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

Ladies and gentlemen, analysts, good morning to you. Welcome to the 2026 12 months ended 31st of March for Sun Art Retail Group Limited. Last night, we have sent you all the PPTs for all those we have registered. If you need it with the online investors, please go to the company website to choose the online results announcement and also you'll be able to get the PPT. Today -- with us today is the Chairman and the CEO, Mr. Julian Juul Wolhardt. And next to me is Ms. Wan Yiwen Desory, the CFO. And also, we have Ms. Gu Xiaobei, the Director for Investment Relations. Now let us have the Chairman share with us some of the investment highlights and the progress of the company.

Thank you. Thank you so much, and welcome to this announcement. In the 2025-'26 financial year results, in this particular financial year, the EBITDA is RMB 3.1 billion, but we always want our EBITDA to be better. Whatever it is in this very difficult environment in the year, we were able to have this EBITDA, and it is an achievement. And going forward, we will be improving on our EBITDA. Now, as for the business development, you have to remember last time when we communicated with you, there were some core points. And today, I will use the same framework. And next year, I will also use the same framework. Why is that so that you can follow our KPIs? And this is very important. I will be responsible for you, and you can follow us on all the major metrics. Now there were 4, 5 things that we really needed to achieve. One, our products. Secondly, online, we have to grow that. And also, thirdly, we have to adjust our shops, and also fourthly, to open new shops. Now last year, I've talked about these 4 themes. And today, I will do the same, and also to tell you the target for the year, for next year, and also for the year after. And in 3 years, for these 3 themes, we will be achieving them. I want to say in the first year, we have been able to reach the targets we have set for ourselves. Next year, we have another target, and in 2028, we want to have achieved them all. First of all, in terms of our products. Now you know that for our stores, we are different from the other stores. We want to have a very deep relationship with our KA, that's what we want to have a very deep relationship, and for our RT-Marts, so that we can have a very good sales and achievement. And also, our self-owned brand, we want to grow that. In May and June, you can see that we have these brands that we have developed ourselves. They were from 0 that we have grown them. And also from the point of view of products, we want fresh to be growing. So this is an attraction point for our patrons. So for products, I said there are different metrics and one there is the products. Products is important. First of all, for fresh foods, you can see from the PPT, Page 7, that it is about 3% in terms of oversales volume growth. And this is important because CPI in China is dropping, there is pressure with the population, competition is more fierce and shops are getting more numerous. But for us, the growth had been overall 3% volume growth, despite competition. Of course, we want this to be 12%, 13%, 14% going up and increasing. So for us in the company, we want to grow fresh food to improve on the quality and efficiency of fresh food. So how do we do this through marketing, that is a very important way. And RT-Mart over the years, we do not have a marketing department as such. So this is something we have to do. And also, another thing we have to do is to make it more Sino, more Chinese. And that is, for example, our Chinese festivals will be tied in with our products. So it is not like the entire year through we will be selling the same thing, rather for the 24 special times of the Chinese calendar that marks the Chinese traditional calendar, we want our products to be in coordination with those. So including vegetables, fruits, seafood, meats and also last year, we said our penetration rate was about 40%. And we want this to be increased to a higher percentage for our penetration rate. This is at the core. So last year, with a very tough environment, we have grown 3% of sales. And coming forward, we will be able to increase that. And for gross profit margin, we, of course, want it to be further increasing. It's increased by 0.8 percentage points. And just now, I said there are 3 points. One, bring in more traffic with fresh foods, that's one. A second one is to have in-depth diversified partnership with premium brands and value creation via national joint procurement. Now we want to build up our national joint procurement as a sustainable self-reinforcing business ecosystem. This is not to lower or compress the KA prices or outsourcing, but rather for the KA or the important KA, we want to grow their share. And by so doing, we are relying on them more and they on us so that they -- in their new products, when they first issue and first introduce their new products, they choose us. So this is for RT-Mart, we are different from others -- or other competitors. We