---
title: "Market Value Fluctuations and Shifting Leadership: The Most Comprehensive Data Analysis and Trend Outlook for New Retail"
description: "Since the O2O wave in June 2013, online-offline integration has become a key theme in retail. From October 2016, when Jack Ma proposed New Retail, the industry has seen Alibaba's stake in Sanjiang Shopping, privatization of Intime Retail, Amazon Go, Hema Fresh's 'supermarket + dining' stores, and Yonghui's Super Species, among other developments. This report analyzes the competitive landscape, financials, and market valuations of major Chinese and US retailers to explore the balance and integration of online and offline channels."
author: "汪立亭李宏科史岳"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2017-05-13"
language: "en"
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# Market Value Fluctuations and Shifting Leadership: The Most Comprehensive Data Analysis and Trend Outlook for New Retail

> Since the O2O wave in June 2013, online-offline integration has become a key theme in retail. From October 2016, when Jack Ma proposed New Retail, the industry has seen Alibaba's stake in Sanjiang Shopping, privatization of Intime Retail, Amazon Go, Hema Fresh's 'supermarket + dining' stores, and Yonghui's Super Species, among other developments. This report analyzes the competitive landscape, financials, and market valuations of major Chinese and US retailers to explore the balance and integration of online and offline channels.

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> Since the O2O wave in June 2013, online-offline integration has become a key theme in the retail industry. Since 2016, most e-commerce and brick-and-mortar players have agreed that a balance between online and offline has been reached. Since Jack Ma proposed New Retail in October 2016, the industry has witnessed a series of high-profile events: Alibaba's stake in Sanjiang Shopping, privatization of Intime Retail, Amazon's Amazon Go store, Hema Fresh's online-offline integrated 'supermarket + dining' stores, and Yonghui Superstores' new Super Species format. Capital markets and industry insiders have engaged in heated discussions around New Retail.
>
>
> On May 8, JD.com disclosed its better-than-expected Q1 2017 results, with Non-GAAP net profit of RMB 1.4 billion, and its market cap hit a record high that day (USD 55.1 billion). Alibaba (USD 299.4 billion) and Amazon (USD 455.4 billion) also hit new highs recently. Vipshop, despite a 29% gain year-to-date, has a current market cap of USD 8.4 billion, less than half its April 2015 peak. Costco's market cap reached USD 80.1 billion on May 4, a record high. Walmart's USD 232.6 billion market cap is 75% of its all-time high (USD 309.3 billion in December 1999) and 80% of its second-highest (USD 288 billion in January 2015), remaining relatively stable. Meanwhile, Macy's, Target, and Kohl's have seen market cap declines, while J.C. Penney and Sears have long fallen from their former glory.
>
> Back to A-shares, Yonghui has not hit a record high, but its current market cap of RMB 59.5 billion has nearly doubled since early 2016 (all-time high of RMB 66.5 billion on June 2, 2015), up 27% year-to-date. Suning is down 11.4% year-to-date, with a current market cap of RMB 94.5 billion, 56% of its peak. Sun Art Retail is up 9.6% year-to-date, with a market cap of HKD 71.5 billion, 58% of its peak. A number of traditional department stores and supermarkets are at relatively low market cap levels.
>
> Market value fluctuations reflect shifting leadership. We are witnessing the accelerated emergence of new formats, models, and services against the backdrop of new demographics and consumption upgrades. New technologies and thinking are being applied in physical retail scenarios. The retail industry is undergoing profound transformation. The elements of 'people, goods, and places' remain, but the thinking, models, relationships, and rules have changed. The competitive landscape and market leaders are also changing, with new leaders winning more market share.
>
> **At this critical juncture of retail development, transformation, and integration, we take major Chinese and US e-commerce platforms (Alibaba, JD, Amazon) and leading physical retailers (Yonghui, Suning, Sun Art, Walmart, Costco) as samples. From perspectives of competitive landscape, GMV/revenue, gross margin, expenses, net margin, ROE, and market valuation, we systematically and deeply interpret and discuss the balance and integration of online and offline. We also conduct data mining and benchmarking analysis on representative Taobao brands Handu Yishe and Three Squirrels, using them as evidence of channel costs. The main content and viewpoints are for your reference. We welcome your feedback!**
> ******1.********Market and Landscape: Online Retail Growth Slows, Competition Stabilizes**
>
>
> (1) Online retail sales grew 26.2% in 2016 and 32% in Q1 2017, slowing from 39% in 2015. Q1 2017 online retail accounted for 16% of total social retail sales. (2) E-commerce penetration for apparel, footwear, hats, and cosmetics has exceeded 20%; for mobile phones, digital products, books, and audio-visual, it is between 15-20%. (3) Among the top 10 Chinese retailers by market share, Alibaba and JD rank first and second with 7.5% and 3.5%, respectively; Vipshop ranks seventh with 0.5%; offline retailers such as Suning and China Resources hold seven spots. In the US, Walmart leads with 11.8% share, and Amazon is the only e-commerce company in the top 10, ranking third with 3.5%.
