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

Ladies and gentlemen, good morning to you. Welcome to the Sun Art Retail Group Limited 2024 Interim Results announcement. This is a hybrid meeting online and off-line. We have already sent the PPT by e-mail to all those registered investors. If you need a PPT, would you please go to the Sun Art website and go to Investor Relations and choose company brief on the online webcast selection and you will be able to get a copy of our PPT. Today, we have on the stage here, the Chief Executive Officer and Executive Director, Mr. Shen Hui; and we have Desory Wan; as well as the Head of Investor, Ms. Gu Xiaobei; and Altus Financial Adviser, Ms. Jeannie Lam. First of all, allow me to read out an announcement because the company had already made a public notification concerning a possible offer according to the acquisitions regulation in our exchange, we can -- we will base our content on be published information, but we will not be able to provide any key new data or release new opinions, or we cannot discuss anything concerning the acquisitions or future forecasts or operation performance after the interim results. First of all, we will have Mr. Shen.

I would just want to say a couple of words to say welcome. Welcome to our old friends and you, and thank you for your support to Sun Art. The arrangement will be -- starting with Desory. She will be talking about our operation results and then I will be reviewing some of the operation strategies and some of our future plans. And I would very much want to engage with you at the Q&A session. Thank you.

Good morning, everyone. I would want to report to you the financial highlights for the first half of 2024. Revenue was RMB 34,708 million. Same-store sales growth grew by 0.3%. Gross profit, RMB 8,526 million. Gross profit margin, 24.6%, and this is a RMB 600 million increase from the year before. And within the period, the EBIT margin was 1.8%. And the company in the first half of the company, had been able to turn around to black to profitable from making a loss, and we have built a very good and sound foundation for our business. Next, let us look at our store expansion for all our multi-format, we have a total of 466 hypermarkets and supermarkets 30, membership stores 6. We continue to focus on our store expansion, and we have been able to increase by single digits in terms of our hypermarkets. And for the future, we will be able to continue to grow also on our superstores. And we had new openings of three membership stores, Nanjing, Changshu and also one other. And this year, in Changshu, Wuxi and Jiangxi, we have increased 3 membership stores, and we have also opened one just last month. And so we have 3 hypermarkets and 4 super store sites that we have secured. And for the revenue of RMB 34,708 million if we take away some of the supply chain business scaling down, including Tao [indiscernible], the actual increase is actually 0.6%. And also the scaling down of the supply business -- chain business is approximately 2.5% impact on revenue, and we continue to pick up. And for APP and also our online contribution. These are major drivers for our revenue and also to our B2C, the ticket size has also been increasing and contributing very positively to our revenue. The rental income was RMB 1.5 billion, representing a year-on-year decrease of 2.3% to RMB 35 million decrease. The reduction of gallery areas caused by store closures and tenant mix adjustments are the reasons. And we have been trying to increase for our gallery shops, our proprietary shops. And also, we have been reducing our gallery areas, but at the same time, complementing our tenant mix and also our products mix. For gross profit margin, it was 24.6%, and there is a year-on-year decrease of 4.1%. And this is partly because of our implementation of low-price strategy and reshaping our price competitiveness. This can be made good by expenses. If you look at the expenses, next page, you'll see that the -- we have been doing well, and it is some RMB 1,090 million decrease year-on-year for expenses, and it is some RMB 900 million plus in terms of a decrease for expenses. And mostly, it is because of our optimization of personnel structure, including the optimization of our stores and headquarters personnel. And also from the original 19% -- 9%, it has increased to 17%. And also the optimization has been continuing -- continually rising, as well as improvement of investment efficiency of our marketing expenses. And we have also stepped up with our negotiation efforts for rental cost reduction. And therefore, overall, the expense rate reduction had been higher than our profit or gross profit margin increase. So -- or decrease. So this is expenses accelerating our cost reduction and efficiency improvement. For EBIT, for operating profit, the profit margin was 1.8%, and we have been able to turn around the loss-making situation. And you are able to see that for our EBIT, it was RMB 621 million. And we know that with our peak of retail and in particular, for some of the festival seasons that had contributed to our operating margin. And going forward, we are very optimistic. For net profit, it is a RMB 186 million. And for our -- next page, working capital days, CapEx and net cash position. Working capital days is at 76 days. And trade payable turnover, 76 and inventory turnover 24. CapEx RMB 419 million and net cash position, because of some of the prepaid cards, et cetera, our free cash -- it is at RMB 6.9 billion compared to the beginning of the year. It was RMB 5.5 billion in terms of free cash. So there is this increase. And so for our first half, we are stable in terms of our profitability and especially for our store rationalization, and we continue to support the strategy for growth going forward. And in particular, for our superstores, some of our optimization will continue to contribute to our increasing and room for further CapEx or further investments. So for the first half of the performance, this is our report card, and it also builds a very good basis for our future. So that is the report for the first half operations. Next, Xiaobei will be talking about our strategies of the company.