embrace the KAs. And today, in terms of FMCG, it's increased national joint procurement to 60% of our sales. So in the financial year going forward, we'll be increasing this point. At the end of the year, you can come back and ask me, have you reached your goal and give me a score? Well, for the national joint procurement, if you look at the lower right-hand corner, you'll be able to see our pork performance. We have about 40 suppliers for pork. And last year, with national joint procurement, it's been compressed to 5, and they're all the biggest KA in the country, and they have increased their sales for us. And as a result, it's a 20% growth in sales volume. This is because we are strong, strong alliance. Compressing 4 TKAs to 5, they make more money. And also, our growth had been 20%, not bad for RT-Mart. So it is a win-win achievement. This is what we want to achieve. It's not like it's a zero-sum game, no, but rather we grow together, and we win together. So today, it's pork and in the future, it will be a series of other things. And also, it will be so for FMCG as well as for fresh food. The third leg is our private brands, and we have developed some private brands. But on the other hand, we decided to go from 0, start again. And for our PBs, private brands, in the financial year, it is about 3% in terms of sales penetration. In the next financial year, I want to be able to achieve 5%. And at the end of next year, 6% to 7%. So this is to say one day, we want our sales target to be 20% for private brands. Of course, that will take a number of years, but this is the overall overarching target. Private brand and KA, they can go hand-in-hand together, because there are many brands in China. We have a few thousand brands, for example. If we compress like pork from 40 to 5, they are better. And we at RT-Mart, we are better as well. So if we grow from 3% to, let's say, 5%, our growth would be increased by 100%. So at the end of the year, you can ask me whether I've achieved the target we set out. So these are the three things in products. And the consumers will be able to get better KA products, get better fresh food products and better private brands from us. So apart from private brands, the other thing that we need to do is store transformation. We have about 500 in 3 years, we have to transform them all. Some are major transformation, some are medium, some are small transformation. Within 3 years, our 500 stores will have to be transformed. And in the end of the financial year, it will be 50% to 60% transformed. We are now on schedule, and we're following the 3-year plan, and this is a 3-year strategy that we have talked about. Now with the store transformation, there are a few things. First of all, fresh food zone reset. So -- and also the display and also our commercial street, and also the supermarket format. So next year, you'll be able to see the results. So the fresh food, and the fixtures and display gallery and also closing some of our underperforming store. So we will continue to push ahead with that. For our supermarkets, we have 34. For the supermarket as a format, is it a proven model? Well, with this format, it has changed from a negative cash flow to positive. So that was encouraging. So the second year, we have been opening new stores and third year, we opened more new stores. So this is -- supermarket is an area that we will grow. So to open stores, first of all, we have to transform them, open new supermarket and also grow our online. It was only about 20% or so of our volume for online business, but it is now about 30% in terms of sales penetration for online business, and within 3 years, we want to reach 40%. I don't know whether we'll be able to achieve that, but right now, we are about 30% already. And this is the target that we have set for ourselves, 40%. So what we tell you within 3 years, we will want to have achieved those targets. Now for online, we should be able to breakthrough 40%. Why? It is because we have the front warehouses. Last year, we had opened front warehouse, and there had been a period of trying and trialing. And this year, for front warehouses, it has already become a self-sustaining model. Some are even profit-making. So for opening front warehouses in the future, it will increase our 40% or help us achieve the 40% sales penetration. First year was trialing, second year growing, third year growing in big ways for front warehouses. So opening new stores is also this 3-step approach. So overall speaking, I hope you want to know, we are working on the products and also the stores and also with our front warehouses. For stores in the next few years, it will be a net positive number. And we also want that for those stores, which are not particularly profiting -- profit-making, we might have to close them. So this is something we might have to do. So in this year, we will continue to enhance the areas that I have talked about. And then, Desory will come back to look at the financials, and then, we will go through the second year and the third year for some of the details of our plans.