>
> **The convergence of China's online retail growth rate toward that of offline leaders suggests that, from a macro perspective, the channel competitive landscape is stabilizing. After consolidating their market positions, e-commerce leaders like Alibaba and JD are focusing more on technology development, new business expansion (e.g., Alibaba Cloud, New Retail), and improving mid-to-long-term profitability. This is also expected to enable other retailers (such as Suning and Vipshop) to gain or enhance relative competitiveness, create incremental traffic and business for offline retailers (such as Alibaba-affiliated Intime, Suning, and Lianhua Supermarket), and encourage the emergence of more 'small but beautiful' new formats (such as Super Species, Hema Fresh, NetEase Yanxuan, Mijia, Miniso), as well as precise supply chain & traffic services.**
>
> **2. Financial Comparison: No Significant Difference in Online and Offline Channel Costs; Quality Leaders Gain Share and Achieve Profitable Growth**
> **(1) Revenue Growth: E-commerce Leaders' Growth Slows but Marginal Share Stabilizes; Physical Retailers Show Divergence.** From 2011-2016 CAGR, JD, Suning, and Alibaba GMV grew 82%, 69%, and 42%, respectively, but Alibaba and JD's GMV growth has slowed significantly in recent years, with active user growth also declining. Amazon's CAGR of 23% is mainly driven by AWS and other service revenue (47% CAGR, 30% of 2016 revenue), while product sales CAGR is about 18%. Yonghui achieved a solid 23% compound growth, far exceeding other offline retailers' below 10% levels, and is expected to maintain 18-20% steady growth over the next three years.
>
> From a **marginal share** (incremental retail sales / incremental total social retail sales) perspective, Alibaba's share rose to a peak of 26.37% in 2014, then stabilized at 22-23% in 2015-16. JD's share rose rapidly from 1.49% in 2012 to 7.03% in 2015, slightly declining to 6.75% in 2016. Suning's (online portion) marginal share has risen rapidly to nearly 1% over the past two years. Yonghui's marginal share hit a low in 2015 but recovered to 0.23% in 2016. Sun Art's marginal share has been declining since 2011, reaching only 0.13% in 2016. **This indicates that Alibaba and JD are still becoming stronger, Suning is improving marginally, Yonghui is achieving effective growth and market share gains through enhanced competitiveness, while Sun Art is gradually losing ground. Therefore, the so-called online-offline balance is more of a dynamic balance among leading players. Kings are changing; in the emerging competitive landscape, leaders with complete ecosystems, core resources, and competitiveness are winning larger market shares. The strong get stronger, and the value of leaders becomes scarcer.**
>
> **(2) Gross Margin: Amazon, JD, Sun Art, and Yonghui have improved year by year; Suning shows a slight downward trend. Further comparative analysis:** (A) **JD's 2016 gross margin of 15.18% exceeded Suning's (14.36%) for the first time; Q1 2017 gross margin of 16.05% was on par with Suning, indicating that price competition between major competitors in the home appliance and 3C sector has reached a balance. JD's pursuit of profitability may also create a more moderate competitive environment for Suning.** (B) Interpretation of JD's 2016 annual report and Q1 2017 report: business structure optimization (third-party platform GMV share rose to 43% in 2016) and category structure optimization (general merchandise GMV share rose to 49%, further to 50% in Q1 2017) **open up sustained growth space for its GMV and revenue, and more importantly, signify JD's successful upgrade to a comprehensive platform, which is of significant value to improving its gross margin and profitability.** (C) Yonghui's 2016 gross margin of 20.19% is 4-5 percentage points lower than Walmart and Sun Art, but about 6 percentage points higher than Costco. Yonghui is currently benchmarking against Costco and Aldi. Through its own construction and cooperation with international leading service providers like Daymon, it is upgrading its supply chain capabilities to a higher stage of brand direct sourcing, quality customization, and standardized processing. **It is expected to continue improving its gross margin while maintaining price competitiveness. Strong supply chain and efficient execution under excellent mechanisms are important sources for simultaneous improvement in market share and profitability.**
>
> **(3) Selling & Administrative Expense Ratio: E-commerce expense ratios are generally higher than physical retailers, requiring higher gross margins to support profitability.** Alibaba and Amazon have S&A expense ratios exceeding 30%; JD is nearly 16%, with order fulfillment, technology & content, and marketing as main expense items. Physical retailers have S&A expense ratios below 21%, with employee and rent expenses totaling about 10-12%. (A) Historical data for Amazon and JD shows that as revenue scales up, order fulfillment cost ratios have risen rather than fallen. Amazon's increased from 8.5% in 2010 to 13% in 2016, while JD's rose from 5.6% to 8.1% (latest Q1 2017 order fulfillment cost ratio fell to 7.7%), indicating no obvious 'economies of scale.' (B) Among comparable companies, JD's S&A expense ratio has been higher than Suning's since 2014, with 2016's 15.98% being 1.58 percentage points higher. JD's expense ratio does not have a significant advantage over offline supermarkets like Sun Art and Yonghui. (C) Both Alibaba and Amazon invest the most in technology and content R&D, which is a key reason driving their expansion into new businesses like cloud computing, New Retail, AWS, and cloud services, improving business structure, and enhancing experience services and revenue.
>
> **(4) Net Margin: Physical Retailers Temporarily Outperform Self-operated E-commerce, but Amazon and JD Have Entered a Growth Phase After Profit Inflection Points.** (A) Physical retailers have more stable profitability than e-commerce. Except for Alibaba (platform e-commerce) with a high net margin of 24.7%, the other seven retailers have net margins generally below 5%, with Amazon, Suning, and JD all not exceeding 2%. (B) Historically, Amazon was loss-making for seven consecutive years after its 1995 IPO, turning profitable in 2002, with net margin peaking at 8.5% in 2004 and maintaining 3-4% from 2007-2010. In recent years, except for slight losses in 2012 and 2014 (loss ratios of 0.06% and 0.27%), it has remained profitable, with 2016 net margin reaching 1.74%, close to 2006 levels. (C) **JD's Non-GAAP net margin had loss ratios exceeding 3% in 2011 and 2012, a slight loss of 0.47% in 2015, but achieved small profits of 0.3-0.4% in 2013, 2014, and 2016. Q1 2017 net profit of RMB 1.4 billion exceeded the full year 2016, basically confirming the profit inflection point.** (D) In contrast, traditional offline retail giants like Walmart and Sun Art had net margins above 3% in previous years, but have gradually declined to 2.5%-3% over the past three years, reflecting some pressure.