I want to discuss our strategies with you. Our strategies -- from the very beginning, we have already formulated this strategy of ours. Well, specifically speaking, I would say, this has always been our roots. We are back to our roots. And I totally identify with that back in Ocean times, and it was a company that was very much integrated with retail. So when we say back to the root strategy, this is very clear and that is we will have more and more high-quality products to be sold to more and more customers at lower and lower prices. So this is our very clear value. And I have always been saying this, and I am completely committed to this, and this is very core to us. And in my -- going around in the rounds to the various meetings. Everybody had also resounded this particular undertaking. And also as Desory had mentioned, we have -- for a time, we have deviated. We had not been paying attention to prices but our consumers, our community neighbors, our clients, definitely, what they want is lower and lower prices. Same quality commodities or products, well, not to say that the product's quality should drop, no, but rather same products, but lower prices. And as Desory had mentioned in the first half, we are definitely growing in our operating revenues and also in our profits. So this is very important. For the first half, it is clearly seen that we are increasing in our operating revenue and our customers. So we are very confident about our future that our growth will be even better going forward. That is the first thing I want to say. And the second thing I want to say is even more important, and that is a value of a company is to care for our colleagues, serve our customers and strive for excellence. And this is in the heart of every one of our personnel. Very often when we talk about the operation of a company, it is based or guided by our value system. And then in our commercial strategy and our HR, in our management strategy, these are implementations. And we also, as management, teach by example. So I very often remind our management members that we have to care for our colleagues, serve our customers and strive for excellence. I want to talk about this in further detail because this is very important. Caring for our colleagues is about trusting and sharing. We have to trust our frontline colleagues, our -- all our colleagues, we have to share the wealth together with them so that they can serve our customers even better. And to me, deep in my heart, I think this is an important KPI apart from caring for our colleagues providing the working conditions for them, supporting them. But at the same time, their incentives, their bonus can also rise as our business performs better. I'm very happy to see that our colleagues in the first half of the year, their bonus has been increased compared to last year, it was a major increase. Serving our customers, our Chairman, Mr. Huang had told us, we always have to satisfy our customers. Who are our customers? We think about every day. What kind of service can we provide to satisfy them? Our customers are all levels comprehensive. And this is a good reminder, because when I say sometimes we have deviated, because we have focused on certain segments of our customers, and this is not good. Our customers actually come from all around. To understand their needs, what they want is important, not just for one segment of our customers. And also for our community neighbors we are a living center, especially for our hypermarkets, we are a center within the community. So we have to continue to serve the community and to strive for excellence every single day. We have to tell our colleagues that, that is what we are about. We want to increase our sales to the maximum and lower our expenses and cost to the minimum. So for there to be growth. I can tell you that we have to build on strong basis, strong basis for customers flow and for our operation, and this is already, what we've done actually is already very encouraging. And at the same time, our expenses had been very well managed. Expenses are to be minimized, and that is what we have achieved in the first half, and that had contributed a good performance in the first half, and this will continue. We provide our customers with fresh convenience comfortable and inexpensive shopping environment, and we build a good neighbor of -- in our community. So within our radius of service, we provide our customers with fresh products and definitely convenient. We have very good car parking. We have good flow off-line and online, and comfortable shopping environment, or also in expensive pricing. And also, we have also been building up, but this is insufficient. And now and in the future, we will continue to do it well, and that's us being a good neighbor in the community. For hypermarkets, I can say that looking all around us, I would say, we cannot say that we are the one and only unique, but we are rare, in the sense that we are really a living center for the neighborhood. It is because of our positioning, and we have sufficient space. We are not only in one shop, but we are really a center for life or livelihood around our community. So in our shopping center, we have the commodities or products that we provide to our neighbors in the community, even for some of the very detailed needs that they have, we try to satisfy them. And also in our gallery, not only we bring in rental income, but we cover traffic and service needs of our community. So together with the -- our own products, and the gallery, we bring in traffic as well as the satisfaction of debt services and other needs of our communities. And this is going to help us grow significantly. This is a very important point, and I just want to talk about that as a start. Yes. Also to focus on our product power and also our customers' needs, that's very important. And also for each of our stores, each of our points, they have to be the leaders within the circle. I half jokingly say to our associates that we have that particular stature about us. We have the operation. We have the values and culture. We have the scale, which is large. And also, we are able to be the leader in our business. But at the same time, we understand that we have deviated for a time. Now fresh is very important. Fresh is very designable and it is the quickest to differentiate us. And so for our growth and also in our penetration, we have definitely done very well. And this is one of the things that will support us in our continuous increase in traffic to our shops. And also further, for instance, for some of the products, let's say, fresh products or RMB 3, bananas is a high-quality fruit, and apples at RMB 3 sale price that's very attractive indeed in terms of pricing. These are blueberries or very reasonably priced. Blueberries are very unique fruits and other products, more differentiated products. We have all of them. And also for purchasing it is nationwide. We have Xinjian, purchasing center and also the CCTV had invited our colleagues to share on the -- concerning our purchasing. And also for our seafood and some of the very popular crabs, et cetera. We also offer that through our purchasing. And also, this is definitely extended to our fresh products. For our proprietary or private label products in the past few years, we have deviated from what is right, because we have given up on the thumbs up label. But I would say we need a higher at the time we said that we needed higher pricing, higher quality but that is a deviation, because we are about hypermarkets. We want to be able to face up to most of the customers. But we have been able to come back to the right path very quickly. So for two things, one for the -- yes, for we have different labels, and we have labels and are focused on first-tier customers, but we are more reasonably priced among these first -- first year pricing. And secondly, for -- if you have been noticing our news for thumbs up and some of our private labels are doing very successful going to some of the shops. Even I myself were not able to get some of the products that have been sold out, and that is a good headache to have. So the effect is very good for the building up of our private label and also our flagship products in terms of sales, pricing trend, it is really very, very good. Please, I invite you to go to our shops to look at this very core value of ours. So we optimize our product selection, and we continue to strengthen the Bastian flagship products that we have. And in my mind of this thinking when we come to a certain scale with our partners, strategic partners and where we have sufficient returns, either we reduced price to share the -- to share with our customers because we are already the lowest price among our competitors or we can provide more products for our customers, raise the basically to optimize our product strategy. And also for some of the food products, for example, the deep-fried dumpling hotel, et cetera, and some of these related products, they are so successful, and some of them have been [indiscernible] the crunchy [indiscernible], if you will, is doing so well, extremely well. So price is really the foundation of our business. So we have talked about fresh being a strategy and products being a strategy, definitely, we are the lowest priced within our industry. So price is our basic business foundation. And our pricing, since we have come back to the path from our deviation compared to the lowest prices in the industry, we have been able to achieve overall speaking for our products. We achieved the lowest within the commercial circle. So this is very important, and it is very worthy of our continuous investment. In the first half, we see that our gross profit has been -- is controllable. It is completely controllable because it is composed of different categories of our products. The different products or categories had led to the gross profit situation. And in the future, for our gross profit margin, we will continue to manage it well. And I have always been saying, we do not chase high gross profit margin, but to avoid wastage, to avoid wastage is something that I take to heart. For retail company, there are three things: commercial and that's customers, management and our