Near-term recovery largely in the price
- We project sales growth of 9%/7% in FY22/FY23F amid CGB consolidation. Digitalisation strategy could also support gradual margin rebound
- Online sales to grow by double digits, with long-term goal to contribute 30% of group revenue
- Share price already up c.18% since our last rating in Mar 2022. Trading at 35.1x FY23 PE, downgrade to HOLD
Ongoing CGB consolidation. The latest round of CGB consolidation is evidenced by the financial difficulties and bankruptcy of certain e-platforms, despite the recent surge in industry sales amid stringent lockdowns and social restrictions in selected areas (e.g., Shanghai, Jilin, and Beijing). Yonghui was able to see positive SSSG since Jan this year, and we believe SSSG reached 12% y-o-y in April. The company is also committed to upgrading its productmix with enhanced SKUs to better attract younger generations, while the contribution from FMCGs has also increased, supporting margin improvements.
In order to leverage on the CGB consolidation and increase customer traffic, we believe Yonghui will stick to the “combination of warehouse and store” for hypermarket operations, which could also integrate both online and offline operations and generate synergies for sales expansion and cost savings. In the meantime, with pressure from CGB players easing, Yonghui may slow the pace of warehouse store openings in order to minimise new store losses while continuing to improve operating efficiency (e.g., increasing focus on house brand products). Overall, we expect Yonghui to see 9%/7% revenue growth in FY22/FY23.
COVID-19 resurgence: a double-edged sword. The recent COVID-19 resurgence has affected Yonghui’s operations in areas that were under severe lockdown, resulting in a significant sales contraction in its 30+ stores in Shanghai. Meanwhile, the stores in cities with smaller outbreaks, such as Shenzhen, have benefited from a higher demand for food and groceries due to tightened social restrictions. With the COVID-19 situation improving and the gradual relaxation of lockdown in Shanghai, Yonghui has seen decent sales recovery since late-April and has attained daily sales performance comparable to pre-resurgence. Overall, we believe the easing COVID-19 situation in China should provide stable support for Yonghui’s performance ahead.
Online business to be a key growth driver. To cope with competition from e-grocery players, Yonghui continues to double down on its online business via its self-operated app Yonghui Shenghuo (????) serving 1,000+ stores, and third-party e-platforms covering 900+ stores thus far. As the recent COVID-19 disruptions also drove a higher demand for e-groceries, Yonghui was able to record a teen’s growth in online revenue during May. Riding on its strong position in online sales among most food retail chains, we believe Yonghui should continue to score double-digit growth in its online revenue in FY22, and target at 30% online revenue contribution in the longer run. Its ongoing efforts in the standardisation of warehouse management and delivery services has also enabled Yonghui to achieve c.96% on-time delivery. With nearly 86m registered members, the increasing revenue contribution from self-owned e-platform (c.60% so far) could also support Yonghui’s gross margin expansion in online sales.
Digitalisation to support efficiency improvement. To facilitate its long-term development prospects, Yonghui has created its own omni-channel operating system “YHDOS”, enabling it to integrate information from supply chains to front-end stores, thereby improving the transparency of logistics and store inventory. The platform is also capable of SKU analysis for the best recommendations to streamline slow-moving goods. Yonghui was thus able to lower its annualised inventory turnover days by three days in 1Q22 vs. 1Q21. In terms of staff cost, “YHDOS” could also help to reduce labour reliance and improve human resource efficiency through attendance scheduling and management. We believe the above measures could help Yonghui maintain competitive prices while achieving higher sales and cost efficiencies. Yonghui should also be able to limit its operating cost ratio to <19% in FY22/FY23 (FY21: 21%). While the worst should be over, fierce competition may linger in the near-term, and it may take Yonghui two to three years to gradually recover towards a net profit margin of 2%+ or higher.