>
> **(5) ROE: Physical Retailers are Relatively Stable, but Only Costco Has Improved Year by Year; Amazon Reached 14.5% in 2016.** Physical retailers like Costco, Walmart, Sun Art, and Yonghui are relatively stable, but only Costco has shown a year-by-year improvement, with 2016 ROE of 20.71%, the highest among the companies. Sun Art's ROE fell to 12.1% in 2016. Yonghui's ROE was below 8% in 2015-2016, mainly due to a 30% net profit decline in 2015 from operational adjustments, and despite net profit doubling in 2016, fundraising increased net assets. It is expected that with process optimization, continued supply chain strengthening, and brand/category management, Yonghui will re-enter a profitability improvement track, driving ROE back to higher levels.
>
> Amazon and JD have volatile ROE due to losses. Amazon's 2016 ROE of 14.52% was the highest since 2011, still 6.2 and 2.7 percentage points lower than Costco and Walmart, respectively. Suning has accelerated online business development in recent years, and online losses have kept its ROE below 3% since 2013.
>
> **3. Market Value and Valuation: New Leaders Hitting Record Highs and Traditional Retailers Declining**
> **(1) Market Value and Gains:** **Amazon, Alibaba, JD, and Costco have hit record stock price highs.** Except for Suning, all other seven companies have risen year-to-date. Amazon leads with a market cap of RMB 3 trillion (USD 455.4 billion), with its current stock price of USD 953 at a record high, up 27% year-to-date. Alibaba is up 37% year-to-date to a market cap of RMB 2 trillion (USD 299.4 billion), with a current stock price of USD 120, a new high, slightly above the November 2014 high of USD 119. JD is up 51% year-to-date, the highest gain among the companies, with a market cap of RMB 374 billion (USD 55 billion), recently hitting a new high. Costco is up 8% to a market cap of RMB 514.8 billion (USD 75.7 billion), also recently hitting a record high (current closing price has slightly pulled back).
>
> Walmart is up 12% year-to-date to a market cap of RMB 1.58 trillion (USD 232.6 billion), 75% of its all-time high (USD 309.3 billion in December 1999). Yonghui Superstores is up 27% year-to-date, with a current market cap of RMB 59.5 billion, nearly double since early 2016 (all-time high of RMB 66.5 billion on June 2, 2015). Suning Commerce is down 11% year-to-date, with a current market cap of RMB 94.5 billion, 45% of its all-time high in June 2015. Sun Art Retail is up 10% year-to-date, with a current market cap of HKD 71.5 billion, 63% of its all-time high in October 2013. A number of traditional department stores and supermarkets are at relatively low market cap levels.
>
> Looking at the longer term, over the past decade since April 30, 2007, Amazon has risen 1454%; Costco 304%; Walmart 103%; Target 22%; Macy's and Kohl's have fallen 17% and 35%, respectively; J.C. Penney and Sears have fallen 92% and 93%, respectively. These stock price trends reflect the mid-term changes in the competitive landscape and operating trends of the US retail market, namely that e-commerce and technology companies represented by Amazon are seizing market share from traditional offline retailers. **The rise and fall of US channels can serve as a mirror. Will this also be the future path of China's retail channel transformation?**
>
> **(2) Revenue and Profit Scale:** Based on 2016 data, Walmart leads in revenue and profit, at approximately RMB 3.3 trillion and RMB 92.8 billion, respectively. Amazon and Costco have similar revenue and profit scales, at approximately RMB 800-900 billion and RMB 16 billion, with Costco's net margin of 1.98% slightly higher than Amazon's 1.74%, but Amazon's market cap is about six times Costco's. JD has revenue of RMB 260 billion and Non-GAAP net profit of RMB 1 billion. Alibaba and Suning each have revenue of about RMB 150 billion, but Alibaba's net profit is estimated to exceed RMB 38 billion. Sun Art and Yonghui have revenue of about RMB 100 billion and RMB 50 billion, respectively, but Yonghui's market cap of RMB 59.5 billion is about 94% of Sun Art's, and Yonghui's revenue growth is also significantly higher than Sun Art's.
>
> **(3) Valuation:** Alibaba's 2017 P/GMV is about 0.44x, slightly higher than JD's 0.4x. On P/S, Alibaba and Amazon have high P/S of 10x and 2.8x, respectively; JD's 1.1x is slightly higher than Yonghui's 1.02x; Sun Art, Costco, Suning, and Walmart have P/S not exceeding 0.6x, which is low. On P/E, Amazon and Suning have P/E exceeding 100x; Alibaba's 39x is slightly higher than Yonghui's 37x; Costco's P/E is about 29x; Sun Art 24x; Walmart's 18x is the lowest.
>
> **4. Brand Cases: Taobao Brand Development Trends and Channel Costs from Handu Yishe and Three Squirrels**
> We use Handu Yishe and Three Squirrels as examples to analyze small and medium e-commerce companies (Taobao brands) incubated on Tmall. Their development positioning represents two different directions and models.
