customers. And at the same time, for our new financial year 2024, there are 4 strategies and 2 core capabilities. And last year, we have not talked about some of them. Last year, we talked about the fulfillment, online and offline experience centers. Now we have added one and that is differentiated product power for this year. So for this kind of competitive environment in the retail segment to sell the same things as others. And it's difficult to attract customers just by that. Just to be slightly cheaper to our customers, it doesn't attract people because online is just too convenient. So we have to differentiate our products. We have to focus on health and happiness for our customers. And that is why for our differentiated own product power, it is based on high-quality price ratio featuring on our brands and on our user values of health and happiness. So we will be giving it all supply chain support. In the past, they come to RT-Mart to buy vegetables, and in the future and now, they will be coming to RT-Mart to buy RT-Mart vegetables, our own brands. And in this, we will continually insist on the 3 strategies mentioned last year and one, develop offline experience centers. So offline becomes a competitive edge for us. We will be creating services, scenes and experiences so as to pull away from the 5 kilometers radius competitors. So the customers who have to love coming and shopping at RT-Mart because it is so attractive. And further, in the past few years, of COVID under that kind of environment because we have the online fulfillment capabilities, we have created this capability. But at the same time, we find that in the past 3 years, online fulfillment had been built by everybody else. So it is something that is already a normalized must, so we have to create the fulfillment and also the experience for our customers because online competition is now completely fierce. So it is only 1 centimeter's difference that is between us and our competitors, meaning it is just the difference between a key on the keyboard. So we will continue to create online fulfillment centers. And at the same time, the third strategy is to increase our efficiency by exploring multi-format, a second growth curve. So we will focus and continue to do this. We will be basing on our competitive advantages of our RT-Mart that we have already been able to build, and we will continue to explore new formats such as M Club, and we will continue to develop our RT-Mini, and we will be going into some of the cities where our competitors are. And that will be the test of our capability. And in the financial year 2024, we will be doing that. And also in our omni-channel digital as well as fresh product processing, we will continue to focus on that so that we will be more successful. Thank you.

Thank you, Kevin, and Desory for the very detailed presentation. Next, we'll have the Q&A time. [Operator Instructions] First of all, the first question over here.

I'm Luo Chen from Merrill. The last time I met Kevin was over 4 years ago at the Hangzhou invest at the headquarters. And in the past 4 years, there have been so much -- so many changes, but very happy to see that the company continues with their strength. I have a few questions. First of all, in terms of the product strength. In the past few years, in our remodeling, it had been in certain areas that is the shops. Now we finally see efforts put into our products, product power. But you also mentioned that all retailers are saying -- talking about fresh product processing and private labels. And in the past few years, even though with all those said, there had been a downward trend. So in terms of product strategy, how are we going to be different from our competitors for products? And we are investors, we are focused on numbers. Can you give us a quantified private label, what percentage of that was last year's revenue and this year for the private labels and also for the other labels, what is the increase in terms of gross profit, please? Numbers, please? And a few years when we met with Kevin, it was in the parent company's headquarters, and we also see that there had been for [ 1 plus 6 plus M ] kind of change. My question is, what is the difference in terms of relationship with Ali. Ali had given you a lot of strength in the past few years in terms of resources, perhaps in terms of sourcing. But on the other hand, in the B2B2C or 2B, we have also contributed a lot to Ali. And I heard Desory saying that for this year for 2B business for this year, there will be deemphasizing for this year. Is that true? And has that got to do with the relationship restructuring with Ali? Can you please explain? A third question just now mentioned it is a flat sales for 2024 to be decreased and 2C is a single-digit growth. And for April to May, it is challenging. For the 4 past quarters, they have been more or less the -- for last year, the 3 first quarters have been at par, the fourth quarter had been dropping. And 2C, it means that you will have to have single-digit growth for 2024. But the beginning of the year had not been good. So what supports your single-digit growth for 2024 claim?

