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

Dear investors and analysts, good morning. Welcome to Sun Art Retail Group Limited results announcement for the whole year. This meeting is going to be conducted online and offline at the same time. We have already sent a PPT to all those who have registered last night. If you need further assistance, you can go to our website to choose online broadcast materials, and you will find the PPT materials there. Without further ado, allow me to introduce members of the management, here with us, we have CEO and Executive Director, Mr. Shen Hui. Next to me is our CFO, Mr. Desory Wan; and Head of Investor Relations, Ms. Xiaobei Gu. Desory is now going to take us through the whole year performance and financial highlights. Desory, please?

Thank you, everyone. Good morning. Yes. I'm going to introduce to you our financial highlights for the full year. We have increased -- we have a fall of EBIT margin by 1.4% for the year. Our revenue is RMB 71.5 billion. Same-store growth 0.6%. And net profit margin 0.5%. We've seen some substantial drops, including our profit margin. So EBIT for the whole year is RMB 1.425 billion, and EBIT margin, 2%. We would like to emphasize that adjusted net profit margin is 1% and adjusted profit for the period RMB 692 million. In February, we have announced a tax provision, and they are nonoperational in nature. So after adjustments, the profit for the period is RMB 692 million. Next page, you can see that after we see the RMB 692 million figure, the corresponding impact as disclosed in our announcement, we are talking about RMB 300 million. After deducting that, the reported net profit is RMB 300-odd million. Now if you look at store expansion in the financial year, we have new opening of 1 hypermarket, 4 supermarkets and 4 membership stores. We have 33 supermarkets, mainly concentrated in the Yangtze River Delta, with a same-store growth of 8%. The contribution is a positive cash flow. Therefore, on this foundation, it is going to continue to support our future development and expansion of our network and foothold. For membership stores, we will need to focus more on the construction of new membership stores. Total revenue, RMB 71.55 billion, the overall revenue grew by 1.6% if we do not count the store closure impact and ticket has increased by 0.6%. Online business, we realized same-store single-digit growth. And that is why we're able to showcase for the full year, beginning from the first half to the second half, we continuously promote our pricing strategies. And in this process, we can see stabilization of online traffic. On the offline front, our revenue has also rebounded. Rental has grown because of certain closures of shops and reorganization of our tenant mix. We will continue to focus on experienced type tenants. At the moment, for the full year, we have vacancy rate of 4.7%. Gross profit margin RMB 17.236 billion (sic) [ gross profit ] representing year-on-year decrease of negative 4%. The decrease was mainly resulted from reshaping our price competitiveness and enhancing our customer pricing perception. We will continue to enhance our gross profit margin. And at the same time, we are going to enhance our efficiency to offer more space for better pricing to our consumers. In terms of expenses RMB 16.941 billion, removing the impact of the impairment losses, we're talking about a drop of RMB 2.2 billion and the expense rate was 23.6%. It used to be 23.3% before the pandemic. So we're getting very close to that. Compared to the previous financial year, we see a drop of 2.7 percentage points because of optimization of store expense structure. And we made significant savings on headquarter personnel cost. And we also achieved optimization of the online fulfillment expenses, and we achieved more than RMB 100 million saving. Concerning headquarter savings, there's a drop of RMB 330 million, which was 0.5 percentage points. For the whole year, online business collaborated with Meituan, allowing us to save a lot of fulfillment expenses. So our online business from this angle, we are doing much better compared to last year. Concerning our rental cost, there's a RMB 150 million reduction of rental level and RMB 80 million would be for the ongoing year. This is going to create benefits for our future years and operation. So we'll continue to optimize our shops. So under such expense level, we think this is sustainable. And we will be able to -- in terms of our pricing and product mix, we can offer something more attractive to our consumers. Therefore, in terms of EBIT, it increased by RMB 2.434 billion. EBIT margin increased by 3.4 percentage points this year. The expenses dropped by RMB 2.2 billion and operating profit was RMB 1.4 billion from operating loss RMB 1 billion compared to the same period of the last financial year, without taking into account the impact of impairment losses and the operating profit increased by RMB 1.146 billion year-on-year. So you can see on this chart. In terms of our revenue and expenses, we have done really well. In terms of our working capital days, working capital days has dropped to 67. And inventory turnover days and trade payable turnover days were 50 and 67 days, respectively. Working capital remained stable and trade payable turnover days decreased by 5 days. CapEx, RMB 775 million, mainly for store opening and expansion of supermarkets and hypermarkets. In Kunshan, we also have a new project requiring certain investments. Net cash position CNY 12.529 billion, representing a decrease of CNY 3.9 billion due to the impact of dividends and decrease in the prepaid cards balances. Restricted deposits about RMB 6.5 billion, representing a year-on-year increase of RMB 1.877 billion. From all these figures, you can see that in terms of our expenses has been substantially reduced, giving us a lot of assurance for the whole fiscal year, things have already stabilized. And in this process, we will continuously focus on maximization of our gross margin, and we will use our pricing optimization work and also the assortment optimization. We will continue to drive up the gross margin and gross profit. We'll be able to achieve more savings and continue to drive for higher revenue. Now I will invite Mr. Shen, our CEO, to talk about our performance highlights other than the financials.

