More time needed
- 1H22 results disappointed with DFI reporting a net loss of US$52m. Core OP shrank 51% yoy, while associates losses dragged DFI into the red.
- Bumpy path to recovery with lack of visibility on HK-China border reopening and margin pressure from macro challenges and higher digital investments.
- Eyes are on associate’s performance to aid DFI’s profit turnaround in 2H22F. Maintain Hold with lower TP of US$2.60.
1H22: Hurt by tighter Covid restrictions in HK and Mainland China
DFI announced a disappointing set of 1H22 results, reporting a net loss of US$52m, vs. both our/Bloomberg consensus expectations of a profitable FY22F. Underlying operating profit shrank 51% yoy to US$76m, as recovery from the Health and Beauty (H&B) segment and increased contribution from IKEA were more than offset by weaker Grocery Retail and Convenience segments. Key impact stemmed from 1) cost inflation, 2) elevated demand for groceries tapering off and 3) higher investments in e-commerce. DFI was dragged into the red with US$65m share of associate losses from Yonghui (one quarter delay in recognising its substantial 4Q21 loss) and Maxim’s (HK’s movement restriction).
Worst is likely over, but bumpy road to recovery as hurdles remain
While we think that the worst is likely over for Hong Kong retail sales with easing Covid related restrictions and rollout of consumption voucher scheme, we see a bumpy path to recovery. Given HK and Mainland China’s current divergence in Covid strategy, we see significant challenges to borders reopening in the near-term. We think a meaningful recovery for DFI’s Health and Beauty segment (biggest earnings contributor pre-Covid) is only likely from 1H23F. We expect operating margin to remain compressed (-1.8% pts yoy) in 2H22F, on the back of supply chain and inflationary pressures. DFI also launched its yuu-to-me e-commerce app in HK in May 2022; we expect sales and marketing expenses to be elevated in the medium term to drive these digital initiatives.
Eyes on associate’s performance to aid profit improvement in 2H
A bright spot is the potential turnaround in associate Yonghui’s (601933 CH, Add, TP: Rmb6.20, CP: Rmb3.47) earnings in FY22F, given reduced subsidy levels for community group purchase platforms, which has improved competitive environment in China. Our China consumer analyst forecasts Yonghui to return to profitability in FY22F (Rmb251m net profit, vs. FY21’s Rmb3.9bn net loss). We also expect a turnaround of Maxim’s business with easing restrictions in Hong Kong to aid DFI’s return to the black in 2H22F.
Maintain Hold with lower TP of US$2.60
Maintain Hold in view of the continued challenging operating environment. We cut our FY22-24F EPS by 3%-46% to bake in margin assumptions; our TP is accordingly lowered to US$2.60, still based on 16.0x CY23F P/E (2 s.d. below 5-year historical mean). Upside risks include more clarity on HK-China border reopening plans or stronger associates’ profit turnaround. Downside risks include higher-than-expected losses on e-commerce venture.