>
> **(1) Handu Yishe:** Still rooted online, but has expanded from a traditional self-owned Taobao brand to an e-commerce ecosystem operation system including online fashion brand incubation and domestic and international brand agency operations, with richer profit models. 2016 revenue was RMB 1.432 billion, net profit RMB 88.34 million. Promotion fees, service fees, and express fees are the main expense items, totaling 19.52% and 18.04% in 2015-2016, respectively. In contrast, representative offline apparel and footwear brands have advertising rates of about 3%, a difference of 15-16 percentage points, roughly equivalent to the 15-20% commission that department stores typically charge for apparel. **Considering the company's scale effect as a leading Taobao women's wear brand and its strong operational capabilities, it is estimated that other Taobao apparel brands have higher expense ratios for these three items (basically exceeding 20%), with almost no cost advantage compared to offline channels.**
>
> **(2) Three Squirrels:** Creating IP effects, moving from online to offline, reflecting the online-offline integration trend of internet brands. 2016 revenue was RMB 4.423 billion, net profit RMB 237 million, with continuous improvement in gross margin and expense ratios. In 2015, gross margin (27%) and selling expense ratio (24%) were about 2 and 4.5 percentage points higher than Baicaowei, respectively, but both lower than Lai Yifen and Yanjin Shop. Lower online gross margin is mainly due to e-commerce's low-price competition to quickly gain market share.
>
> **We compare the main expense items (excluding employee costs) between online and offline:** Lai Yifen and Yanjin Shop's 2016 offline main expense ratios (transportation + promotion + store rental/decoration) were 14.24% and 13.21%, respectively, higher than the company's 2016 online main expense ratio (transportation + promotion + platform service fees) of 12.62%. The company's main expense ratio is lower than both online and offline peers, reflecting strong expense control capabilities. **However, comparing the three-year average main expense ratios from 2014-2016, Three Squirrels is 15.46%, Baicaowei (2014-15 average) is 16.13%, Lai Yifen is 14.04%, and Yanjin Shop is 12.83%. Considering that Three Squirrels and Baicaowei are already relatively excellent leisure food e-commerce brands, the comparison of main expense ratios does not show significant differences in operating costs between online and offline for this category.**
>
> **5. Trends and Recommendations: Expecting Deepening of New Retail and Results, Prefer Leading Retailers like Yonghui Superstores**
> **In traditional retail, 'people, goods, and places' are separate. Under New Retail, these three core elements have all changed and are dynamically influencing each other. The driving factors of New Retail come from the demand side, with changes in people and consumer demand, as the rise of the 90/95 generation and the middle class drives consumption upgrades, with greater pursuit of individuality, quality, and experience. On the supply side, new technologies, new thinking, and new balance drive channel transformation and integration, putting customers first, upgrading formats, product supply chains, logistics systems, business models, and service awareness, committed to delivering the best products and services to the most suitable users with optimal supply chain efficiency.**
>
> **Leading offline retailers such as Yonghui Superstores, Intime Retail, Tianhong Co., and Suning Commerce have seen their transformation effects gradually emerge after years of effort. In their integration and interaction with e-commerce platforms, they are also driving the industry toward deeper transformation, giving rise to new formats, new services, and new, good business models, providing capital markets with more and better investment targets.** For example, discount stores like Miniso, convenience stores like Meiyijia and Bianlifeng, 'supermarket + dining' formats like Hema Fresh and Super Species, and new supply chain services and e-commerce models like Alibaba Retail Link, Shanguangou, NetEase Yanxuan, and Mijia have all attracted widespread market attention.
>
> **In addition to the two major e-commerce leaders listed in the US, Alibaba and JD, among A-share retailers, we favor two types of companies:**
>
> **First, leaders that have shown initial transformation results: Yonghui Superstores, Tianhong Co., and Suning Commerce. Among them: [Yonghui Superstores] has reached a critical point in comprehensive capabilities and is entering a new stage of value growth. Long-term first choice, short-term target market cap of RMB 70.2 billion. [Suning Commerce] has been profitable for two consecutive quarters, with a logic of marginal improvement after the performance inflection point, target market cap of RMB 148.8 billion. [Tianhong Co.] is a representative comprehensive retailer mainly focused on department stores, leading transformation around content and channels, target price of RMB 19.48.**
>
> **Second, targets in new formats and new services: First choice is Qingdao Kingking. In the medium to long term, we continue to recommend Zhongbai Group, which is transforming into convenience store formats, Dongbai Group, which is accelerating transformation into logistics real estate services, and Jiangsu Guotai, a high-quality supply chain service provider. Pay attention to Kuaixun Tong, Nanji E-commerce, etc.**
>
> **For regional retailers mainly owned by state capital, we first recognize their rich resources accumulated over years of operation. We hope they can usher in substantive state-owned enterprise reform, improve performance, and release value. We particularly look forward to their use of their own resources as a basis to reform mechanisms, reshape teams, update thinking, and execute firmly, accelerating into the new era of New Retail transformation. We recommend a portfolio of Hefei Department Store, Inzone Group, Bailian Co., etc.**
>
> **Risk factors:** Continued weak consumption; SOE reform progress falling short of expectations; uncertainty in transformation and innovation progress.
Report Body
> **1**
>
> **Market Overview: Online Retail Growth Slows, Competitive Landscape Stabilizes**
> **China's online retail sales growth slowed to 16% of total retail sales in Q1 2017.** According to the National Bureau of Statistics, China's online retail sales in 2016 were RMB 5.1556 trillion (including physical and virtual goods), up 26.2% year-on-year, slowing from 39% in 2015. The share of total retail sales rose from 12.9% in 2015 to 15.5% in 2016. In Q1 2017, online retail sales grew 32% year-on-year, with the ratio to total retail sales slightly increasing to 16%, but the pace of increase slowed.