Very good questions. Thank you for the questions. First of all, for differentiated product, well, we have started late, actually, our competitors are all doing it already, I would say. But why, for us our product power can be different from others. How are we able to differentiate from others? Well, I think it is because of positioning in label. In the past, for the hypermarket, it was really about encashing and therefore, earning gross profit from the brands. So it is like coming up with lower costs, slightly lower cost, same product with the major brands that kind of a positioning for the products. That's been the past strategy. But now for our positioning, it is much clearer. First, we believe that for products, it is a traffic attraction. It attracts traffic. It is not just to encash traffic. When we talk about products, therefore, it is not about duplicating or replicating the major brands. But rather as I've mentioned, as we digitalize our customers, we will know our customers much better. We will know and understand our customers even better than the major brands and major products. And therefore, as we develop our products, we will be using that data and also we're providing value to our customers. We are the best brand, but at the same time, we are competitive in terms of price. And we are happy and we are healthy as brand and products. So with our self-products, you will see -- you will be able to see that we have a very short delivery time. And the major brands will not be able to do so because they will have to go through the entire channel. They have to waste a lot of time compared to us. But for us, our speed is very fast to the customer. And also our resources deployment is all in our hands. So a happy and healthy products can be better sold to our customers than the major brands. And secondly, it is our determination for all the retailers which retailer can come up with a major strategy and tomorrow, they will be able to be very successful. Well, I will copy them, but I've not found anybody doing that. It is all about sustainability. It's all about us putting one's head down and being determined and plotting on. And that has been a core competitor for our company, Sun Art as well. And also for the team in November around that time, we have come up with a new product and also in CNY, it is -- we have also come up with new private label products as well. So if you talk about the percentage, it is 1% only of our revenue, but we will be going to 5% for our private labels. But at the same time, private labels will be able to take us further away from our competitors. It will bring us diversified products and also our bakery and also our noodles and our food processing, we are going to put that into a private brand as well. So for this kind of broad-based or broadly defined private label, we want that to be 10% of our revenue. And also because we skipped the marketing costs. So we will still be about 5% to 10% higher than the products -- the average products because we skip the marketing expenses when they cannot. And they cannot just open up a few shops or a few hypermarkets, they will be able to be successful. They will have to be long term, they will have to understand the customers and also have the customers, have that kind of advertise for them. So they will have to so-called plants the grass, they will have to do that kind of work, and we will be investing heavily in this kind of work. So for the other strategy that you mentioned, [ 1 plus 6 plus M ] for Ali, all the subsidiary companies, this is the least impactful on us because all along for Sun Art, we have been a CEO-led company under the Board for all our cooperation with Ali, we have gone through CCT marketization. So in the future, this will persist. For our relationship and cooperation with Ali, the major direction will not change. It will be a win-win situation. It will continue to be so. Any cooperation will have to be valuable to the other party before it can be sustainable. In the past, for some businesses, there have been other objectives. For example, vis-a-vis the competitors, we want to compete with them and therefore, we have exited certain businesses, and it's not been sustainable. And at the end, it had -- we had to pay a price for it. So for this year, for where there is no customer value, including B2B2C and without any value to us it is just supply chain, we will be minimizing those businesses where there is no customer value, where there's no commercial value, where it does not contribute to our core competitiveness; for this kind of business, we will be diminishing them. And for fresh products, we'll be increasing that because we also think that online delivery and fulfillment is a major competitive edge for us. And therefore, Taoxianda is going to be a core area for us. So there is this win-win cooperation with Ali. This is also how they see it. So this is [ 1 plus 6 plus M ] for the strategy. And in the future, we'll continue to cooperate with Ali and our different BUs and also, we will continue with the marketized approach in our cooperation with them. Now for figures, after the New Year, we had a lot of ambition for the new financial year, we thought it's going to be very good. We -- because we had the right strategy, we have built