Thank you very much. Next, we look at the overall achievements for the year. We had 507 stores in 2024. And this year, overall, the competition had been keen. The industry is also changeable with split-second consumption, et cetera. So overall, to see, it is about the same as last year. So overall, revenue is RMB 63,442 million, and it is a 0.1% growth from the year before. And also for our revenue, and especially from fresh food had increased, and also our private brands had also grown. And this is the reason for our gross profit margin increase, which had increased, as I've mentioned, 0.1%. And adjusted EBITDA margin is 5% and adjusted EBITDA is RMB 3,157 million, and this is a healthy financial performance. And in the future, our strategic planning and our mid- to long-term planning will have this basis. As for our net cash position, we are in a very healthy and very ample position. Our net cash position is minus RMB 1.8 billion in terms of our debt. It is still over RMB 10,000 million as our net cash position. And also, we had a bonus and from minus that, our net cash position is still very healthy. Inventory turnover days this year, for our turnover days, you have to look at it in this way. So for 3/31, actually in the spring festival of this year, it was on the 3rd of March in the past 11 years. This is the first time the Yuanxiao Festival and the Spring Festival was in March. And after that, the -- with some of the speed of or pace of the returns, et cetera, it was because of the festival timing that it had been delayed. So therefore, the inventory turnover days was a result of that. And in May, it has already come back to stability in terms of inventory turnover days. And also CapEx is RMB 545 million less than last year. It is because of our Kunshan project. It is at the end of its project construction term. And also in our procurement -- integrated procurement, we have been -- we had more action on our KAs, and also our stores transformation and also our front warehouses, there have been some smarter investments, lower investments, and therefore, the overall CapEx has decreased. So for these 507 stores, the number of stores, there are 507 membership stores and also 32 are membership -- the hypermarket stores are 462 and 34 are super stores. And this year, we are also making some transformations or we have closed 9 nonprofit-making stores. Our trend is the same in the future for some of the better regions, commercial circles, we will continue to put in our superstores and also our front warehouses and also our stores. So we are in keeping with our overall store expansion existence. Now for total revenue, it is RMB 63,442 million, which is a drop from last year, and it is 11.3% drop year-on-year. So for our major reasons, it is because of competition in the market, and there had been for lower expenditure. And last year, for the pop and mom stores, there had been competition and there had been pressure. And therefore, compared to last year, there had been a 1.8% in terms of impact on the company. And in the first half, we said that we will be making adjustments in the Central China region, and we have been doing that, restructuring that. And therefore, for our revenue impact, it is about 1.5% impact. And also the CPI, as mentioned by the Chairman just now, it had been lowering, especially for livelihood factors. And for pork and vegetables, CPI and eggs, it had been over 10% drop. So for this kind of impact from the revenue, it is about 0.8%. So overall speaking, it is about total 4% impact. In this kind of competition, on the one hand, there will be diversification from our traffic and our customers. In the beginning, we already said that to see omnichannel compared to last year, it is stable, though. And in that process, online, we have been very strong and resilient. So for B2C orders to C channel, it is some 30% from revenue, it is 26% share. And B2C had increased 2.6% as share. And overall, the situation is controllable. And also, there had been some change to the overall order volume. And online orders has increased approximately 5.5% year-on-year. And it is because of our voluntary adjustment from our company. We restructured our overall structure, brought in more food and beverage and also for some of our tenants, we have lowered the rentals to them. That is for our gallery. So we prioritize lowering the vacancy rates to optimize the tenant mix, and we have been steadily raising the share, as mentioned, with our food and beverage format, with our tenant portfolio, and we are quite stable there. So for gross profit margin, it is RMB 15,372 million, which is a drop of 10.8% as we have mentioned. It is also because of rentals from gallery lowering, but also gross margin is a rise for fresh foods optimization and also the product mix for fresh food and also the operation for the fresh foods, they have increased the margin for fresh foods. And PB, it had also increased and contributing more to our gross profit. And also for FMCG, and especially for our private brand, FMCG will need time to adjust the supply chain. So this presents short-term pressure. And for expenses, it is a lowering of -- decrease of 5.5% being the expenses, it was RMB 16,005 million, representing a year-on-year decrease of RMB 936 million. And with our shops, it is over 20% in terms of our utilization, which is 3% higher than last year. And also our headquarters, it is some 15% higher. So through the optimization and management, our costs have decreased. So for us, it has -- the tenant rentals, that also had -- there had been negotiations with them. And also, this is rental cost reduction negotiations across our all store networks. And also, we have better centralized resource coordination to drive cost savings. Now for our adjusted EBITDA and also our property valuation and net cash position, Page 18. For our property valuation and net cash position, we have ample cash reserves, and we have supporting -- we have been supporting a robust financial structure. And this is a very good foundation for us to go forward. So in the year, financial year, even though external, internal, there has been a lot of pressure and changes. But as mentioned, for fresh foods and also private brand strategy, it has come to some fruition. And also for the superstores, it is also bringing in positive cash flow. And also for our front warehouses, there are pilot points and some of the warehouses have already reached very closely to our target. So for this year, the second dividend HKD 0.08 per share, given that we have already completed our dividend for the year. For our strategy of dividend, we hope to be able to keep our stable and consistent policy so that shareholders will have a steady and consistent income. For the next year, we'll have new organization and new coordination efforts. And as the Chairman said, we will continue to materialize our 3-year strategy and in particular, in the experience of the consumers in our stores. And we hope that we will continue to be stable with slight increase in our performance, but at the same time, we will continue to invest into the operation, into experience, and also in fresh foods, for example, and our resources, we will be investing and also to extend them to the entire year, we would want to be profitable. And so for our financial performance, we will be -- have a positive profit or to achieve this balance. So next, I would want to have Julian come up and speak to us.