>
> **Internationally, China's online retail sales as a share of total retail sales in 2015 was 12.9%, second only to the UK among major countries. It is estimated that the two were basically on par in 2016. In 2015, France, Japan, and the US had online retail sales shares of 10% or below.**
>
> We believe that the year-on-year decline in China's online retail growth is partly due to the natural slowdown from the base effect, and partly reflects consumers' increasingly rational and diversified choices among online and offline channels after fully understanding and experiencing e-commerce, such as pursuing personalization, experience, and cost-effectiveness. **As China's online retail market growth slows and converges with offline leaders, it means that from a macro perspective, the overall competitive landscape between online and offline is becoming relatively stable** (though changes in individual companies' market shares are also related to their own development strategies and market tactics).
>
> **E-commerce penetration for major retail categories is already high.** According to Analysys International, e-commerce penetration for apparel, footwear, hats, and cosmetics exceeds 20%; for mobile phones, digital products, books, and audio-visual, it is between 15-20%, all at relatively high levels. We expect limited future increases. Luxury goods (high unit price, higher requirements for experience and service), fresh produce (non-standard and cold chain), and alcoholic beverages are still around 1% or below.
> **Among the top 10 Chinese retailers by market share, offline retailers hold 7 spots.** In 2016, Alibaba and JD ranked first and second with 7.5% and 3.5% shares, respectively; Vipshop ranked seventh with 0.5%; the rest were offline (or mainly offline) retailers, including Suning 1.2%, Gome 0.9%, China Resources 1.1%, Auchan 0.7%, Walmart 0.5%, Bailian 0.4%, and Yonghui 0.3%.
>
> **In the US top 10, only Amazon is an e-commerce company; the other nine are offline retailers.** Walmart leads with an absolute advantage of 11.8% market share, higher than the combined 11% of Alibaba and JD, reflecting the strong overall competitiveness of US offline retailers.
>
> We believe that **after consolidating their market positions, e-commerce leaders like Alibaba and JD will focus more on technology development, new business expansion (e.g., Alibaba Cloud, New Retail), and improving mid-to-long-term profitability. This is also expected to enable other retailers (such as Suning and Vipshop) to gain or enhance relative competitiveness, create incremental traffic and business for offline retailers (such as Alibaba-affiliated Intime, Suning, and Lianhua Supermarket), and encourage the emergence of more 'small but beautiful' new formats (such as Super Species, Hema Fresh, NetEase Yanxuan, Mijia, Miniso), as well as precise supply chain & traffic services.**
> > **2**
>
> **Financial Comparison: No Significant Difference in Online and Offline Channel Costs; Quality Leaders Gain Share and Achieve Profitable Growth**
> **Revenue Growth: E-commerce Leaders' Growth Slows but Marginal Share Stabilizes; Physical Retailers Show Divergence**
> We use GMV to measure revenue scale for Alibaba, JD, and Suning, and total operating revenue for Amazon, Walmart, Costco, Sun Art, and Yonghui. We use a 6.8 RMB/USD exchange rate for US-listed company statements (historical data calculated at this rate).
>
> **(1) Scale:** Based on 2016 data: **1 Tier 1 > RMB 3 trillion:** Alibaba has not yet disclosed 2016 results and no longer publishes GMV; we assume 2016 GMV grew 23.5% to RMB 3.8 trillion. Walmart's 2016 revenue of USD 485.9 billion is approximately RMB 3.3 trillion. **2 Tier 2 > RMB 500 billion:** Amazon's 2016 revenue of USD 136 billion is approximately RMB 920 billion; Costco's revenue is about RMB 800 billion; JD's GMV is RMB 658.2 billion. **3 Tier 3 ≤ RMB 100 billion** (Figure 8): Sun Art's revenue is RMB 100.9 billion; Suning's GMV is RMB 80.5 billion; Yonghui's revenue is RMB 49.2 billion.
> **(2) Growth:** (A) From 2011-2016 CAGR, JD, Suning, and Alibaba GMV grew 82%, 69%, and 42%, respectively, far exceeding other companies. Amazon's revenue CAGR of 23% is mainly driven by AWS and other service revenue (CAGR 47%, 30% of 2016 revenue), while product sales revenue CAGR is about 18%. **Yonghui Superstores, due to rapid store expansion, achieved a solid 23% compound growth, far exceeding other offline retailers' below 10% levels.**
>
> (B) In terms of trends, Alibaba and JD's GMV growth has slowed significantly in recent years, with active user growth also declining year by year, consistent with the slowdown in China's overall online retail sales. Suning's GMV has maintained rapid growth of over 60% in the past two years, mainly due to its low base, proper business adjustments, and traffic support from Alibaba. **Amazon** has accelerated growth in recent years, partly from stable product sales growth (13%-19%), but more importantly from service business revenue maintaining high growth of over 40%. **Yonghui Superstores** has maintained steady growth of 15-20% in recent years, and we expect the revenue growth center to rise to around 20% over the next three years as store expansion accelerates. Sun Art, Walmart, and Costco have seen only single-digit revenue growth in recent years, mainly due to weak consumption environments and the larger bases of the latter two.