staff. First of all, customers, we have to understand our customers. Management is to cut down waste to actually stamp out any waste in terms of staff efficiency, investments to avoid any waste. And for staff team, all our staff are our brothers and sisters. We want to make them a working environment, whereby they can work happily. And further, for the pricing matrix, we have the thumbs up. we have PB, we have tin tin pin. These are -- we are very highly sensitive to lowest pricing within the commercial circle, and we work together with our partners and suppliers, we all pitch in, and also not to raise prices and also special category products with guaranteed low price. Our penetration is extremely high -- and for these products. And these completely are important in providing new quality products to our customers. And in our super stores because they are smaller than our hypermarkets. It's easier for us to do the presentation and for our focused products, and that is important. So efficiency is also a key to our company's survival. Actually, Mr. Huang had said that our efficiency is the key to whether our company continues to exist a survival. So we have an efficiency committee and among our peers, there are companies which are doing very well. Actually, there are good examples among our peers, and we have been taking notice of them. But we -- for our hypermarkets, of course, we are differentiated as well. With our hypermarkets, deep in my heart, I would say, for efficiency, it is very important. Otherwise, it will be very difficult to maintain the competitiveness of our hypermarkets, but we should be able to attain with high efficiency. And also, we already have some results from raising our efficiency. And we continue to push ahead strongly. For example, in marketing, in operation and supply chain efficiency, we continue to improve. And also in our marketing for some of our good products, to promote its sales. I would say, perhaps in marketing, there had been some inefficient marketing and with insufficient response from our customers, we will make adjustments for these. And we will have a lot of optimization programs for them, and we have already put in such optimization strategies. And further, we will continue to -- we have already gained certain results to allow our customers through IT, technology and through adjustments, we allow our customers to use more of our self-help purchases and also for our supply chain efficiency, that is important, too. So if you look at the PPT for supply chain, as I mentioned, for the thumbs, I can say I'm very happy with it. It is scoring over 95% in terms of marking, because it is about a iteration for quality, we continue to optimize and enhance it in packaging, we continue to enhance as well. And also we have PPQ, and that is the whole cotton of presentation and the effect of that had been very good. So, we also, apart from PB, we have some other products which are on the road, and they would include some of the staples such as oil, et cetera. So this is a whole carton sales. It is a -- it is about gross profit we're chasing for gross profit and not gross profit margin for this kind of sales format, because it lowers our expenses and this whole carton or whole box sales gives us higher efficiency and higher profit margin and higher price competitiveness. We also, second point, continue to optimize our personnel structure and pattern, and this will help in reducing our man hour. And we're able to digest that processing, bakery and cooked food, et cetera, we need personnel as well. or in the past, we have been overdoing it a bit. So on the one hand, we raise our efficiency. And at the same time, we also reward our personnel. And that is why I said just now, we want our personnel's bonus and income to increase. So as we increase our operation results, we also want to reward our personnel as well. And also our personnel also help us increase our efficiency. Third point to raise our efficiency pertains to our ratification of tail-end stores, the low-performing stores in September, we are very clearly able to see that trend in the future. We will continue to rectify such stores with significant improvement. And internally, we will be -- we will categorize these as stores that have experienced low revenue. I'm not saying all these talent stores are loss-making or hopeless no, that is not so. But rather, in our fine categorization of these tail-end stores, for example, the commercial circle, their competition, their operation, and we look for solutions for each of the stores and each of the stores will be differentiated. We will be pinpointing their pain points, their problems, and we will try to resolve them. And if indeed, we cannot resolve those problems, we may consider closing them. But before we close these tail-end stores, we will try to resolve the problems. For one store, for example, after rectification or adjustments, I can say that, that store has turned around from loss-making to become a more typical store, profitable. And there's another one, which will be changed to -- from hypermarket to a superstore. And also, there is another store, which may become more facing to the community and with more food provision. So the results have been very good for such rectification of these stores. Next, continue -- we continue our multi-format and omnichannel development, and that would include our RTE supers. This is basic towards the hypermarkets. We are fully confident that the future would be better. for our super hypermarkets. So this is our basics. And at present, there are a few areas of our development. And first of all, for our RT-Supers, M Club, our membership stores and also our online sales. Right. This is in the beginning of the month, we have opened this RT-Super. It is about 2,700 square meter is big. And we have -- at the beginning of the year, we have been adjusting our RT-Supers and we have looked at Pandan Li and also some of the exemplary peers, and we have taken a lot of their concepts. And so we continue to adjust our products, our product mix. And also, we have already made some adjustments for these RT-Supers and in particular for this RT-Super that we have made adjustments to in the beginning of the month. We have showcased all the rectifications and adjustments and some of the new concepts and the performance is very encouraging. For example, the SKUs, we have contracted that. And also, we have, also made stronger presentations, lower prices, increasing the quantity, quality of the products, but staying put with the pricing, et cetera. And also some of our new product mix. So for the pricing mix matrix, the advantage is even more significant than our hypermarket, the pricing, especially for the coastal Eastern regions for the first half been performing well. And also in the first half of the year, the results are very solid, and the consumers' feedback is very positive. For our RT-Super, we are very confident from the feedback that we have gleaned, this will be the way we are going. Now as for the hypermarkets in terms of development, we will be opening some sparingly, but it's difficult to find the right spot for it. So yes, the hypermarkets will become the centers of our community, and we will continue to look for the relevant spots. But on the other hand, if I can just share with you the French situation in France, there is [indiscernible]. [indiscernible] is a French brand name. Over 10 years ago, it was 12% in terms of market share, 24% now and [indiscernible] and Carrefour lag behind its price competitiveness. Now this is a hypermarket brand. Even in countries such as France, it is doing so well. Our hypermarkets are even closer to the community, not in France. And even so, they've been performing so well. But we have a lot of room, as I've mentioned, a lot of room for further optimization, and it is also true for our superstores as well. For M Club, on Friday, we'll have another store opening. And for this month, there will be 7 in total for M Clubs. Some of the results that we have got, we will continue with this direction of M Clubs. I cannot say tomorrow that we will be picking up speed and opening a lot more M Clubs now, but we are still strategizing and Costco and [indiscernible] would be our models for operation. We'll be more localized, and we will be more utilizing our supply chain for Alti Mart, and we have Jiangxiin and mainly in the coastal -- east and coastal region for our M Club opening. And relatively speaking, we have some new quality products, which is already very popular with our M Club customers. So we have these 7 M Clubs and this is found provided us with a sound foundation. In terms of our brands, of our partners and our supply chain, we will continue to refine that, so as to build up our supply chain and product power. If you look at the Yangzhou M Club store in the first half financial year compared to last year. Let me think. What is that? Right. The membership card, it is slightly lower than the [indiscernible] level. But in terms of sales, it is very encouraging, these M Clubs. And also in investment, the loss is come narrowed. So I cannot say we are already there. We've reached the destination, but definitely, we are on the right path. And for online, -- for our product power off-line, it also helps with our online sales. This is very important. For our product power there is this RT, Duca are uniquely RT and this is a product line that is very, very popular and welcomed by our customers. And that is a multichannel drive off-line driving online, and including our Jingdong, [indiscernible], [indiscernible], our new partners have also provided us with a lot better revenue online. And for online, every sale is profitable for us. So we will continue to increase our sales online. And for efficiency, online. It is also being enhanced and it also with our product power and low price competitiveness, we continue to enhance our customers' stickiness. And our ticket size is also increasing for online, and I would hope that to be a 10% increase for the first half of the year compared to last year, it is an increase of close to 10%, which indicates that our profitability will be higher even for our online sales. So that concludes my sharing. Thank you very much.

