News Alert: FY22 profit warning with net loss of RMB0.75bn-0.95bn amid significant provisions
- Sun Art is expected to post a net loss of RMB0.75bn-0.95bn for FY22 (i.e., 12 months ended Mar 2022), the first time since its IPO in 2011. Such a loss represented a decrease of c.RMB3bn-3.2bn as compared to its net profit of RMB2.3bn a year ago.
- Stripping away c.RMB1.4bn net provision, mainly due to store impairment, litigation provisions and bad debt accruals, core net profit should amount to RMB0.45bn-0.65bn, in line with our expectation of RMB0.46bn and market consensus estimate of c.RMB0.6bn.
- Our last rating was a HOLD with target price of HK$3.23.
- Out of its 504 hypermarkets in China, Sun Art currently operates 10/26 hypermarkets in Jilin Province/Shanghai that have largely been affected by the recent COVID-19 lockdowns. On the whole, exceptionally fierce competition from all channels in 1H FY22 as well as the COVID-19 disruptions in 2H FY22 had dragged revenue by 5.3%/5.6% y-o-y in FY22/2H FY22 to about RMB88bn/RMB46bn, slightly below our expectations.
- Sun Art expects to maintain a net cash of c.RMB18.5bn by the end of FY22, and stays confident of sufficient cash flows to fulfill its working capital requirement and capital expenditure for future expansion plans.
- Subject to the final review of its FY22 results as well as factors including retained earnings and distributable reserves, a final dividend may be considered, while no decision has been made as of this latest profit warning announcement.
- We do expect lingering competition from e-grocery players (e.g., community group buying platforms) and disruptions from COVID-19 resurgence could continue to affect Sun Art’s offline sales in the near-term, while the company may score sequential improvement during FY23 once the business environment starts to normalise.
- Meanwhile, Sun Art will continue to build its stores into “offline experience centers” and “logistic fulfillment centers for its online division”, enhance its product power and develops a fresh food supply chain to adhere to its multi-format, omni-channel development for better medium-term prospects.