I just want to repeat the strategic side because I want you to be able to track us year-on-year. EBITDA had been RMB 3 billion plus. This is a very important target, and this is something that we have to look at the EBITDA. But the CapEx had been lowered significantly in the past year. So it is not comparing like with like from previous years. So we are thinking about EBITDA all the time. So every year, I'm thinking about this every day, and that is EBITDA, and this is very important. Let's talk about the 3-year strategy. What is our vision? Our vision is to be the most trusted, the most favored company for our consumers and also a company that our staff can be proud of. All the things that we have done is for this, and this -- that is, one day, when our staff go out, they are very proud to say, they go to work at Sun Art and/or RT-Mart, and I want our customers to trust us to rely on us. So all that we are doing have the single reason. So we want our staff to be more efficient. And this is something that we are looking at every day. This is our vision, and we have a 3-year strategy. Just now, I talked about a lot of details. Why? Because we want to be an omnichannel company, that is, in the 3 kilometers area, we will be the center. Why our stores so big? Because we are a community livelihood center. We're not a convenience store. No. It provides solution with everything. If someone wants a lunch, a fresh food or wants to buy a pair of scissors, we are a one-stop shop. And in Japan, it exists this kind of format, in U.S., in the U.K., in Germany, and this is a commercial model that is global. So this is our 3-year goal. So we want fresh foods and also our stores and also, et cetera, we have talked about the 3-year strategy. So product and supply chain and also our channel deployment. So we have talked about the categories, but overall, for product and experience upgrade, product and experience go hand in hand. That's why we talked a lot about fresh foods and also the total cycle time for our supply chain will be compressed. And also, we embrace our KA and also grow our PBs, private brands. And with this, we will enhance experience. When the customers come to our stores, they will see, "Oh, better products, oh, better display" because the products, it is part of our store. It is a combo. So you would understand in order to achieve the 3-year goal, our consumers' experience will have to be good. So this will be the comfortable environment in the store and good products. So digitalization. Digitalization is part of or encompasses supply chain. It's all about machine learning, AI -- basically, AI because without digitalization, you're not able to at all with this huge volume, increase efficiency and speed. For our online operation, it is very much AI and our design. Our IT team in the entire company is growing in size. It is 20% more in terms of our IT team. And next year, perhaps, another 10% increase to our IT team. So as we optimize our digitalization, we will definitely be going on to the path of AI and platform. And this is something that's a megatrend, and there's no turning back on that. Now for this year, for our supply chain, we have put in a lot of time and energy, and it has grown 8% for each of the category. So we are thinking every day about lowering our supply chain costs and also increasing its efficiency. So it is not just about cost, but also total cycle time. This is something that we think about with a lot of time. And so experience and also digitalization and supply chain optimization. And the third one is multi-format. Multi-format is all the different sizes of stores and also online and also our front warehouses. So it will be a megastore and around that superstores and also front warehouses. It's not like we're covering the entire country, but we are using a kind of combo strategy. So 45 minutes delivery to the home, this is our goal. So -- and you can shop as you buy and also when in the store, you'll be able to enjoy very good experience. But at the home, you can also place your orders online, and you can also enjoy it, and the guarantee is about 45 minutes, 96% completion that is delivery to the home. So in China, there is no single format that can cover the entire nation. That's why we say multi-format, we always mentioned that, but we always say that in the concentric circle, there is the megastore, and then, the superstore around them, and then, also the front warehouses. So it is a community livelihood center hub. That's what we want to build. And in the year, in terms of our structure, there had been a lot of optimization within the organization. From purchasing team to senior management, there had been some 50, that's a number of change. So there have been major adjustments. And 90% of the personnel adjustment or change have been -- will be completed within the year. So there is a lot of staff optimization. And I would say it is 90% stable. So with the existing staff, I hope they will lead the company on to the second and the third year going forward. And the average age has been lowered by 10 years or 15 years in terms of age. So new people bring on new energy and also, we have some more older senior people to bring up the younger ones, and this is a good combination. So we have good strategy. We have good digitalization, and we have good format, and we have to find the right people. If it's the same team hoping that they will achieve different results, that's difficult. So we have to redefine our structure, bring in new people and that is the reason why. And just now, I've talked about a lot of different products. We have to think about our core as well. What is at the core of it. And this has to be on the 6 rights, what do we have to do right? First of all, it will have to be rich, all customers and all scenarios coverage. It's not like we're going to have just 5,000 SKUs. We want to be all encompassing. That is our goal. If you want some other things, we want -- you can buy online 30-minute delivery. And also, we want safety, which is end-to-end reliability. Over the years, we, as a company, had not had any major incident. Decades ago, when we first started the company in China, there had been certain incidents, but we have come a long way from that. We want safety. We will provide safety to our consumers. And also price competitiveness. We want higher sales, but we -- based on thinner margins. So grow the volume and even with affordability. So everything we do from customers, fresh, et cetera, it is about the 6 rights. So that's why I also talked about total cycle time. Let's say, a cabbage from the land to our store shelf, how long does it take? How many hours? I need to know that information so that we know that what we sell is fresh. And also processing, processing when they -- if you buy our cabbage from our store, you can also try our dumplings, for example. So it is not just selling something that's tasty, it is also selling experience. So it is a double effect. So we want our store to be very visitable. It's a good experience. And also, we're not LV, we're not MS. No, of course, not. But we are a lifestyle leader, nevertheless. What does it mean? That is what you want as consumers. In summer, you want the best vegetables, and you want clothing, I give you the trendiest, but of course, we are not selling high-priced clothing, but I want to give you something that's affordable, that is high quality. So when people think of our products, think about our fresh foods, et cetera, when they come to our store for experience, it is all about the 6 rights. Everything will be our 6 rights, which defines our standards and our customer experience. So with our staff, how can we bring everybody on to the same path? We basis on the 6 rights. So I gave you a report just now. And also, we -- every year, when we -- I communicate with you, I will use the same framework so that you're able to track us to know whether we're going on the right path. Just now, our EBITDA is RMB 3 billion plus, as Desory said, and it is HKD 0.85 (sic) [ HKD 0.085 ] in terms of our dividend, and we will be keeping those stable going forward. So today, I will close my presentation here. I just want to know whether you have questions, we'll be very happy to answer your questions. Thank you.