Thank you very much, Desory, and our CEO for the sharing. We will have two parts to the Q&A. First of all, those basically in the room and then those online. [Operator Instructions]

I am Lo Chen from Merrill. Just now, I have heard Mr. Shen's sharing I would say, as a veteran in the industry. Definitely, you -- from your joining, you have already raised the performance of the company. And just now you talked about the community center positioning of the hypermarket. Now I my home is in Shanghai Pudong and I can say personally that with the -- your hypermart, it has breathed in a lot of vitality to the community. Now for the retail market, I have to say that the drop in market share is something that is undeniable. And so given that, what is the hypermarket future for you? How do you see it? And some of our leading companies in the field are having a hard time, and it seems that there will have to be major adjustments. But on the other hand, we have to always be chasing the changing times. I mean the entire industry is making adjustments, but everybody seems to be the same kind of rectification and adjustments, fresh products, proprietary brands, lowering of prices, but very often or sometimes the plans, strategies cannot keep up with the changing times. And every few years, there is a new change, digitalization, and all automation, all kinds of changes. And after 2 years, there may be another major change for the industry again. So strategy cannot chase up to keep up with new changes. Given that reality, how do we see the future in our hypermarket segment? How do we want to position our hypermarket given that kind of macro or industry change? That's the first question. Secondly, Pangdongli, some of the other companies have been or some of the peers have been replicating the Pangdongli model nationwide. So how do you see this? Are there things that you can learn from the Pangdongli experience or perhaps in the Tier 1 to 2 cities? Is there anything that we can perhaps replicate?

First of all, I want to say for our performance, for our -- coming back to the path, coming back to roOTC for our product power, et cetera, it is not because of me. It is because of the very sound foundation of RT Sun Art. So this is very important in coming back to the path. Now when I first started in the presentation, I already said that RT had already been existence, but I am of course, also guiding the company on the path. So what I said came from my heart, and that's very important to me. And in the future -- for the future, I would say the following: First of all, for retail environment, it has always been constantly changing. I see that in Europe as well. Auchan, for example, a few years ago, it was the -- in terms of e-commerce, it was very active and now it is omnichannel, et cetera. So there are changes constantly. But what is important is that we always provide what the consumers need. For example, for the different shops that we have, the different stores that we have. For example, Jiangchang store in Shanghai in our commercial circle, it is -- it was a hypermarket. Originally, it was a hypermarket. And we are planning for it to become a superstore, and we also put in the community cafeteria. And I will give you an example as follows: In September, this store was the highest growth in Shanghai. I'm not saying all stores will follow that model, no. But according to the environment, according to our structure and also our neighborhood, we will be positioning our stores appropriately. And secondly, for example, in Suzhou, in Northern -- Suzhou -- or Suchen, the store in Suchen area in Suzhou. It is a center for community life. And at present, at this moment, I do not have a definition as to exactly what it will look like. But definitely, it will face up to the community to provide the services and products that it needs. For Europe, especially for France and for Canada, U.S., there's Walmart, and compared to Costco, [ Samarel ] they can integrate with the community very well. I remind my team all the time that the market is big enough. We have some stores where there is a [ Samarel ] opening right near us and they're doing very well. And we have the stature. I always tell my team, it is fine to have a competitor opening near us. Our store will still be growing as well as they because when we talk about a community center, it is not just about the circle because the -- we are open, we open up to the outside. It's not just a closed circle. We are optimizing it still. But we -- what I'm saying is that we attract a lot of traffic. You can imagine 1.5 kilometers radius, if we are able to buy good products, really fresh products at good prices and at the same time, I get the service that I want, and I can also have entertainment for half a day and dine out there. So it becomes a community. So it is attractive for the -- for traffic, and this is what our neighbors need in a community. So I just want to illustrate that. Your second question, Pangdonglai, it is a true example because in its positioning, as I've mentioned just now, for our supers and also our hypermarkets, we are planning them and in the next financial year, beginning of next financial year for hypermarkets, we will have some of the features of Pangdonglai. And when the time is right, I will be sharing with you. But for RT-Super, we have already some of the concepts already included. It is something that retailers should do actually for many of the features, it is what retailers should have. So as I've mentioned, we have to respond to demands. Not only that, we have to make adjustments all the time. For example, online and offline, we integrated. And also we have the ceiling chain system, as you know, already put in the hypermarkets, so we already have certain solid foundation to forge ahead strongly. We are definitely not just sticking around and having a hard time, no. But rather, our team has high morale the condition for our team is very good. And some people say, why don't you move faster, quicker paces going forward. And I say, well, in the first half of the financial year, I want to build a solid foundation first so -- and also, we continuously absorb examples from the market, not only from Pangdonglai, but of course, we have our own unique foundation. But at the same time, we learn, we are open-minded to our industry. We're definitely not waiting out for others to die off and whittle down. That's not our strategy, but rather we are very vibrant. At present, Pangdonglai, I would say, for the stores in the commercial centers, the renovated stores are in these areas. As for us, we are more in communities, for the [ Hangzhou ] superstore, for example we are still by ourselves. It is not built into a community center yet because around our store, there is not a lot of buildup, not a lot of offerings still. So it will improve. And this is important just to respond to you. We have our very clear plan, and we will continue on our very solid foundation.