out our capability and all our organization, our teams, we have a high morale. So we thought the market would definitely return. It would definitely be good. And therefore, for the strategy, I have also set a high confidence number. So 2C is a high single-digit growth for the -- for March to May, we have not reached our target. We are disappointed. And we find that our customers compared to last year, offline customer had grown 10% also. But on the other hand, ticket size had decreased because before the COVID, there had been an online difference, but it has gone back to before then. So it has -- we have not reached our target because during COVID, a lot of the traffic had been because people could not get merchandise because of COVID shutdowns. But now it's gone back to before COVID time. So it's a little bit disappointing for us not to be able to reach our very ambitious targets, but our competitors have been doing worse. So in the past few months, it had been extremely challenging. But the base for last year in April and May, it was also very uneven. There was 1 region growing exponentially and other region dropping exponentially. So we hope that going forward, in particular, Duanwu festival, it is in June and also in the summertime, summer vacation, the children are at home, and we would want there to be greater family consumption. So we are optimistic about the future. For the first half of the year, it is challenging. We'll have to gradually improve. So the hope is in the second half, after the second quarter. So on the one hand, it is the market. And at the same time, we also need time to build up. We will have 170 SKU -- new SKU for the first year -- first half. And the second half, we'll have over 300 total SKUs introduced, and we are continuing with our solution with the shops going for remodeling 2.0. We are going from shop-to-shop remodeling. So the next half of the year will be a lot more hopeful. In the next half of the year, it will be more optimistic, I mean, better in terms of performance than the first half, even though it is below expectations in terms of our performance, but compared to our competitors, we are way up there, and we are very confident about our strategy. And for the second half, we are highly hopeful.

Greetings. Citibank, Wei Xiaopo. And this is the first time we are meeting and before I ask a question, I just want to say that I have been following this company for over 10 years since IPO. And I see that your -- the management table is a lot shorter and it's more localized and the management is younger and your business model is a lot more flexible. And in the past, it was old school discussion. And this year, it is new school discussion. And that's my observation. Now back to an investor-focused question. In the past 10 years, also not just 3 to 5 years, we have gone through a few cycles, major ones. For example, for some of the competition with the overseas chains. And there's another one, which is the impact on competition from group buys and also for the COVID time fluctuations, contraction and opening and closing, et cetera. And the company had been changing along the way. But for food retailing, I think there had not been a successful model in China because there is no other country in the world with a good precedent for China. And the company is also making different attempts. And with this kind of achievement today for some of the companies in the same sector, they're not listed. So we don't see them. For a public company, we see the ups and downs, but we also see the efforts of the company. Given that, I want to ask you a question. Now the company situation compared to, say, 10 years ago since IPO before the impacts that I have mentioned, the management had talked about -- mostly about gross profit margin. So for SG&A pressure or inflation of costs, creating pressure, we have always been able to compensate for this kind of pressure offset, this kind of pressure by raising OP margin because of gross revenue and gross profit increase. So I would like to know from the management at this point in time of our company for -- we see that gross margin had increased rather significantly. And you talked about a lot of our investment in products, differentiation in products. Can you talk about this a little bit more for gross margin, is it still the same as before, that it will continue to in the mid- to long term to rise continuously so as to offset some of the uncertainties? So how do you see this in terms of the financial performance? Just now you said gross margin is a result. But my question is, would gross margin continue to increase, so as to offset the pressure from uncertainties. The second question is about this chaotic industry. There are new entrants as well and some of the companies are actually on-selling, off-selling and there are consolidations as well. So quite chaotic. So in terms of M&A, what are your plans? Are you cautious? You're not going to do extensive acquisition or if there are exceptionally good opportunities in certain regions, you'll go for it. And in the past, we have been working with [ Hama. ] And we understand the background to the cooperation. For [ Hama, ] what is the cooperation format in the future? Will we extend the scope of cooperation? So 3 questions.