Thank you, Julian. Thank you, Desory. This is the Q&A period. There will be 2 parts to it. The on-site investors will raise questions, and then, the online investors. First of all, the second row, the gentleman over there.

Morgan Stanley, Dustin. I have three questions to ask. First of all, concerning competition. For competition, online had been impacted, but offline, there are different formats, small shops and different products, which is competing with your hyperstores. So from the latest trend, can you talk about the period this period and also the last period, has there been returns and what kind of a competition situation? And also, what about the front warehouses? What are some of the more aggressive things that you have done? And also for fresh foods, fruit stores, et cetera, is there a vertical that you'll be thinking about? For example, one-stop purchase, are there some new formats that you will be considering? And also for the operation and financial targets, what about the sales and EBITDA projections? And in particular, for the financial year, what are some of the assumptions and the factors that would affect it going forward? The EBITDA last year with all these factors in play, it had been stable that there have been a lot of measures on it. And for the margin going forward, what is your forecast? And also, Julian mentioned AI. Can you give us more examples? It is in the website? Or is it in the other areas? AI empowerment, how does it bring on better sales or efficiency, et cetera?

Yes, I will answer the one -- the first question. First of all, on competition, you asked a question. We have been close to 30 years operation in China. It has always been competitive. We have never had an industry in China, which had been demand over-stripping supply. This is characteristic of China, in pork, in milk, et cetera, around all the industries. This is a basic fundamental for the China market. You never have something that only you have that is unique. So that doesn't happen. That's why we have been thinking about our differentiation. One, our stores are very big. This is an advantage, but how do we bring -- make it an advantage. It takes everyday thinking. It has to be a pleasant experience for our customers. So we have to be thinking how we can transform our stores, how can we have fresher cabbagges, better dumplings, mantou, et cetera. From competition point of view in China, it's never been that there's no competition. There's always been competition. So it is about how we strengthen ourselves within that competition. Second, last year compared to this year, of course, we know that there are a lot of online stores, burning cash and some of them are giving out gifts or milk tea, et cetera, with just a small amount of food purchase, but on the other hand, people's stomach is only this big. It wouldn't be that I'm going to buy even more because you're giving me free gifts. So this year, how do we see this year? Will people still -- the online operators still be burning cash like last year, like RMB 100 billion. So we need to continually to improve. As Desory said, we will continue to do so. And we have already prepared and the burning of cash will continue because that is characteristic of China. Now online and offline, you think about these are 2 different industries. That kind of understanding is, per se, it's not any more. That is to say online and offline are completely integrated. It's the same thing. In the past, we say, "Oh, he's in online. Oh, he's in offline." Those days are gone. And it will always be the same war going forward, O2O. So it's like the Chinese martial arts novels, it has to be like that. So in the future, there will be no segregation. For the offline stores, we find that there is something that's very interesting. The pop and mom shops are exiting. When we first started in retail, these stores were 80% of the market. Now it's 60%. In the future, it will be 30%. I don't know which day that will come, but the trend is definitely decreasing because the experience is not as good and they cannot go online. So when we first came to the market, the pop and mom stores market share was higher. It's going to decline gradually. So this is products and also channel. And Desory also talked about some new stores. And yes, for some of the experiential stores, member stores, et cetera, or some mini stores, yes, we have all those formats as well. But why do we talk about like it's a big thing because it's an experiment for this financial year? And after trials, if it's successful, we'll do it. If it's not successful, we'll not do it. And so we still have about a dozen stores, which are under trial. And going back to our omnichannel strategy, it's not like when you open a store, just right, you have a 2,000 square meters, 3,000 square meter space. If they only have 1,000, then we have to open that kind of a store. But on the other hand, the sizes of stores, we have different sizes. And also, there are trials, there are experiments for the different sizes. The third question was on AI. Ordering, for example, SKUs can be like 15,000, 25,000. How do we predict that next year, we need 6 of these, 9 of those products? And right now, we have a few hundred people writing all this down. This will not be the case in the future. It's impossible. AI is not going to replace these people, but for our ordering speed, and the accuracy of it will be higher. Let's say, tomorrow, it's going to rain or 3 days later, it's going to rain. Today, we are already going to be ordered appropriately with that prediction. So this times 365 days, the change. The factors that can change are huge. So we have to use AI prediction given that using AI is a must. So for fresh food, you also talked about using AI. For the national purchasing, that's one thing. And through AI, it will be even more accurate in terms of procurement, and also inventory days, 2 years later, it would have improved as well. So this is something we're thinking about every day, and that also includes this AI utilization. For example, our delivery man, what is the route, for example? And in the future, for our supply chain, the trucks, the routing, which route it should take in order to save some fuel, that is something you say it's arithmetic, it's math, that's algorithm for you, actually. So AI, machine learning is already something that is a must. I don't think that this is a differentiation, but something that every company needs to do today. I think every company does that. Who is not using that? I think this is almost basic now. So apart from the basic, what we're thinking is what else we can do. So this is the next step of development for us. So in terms of cost, you want to say something, Desory?