Thank you, Desory. Good morning, everyone. I'm happy to again meet with you here. Last year, we have already made certain exchanges. Fiscal year '25 to Sun Art is a year of return of our value. And then we have turned losses into profits. We have achieved some very good results. So concerning our situation, it is actually quite widespread. So I wouldn't call the results outstanding per se other than some fundamental return. We have to insist on the four major initiatives. In fact, during the year, we've done a lot of preparation work. So we have our pricing return and pricing structure, execution power. At the same time, we are also doing some preparation work for future sake. Very often in my mind and also among our team members, we have created major community hubs. We are doing a lot on the retail frontline in terms of preparation work. So in fiscal year '26, many people would ask us what is happening to your preparation, and we are going to continue to do some testing, modular testing. So before I start, I would like to tell you this information to us, to our company, we hope, there will be more and more quality products and lower and lower prices and more and more customers. That is our policy. And it also shows that hopefully we can drive up revenue and gross margin and a better control level of our expenses. So for fiscal year '25, we are focusing on adjustments. We will have certain indicators, but more importantly, it is about driving up the revenue and also gross margin and gross profit. The absolute amount is more important than the margin. In terms of product strategy, because we are in retail business, we're talking about differentiation and the high-value community hubs. So on the product end, how do we make improvements? Not long ago, we conducted this review on our product assortment. So in the past year or so, we have been exploring into this topic and not long ago, together with our product department, we have reviewed our product structure. What is our core product, what are the trending categories? And also, we need to consider what type of products are needed. Secondly, our PB. We have talked about the lower priced products, they have not been taken offline. The qualities of such products are actually very often better than a national standard. We continue to pursue such products with quality better than the national standard. We will place different brands together so that we can offer a series of high-quality products. So I understand that to build very good brands, we will need to invest a lot of time and energy. Such high-quality products, their proportion will continue to rise. And we also need to use data to further optimize our product mix and pricing mix. So that when we consolidate different products, how can we put them together so as to drive up acceptability by consumers? And then when it comes to pricing, we understand that our consumers have very strong feelings about pricing. So we must offer something that is the most affordable. So we are looking for value for money. And thirdly, we have to continuously construct our community lifestyle hub. We have sufficient space, and we will do it store-by-store and case-by-case to construct such lifestyle hubs so that nearby residents can receive one-stop services, and we will be the best neighbor. In terms of management upgrade, first of all, we are data-driven to optimize our operations and efficiency. We have this efficiency committee and we need to focus on three areas. First is about the efficiency of our supply chain because beginning from our suppliers, our cooperators and then DC, warehouse, regular temperature ones or low temperature or high temperature ones and then our stores. We can more quickly provide the best services to our customers and then about our operational efficiencies. From different dimensions, we still have plenty of room for further improvement. And then for promotional capability, originally, we have taken some sidetracked pathways and listed certain price reduction opportunities. So in terms of our calculations or planning, we need to do better. Thirdly, we have weekly surprises. We have so many seasons and festivals. We have so much space. How do we better utilize our space so that every week, there is a surprise waiting for our consumers, so that we can enhance sales figures and efficiency. And then it is also about quality control. Last year, during our internal annual meeting, together with our colleagues and our partners and suppliers, we've made plenty of exchanges. I talked about the four insistence. The first one is always quality. How to make sure people buy from us, every item is of high and good quality. We have achieved some results, but there's a long way to go. So I told our quality control leaders, if there are problems we need to investigate. We need to set up a comprehensive management system to ensure whatever purchased by our consumers are of the best quality. We also advanced our fresh product standardization work because we choose the products on our consumers' behalf so we must establish a full chain quality control system. Thirdly, our teams, it should always come first. We talk about culture and value. We have to care for our colleagues, our consumers and continue to strive for excellence. We must focus on our team members first. We need to take good care of our teams. How do we improve our incentive scheme for everyone, for procurement all the way to the back end because they are on the battlefield, on the front line, how do we provide them very good incentives to continue to drive them to go forward and fight harder in our system, we will continue to optimize and promote these values. Secondly, we have many good talents, outstanding talents. How do we do succession planning, training and cultivate them to grow so that they can assist the company to move forward. That's the second point. Thirdly, back to cultural values. We need to connect the dots. We are one big family. We are brothers and sisters. We must care for one another. So by extension, our GD policy, HR policy, senior management will be the good models for the younger members of the team so that the whole team will have a high level of combat capability. Finally, before we take your questions, I would like to say to us, develop our business, and we will analyze our members, our customers how they spend, how they behave, what are their needs? Based on such figures and data, we'll be able to better understand their demands and satisfy them. On this front, we need to do a lot more from online to offline. We have some members. They are very sticky. The standardization work may be different for them. They may focus more on experience-type activities. We can organize such experiences for them when we launch new products, we invite them to come and try them out. That is how we better respond to their needs. Secondly, in certain regions and areas we have core competitiveness, so how do we design our layout of our supermarkets, hypermarkets and membership stores. How do we integrate such elements into our networks so that we have good penetration in the overall market and better serve our neighbors. Thirdly, we need to focus on comparable store growth whether it is membership stores or community hubs or supermarkets or hypermarkets. How do we further expand our penetration in these cycles? And then how do we enhance the purchasing level. So comparable store growth will continue to be one of our focuses. We need to continuously optimize them so that we can attract more customers so that they can buy more products from us. Finally, our membership stores, we're continuously refining them. The time taken is a bit longer than expected. We can't say we can quickly copy and paste the same model. But in terms of product optimization, we will better serve our members, our friends so that there is value added and there are surprises every time they purchase from us. So we are still working on this. And I can tell you we have already achieved some results. Of course, there is still plenty of room for improvement in terms of revenue. But in terms of cash flow compared to the past, it is already improving. Time is taking longer than expected. But this is one important project for us. We'll continuously optimize it so that the company's development will be better supported. Thank you, everyone.

