3Q23 Business Update: Impressive turnaround with more growth headroom ahead
- Underlying profit increased >80% y-o-y on strength in Health & Beauty, Convenience Stores and Restaurants, offset by softer Grocery Retail and Home Furnishing results
- Management guided for substantially lower growth rate in 4Q23 given base effect of Health & Beauty segment
- Likely to miss FY23F expectations of 66% growth in 2H23F, but see multiple growth catalysts going into FY24
- YTD share price correction unjustified given clear recovery trajectory; Maintain BUY, TP at US$3.80
DFI 3Q23 interim management update highlighted >80% growth in underlying profit over 3Q22. In its interim update, DFI Retail Group (DFI) shared that the substantial growth was driven by Health & Beauty (H&B), Convenience Stores (CS) and Restaurants segments, offset by lower results in Grocery Retail and Home Furnishing segments.
Management guided for lower growth rate in 4Q23 compared to the current >80% seen in 3Q23. Management stated that given high base in 4Q22 on strong H&B sales due to surge in COVID cases post relaxation of mobility restrictions in China, it is expecting substantially lower 4Q23 growth relative to current >80% for 3Q23.
We summarise the segmental commentaries in the table below:
Continued signs of recovery, but likely to miss FY23F expectations. 3Q23 business update again reinforces our recovery investment thesis. Post-COVID recovery continues to provide a significant boost to Convenience Store, Health & Beauty and Maxim’s despite the soft consumer sentiments in Mainland China. We believe management guidance is hinting at continued growth in 4Q23 potentially in the mid double-digit range, lower than the very strong 80% currently seen, but still relatively impressive. Based on our initial assessment, we believe the company’s 2H23 core PATMI could fall short of our 2H23F core PATMI at US$134m (66% y-o-y growth).
See Yonghui performance as potential risk to our earnings forecast. Sun Art Retail, a close competitor to Yonghui, announced a profit warning of widening losses in 1HFY24, which could imply a similar situation at Yonghui. We have penciled in continued losses within our revised forecast post 2Q23 earnings and that losses will persist into FY24F. Nonetheless, we do not discount the risk of widening losses even going into FY24F, which might adversely impact our FY24F earnings.
Valuations pegged to FY24F earnings; Reiterate BUY; TP: US$3.80. While earnings recovery could fall short of our expectations for FY23F, we expect growth momentum to continue into FY24F with normalisation of tourist arrivals to Hong Kong boosting H&B and Maxim’s. In addition, generally higher sales should contribute to improved margins due to operating leverage. Share price has retreated by 18% YTD, and back to the same level a year ago when restrictions were just lifted. We believe this may not be justified given that we are clearly on the recovery path. We maintain our BUY call with TP of US$3.80, pegged to 17.4x PE ratio on its FY24F earnings, which is -1.5S.D. of its 10 year historical pre-COVID PE valuation.