Citi Bank, Wei Xiaopo. I have 3 questions. One big one and 2 small ones. One concerning the operation. Just now you said that it's not just about the profit margin, but about the gross profit more. So in terms of sales and also profit margin, what is your balance? And it is 24.6% for our profit margin. But if you say that is not the main point. But at least there is a baseline, right? You cannot have too low a gross profit margin, right? What is the lowest? So as you grow your top line, what is your baseline for gross profit margin? That's the first question. And secondly, for your proprietary products, your own labels, can you discuss the own label performance in the past half year? What is the gross profit margin for these brands? And also what is its contribution to total sales. Third question, perhaps is a more challenging question, and that is I saw from Mr. Shen's PPT that there are a few strategies for operation. And in English, it says caring for the staff. But in the first half, there's been a lot of staff cuts. And we are in the financial industry perhaps just now, the person asked a question, for us in the financial industry, we are trying to just survive and where the -- and there had been a lot of staff cuts. And where there are these staff cuts, it is a hit to the morale. And then you say you care for the -- your personnel -- and you also want to rationalize your personnel team. So how do you balance that? And how do you -- perhaps you also incentivize them. Pangdonglai is not talking about their stuff, but I would think that is important, caring for the colleagues. And how do you actually go about doing that?

First of all, your first question, of course, we do focus on gross profit margin. I'm not saying that we disregard that. For each of our categories, we have a standard for it for gross profit margin. For this year, the gross profit margin looks that -- like it is slightly decreasing, but we have to look at the mix. For fresh products, it was quickest in its increase, and it has decreased a little bit in the first half. And of course, we minimize always, as I have mentioned. And for next year, for example, for our Suning. As you know, Suning household electrics, we -- they've come back to partner with us. And the profit margin there is lower for these products -- for household electricals. So for gross profit margin, as far as I can see now, it is reasonable. It is at a reasonable level. And also, we know where -- which categories of products we can put in more investments and where we can optimize a bit. So gross profit margin is important. It is very important just to assure you. Secondly, for our own labels' profit margin, it is higher than our other categories gross profit margin. I don't know whether I can share this piece of information, actually. But I will say that we are -- our cooperation with the suppliers, manufacturers even closer. And I would say for [indiscernible] long, for example, we had a 3-day business strategy meeting with them. And the CEO said that they're talking about the ROA for a single product. So this is not just about gross profit margin, but rather for their supply chain, they put all the elements inside and they calculate an ROA. And this ROA is quota based. And on that basis, they lower their price. And Auchan, there is a backpack, right, product. And basically, we cannot match them in terms of pricing. So they look at not just at the gross profit margin, they look at ROA, that's what they do. So for our private labels, we will do the same going forward. We already have a list have not gone into details, but I can tell you that either in pricing will be even lower for our own labels, but at the same time, we'll be also optimizing or enhancing our quality. And this private label is helping us positively contributing to our gross profit margin. And lastly, your question concerning caring for the colleagues -- Contribution to sales for our private labels, right, you asked that question. For French companies or Costco, it is about 30% contribution. But because we've just come back to the path, so we do not have a requirement for sales contribution. But for each of the products, each of the categories, we want to be the best for our private labels. In the future, we can talk about trends, et cetera. But at present, what I'm happiest about is that more or less, I cannot say 100%, but basically for our private labels, they are doing very well. I can tell you, I can use the description as highly satisfied. I'm highly satisfied with the performance of our private label products. For some of the peers, as I've mentioned, it is about 30% in terms of sales contribution. Your last question was on caring for the staff or colleagues. You see this is #1 in our value system. We are brothers and sisters. Somebody shared this with me some time ago. And that is if there is no warmth in the company, how can there be smiles in our service. So at a very difficult time last year, at the end of the year or more or less at that time, we had a round of staff cuts, and the morale was bad at the time. And through our revenues increase and our increased profitability, it had raised a confidence level of our staff and our team. And we have a survey. We've stopped that for a few years and before at RT, we had -- we always had that survey, staff survey to gauge the confidence level and well-being of our staff. We have done some of this survey and also some of them were open-ended questions for our staff to fill in. And they have said they have really realized something new, and that is the income had increased for the first half of the financial year, yes, and we will continue to make adjustments. And we also see the Pangdonlai bonuses, monthly, et cetera, and we will be considering those for the bonus. Total bonus is higher this year compared to last year by double digits. Because of our staff rationalization, the bonus for each staff member is higher. So the staff are happy. For the first half financial year for 100 stores, well, I have to say, I've been to many of these stores. First of all, I look at the customer responses at the stores on site. And also, I was considering the strategy, for example, some of the price metrics, the degree of freshness of our fresh products, et cetera, I look at everything. And so while there, I was considering our strategies and also very importantly, by being on site, I am talking -- exchanging views with our front-line colleagues because their feedback is very real. And I find that they are happy compared to a past period of time where they were confused and lost. Same with the management, actually. So we have been working in continuously on this. So what I'm most happy about for colleagues is that through bonuses, we are increasing their confidence level and also raising efficiency. When I say efficiency raising is not about staff cut, but rather, we become more competitive. And in certain divisions, we are actually adding staff, so as to raise our performance. And at the same time, we are sharing the results, the positive results with our staff, rewarding them. And I can feel that from some of the responses in our surveys, I can feel that for our front-liners, they are proactive, and we have been caring for them.

The second row there.

Dustin from Morgan Stanley. 3 questions. The first question is a management question. In the first half, the performance had been good. And the management seems to have been doing well, and we see acquisition news in the market. So Mr. Shen, as the CEO of the company, -- and I'm sure you have plans and strategies for the next year and also for CNY and also the graps that retail sales opportunity and also we have some very positive changes. How can you continue with that trend and because you may be facing with certain changes? And Mr. Shen, how do you formulate a good strategy and to persuade your colleagues that this will be the way forward, and it will not be affected by any change in shareholding? That's the first question. The other 2 questions are just about operation for same-store for the first half, we see that there had been an improvement. That is good news. And so offline, online, what is the contribution? And what are some of the regions? Are there strong locations or regions with good performances and what are some of the less performing areas compared to, let's say, is it the Eastern Coastal regions that's been doing well? Can you share how do they compare? And also offline, Mr. Shen in the Q&A session and in your presentation, you talked about the offline, and this is going back to the path. But on the other hand, we see that online growth has been bigger. So for the APP, the RT-APP, is that your main engine for driving online growth and what is the return purchases rate? And if our members are -- how are they performing? Are they buying offline as well as online? And what is their behavior? And going forward, what do you see as the further penetration of online? Or do you think you are good now? And what about online and offline integration?

