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.