> We exclude the interference of base effects on growth rates and use the **marginal market share (incremental retail sales of major retailers / incremental total social retail sales)** for further analysis. Alibaba's marginal share rose from 2012 to a peak of 26.37% in 2014, then stabilized at 22-23% in 2015-16. JD's marginal share rose rapidly from 1.49% in 2012 to 7.03% in 2015, slightly declining to 6.75% in 2016. Suning's (online portion) marginal share has risen rapidly to nearly 1% over the past two years. Yonghui's marginal share hit a low in 2015 but recovered in 2016. Sun Art's marginal share has been declining since 2011, reaching only 0.13% in 2016.
>
> From the above analysis, we believe: **Alibaba and JD are still becoming stronger, Suning is improving marginally, Yonghui is achieving effective growth and market share gains through enhanced competitiveness, while Sun Art is gradually losing ground. Therefore, the so-called online-offline balance is not a balance among all participants, but more of a dynamic balance among online and offline leaders. Kings are changing; in the emerging competitive structure, leaders with complete ecosystems, core resources, and competitiveness are winning larger market shares. The strong get stronger, and the value of leaders becomes scarcer.**
> **Gross Margin: Amazon, JD, Sun Art, and Yonghui Have Improved Year by Year; Suning Shows a Slight Downward Trend**
> **(1) Gross Margin Levels:** As a platform e-commerce company, Alibaba's revenue and GMV scales differ significantly, with gross margin maintaining a high level of 65-75%. Costco's low gross margin is mainly related to its low-price strategy, with product sales gross margin between 10.5-11.5%, plus about 2 percentage points from membership fees. Sun Art's comprehensive gross margin of 23-24% includes product sales gross margin of about 20-21%, with an additional 2-3 percentage points from rental income. Yonghui's comprehensive gross margin of about 20% includes main business gross margin of about 16-17%, with an additional 3-plus percentage points from rental, financial, and other businesses.
>
> **(2) Trends:** Amazon, JD, Sun Art, and Yonghui have all shown improving gross margins in recent years, while Suning's gross margin has declined overall due to the rapid development of its low-margin online business and market share grabbing. **It is worth noting that JD's 2016 gross margin of 15.18% exceeded Suning's (14.36%) for the first time; Q1 2017 gross margin of 16.05% was on par with Suning, indicating that price competition between major competitors in the home appliance and 3C sector has reached a balance. JD's pursuit of profitability may also create a more moderate competitive environment for Suning.**
>
> **(3) JD's Gross Margin Trend and Potential for Sustained Profitability:** JD's gross margin has risen significantly from 4.82% in 2010 to 15.18% in 2016, clearly reflecting scale effects. More deeply, from its 2016 annual report and Q1 2017 report: (A) Business structure optimization: JD's third-party platform GMV share grew from 9% in 2011 to 43% in 2016, with faster growth than its self-operated business. (B) Category structure optimization: With competitiveness in 3C and home appliances, the company has begun to expand into other categories. General merchandise GMV share rose from 20% in 2011 to 49% in 2016, further to 50% in Q1 2017, with Q4 2016 already exceeding half at 51.55%, and expected to rise further. **This opens up sustained growth space for its GMV and revenue, and more importantly, signifies JD's successful upgrade from an initial 3C self-operated platform to a comprehensive platform, which is of significant value to improving its gross margin and profitability.**
>
> **(4) Comparison of Yonghui Superstores' Gross Margin with Walmart, Sun Art, and Costco and Its Significance.** Based on 2016 data, Yonghui's gross margin of 20.19% is 4-5 percentage points lower than Walmart and Sun Art, but about 6 percentage points higher than Costco. Yonghui is currently benchmarking against Costco and Aldi. Through cooperation with international leading service providers like Daymon, it is upgrading its supply chain capabilities to a higher level, entering the stage of brand direct sourcing, quality customization, and standardized processing. **We believe that Yonghui Superstores will be able to continue improving its gross margin while maintaining price competitiveness (thus rapidly increasing market share). Strong supply chain capabilities and efficient execution under excellent mechanisms are important sources for simultaneous improvement in market share and profitability.**
> **Selling & Administrative Expense Ratio: E-commerce Expense Ratios Are Generally Higher Than Physical Retailers, Requiring Higher Gross Margins to Support Profitability**
> Except for Alibaba (declining) and Costco (stable), other companies' S&A expense ratios have increased in recent years. **In terms of expense ratio levels, e-commerce expense ratios are generally higher (at least not lower) than physical retailers, requiring them to have higher gross margins to support profitability:**
>
> **(1) Online: Order Fulfillment, Technology & Content, and Marketing Are Main Expense Items.** Based on 2015-2016 expense ratios, Alibaba and Amazon have S&A expense ratios exceeding 30%, with both having technology and content (product development) expense ratios exceeding 12%. Alibaba's marketing expense ratio is 11% (plus 9% for administrative expenses), and Amazon's order fulfillment expense ratio is 13%, the largest expense item. JD's expense ratio is around 16%, half of which comes from order fulfillment costs, with marketing and technology & content expense ratios of 4% and 2%, respectively.
>
> Regarding order fulfillment costs, historical data for Amazon and JD shows that as revenue scales up, this expense ratio has risen rather than fallen, showing no obvious 'economies of scale.' Amazon's increased from 8.5% in 2010 to 13% in 2016, while JD's rose from 5.6% to 8.1% (latest Q1 2017 order fulfillment cost ratio fell to 7.7%). We believe this may be mainly due to: (A) Although revenue scale and coverage areas continue to expand, last-mile delivery costs still mainly rely on couriers, which is difficult to amortize through fixed asset investment. (B) The expansion of logistics coverage often moves from first- and second-tier cities to third- and fourth-tier cities, or from city centers to surrounding areas. These peripheral areas, though less competitive, often have weaker economic levels, consumption capacity, and infrastructure, making delivery uneconomical more likely and profit margins in new areas potentially smaller. Additionally, for JD, as its categories expand from initial 3C and home appliances to general merchandise, the average order value tends to decline, reducing its delivery cost efficiency.