I often say -- this is what I think and feel. And that is confidence is more important than gold. Without confidence for the company, for the future, for life, it is not a happy place if that is the case. In the beginning of the year before I came back and after I came back, there have been some rumors in the market, and they were false rumors and they had hit the company. But regardless, I think what we -- the state we are in now is that we are confident and stable. There is no impact from outside whatever the news of rumors, but we are very solid. We have value in our company. Our customers are satisfied and at present internally, I can tell you truthfully, we are very positive. We are very confident there is no so-called influence from exterior, outside. So my purpose is to operate well our company, whether it is our top management, our store managers, our middle management. We want to operate our company well, and that is all that is important. All our work and behavior shows that there is confidence in our company. It is a very good situation. I can tell you truthfully, and I do not feel that there are any thinking or problems affecting us from outside. This is very, very important. Second question, online, offline. The first -- or the previous financial year, we have been moving our offline to online, and that is a mistake. In the first half of this year, for our traffic. It is as far as I can tell, I would say it has been increasing. Actually, online traffic is increasing higher than offline even though it has been affected by Taoxianda, but we have new channels, and our ticket sizes have also been increasing online and the contribution has been significant. So we are growing faster online than offline, but there's something important is that we have stabilized sales revenue and also traffic increase. And also for the regions, your other question, the region's performance. For our major regions, we are all improving, some are improving faster than others. This is important, in particular for Eastern Coastal region. We have a number of regions where our gross profit margin increased, our sales increase, our expenses have been well managed, and there is good cash flow. I will not go into the details, though, we have the few major regions. They are all improving. And especially for Eastern Coastal, it is -- it's a very good trend. If we strengthen, our community center positioning will be even better. As mentioned just now, there is this company, let me think the name. What is the name? In Suzhou, Northern -- Suchen, that is the name of the company. Well, our store was doing very well. And in the community center, there was this other store, which had been opened next to us. And -- but we continue to increase our attractiveness to -- for offline, to increase our attractiveness offline. Convenience is important offline. We are profit-making. And also the ticket size, we continue to increase that, that would be making a better contribution. Now word of mouth is important. Word of mouth marketing is most important, whether it is from product side for F&B or bringing in traffic, et cetera, if we have word of mouth, whether it is offline, or whether if people don't have the time, they go online for purchases, we must have word of mouth. That is the most powerful marketing. And also for certain instances, first of all, there's a store which had been decreasing. But I say in the regional meeting, I noticed that for each of our customer, he or she is important. We have to think about it, where there are complaints, actually, it is a good thing because we can analyze what is behind that particular dissatisfaction. So customer satisfaction is very important because it gives us a word of mouth marketing. In all our channels, this is core and also online, offline, there is 20-plus percentage, which is online and offline active. So among our members, we are doing the analysis, but we have to perhaps go deeper into it. For repeat purchases, it is about 2% -- over 2% for Youxian and overall, it is 35% contribution. And for the first half of financial year, the growth rate has been good for Meituan partnership for B2C. Q2 was 18%. So Youxian plus Meituan together for online, for our company, it is a strong contributor and performing well.

[Operator Instructions] The front line there.

Macquarie, Linda. For the nurturing period of new stores, can you -- do you see that you can already compress that time line? That's the first question. And second question on rentals. The first half, it is because of shop numbers that rentals have been -- the number have been changed. How do we continue to control that? On this basis, how do you see rentals increasing for galleries and also for tenant mix, how are you going to adjust that? And also, there are some nonperforming assets in your results disclosure. What are these nonperforming assets? And has that been disposed? And there's one that's been perhaps handled in September. What is it? Can you talk about it a little bit more?

Concerning new stores, from our newly opened Huazhou store, I then say how long it takes to -- or how many months it takes for it to break even, but I would say it is better than expected. I would say this. generally, for a store, the second year, it will be cash flow positive third year breakeven. in planning new stores in our basic framework, it is unchanged. If that cannot be attained that kind of time line, we may give it up. In the first half, we had planned some of the new store points, but we have given them up. So while we are confident we have to be clear as to our framework. We have reassessed the commercial circle around the neighborhood. So we have abandon some of the points. Before we are prepared, I always say, I would rather abandon some opportunities rather than to bring on more burden. That is important. And this is how we think about RT-Super and also in our future development. For hypermarkets, we have some excellent locations now because they are community centers, that's different. So that's for new stores. for rentals we have some adjustments and rationalization in our different industries. For example, for the preparation time for new stores and rationalization of existing galleries, and that has affected our rental income a bit. And this year, when I have returned to the company. I had already said that it is very important for our offline customers' traffic. We have to bring in traffic for our retail, and that will also help our tenants in making a higher profit. So we are still in the of planning adjustment. So we definitely want to bring in more traffic by ourselves. So as to enliven the business of our calorie and lower the vacancy rate for our gallery. Vacancy rate is a very important indicator for us. We expect for the future through these adjustment measures, our vacancy rate for the galleries would be lower and will continue to decrease. The nonperforming asset, Desory?

Yes. It is an asset for sale. Last year, in the last financial year, there was also this disclosure. So this is for certain stores because there are certain parties which can take these up in the locality. And these stores have been stores that we wanted to rationalize our handle. It was on our list of stores to be sold. So there was no major loss at all for our store closure. Yes. As mentioned, for some of the tail-end stores, we continue to rectify them, either we reform them, we improve them for some of the stores, because of the situation, we have to close them. And there are other parties which say, yes, we want to take up your store. And for such stores where we can transfer them, that would be best. So it is equity sell or exchange for the stores. So yes, so through these equity transfer out we handle these stores. And also in terms of compensation, et cetera, it is a least impact to our company through this transfer of stores.

[indiscernible] Christine. Management, I have 3 questions. The first question is a small question about your savings. In your PPT, I noticed that you have some very detailed reasons for your expenses for example, optimization of your staff, et cetera, and rentals decrease. Can you talk about the annual efficiency in investment? Can you talk about each? And also for your expenses, will there be more room for reduction going forward? That's sorry, perhaps if you can share that with us. Second question concerning your superstores just now. It's been mentioned by Mr. Shen that you have gone into a good path for your operation of your superstores. So for the profitability of each of the stores and -- can you talk about the details? Third question is a question for the medium to long term, you have a 1.5% net profit margin level and Mr. Shen, you've been at the company for a period of time. Is this a possibility? And on that basis, can you actually achieve even better profit margin? Three questions.