Yes. Until May, if we look at May, it is stable. And per order, we see a narrowing of compression. So May compared to last year, it is narrowing of mid- to high single digit. As Julian mentioned, for online and offline, it is dynamic, it's changeable. So today, our B2C order had changed from 30% increase -- room for increase is huge. And also compared to the past, Ele.me and Meituan cooperation with us, there has not been any decrease in this area. So for the room for growth, we will realize this year. And this will be mid- to high single-digit growth. For our total customers and with our products attraction mix of products, we want to increase our ASP and the expenditure per -- or the consumption per customer. And also our fresh foods had increased as a share, and this year, we want this to be a mid- to high single-digit growth for fresh foods. And also for PB -- for the fresh foods and also our PBs, there will be room for further increase. So together with our nationwide procurement, 60% of our sales come from these integrated national procurement. It's not like I'm just locking in prices with the big brands, but rather through this procurement method, we will have more ODM new products launched, developing ODM and also with some dozens of new brands introduced. So it will be increase of 10% of brands increase. So from our products, from our sales, it would be an increase in sales of a few hundred million RMB. So overall speaking, for instance, last year to this year overall, what has been under pressure, for example, in terms of cooked food and also for some of the new products in terms of daily sundries, et cetera, they will be introduced. These new products and new brands in August and September, we'll be realizing these to take away or replace the old products. And PB had increased by 60% this year, as mentioned, and if it is 5% of sales, then that would be like a RMB 2 billion increase. So this will be in a number of products, including wines, including in clothing, et cetera. And the response from the customers for PB has been very positive. So for top line and also for gross margin for PB, we want to realize our whole year at least balance the results.

Next question.

Huatai Securities, Shi Di. I have three questions. First of all, it's been mentioned the four strategies. One is transformation of stores. What is the percentage of transformed stores over the total number of stores? And also if there is an increase of growth after transformation number? And also, Mr. Wan talked about the size, the big size of the stores is an advantage and also our sales have been increasing. Now, I would like to know whether there will be some decreasing of the size of some megastores? And if so, what is the pace of that? And the third question is in the future for the renewal of new generations of products. For example, for some of the transformed channels, there are -- for some of the competitors, for example, there will be weekly new products and monthly new products, et cetera. So as we consolidate our team for choosing products and renewing the products, what is the outlook so that there will be newer and newer experience for the customers with newer products?