Thank you for the observations that you have made just now, and it is true. These are very good questions. First of all, I feel that for the China retail industry, the competition is unmatched anywhere. It is fierce and for the channels changes to acquire customers, this is short term only because for any model of the channel, it can easily be duplicated and replicated. For hypermarket, for instance, if you take out the logo, or change around the logos, they look basically the same. They're all the same. No differentiation. So the new fulfillment, now everybody does online fulfillment. Nobody doesn't do it. So you can do big markets, medium-sized markets, small markets, and everybody else can do that, too. So for this industry, because of this very, very fierce competition, as I've mentioned just now, in the end, it will have to go back to differentiation competition. All the customers you think, can you get them all? Very difficult. If you cater to 1 sector, you lose another. So you have to focus on certain sectors of customers. As you focus on certain sectors of customers, you have to understand them deeply. After digitalization, as I've mentioned, with the data that we have, we will have a lot more insight into them. Before the end of the year, we have had 2,000 interviews with our customers. And we'll continue to do this, normalize it every month, in every operation region, we will pick stores, and we will have specialized consultancy firms to do this. And the shop managers will listen to the answers. And the questions are very focused and well set out. We will standardize these questions, and we are -- this is according to plan. And then we will be able to come up with a very comprehensive insightful report on our customers. So this -- we have already done the first step in understanding our customers. Secondly, we have to define our customers. A lot of retailers these days, I feel they're just selling, selling stuff. Selling stuff has no customer value because transaction is no longer a value, transaction is anything with a swipe of the mobile phone. So we have to go back to the products themselves, high-quality products, competitive pricing. That is the key. And every product has to be healthy and happy. If we have tens of thousands of products which are healthy and happy, we will be attracting customers with hard demand for health and happiness. Those who do not want health and happiness, those who only go for low price, for these customers, we'll have to abandon them. We'll have to forsake them. As for gross margin -- for gross profit margin, I think we are high for RT-Mart. In my mind, it cannot be over 20% for hypermarket gross margin. Today, we are at 24%, but that's, of course, partly because of lease income. With gross margin high, it means we have more room between us and the competitors, meaning there will be more entrants entering into this market. So I would want to control the gross margin to around 20% or just under. But because I have financial performance pressure, I have to continually increase the gross margin. But in the future, I think it will be because of efficiency that we grow the gross margin. That is operation, efficiency of our stores and where do we get the efficiency from digitalization and size, I'd say. And also through our optimization, our technology and also our operation excellence. We will able to lower the price for our and cost for our customers. And our customers will reward us with the money that they have saved by our efforts. So for last year, for example, I have grown 1.5% and there had been some impact on the -- because of COVID, and there have been certain businesses, which have been impacted. In the future, we will focus on growth and also on customer value. But I think the value must only come from efficiency of operation. For our industry, it is a difficult industry. For us, it is difficult. For our competitors even more difficult. For our company, with the regions such as [ in Jiangsu, ] where we have competitive edges, we will continue to grow the number of shops because we have the competitive edge, and we have the foundation. But we'll be very cautious in opening stores where we are weaker. In these regions, can we have this opportunity? We will have to be careful and if we just have a couple of stores going into a new city, we don't have that opportunity anymore, unless we have a good target for acquisition at the right price and there can be complementary relationship with our RT-Mart, only then will we do so. In the short term, it is not a major consideration of ours in terms of M&A because we talk about supply chain capability, digitalization capability. We're still building those. We have to have that kind of strong capabilities before we can grow a number of stores. It is not A plus B equals C, it is A x B with chemical reaction. Therefore, we are able to have more exponential growth. As for your third question, relationship, I think it will have to be a win-win relationship. If we have win-win cooperation, we will cooperate. But overall speaking, for us with, our business model, our target customers, they are different. So I think we are not competitive, but rather a kind of learning from each other kind of relationship. I'm good friends with Mr. [ Tai. ] We share all the time. And this can be synergistic in the future and importing products, perhaps there can be cooperation opportunities. I think it's possible, but it's not on the agenda right now.