For your first question, in terms of expenses for expenses, there is a RMB 1,090 million year-on-year decrease or 11.3%. And for RMB 500 million, it is personnel and also in RMB 200 million is in depreciation for personnel for at the stores, there is major savings. Internally, for example, for the personnel at the stores, compared to the previous period. It is a cut of 1.5% and also headquarters. As mentioned, it was 2.2% last year. And September, it was 1.4% HQ expenses, that is over RMB 70 million savings. So last year compared to this year, we have been continuing with our optimization and this is the annualization performance. And for marketing, last year, we had a lot of expenses in , for example, the stores, marketing measures and this year, even though we have done some promotions, but there had been third-party teams doing the marketing. And for each year, it will be tens of millions in terms of marketing even for certain stores. So we have cut down on that. It was 1.2% last year, 0.8% this year for marketing expenses with great savings and improvement for that efficiency. For expenses decrease, in the first half, it is within our expectations. And going forward, there is a further room for improvement. As I've mentioned just now, in marketing measures, in operation and supply chain, there is still a lot of room, and we are taking action. So in expenses. There is still a lot of room for further improvement. And also HQ expenses. First half, the HQ expenses control was very good. And our goal is 1% or even lower. It's -- we've not reached that yet, but we have made major improvements. And further for marketing expenses last year, as an example, last year, in marketing, we have done a lot of different marketing measures, I would say, well, directly, I would say these are waste -- wastage. As I've mentioned earlier, I want to cut out all wastage. They're meaningless. For example, we have used a lot of expenses on certain simulation of sales. Now we have come back to normalcy. We have come back to the right path and we have a lot of further room for improvement of efficiency in terms of marketing. So that's just 2 points for supplement. For this year, first half, we have come back to a reasonable level in terms of our expenses ratio. and that is very, very good. But there is still a lot of room for continuous improvement. As for the supermart -- stores, I just want to say a couple of words. Before Huazhou, there were other stores, which had been reformed. So we have been more selective in our product mix, for example, through the products presentation, price matrics higher quality, lower prices, processing of food, fresh products extension of categories, differentiated categories, direct presentation, et cetera, et cetera. A lot of our customers are giving us feedback. And we are also taking off the attractive products as well. So good feedback from our customers. And also in our work mode, in our ordering of products, we have done major optimization. Our team is also slimmer. And for a dad store, for example, we have rationalized the work process. We have less staff, and the remaining staff are happier their efficiency is higher. And this is really impressive. And also in Coastal Eastern region for the management team for superstores together with the team, had gone to all the stores in this region, and we see major and fast improvement in all the stores. So for the improvements of the stores, we are picking up the pace and the cash flow for the first half was positive. And very importantly, investment is very important. For the front of shop and back end, it is very important. Huazhou had already improved significantly, and we will continue with that going forward in our investments, definitely, it will be directed to this goal. And it will bring us higher returns and even better competitiveness, that is only to be expected. Because the company had already given out a public notice concerning a possible acquisition.

So whether online or offline, the investors, I encourage you to grasp this opportunity for questions. [Operator Instructions]

I have a question -- another question for you. You mentioned going back to pricing. But there is a question for you, and that is for the retail industry in China, there is a lot of channel expenses. We have to charge these channel expenses. It's an avoidable. Hema, for instance, at the time. And when Mr. Tai was there, that was done as well. and there was a lot of resistance from the product brands. And also after taking out some of the less -- lower performing SKUs, consumers felt that there was less choice available for them. So how do you balance that?

First of all, as I have mentioned just now, we are optimizing our offerings and you already see some of the adjustments in our superstores. So what we are doing is not going through channel fees or increasing fees to increase our growth profit or gross profit margin. Our gross profit margin for superstores is higher than our hypermarkets for the first half. That's the first point to note. And the second point is that when you see our gross profit situation, this is just a composition. It is not a composition in the sense that it is our front of shop and our back office composition. And compared to our peers, I think this is very important. We are competitive. So it is -- and the composition is different from some of our peers. We cannot see that we cannot say that for some of the other peers, they are charging certain fees, and we will therefore do it. And for some of the products that our customers need as long as they need it, we will be putting it in our stores. So also we are planning our products very carefully. And I can say -- tell you that this is something that is very deep as a scale as a study. Our product power is very important. Our purchasing is important, but the Chairman had also the same. And that is controlling the inclusion of what products and what to read out in terms of product. This is something that's squarely on my shoulders. It is not the responsibility just of our purchasing team, no. So we will be optimizing our product mix, our inclusion of products. And this optimization, I'm fully confident will not adversely affect our profit gross profit or gross profit margin, but rather it will increase our competitiveness. So this so-called channel fee is not something that will affect us. We will just continue to optimize our products. We will be weeding away the -- some of the products. And so that our product will be product power would be even stronger. So that's very important. So according to our product categories, we will define each category, which kind of category is it? For example, in my mind, I always have this as an example, juice, produce has to be wide enough and deep enough for the hypermarkets that have to be choices. But for some of the other products as long as we have that would be fine, it is just to satisfy certain consumers' needs. So that will not affect us. The channel that you've talked about will not affect us.

Jefferies, Anne Ling. I have a few questions. Just now, you talked about the products. Can you talk about our product mix right now? In the past, we had 4 to 5 major categories: food, cooked food and different categories. In the future, what would it be? And in our reform for the product mix, how has that changed? And also, can you talk about the first half in terms of the products same-store differentiation. And for example, home appliances is that in one of the product categories? And what about this category? That's about products? And second question offline, we are working with Meituan, and they have these pop-up stores concepts. For Meituan pop-up, they talk about instant shopping at Meituan. So where does this market share come from? They -- taking away from the online or off-line part. The third question for the second half, there would be a larger volume rebate to help our gross profits. I would like to know this volume rebate in the second half. Will that still be offered, please?