For transformation of stores, right now, it is about 25%. By the end of the year, it will be 60%. That is the direction. As for the exact ratio for the major transformation, the results, the sales have been increasing. But it's very difficult to just focus on the good side. That is the -- that would be unfair, because if you look at some of the other stores, they are going through different levels of transformation. So it's very difficult to quantify. Transformation, first of all, is in fresh and fresh is increasing. And then, we will be replicating this in other stores. So it will bring on PB, and also processing goods. So it is about what Desory talked about buying one more. So this is the transformation strategy. And our direction will not be like knocking it down and starting from 0 again. That had never been our company's culture. So there will be a process for transformation, and that's why we say that it is a 3-year strategy. Yes, big stores have our history and it is good, and we have 14,000 square meters store as well. Will they become 7,500 meter stores? Yes, it is possible, but that kind of store will not be decreased to only 3,000, but would 7,500 square meter be the goal? Yes. And the extra space will be the gallery. It can be used for bringing in the outside warehouse that is no longer located outside the warehouses, but right there at the stores, beside the stores, it is possible. So the sales per square meter will be lower. Why? Because we want to grow our sales. The large stores, it is a fact of life that sales per square meters will be lower. That's why we want to lower the square meterage so that the sales per meter will be higher. Now as for your question, PB last year was 0. Now it's 600 SKU. And some of them have been taken off because they have not been selling well. So of course, the cycle of replacement will be faster, it will be fast. But of course, the operation will take time. In our hearts, our wish, of course, we want it to be faster, but the reality and operation will always be slower. But on the other hand, our pace will pick up for sure because as you mentioned, we want there to be a nice surprise, something new when people come to our store. It's not like every month, it's the same, same as a few months ago. We want that as an experience. We don't want that as an experience of customers. It is important. So in this particular area, we have an algorithm company to help us track this. And yes, we will be speeding it up.

Next question.

I'm Anne Ling. I have a small question. For our relationship with the supplier, what is it? Because for our stores, we always have the back-end expenses, and that has always been part of our cost. And I would like to know what is the relationship? Will there be any changes in this regard?

It is like this. Let's talk about the results first. That is gross margin results and the KA margin. It's not -- it's the same. That is -- the end result is the same. That is a main principle, but with the nationwide procurement, we want the ratio to be better, not to say that KA had lost, but rather can have better alliance so that we have more better new products. So new products, the margin should be slightly higher, right? So from this angle, we want to bring up the ratio. It's not like you give me more this year. And with more this year, you will get best. But rather, we want it to be a win-win situation where they grow, and we grow as well together with them. As for the ratio between the front and the back end, we want that to change because when you have a new product selling, the margin will be higher. Now for ODM, for example, we have an up-and-coming product. When we talk to the KA, they will say, "Oh, you're going to be a joint brand party. So this is your Sun Art only sale." So will there be a day where there will be a gross margin decrease, where there is none of such relationship with the KA? No. Because national joint procurement is going to stay. A lot of KAs, our competitors don't want to work with them because they want their own brands, but over the years, we've worked with the KAs. We want this to be together, joining hands to bring on a better future. So the joining hands, the cooperation will not change. Maybe the ratio would change on the other hand.

Are there any other questions? If there are no other questions on site, the online investors can ask questions now. [Operator Instructions]. Online question from UBS, Viola.

I'm Viola from UBS. I have two questions to ask. First of all, on the CapEx for this year, can you talk about that? And for the front-store warehouses from -- for the superstores, what is the CapEx? And the second question about dividend policy. Can you repeat the policy for this year or -- and also the years going forward?

For the CapEx, for capital and from last period is more or less the same with slight increase. After the Kunshan project repayment, it will be about RMB 400 million CapEx investment. And it will -- for the stores and the warehouses, it will be RMB 60 million and RMB 100 million for transformation. And we already mentioned the transformation number of stores, and we want that to be increased sales from the transformed stores and also gallery increase in savings in terms of investment and also the AI investment, et cetera. As for dividend policy, I've mentioned that just now and the interim dividend is HKD 0.085 per share. And with this, we have completed our 2026 dividend payout work. And we see that from last year to this year, the company, in terms of dividend, had been consistent. And in the future, for dividend policy, it will be consistent and stable. That is our policy so that the shareholders will have a stable and consistent dividend return every year.

CICC, Wang Jierui, next.

I have two small questions to ask. First of all, about our front warehouse in terms of orders, et cetera, what is the situation? And also going forward, what are some of the situation with the front warehouse? And also for the national joint procurement, right now, there is a pretty good performance. Going forward, for the joint procurement, what is the penetration rate that you intend? And what are some of the product categories that you want to go for national joint procurement?