Dustin from Morgan Stanley. First question, in short term, after COVID, how do you see the consumer trend? For April, May, you said it is less than expectation and online to see there had been some pressure on that business. Last year, same period, that was terrible time offline. But for April and May offline, there is no return of business in major ways. Is it because -- of what reasons, it is because people have been accumulating goods before COVID or during COVID? What is the reason for this challenge? In the past, it has helped with our sales because people have been accumulating goods. And for this year, we are able to see the results of that. I would like to know that is to say after COVID, what are some of the changes in terms of retail or consumer trends, consumer behavior, online and offline traffic and also some of the changes in the past 2 to 3 months? And second question is on guidance for profit. For FY 2024 compared to 2023, what do you think? Is it going to be still low? Just now, it's been mentioned, 80% of the shops have closed during COVID. There has been a lot of interference. So where the demand is relatively weak, but at the same time with no closures, can you talk about the different channels for us? What do we expect for this year, B2C, for example, online? Will it grow? And what about OP margins and 2B business, if they are to contract? Will there be extra loss or will they still be profitable? And from channels point of view, can you just share with us our overall profit, what will it be? And in the first half, if it's going to be challenging, will it be possible that for the first half, the company will be balanced or will there be actually a loss registered, please? And also for the 2025, 2026, how do we see profits margin going forward? And compared to 2024, if it is a growth say, by 1% or whatever percent, the main reason is for because of recovery of the industry or because of some of our individual -- our own company's strategies working out.

All right. First of all, the trend for April and May. For online, it has returned the business for April; offline, it is 10% growth compared to last year. But for ticket size, whether B2C or online or offline, it is 10% to 14% drop. But in that drop, we have analyzed the tickets, the customer orders. If we look at the same period last year, April, it was 28% growth. So last year was a very high base. And in that process, with this drop, the structure is because of 1 thing, and that is same period of last year during COVID, that was -- that was the reason. For each of the value compared to same period of last year, it would be higher. That is to say for the company in the past 1 to 2 years, the product mix had helped with the situation. So if we look at online compared to offline, the online ticket size drop is better than offline. And Kevin had talked about this just now. For overall this year, for the orders for March to May, the orders increase is a single-digit growth, and that would include consumer confidence coming back up. And also in the past year, we look at macro, online had been growing significantly. And now normalized regular consumption is something that everybody will be focused on. And all the retailers are also focused on that as well. And as a result, there had been a dissipation of consumption for us. In the past 1 year, everybody had been staying at home. When things opened up, there would be a period of time where people would want to go offline, they would want to go [indiscernible] that is to say, eat out. So this quarter, as everything continues to normalize for all the pent-up consumption, which we have to wait for it to have been released before there can be normalization. So this is our outlook for April and May. And secondly, for the guidance, if I can just further analyze. For 2023, there have been a double-digit growth for our ticket and overall gross margin at a 0.7% increase. In the second half, it will be even higher growth for margin. And B2C was an increase of 2% and the company in the multichannel operation 2B business, we have that capability. And in the past, during COVID, we have a very important role, a social role to play actually. So this 2B business in '23, it is about 6% -- or 2.6% of our profit for 2024 for this kind of channels, they will be normal in terms of margin, B2C would be 1% and -- B2C as well. And in that process, the gross margin would also increase. So for existing 2C business from gross margin optimization and cost optimization, there will be an upside of CNY 300 million net profit. For example, we have talked about certain impact last year. There had been a CNY 80 million impact last year during COVID. For B2C haircut, it is a CNY 70 million to CNY 80 million impact. So in the past year -- 2 years, for electrical appliances, it