Thank you, Desory and Mr. Shen for the detailed presentation. We will now enter the Q&A session. We're going to divide it into 2 parts. We'll take on-site questions first and then online investors can also raise questions. Let's first take questions from investors inside the room, we will pass you the mic. Please tell us who you represent.

I am from Citi bank, Wei Xiaopo. Thank you for the opportunity to exchange some views with the three of you. Well, things are changing very quickly. And the company continues to change, competition layout is different. So your performance just like what you mentioned, financial year '25 was a year of adjustments. We may see some temporary scenarios or situations. You are concerned about sales and then GP margin or GP instead of GP margin. So can I understand that -- from now on, perhaps you want to see gross profit growth, not necessarily faster than the expansion of sales. So from the accounting perspective, GP margin is an important driver for growth. But perhaps are you going to focus more on the supply chain and staff incentives and expenses, OpEx, there is room for saving. So my understanding is that you want to achieve a positive leverage. Is that correct? GP and EBIT margin, you still have a certain aspiration, yes. What about your overall operational theory or philosophy? And then my second question is about prepaid cards, 1 billion less. So is that intentional? Or is it because the customers are encouraged to do so? Or is it because customers have taken the money elsewhere because prepaid cards will lock down future spending. So now under Mr. Shen's leadership, what do you think about such prepaid cards? Third question, Ms. Wan, when you talked about expenses, you mentioned more than RMB 1 billion drop in terms of expenses for your staff. Mr. Shen talked about more incentives given to frontline staff. This business really depends on people. So what will be the number of employees in the company? Is it about to be stabilized? Are you cutting back on the number?