The national joint procurement, our hope is to have it achieved 60%, for pork, for instance, even though the quantity volume had grown significantly, but we are surprised as well. If you sell pork, how can you actually increase customer flow like this and also the performance like this. So if you want projection, I cannot say for sure, but I think it will be even better in terms of sales. When we were selling these pork, we had not compressed the pork sales price significantly. No, that it's like our pork had been fresher, our products are better. And because also with national joint procurement, we have first launched product advantage. So we want to have 60 KA to further compress. So this is the plan -- work plan for the future. Now for the front warehouses, it's tough to say because at present, the stores concerned are not that many. And we have for some stores with 2,000, but some stores with only 500 orders per day. So it's difficult to give you the exact number. We have just over a dozen these front warehouses. It's very difficult to give you an average of the numbers. And also, first store is about 800,000 or 1 million. And now it is about 400,000. I think we can continue to lower. So if you talk about CapEx, it is already cut by half, but in the future, we will have to adjust again according to our assessment. For our cycle days, the good and the bad put together average, it is 2.5 years. However, we cannot look at the average because there are many stores, which are a mistake. So we have paid the tuition fee, but we don't want to repeat the mistakes. So for the worst stores, let's say, the 500 orders per day versus the 2,000 orders per day stores, but I will not be fixated in the numbers. I think, so for the -- I think this is a trial for our stores. Now the superstores are already successful, the trial, so there will be more of them. And for front warehousing, we will be doing that, increasing them as well. So some of the things will be successful, some less. The front warehouses are successful and also for our member store and also for our small stores, the mini stores, we're still trialing. So different formats, a different situation, and we will continue to trial. And the range for front warehousing, it is 600 to 800 orders per day, but for some of them are better performing, but it would be about RMB 55 order size. And overall, our product category mix is optimizing. And also for some of the stores, they are better in terms of rentals. We have 4 major regions nationwide. In different megacities and different commercial circles, we will make different trials so that we will find a product mix and cost-optimal structure for the front warehouses.

[Operator Instructions] I do not know whether there are further questions. Yes, there is a question online. Yes. CICC, Wang Jierui.

I'm sorry, I'm repeating. I just want to confirm a small detail and given the chance. So achieving the model, what exactly did you mean by achieving the model?

Achieving the model is breakeven, EBITDA breakeven, we say we are achieving what we want them to achieve.

[indiscernible].

I would ask a question on organization and structure. In the past 3 years, the CEO of the company, the senior management team had changed significantly and there had been significant staff cuts. With this kind of situation as a background, how do you maintain our frontline customers to live out and express our culture, our values and the quality of our service, how do you achieve that through execution? And also staff cutting, what exactly is the stage now? Can -- is it like senior management change, it's already achieved 90%. And also going forward with the staff, will the cut be more or less the same pace? And what about incentives? Last year, it's been -- already been ongoing for a year. What is the outlook? What is the forecast in a 3-year time or longer period? So what is the plan for the company to have done?

Let's talk about the frontline workers. They are the most important part of the company. We are not hoping that in the -- that we will be continually cutting staff. That is not the plan. We want to keep our existing staff size, but there will be adjustments. What kind of adjustment? That is to say through algorithm for the back and front operations, we want to optimize that. That is to say, we want more people to be serving frontline. So the overall staff size will not change, but the ratio will change between front and back. So for food and processing, it needs more hands, workers. So we want less PBT, but more sales work. So for the servers in the stores, that would increase. Back end will decrease. So that will be a balance. To achieve the sales increase that we have as a target, well, I think it is impossible that year-on-year, we will have the same pace of transformation. But on the other hand, I think from our structure -- from our organization structure, we have already made a lot of adjustments. Procurement, for example, there have been changes. And also there, we did not have a marketing department. We will have that. That is already changes in organization structure, and that's been done, and there will not be any major change in the future. Senior staff, 90% change, that will not change further. And are there certain areas where there will be certain detailed changes? Yes. But overall, it is already done, stable. So for machine learning point of view, if it's going to impact us significantly, so what will the impact be for staffing? I really don't know. But now the change, as far as I can see, will not be the frontline staff. So if our procurement is more ordering, ordering is more and more accurate, how would it impact the team? I really don't know. But the -- I can tell you, IT team has been bigger. But in our tens of thousands of staff, that's just a small team. So for incentives, we changed the structure. Last year, in the different stores, we have tried out different incentive schemes, but it's not reached perfection yet. I think we may have to design a new -- that -- so we will be changing that. For senior management or mid- to senior management, there will be a new incentive scheme so that for company value and expectations of the shareholder, they will be more aligned. So from front line staff to mid- to senior management, there had been -- there will be incentive structure change. So for the next couple of years, it will be more stable, compared to last year major changes. There will be further tinkering for the next 2 years, but no major changes. So this is -- I would want to supplement. This is no longer about staff cutting, but about capability and structure, and we will continue to do so. Like today, we say in terms of staff cost optimization, it had come from optimization of certain staff, whether full time or part time in terms of the rotation, in terms of the flexible, part-time, full-time, optimization, combination, we will continue to explore these and within what is achievable for us.

Any other questions online and offline. [Operator Instructions].

Thank you so much, everyone. The management has been very clear in their presentation. So this ends our annual results announcement today. Thank you again for your participation. We have some snacks from our PB. Please bring back home some of the products that are on display outside. If you have further questions, would you please contact our Investor Relations team? We hope to see you next time. Thank you. Thank you.