>
> **(2) Offline: Employee and Rent Are Main Expense Items.** Walmart's S&A expense ratio is about 20%, about 3 percentage points higher than Sun Art and Yonghui. Employee and rent are the main expense items for Sun Art and Yonghui, with combined expense ratios of about 10-12%, accounting for over 60% of S&A expenses. For physical retailers, when revenue growth slows, operating expenses such as labor, rent, and utilities often show stronger rigidity, leading to higher expense ratios. However, this can also prompt them to improve operational management efficiency and compress expense ratios to maintain a certain level of profitability.
>
> Among comparable companies, JD's S&A expense ratio has been higher than Suning's since 2014, and in 2016 it was 1.58 percentage points higher. JD's 15.98% expense ratio does not have a significant advantage over offline supermarkets like Sun Art and Yonghui. Alibaba, as a platform ecosystem, has invested heavily in technology and content R&D, as well as traffic and marketing, maintaining an expense ratio of around 40%, but corresponding to its gross margin of about 70%, it can still maintain substantial profitability. Amazon's expense ratio has risen from 18.23% in 2010 to 32% in 2016, with investments mainly in technology and content besides order fulfillment costs, highlighting the company's leading innovation awareness and substantial investment, which is also an important reason for its ability to improve business structure and increase revenue through new services like AWS.
> **Net Margin: Physical Retailers Temporarily Outperform Self-operated E-commerce, but Amazon and JD Have Entered Profitable Growth**
> **(1) Net Profit:** Except for Walmart, Alibaba, Amazon, and Costco, whose 2016 attributable net profits exceeded RMB 10 billion, the other companies' net profits were all below RMB 3 billion. Physical retailers have significantly more stable profitability than e-commerce. For example, Amazon had losses in 2012 and 2014, JD's Non-GAAP net profit fluctuated significantly, and Suning, due to its aggressive online business development, saw net profit drop rapidly from RMB 4-5 billion in 2010-2011 to below RMB 1 billion (including Reits gains; excluding these, its main business has been loss-making in recent years).
> **(2) Attributable Net Margin:** Except for Alibaba (platform e-commerce) with a high net margin, the other seven retailers have net margins generally below 5%, with Amazon, Suning, and JD all not exceeding 2%. Walmart's net margin fell from 3.9% in 2010 to 2.8% in 2016; Suning's fell from 5.3% in 2010 to 0.47% in 2016. Sun Art and Yonghui declined year by year from 2013-2015 but stabilized and recovered in 2016. We expect Yonghui to gradually improve from its current 2.5% to 3% or higher (see our in-depth report on Yonghui Superstores: 'Standing at a New Starting Point, Entering a New Stage of Value Growth, Maintain Buy, April 19, 2017').
>
> **(3) Major Self-operated E-commerce Platforms Have Entered Profit Inflection Points.** Historically, Amazon was loss-making for seven consecutive years after its 1995 IPO, turning profitable in 2002, with net margin peaking at 8.5% in 2004 and maintaining 3-4% from 2007-2010. In recent years, except for slight losses in 2012 and 2014 (loss ratios of 0.06% and 0.27%), it has remained profitable, with 2016 net margin reaching 1.74%, a significant improvement from 0.56% in 2015, close to 2006 levels (1.77%). JD's Non-GAAP net margin had loss ratios exceeding 3% in 2011 and 2012, a slight loss of 0.47% in 2015, but achieved small profits of 0.3-0.4% in 2013, 2014, and 2016. Q1 2017 net profit of RMB 1.4 billion (Q1 2016 loss of RMB 0.2 billion) exceeded the full year 2016's RMB 1 billion, basically confirming the profit inflection point.
>
> **In contrast, traditional offline retail giants like Walmart and Sun Art had net margins above 3% in previous years, but have gradually declined to 2.5%-3% over the past three years, reflecting some pressure.**
> **ROE: Physical Retailers Are Relatively Stable, but Only Costco Has Improved Year by Year; Amazon Reached 14.5% in 2016**
> From an ROE perspective, physical retailers like Costco, Walmart, Sun Art, and Yonghui are relatively stable, but only Costco has shown a year-by-year improvement, with 2016 ROE of 20.71%, the highest among the companies (possibly still lower than Alibaba). Sun Art's ROE has declined, mainly due to weaker consumption environments leading to lower profitability. Yonghui's ROE was below 8% in 2015-2016, a significant decline from previous years, mainly due to a 30% net profit decline in 2015 from operational adjustments, and despite net profit doubling in 2016, fundraising increased net assets. It is expected that with process optimization, continued supply chain strengthening, and brand/category management, Yonghui will re-enter a profitability improvement track, driving ROE back to higher levels.
>
> Amazon and JD have volatile ROE due to losses. Amazon's 2016 ROE of 14.52% was the highest since 2011, still 6.2 and 2.7 percentage points lower than Costco and Walmart, respectively. Suning has accelerated online business development in recent years, and online losses have kept its overall ROE below 3% since 2013.
> **3**
**Market Value and Valuation: New Leaders Hitting Record Highs and Traditional Retailers Declining**
> We compare the market caps, gains, revenue and profit scales, and valuations of the eight sample companies, using a 6.8 RMB/USD exchange rate for conversion.