First of all, GP and GP margin will look at both of them. The GP growth is more important than growth in margin. I want to say let's not waste anything. Efficiency of promotions and pricing, sometimes we see wastage. So in terms of management, we should not waste them. If they can drive for growth in our revenue and GP margin and GP, the main point here is not to allow the GP margin to drop continuously, but rather, we want to reduce wastage. That's the first thing. Hopefully, there will be growth in our revenue. Secondly, expenses. In fact, for FY '25, in terms of GP margin falling, I already expected that, although not 100%. We removed some original way of operation and now we see a drop in the margin. But of course, we need to eliminate any type of wastage. Expenses are important. We've made a lot of savings. For our headquarter, it dropped by a rather big margin. That is very, very important. And in our organization, there's plenty of room. There could be further reduction, so we'll continue to proceed accordingly. Thirdly, we can see that certain savings have been overachieved. We need to return to the pathway of investment. For example, processing department and other departments, they may need people. In the overall framework, we have returned to some higher level of investment. So that is how we approach the overall topic of expenses. And I also want to say there are some peers with much higher level of efficiency. For example, in different warehouses, refrigerating warehouses or freezing -- or freezer warehouses, well, there are many things involved. So I can only tell you that things are being planned, we'll control our expenses, drive up our revenue and EBITDA will also improve and better operating cash flow. We care about this figure very much. We must see that it is improving. So every month, I will look into this. Prepaid cards, beginning from last year, we launched the e-card and physical cards. So use the physical card to use it. But for e-card, they are bundled together with your wallet. So the frequency of use will be much higher. So breakage income in the past 2 years, you can see a falling trend because of higher frequency. The balance will be consumed more quickly, which is a good thing. But in the process of selling, in the past 2 years, the economy is not doing so well. We're not looking at rising trends. So through such prepaid e-cards, we can better increase stickiness. When they have the balance, they will use it. They will spend it. The national level of issuance of e-cards is the highest. We're taking about 50% of the market share. So as a leader, when we consider our cash level, we are not concerned. I want people to spend more frequently and spend more. So this is combining the external situation. And we also want to use the e-platform to run our business. EBIT margin. Mr. Shen also said that we would like to grow more traffic so that we can drive up our revenue and gross profit can also improve. Our margin dropped within our expectation scope. In previous communications, we have talked about why in the past, for example, FY '24, our strategies and price index was higher than [indiscernible]. So we are returning to this position as a leader inside our community circles. Our margin must be well supported. You have to be rational in pricing. That is more important than everything, and then you can drive revenue growth and gross profit growth. And we will still have some flexibility in our expenses. OP margin will definitely be better compared to last year. That is the direction we wanted to see. GP has further room because this is the year of return. We have to do everything first, and there's a lot of room for optimization in the process. For example, digitalization, optimization very often, do we have to do such deep level of pricing? Do we have to adjust pricing in the same way for all types of products? Or should we focus on certain product types? There are many details here. Price matrix and refined management, they will be implemented in FY '26. And processing, we are also doing that because everyone is doing it. And you may ask about this. We have already started this. In some of our stores, 1 or 2, we are doing some small-scale testing. The outcome is very good. We have done some trial runs and penetration has improved. So the GP would be much better compared to our standard products. So that is about volume and margin impact. That is why we said FY '25 is a year of transition. We'll do well and do correctly our pricing to obtain more certainty.

I'm from Merrill Lynch. My name is Luo Chen. I have two questions. First, we can see at the moment inside Mainland China in lower-tier markets, there are many supermarkets developing very quickly, especially with snacks business. In recent time, they are being integrated into supermarkets, the snack stores. So for medium-to-lower tier shops, is it going to affect your business? How are you going to tackle this trend? Second question is somehow connected. We have noticed that traditional market -- supermarkets, there's a lot of channel-related expenses. But now for emerging shops, they collect less and less from suppliers. They use high turnover model with low level of profit margin. So in terms of your operation and your profit, a lot of that is affected by the suppliers' fees. So how can we balance short-term operational demand and longer-term reform needs so that we can further enhance our value level.