So from the categories of products and the structure of the categories, First of all, in the first half for fresh products that is we have very good response, and we'll continue to extend that category and also for cooked foods and bakeries, we will increase that as well. And that's -- those products has been doing well. For processing, especially for baking and noodles, are coming back to the path for these categories. I should say that. And also for adjustments of the stores and also for the Huazhou store data, we see that we are fast going back to the right path. So we are going back to the right path. We are on that right path. And also for some of the fast consumer goods, Yes, we will increase the selection choices for those categories. For home appliances, with Suning, we are to next year, 331, we are in a process of adjustments. And starting from the next financial year, we will be operating that ourselves. For home appliances, the pricing is very transparent. And also, we can also do online sales of home appliances. But it doesn't mean that we will not have home appliances in the superstores. For example, Huazhou, it is a very small proportion of home appliances and the total sales, different for each of the stores. For hypermarkets, starting from next year, we will be self-operating home appliances. And batch by batch we will be going back to the right path. So that would be a better return in all ways then from cooperating with Suning, not only in profits, but also in better relationship with our customers. for pop-ups that is their strategy, and this is what I think and that is compared to some of the other peers, for example, Pangdonglai, they don't have pop-ups and they're doing well. And that is true for a lot of peers in the industry as well. So what is most important is that we build the framework for our basic retail and word of mouth, we have to improve on that and also product mix. And then online, we also do that. Meituan is an excellent channel for online. As for pop-ups, we can pay attention to it. In answer to your question, I would say we are already doing very well. And for some of the -- the pop-ups, -- from time to time, it would affect us some, but most of the time, it has no effect on us. No impact on us, whether this is for Meituan pop-ups or some of these other efforts by our peers, I don't think it impacts us adversely in big ways at all. I think the market is big enough. I always think so. And I always say so. So -- and also, there is another thing we say is low margin and sell more. So more sales, lower margins. Why people don't come to us to make purchases? Well, we want people to come to us, and we already have the scale and et cetera.

Now because of time, this is the last question. 1 to 2 questions.

[indiscernible] Eric. I have a couple of questions. For asset-light and asset-heavy, this is the first question for you, for these over 100 stores ownership -- and with our RMB 300 million kind of value, do you think that this is the right way forward? That's the first question. Secondly, low price strategy. For some of the other platforms, JD, Costco, et cetera, there it is 9% to 12% for the gross profit margin because the cost level is low. Our OpEx is over 40%. So average wise, it's very difficult for us to replicate their costs. So for this low price strategy, we are -- so what do you think about this, the value of our low price strategy? Another question in the past few years in restricted cash, Desory, and prepaid card and it is about 30% or so stable. But you're saying that there is some changes to the regulations, and that has risen by 100%, et cetera. And behind it, are there some prepaid cards situation. For example, there are some very dormant prepaid cards. And so there will be some changes to your provisions. Can you give us some highlights?

Thank you, Eric. Concerning light asset, we have all along considered that our long-term operation, our stores and our retail and to build our stores into community living centers, this is highly, highly meaningful and it is a foundation stone of ours. So our proprietary or private operate labels, operation and our -- we will try to operate well. And -- so this is very important as a foundation stone. And for asset-light and asset-heavy, let me just respond this way. And I was looking at an article concerning an analysis of Costco, very deep analysis is -- Costco is a light asset company. Why is it light? Its business, it's there. They operate their own stores and business. Why is it a light as a company because their turnover -- product turnover is very fast. Within 20 days or average 18 days -- and the payment cycle, including is 2 months. So they're not using their own capital basically to make business development. That's why they're categorized as light as a company. Now one thing I'm very happy about after I returned is inventory days. For inventory days, if it is lower than our payment cycle, then this is very good. and this is a very good cycle for light asset. And I said we want to be a good light as a company, but we are still on the path for that purpose. Second point, Costco, [ Samuel ], their membership stores, membership club, their gross profit margin is at just over 10%, and we are more or less the same. For them, there are 2 types. One is for discounts for some of the major brands discounts. Costco is doing that in big ways. And also, they have huge big packages, big packages and low price. But for us, it is smaller packages, and we have more choices. So we are different in that sense. And for some of the hypersensitive products, we are very low in prices. But on the other hand, we have of -- how private labels and those are differentiated from them. So definitely, we want to be low priced and also for the products. For [ 3,000 ] to [ 4,000 ] range, we have more choices, more brands, for example, for them, they have less selection. So we have many, many points of differences. Another example -- and I was studying in Monterrey. And I saw next to Costco that was a Walmart store opened, and it's completely full of customers. And we were in Walmart why are the customers in Walmart and the responses so rich, so rich and choices, a lot of choices, all of choices, smaller packages. So I always say the market is big enough. We can have different positionings for the membership club stores, for example, in Yangzhou, we have hypermarket, and we have the M-Club. No bad impact on each other. No cannibalization because they are different.

Last question -- that was a last question.

And for the first half, yes, there was an increase and definitely for '20 -- or beginning from last year for China for retail market. There are some peers where the prepaid cards had been affected, for example, Carrefour will be one. So for prepaid cards for the regulations and their prepaid card associations, there had been certain changes in the regulations. So it is 100% regulated for prepaid cards. For example, for the regulators, they want the cash and to be used 40% for coverage -- insurance coverage. So for our prepaid cards, it is RMB 15 billion I think for prepaid cards, we are 50% of total in China. So this is significant. So we work very closely with the partners concerned. So on the one hand, it is 40% in terms of our insured coverage. So also for the credit, we -- for the cash that we can use, it is still significant it is still over RMB 10 billion that we can use this is a significant amount. And for free cash apart from prepaid cards and borrowings. We have free cash of net RMB 7 billion plus. And the first half, we have increased by RMB 1.4 billion in free cash, so that is very important for our health and future development for the company. And the trend is also positive. If we have another question, this will be the last one.

I have a question. We see that the F&B restaurants are not doing well. The sector has been not performing well. And people are saying that they stay home to cook not eat out. So in the past 6 months or so, what is the image that you see? Has there been changes for the food and beverage, I've been to Shanghai a couple of times and some friends say they are going to the wet market, they're going to supermarket to buy fresh and then cook at home. How is this impacting you?

According to my understanding, for F&B sector, the -- my own feeling is that just from observation, just from my friends observation, I would say this is different from our gallery business. it's different because we are smaller eateries at our gallery, we sell noodles and also the rice dishes, and they are doing well, actually, F&B in our galleries. And secondly this year for fruit and vegetables in the first half, the growth has been picking up. That is true. Personally, I did not do any refined analysis, but there may be some impact the trend that you talked about, but I cannot be certain for fresh products, as I've mentioned just now, that is our strategic emphasis because in terms of traffic, penetration, all these are picking up for it. But I've not connected this up with the F&B trend in the market. Thank you very much for your presentation and your sharing the management. We closed the meeting here. Again, we would thank the investors for taking the time and for all your support. Thank you. Goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]