has not been an upward trend. In the past 2 years for home appliances, it had been a contraction for the sales of this. So whether it is a major household appliances, and there had been a decrease. It is about CNY 50 million in terms of downward and also lease income had also decreased. So last year, lease, we gave subsidies to our tenants and concessions to our tenants last year. But if we look at vacancy rate for commercial real estate, it is very high. So everybody wants to lower the vacancy rate. Everybody wants to do that. And as a result, the lease income would decrease, same as us. And we consider during this process, we will have to give the tenants very competitive conditions. And also our positioning has also changed. In the past, we have been a hypermarket and selling products. And now we want tenants who can bring in traffic, to bring in traffic for us. So their format of business would also change for these tenants. So for a hypermarket and the gallery are both important. So for the tenants, we will consider this for [ a gallery. ] And so there will be 2% to 3% drop in terms of lease income. And the vacancy rate continues to lower for the different regions. So for our gross margin outlook and our performance outlook given the present pace of development, it will be the first half lower than the second half. So this is the pace for us. In the first half, our -- if you look at the full 3 quarters last year, it had been very high base. So given that this year will be first half low, second half high. So for our deliverables for the first half financial year, we want to be at par with the first half of last year or even be breakeven. So this is something that we are adjusting all the time as we look at the pace of development. So this is the profit for the entire year. So for 3 to 5 years' outlook, 3 to 5 years, we hope to be able to have 1% to 1.5% profit margin. That hasn't changed. And the only change is building up of our capabilities and continually adjusting the pace of our development. For the next 3 years, we -- for the top line 2C omni-channel, it will be mid-single-digit growth. And at the same time, gross margin as we optimize our products and our operation, it will be a growth of 0.2%. And in that midst, we will continue to digitalize and that would include the digitalization, inventory of our shops and also the staffing. So staffing would also decrease by cost by 0.2%. So overall costs would decrease by 0.4% approximately. So that's overall speaking. That's a 3-year outlook.

UBS, Christine. The next question is still on performance. The first question is about cost. If we look at offline retail, it is already -- I mean overall, for China, the economy has changed. Look at the operating expenses ratio compared to 2019 before COVID, it is 160 bps higher. And your gross margin had decreased to 4.6% from about 7%. I think Kevin had come to the company in April of last year. So overall speaking, how do you see the cost coming down, expenses coming down? What is your pace of decrease? And in terms of magnitude of decrease, can it be higher? So it is not just about short-term profit growth, but it is about the entire economy of China slowing down and retail is kind of slowing down. So in terms of conservation and cutting down on staff cost, in particular and other costs, what is your outlook? And we see that for staff it has come down by 12% overall, but traffic had come down by 30% to 40% last year. So in terms of cost contraction in staff and in other areas, is there something that is structural for you? Whether it is target or measures, can you please explain. Environment is changing. But when that is not something you can control, but you can control the cost, right? And another question is on financials. You have CNY 200 million -- CNY 20 billion in terms of cash on hand and credit lines. But your opening cash flow is CNY 4 billion to CNY 5 billion. So you are a positive cash flow -- free cash flow company. How do you plan to use that cash? And your expenses is 100% higher than last year, and this is completely different from your revenue. How come? Can you talk about your tax rate? Why is it so high? That's the third question. Fourth question. I believe it was the first analyst who asked that question. If I can deepen that question, and that is your Ali relationship and your management change. The management had no -- just from your financial reports, no remuneration from the listed company. So for the -- your incentive structure, your remuneration with the reorganization of Ali, how does it affect the management here? I'm sure you have a very thorough exchange with Ali, given Ali's reorganization in the past month. Can you give us details, please? What is your incentive scheme and incentive structure given Ali's relationship.