Thank you very much. That is very professional and very refined. First of all, pop-up shops, they are developing very quickly, especially in lower-tier cities. There could be two of them next to our big shop for the shorter term, to some of our leisure-type products, yes, some impacts have been seen. But for our major products, the impact is quite limited. And they focus more on baking products or baked products and frozen snacks. My understanding is they only focus on snacks. So there's a lot of pressure on them. We're talking about very different types of business and business models when you consider changing a snack shop to a supermarket, there are plenty of competitors outside. The market is big enough. So if we are not healthy, we may have good pricing, good products, good experience. Otherwise, we will be phased out. So we must focus on optimization of our product mix, dynamic layout, how to improve fresh products, PB, things will need time. Things cannot be achieved overnight, but I believe in ourselves. If they are doing well, they grow quickly, but that's okay. Every day, something is emerging. So I think that is not a problem. Your second question about procurement model or profit model. In fact, in the past 1 year or so, I've been looking at this and analyzing the situation, and I very often say this is the feeling. We charge this -- charge that. But if you look at the consolidated profit rate margin, it's not that high compared to our peers. So how do you strike that balance? That is something we have been trying to achieve. Our GP margin is really not that high. So it is about combination. We are in the process of testing, understanding and optimizing. I trust that we will find a very good point, a very good equilibrium. You may think we are charging a lot of expenses or fees. But actually, no, that's not true. We'll continue to find a balance to improve everything. I'm not too worried because we will continue to optimization so that our partners and suppliers, they know better what is happening, what kind of structure for the gross margin and everything is transparent, which will facilitate our future collaboration. Can we take the next question?

I am Linda from Macquarie. Some simple questions. First of all, about dividend. Interim and year-end dividends, you are very generous. So I want to know future dividend, what is the principle, is it sustainable? And when you pay out dividend, contract liability is not included, right? So I want to understand about the payout principle. And second, private label. It seems to be a global trend. So I want to know when it comes to private label in other countries compared to China, how are we doing in terms of speed? I think there is room for improvement with the tariff war going on. In terms of GP, can you be more optimistic? And then about some pop-up retail shops. Do we have any collaboration? How does that affect your offline profit?

I want to talk about dividend. It may not seem like a lot, but every year, we are asked. We have so much cash returned earnings. Why don't you pay them out? Well, our performance in this year is not too bad. Last year, when we communicated with investors what will the next 3 years look like. And we achieved that in the first year within the scope of our expectations. So in terms of dividend payout loan policy, there will be no major changes in terms of the direction. And dividend payout depends more on our net profit performance and cash performance. And dividend also shows what the company thinks about its strategies and direction and its confidence level. So I think overall payout policy will not change fundamentally. And as we improve our cash flow, we will make sure dividend will move in a well-aligned manner. Dividend shows our operational cash flow confidence. That is important. We should have the ability to continuously create operational cash flow. That is very important. So I just want to add that. Secondly, about PB. We can see our peers domestically and internationally, medium-to-larger scale supermarkets, 20% to 30% of them. Our strategy, first of all, we -- supermarkets, if you look at Walmart, and also those in European markets, we essentially are supermarket, but we choose what our customers prefer. So different brands, we hope that they can collaborate with us. There is plenty of room to develop PB, private label products. We have achieved some good results. It will continue to pick up over time. We have our PB department and each procurement team will look into different product mixes. We're talking about, first of all, quality higher than national standard. And then we have PB single products quality same as PB brands, but we offer lower prices because they are our own brands. As for tariff issue, it drives us to choose more widely in terms of sourcing quality partners and manufacturers. First of all, we talk about GP instead of margin. So finding the right pricing is important. There should be a win-win so that our consumers can benefit. We want to return the benefits to our consumers, and we have indeed done a lot to help our consumers. Last month, we opened a green channel to many enterprises originally focused on export trade. Now they can join us in our stores, many green channels to sell their products. We have obtained from government departments, a lot of positive feedback. So that is about PB. For instant retail, yes, we do have some collaborators other than our own APP and small apps, about 40% is the proportion with Meituan, JD, Alumar and also more recently, Taobao. So basically, we have many different types of collaborators. Secondly, based on physical store systems. In terms of efficiency, we are still doing well. For instant retail, we are making a profit and that will allow us to move forward without fear. How do we achieve win-win? We will continue to work on that. Linda, further question?

One moment. Concerning dividend, I want to follow up. So this is not a ratio concept. So is it going to be stable DPS?

Yes. About dividend payout. Well, previously, during IPO, we have talked about certain disclosure on dividend policy. No change at the moment. In the past 2 years, while we were suffering from losses, we were still offering dividend. So we have sufficient flexibility. But for the longer term, it really depends on our overall performance.

