FY22F a year of investment
? Divergence in HK and China’s Covid strategy could pose a challenge to nearterm border reopening between the two, delaying H&B segment recovery.
? We expect weaker margins for DFI in FY22F in view of macro challenges and
further investments in e-commerce.
? Yonghui’s potential turnaround looks unlikely to offset the weaker core
operations; we expect DFI to see profit decline in FY22F. Reiterate Hold.
Bumpy recovery as hurdles to HK-China border reopening remain
While we think that the worst is likely over for Hong Kong retail sales with 1) easing
Covid-related restrictions since late-Apr 22, and 2) roll out of HK$10,000 consumption
voucher scheme, we continue to see a bumpy path to recovery for DFI. Given HK and
Mainland China’s current divergence in Covid strategy, we see significant challenges to
borders reopening in the near-term. We further delay our recovery expectations for DFI’s
Health and Beauty segment (biggest earnings contributor for DFI pre-Covid), as we think
it is unlikely to see a meaningful return of Chinese tourists in FY22F.
Margins to be hurt by macro challenges and e-comm investments
Meanwhile, DFI’s other operating segments are impacted by various macro challenges,
including higher pandemic-related costs, supply chain constraints, and higher utility
expenses etc. Such elevated costs have offset revenue gains from segments including
Grocery Retail and Home Furnishing in 1Q22, and we expect this to further weigh on
margins in the remainder of FY22F. DFI also intends to further invest in e-commerce
capabilities (yuu-to-me in Hong Kong, Cart in Singapore) as part of its transformation
roadmap; we expect sales and marketing expenses to be elevated in the medium term to
drive such initiatives. We now forecast DFI’s operating margin to see further compression
of 1.1% pts yoy in FY22F, lowering operating profit by 32% yoy.
Stronger associates’ contribution not enough to turn the tide
A bright spot is the potential turnaround in associate Yonghui’s (601933 CH, Add, TP:
Rmb6.20, CP: Rmb4.06) in FY22F, given reduced subsidy levels for community group
purchase platforms, which has improved competitive environment. Our China consumer
analyst forecasts Yonghui to return to profitability in FY22F (Rmb251m net profit, vs.
FY21’s Rmb3.9bn net loss). However, DFI accounts for Yonghui’s contributions with a
quarter lag – it will be recognising its share in Yonghui’s 4Q21 net loss of Rmb1.8bn in its
FY22F financials. We hence forecast DFI’s net profit to fall 17% yoy in FY22F.
Retain Hold with a lower TP of US$2.70
We retain our Hold call in view of the continued challenging operating environment. We
cut our FY22-24F EPS by 1.1-52.6% to bake in lower revenue and margin assumptions.
With lower EPS, our TP is lowered to US$2.70, still based on 16.0x CY23F P/E (2 s.d.
below DFI’s 5-year historical mean). Upside risks include more clarity on HK-China
border reopening plans, or stronger sales recovery driven by store productivity gains.
Downside risks include higher than expected losses on e-commerce venture.