I'll answer the first and fourth question, and Desory will answer the other questions. If you look at the PPT, the last page, the strategy. First of all, the fresh product processing that was added last year and digitalization is this year. So we will be digitalizing all our stores. For e-commerce and also delivery service, it is just about product digitalization. But this product is not linked to the shop's digitalization. So we are providing this store space digitalization. That includes our stores, the inventories and the product [indiscernible] digitalization. That has been done to a certain extent. And also, there will be a separation of the shop and the inventory or the processing center. For the processing center, that would include our replenishment of goods, et cetera, and that -- and there will be tasks for everyone when the products have come and arrived and there will be a very efficient operation. The efficiency will actually increase significantly and for all our staff members, they will also lower the time and efforts that they need to look for the products in the center at the back of the store. So through this space or store digitalization and product digitalization, we will be able to realize the digitalization or smart picking of goods. And this actually contributes to quality. That is to say if the products are not accurate, then you actually lose the products because they go bad because the products are not sold in time. So with our store manager's experience, they will be able to order their supplemental products. So the accuracy is assured. And in this year, financial year, for most of our stores, this digitalization will be completed. And the separation of the shop and the back-of-store -- back-of-shop store, the separation with different systems that will take time because it will take time to also change the behavior, working behavior of the staff as well. So we believe that the cost efficiency will continue because the hypermarkets are big and the staff members are about 200, strong for each of them. And our goal is about 100 strong as well. So it's like 400 staff members for each store. As efficiency raises, the efficiency of the store -- as it increases, I believe, that at least in the next few years, Desory will be talking about the target, we will be able to continue with the increase in efficiency and lower staff costs. This is not about cutting the salaries of our staff. We want them to earn more, but we want to raise efficiency. But at the same time, what we want more is to provide better service. For the hypermarket, we want to be IMAX of hypermarkets. So it's different from the movie houses. IMAX is different like 20 years ago. And hypermarkets, our hypermarkets are different from other markets. It is a kind of service, it's a scene, it is an experience, and it takes staff. And the staff that we have released, we will put into the scene and also the products and also to raise our performance. So the staff we have different roles in the future. We changed even the title of our store -- of our store staff, the store staff are now sales staff now. It used to be that they were product staff. In the past, the hypermarkets will put their products there so that the customers can come, pick and choose, no longer that. We understand the customers. We actually design products for our target customers, and we sell them those products. So this is the most important change. So we are very confident about staff costs and other cost efficiency. As per the management's incentive very clearly, we will be localizing all management to Sun Art. And we will be getting a salary from Sun Art. And we are -- we would expect that there will be stock options from Sun Art sometime in the future. So for all the investors, we are together with you for the long term. We will be creating value for Sun Art. And also, we will be rewarding the management as we achieve those targets.

Christine talked about cash usage. Yes. And as mentioned, [ CNY 155 ] is from prepaid card. For prepaid card, it is money from the customer. So we are just managing their money. So if we look at this kind of wealth management return on investment, it is much higher than the market. Last year, [indiscernible] was 1.5% or 2%, and we were at about 3%. So this is about our customers' cash. As for the CNY 6.2 billion for CapEx, it is over CNY 2 billion for the financial year and that would include 2.0 remodeling. This financial year, we want to be building up the scenes and for remodeling, we will be going to 200 to 300 stores. And also for multi-format, there will be CapEx as well there, 12 stores and M club as well, there will be CapEx there as well. And this is the first year of reopening up, and our CapEx will be as such. So from our free cash flow, we hope that we will be able to provide us with development capability and possibilities. And that is how we're going to use our cash. As for tax, if you look at the financial report this year compared to last year, there is a difference because last year, profit tax is higher than this year because last year, there was impairment. So for financial arrangement, there is a deferred asset. It is a deferred asset. So the profit tax was about CNY 300 million compared to CNY 600 million this year. For this financial year, East and coastal region was impacted severely by COVID. For the revenue there, it will be better in terms of growth. So the regional differentiation will cause some of the profit tax to be higher for these regions. And in the future, the company will look at the 5 major regions in the country and including our supply chain and also our self-owned brands, there will be further optimization.

Now because of time, we will have -- we have another event. So please continue to communicate off stage. So we have to close the session here. Thank you very much for your participation. We hope to be able to see you and meet you as soon as possible. Again, thank you, management. Thank you, everybody. [Statements in English on this transcript were spoken by an interpreter present on the live call.]