I'm [indiscernible] from Huatai Securities. First question, in FY '25, we can see some optimization of operational efficiency since profitability is enhancing, are you going to open more shops more quickly for hyper or supermarkets and membership stores, what will be the momentum? Firstly, we talked about membership stores. The momentum has been slower than expected. So what challenges are we facing for supermarket and membership stores? Thirdly, Mr. Shen, you talked about creating this community hub concept to enhance differentiation advantage. So there are many community shops talking about a similar concept for supermarkets. They have plenty of space. And hypermarkets because they are very, very big, they may be further away from community centers. So it is about one-stop services being provided to the community members. Can you share more about that?

Thank you. First, about expansion. Future opening will focus on supermarkets, mainly supermarkets for the shorter term, that is next 1 to 2 years. So we are actively identifying the correct locations. And in the last FY, we set a very good foundation. But of course, we will continue to look at the actual situation. Some locations are so good. It takes good opportunities. They take up very good spaces in the communities. So sometimes you can look and look and you may not find them. As for warehouses, we will be very careful in selection of our products, essential products so that together with supermarkets, we can work out the scale in a certain city or logistical services, or we have to integrate everything into our consolidation and consideration plan. As for membership stores, it is all about the products. We need to do continuous updating and iteration so that our members can feel surprised all the time. In fact, for fresh products, we have been going along more quickly. For quick sales, we are strong, and we need to optimize the experience for new products and fresh products, invite our members to come all the time and every time there are surprises, new things to try, that is the core. Firstly, about the community hubs or lifestyle hubs. Our hypermarkets are good. We have shopping streets. They are of very large scales, more than 10,000 square meters. Some 5,000, some 3,000, some 1,000. We already have a lot of planning and good analytic work, including, for example, restaurants and children experience. Now the state is encouraging, giving birth. So what can we do to offer a better experience. We have done many rounds of analysis to better plan our footprint. We have some stores already set up, receiving very good feedback. If you come to Shanghai Changyang Store and Guangdou Yabo Store, originally, it is enclosed. It is in the inside. But now we open it up with a lot of restaurants. The whole place is shining very brightly. It's not huge. But it is a mall, it is a shop. It is a hub with real content. People would enjoy walking around in this space. They can find good quality products, products that they look for, fresh products, unique products. We must combine all of these. We are not just copying the same model. Every shop is unique in its own way. We have good locations, but every store we're looking at a different structure, different commercial circle. So every case is done in a special way. Thank you.

Online, we have accumulated many questions. So perhaps we will now invite some questions from our online participants. Operator?

[Operator Instructions] We can take questions now. Are there any questions? Not yet. In that case, let's come back to the on-site participants.

I'm Eric Chen. Two questions. First, Mr. Shen, you talked about frontline incentive. Can you offer more details about such incentives? Are you going to increase the salary to drive up the efficiency? That's the first question. Secondly, Desory, you talked about prepaid card, utilization and speed in our cash flow, more than 60% provision would be in such deposits. If utilization rate is higher, how come the cash mix is not going through fundamental changes. More than RMB 400 million still trapped in the incentive schemes?

Well, first of all, in financial year '25, we need to understand that we have offered many bonuses, especially in first-tier cities. We will need to continue to make adjustments. And hopefully, first of all, our employees. We hope that the working efficiency can be greatly enhanced. So we'll continue to carry out in-depth analysis and optimization. And secondly, our employees can have their performance linked to their remuneration and the performance of the stores so that they can see more clearly what is happening. Thirdly, we hope that in the overall process, they can receive better support.

What about the cash?

Well, actually, time deposit has been an area of our concern. As you may already know, in China, in this renminbi policy or exchange rate or interest rate, things are going down. So 2 years ago, we have already entered high interest cycle. And we have already done some planning. So in the past 2 to 3 years, even today, the overall return level is higher than the market rate. This is not going to have a major impact on our prepaid card funds. The balances will take up a lot of our cash. In terms of operating cash flow, we maintain healthy and stable trends. So in this cash structure, we can better plan for our return. We are not worried about the usage being higher for the prepaid cards affecting our cash flow, definitely not.

[Operator Instructions] Now let's continue to take questions on site.

I have a few questions. First of all, about underline many peers are saying that they will do hypermarkets. But I think the original philosophy about running retail is the same. It doesn't matter what you call these shops. Ultimately, it is about foot traffic. When you do retail, you have to focus well on your fundamentals. You also need to attract volume. So any plans on this front at the moment? And we can also see that in the second half of last year, especially Q4, in the natural year, Q1, we encountered spring festival, which is the most important festival. And after Chinese New Year, what is -- the retail momentum has come down. And then there's this trade war. So what we have observed in this quarter, any changes over the previous quarter? And finally, you have talked about supply chain business. All along, you have been actively shrinking that affecting our revenue. So what is the proportion at the moment from supply chain, their contraction? How far would it impact on our revenue?

Thank you. First of all, we have learned from [indiscernible]. We want to understand the concept behind them, but then we saw a lot of operational details and they talked about the people. We were told that we can also consider this trend. They are massively upgraded shops, but we need to continue to observe their performance. We need to focus on the fundamentals. We have been doing some modular transformation. If you come to our shops, we have done a lot of modification adjustments, for example, how to launch new products and speedy sales. So we are not yet at the stage of copying the model elsewhere. So that is the first point. And secondly, compared to -- well, in the second half of the year compared to the first half, that should be a rising trend, that should be the general trend, and we do not anticipate any changes there. FY '25 budget has already been set. Actually, it should be FY '26. The trend overall is still within the range of budget. So FY '26, we have fundamental confidence in achieving our budget. Thirdly, about supply chain business. [indiscernible] well, not much impact on our profit. That's the first half of last year. The base is compared with first half of last year. In the second half of the previous year, [indiscernible], the operations are already gone. So it is a clean base basically. I want to supplement by saying that for the full financial year, it starts from a low point and it goes up. So the overall trend should be a rising trend, including the ticket number and foot traffic. And foot traffic has grown compared to the previous year, and it is within the range of our anticipation. So it is in line with our expectation.

I'm Viola from UBS. I have 2 small questions. First of all, concerning the losses, cash flow still negative for those stores, what indicators will have to be seen before they are disposed off or closed? Our tax rate, 35% is rather high because there are certain losses. So what will be your initiative to tackle that high tax rate?

Concerning negative cash flow stores, we will express support to them, and we track them very closely. For such negative cash stores in FY '25, we have great optimization plans. We need to identify the problems. Is it about our operation? Is it because the products are not suitable? Is it the rental level? Or is it too remote, our resources cannot reach there? We analyze and then we will take action. We have closed a number of stores, single digit. All of them had problems, real problems. So we'll try rescue plans first. First, we talked to the landlord, perhaps the rental is too high. We achieved pretty good results for a number of stores. Ultimately, with the landlord, we achieved very good rental reduction. To us, if we leave the premises, they will also suffer. So it is about achieving win-win. It's not just grabbing all the money and putting them in one person's pocket. So continuous operation is beneficial. Can we have any opportunity to turn cash flow back to a positive figure in the next couple of years? In terms of rental reductions, supply chain optimization, if we have considered everything and still, it is not likely to happen, we can't turn things around. We will close the store, but we will try our best not to close our stores because with better operation, there are better opportunities. But if there is no other way, we will still close the store. So for negative cash flow stores in FY '25, I think we have already achieved rather good outcome. Tax rate compared to last year, it is the RMB 248 million with an incremental compared to the previous year, which is prehold tax. If we take that aside, the effective tax rate is less than 32% compared to 2019, it was 29% back then. So first of all, in relation to this year's tax rate, I think it's already quite optimistic as long as we enhance our capability in terms of net profit going forward every year. We can fight for it percent by percent.

A follow-up on a big issue about your business model and layout. 33 supermarkets and sometimes you open hypermarket, but the business side is not catching up, but sometimes it's very difficult to find the right location. What do you think about the ideal mix? And you talked about turning losses into profit for hypermarkets, but that is more on the passive side. Are you doing anything proactively? What is the ideal situation instead of waiting and seeing what may happen next [indiscernible] has been adjusting, you have been adjusting. And you talked about rescuing store by store. That is a defensive outcome with a subjective action?

Well, first of all, when things are not healthy, we defend. That's why we have to ASAP return to good health and create good models for hypermarkets. If there are such opportunities, of course, we'd like to identify good locations for our hypermarkets unless others are withdrawing from the market. In terms of store expansion plan, we'll definitely focus on supermarkets, and we hope to more quickly move forward. Secondly, we're talking about malls at different levels in the communities. So we need to use warehouses to support our malls. But for hypermarkets really, even when we want to develop, we have to wait for the right timing and opportunities. But in terms of number of stores, that is not our priority. Supermarket and fulfillment replenishment from our warehouses will be the focus. We will consider our advantage regions and quality cities and the surrounding areas, that will be our core consideration. There may not be eastern part of China only. In other regions, there are premium locations, too. So in these premium areas, we will have planning to make use of our supply chain to connect perhaps 2 quality areas. Before we make any proactive moves, we need a good model first so that we can optimize and implement first. Operator, we have a question online.

I have 3 questions. Large shareholders has seen some changes. Any changes in your strategies and directions? And restricted funds, is that going to affect your long-term development? Has some major shareholder set any operational targets? Secondly, we can see [indiscernible] opened many, many shops in Eastern China. So how are you going to tackle the competition from [indiscernible]? Concerning membership stores, I understand this trend came from the United States. They are mainly in major cities. But our membership stores may sometimes overlap with our hypermarket, and you focus mainly on first- and second-tier cities. So what about third and fourth tier cities? Are you considering setting up such membership stores as well? What are their competitive advantages?

Thank you. First of all, in fact, our major shareholder, we have been making exchanges for over half a year. In the process, we continue to understand each other. Now our target is well aligned. Our philosophy is well aligned. He is also a long-term investor, how to make this company better and healthier. Secondly, they have brought to us data analytics, which is more refined and specific, which is very helpful. If we are looking at the matrix, or a Sudoku layout, how do you do better? How do you achieve a better layout? And what about our culture and values? We have spent a lot of time on such exchanges. Our majority shareholder also wants to create a better and greater business. So together, we will improve our business for [indiscernible]. In fact, in third, fourth tier cities in the Eastern region, they have done quite well. But some cities if we are doing well, originally, they are not impacting on us at all. So the market is big enough. I still need to say this. We need to learn from good peers, when it comes to operation, efficiency and quality. If we do well enough, we are still obtaining very good results and operations. Desory, about the connected transaction or you can talk about that. About membership shops, we can see, in fact, compared to hypermarkets, the customer base is quite different. When we are good enough. Other people may open other supermarkets or hypermarkets, but they have no impact on us. There are newcomers, [indiscernible]. In the Eastern region, we are located in cities with sufficient level of consumption power. We are still exploring and looking into them. So there's no conflict with our hypermarkets. There isn't much impact on us. We would like to focus at the moment on creating a good model and then developing further.

Yes. Two things. It's about [indiscernible] development. We are all working very hard in terms of fresh products. Stability of quality is the key. When you are moving forward quickly, the stability of fresh products will affect you because that really affects certainty of offering to our consumers. For the whole year, last year, Mr. Shen joined us and assisted the company to realize some new initiatives. The fulfillment capability and stability of fresh products can assure our consumers. It's not just about developing rapidly a certain brand. In a certain site, what do you offer in terms of quality assurance and stability and pricing to your consumers in that circle, that is more important. Secondly, yes, we originally belong to this Ali lifestyle cycle. But we're talking about a different track. And our collaboration with Ali in the past, you already know the focus was on 2 brands. But for FY '25, we have become more independent. We have developed very rapidly our collaboration with Meituan. So the entire B2C business, one big channel is our own APP. It takes up about 35% of our business. Our growth was more than 10% in the past. The second channel is Meituan, 17.5% with very good business model. With [indiscernible], we are still collaborating. We're the biggest contributor on [indiscernible]. In the shorter term, for Tao, they have launched this flash sales recently. [indiscernible] has been connected to certain Taobao offerings in terms of bulk purchase. So for the longer term, the traffic and conversion rate will be beneficial to us. [indiscernible], on our B2C business takes up about 28%, [indiscernible] more than 10%. Both parties can drive for customer base expansion and in this process, in terms of fulfillment rate and platform rate, we can be better positioned to negotiate further. So the entire B2C model through Meituan's joining, we have omnichannel operations. Our operational profit has been enhanced. We have better negotiation with landlords to optimize our cost base. So all these are very helpful from our perspective. Thank you, everyone. Because of time constraints, we are going to wrap up this presentation. Once again, thank you, our management and all our participants on site and online. If you have further questions, please, any time, contact us. And once again, I look forward to meeting with you in the future. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]