>
> **(1) Market Value and Gains:** **Amazon, Alibaba, JD, and Costco have hit record stock price highs.** Except for Suning, all other seven companies have risen year-to-date. Amazon leads with a market cap of RMB 3 trillion (USD 455.4 billion), with its current stock price of USD 953 at a record high, up 27% year-to-date. Alibaba is up 37% year-to-date to a market cap of RMB 2 trillion (USD 299.4 billion), with a current stock price of USD 120, a new high, slightly above the November 2014 high of USD 119. JD is up 51% year-to-date, the highest gain among the companies, with a market cap of RMB 374 billion (USD 55 billion), recently hitting a new high. Costco is up 8% to a market cap of RMB 514.8 billion (USD 75.7 billion), also recently hitting a record high (current closing price has slightly pulled back).
>
> Walmart is up 12% year-to-date to a market cap of RMB 1.58 trillion (USD 232.6 billion), 75% of its all-time high (USD 309.3 billion in December 1999) and 80% of its second-highest (USD 288 billion in January 2015), relatively stable. Yonghui Superstores is up 27% year-to-date, with a current market cap of RMB 59.5 billion, nearly double since early 2016 (all-time high of RMB 66.5 billion on June 2, 2015). Suning Commerce is down 11% year-to-date, with a current market cap of RMB 94.5 billion, 45% of its all-time high in June 2015. Sun Art Retail is up 10% year-to-date, with a current market cap of HKD 71.5 billion, 63% of its all-time high in October 2013. A number of traditional department stores and supermarkets are at relatively low market cap levels.
>
> Looking at the longer term, over the past decade since April 30, 2007, Amazon has risen 1454%; Costco 304%; Walmart 103%; Target 22%; Macy's and Kohl's have fallen 17% and 35%, respectively; J.C. Penney and Sears have fallen 92% and 93%, respectively.
>
> These stock price trends reflect the competitive landscape and operating trends of the US retail market, namely that e-commerce and technology companies represented by Amazon are seizing market share from traditional offline retailers, leading to dual declines in performance and stock prices for department stores like Sears and J.C. Penney. Macy's, despite pioneering an omni-channel strategy around 2013, has shown no significant results in the past two years. After closing nearly 100 stores in 2016, it announced in early 2017 that it would close 68 more by mid-year. Its 2015 and 2016 revenue both fell 3-5% (expected to fall 3.2-4.3% in 2017), net profit fell 30% and 42%, respectively, and net margin fell from 5.43% in 2014 to 2.37% in 2016, the lowest since 2010.
>
> **The rise and fall of US channels can serve as a mirror. Will this also be the future path of China's retail channel transformation?**
> **(2) Revenue and Profit Scale:** Based on 2016 data, Walmart leads in revenue and profit, at approximately RMB 3.3 trillion and RMB 92.8 billion, respectively. Amazon and Costco have similar revenue and profit scales, at approximately RMB 800-900 billion and RMB 16 billion, with Costco's net margin of 1.98% slightly higher than Amazon's 1.74%, but Amazon's market cap is about six times Costco's. JD has revenue of RMB 260 billion and Non-GAAP net profit of RMB 1 billion. Alibaba and Suning each have revenue of about RMB 150 billion, but Alibaba's net profit is estimated to exceed RMB 38 billion. Sun Art and Yonghui have revenue of about RMB 100 billion and RMB 50 billion, respectively, but Yonghui's market cap of RMB 59.5 billion is about 94% of Sun Art's, and Yonghui's revenue growth is also significantly higher than Sun Art's.
>
> **(3) Valuation:** We use P/GMV for e-commerce companies, but for Suning, which includes offline business, P/S is more relevant than P/GMV. Alibaba's 2017 P/GMV is about 0.44x, slightly higher than JD's 0.4x. On P/S, Alibaba and Amazon have high P/S of 10x and 2.8x, respectively; JD's 1.1x is slightly higher than Yonghui's 1.02x; Sun Art, Costco, Suning, and Walmart have P/S not exceeding 0.6x, which is low. On P/E, Amazon and Suning have P/E exceeding 100x; Alibaba's 39x is slightly higher than Yonghui's 37x; Costco's P/E is about 29x; Sun Art 24x; Walmart's 18x is the lowest (JD's Q1 profit improved significantly quarter-over-quarter, so we do not make a full-year Non-GAAP profit forecast).
> **4**
**Brand Cases: Taobao Brand Development Trends and Channel Costs from Handu Yishe and Three Squirrels**
> Based on available financial data, we use Handu Yishe and Three Squirrels as examples to analyze small and medium e-commerce companies (Taobao brands) incubated on Tmall. Their development positioning represents two different directions and models. Handu Yishe remains rooted online but has expanded from a traditional self-owned Taobao brand to an e-commerce ecosystem operation system including online fashion brand incubation and domestic and international brand agency operations, with richer profit models. Three Squirrels creates IP effects, moving from online to offline, reflecting the online-offline integration trend of internet brands.
> **Handu Yishe: Strategic Upgrade from Taobao Brand to Internet Brand 'Secondary Ecosystem'**
> **(1) Leveraging China's Rapid Online Retail Market Growth, Leading Taobao Women's Wear Brand.** Handu Yishe was founded in 2008, starting as a Taobao brand. It listed on the NEEQ in 2016 (838711), with a current market cap of RMB 3.5 billion. 2016 revenue grew 14% to RMB 1.432 billion, and attributable net profit grew 161% to RMB 88.34 million. Leveraging the rapid development of China's online retail market, the company's transaction volume has grown rapidly since its inception, from RMB 3 million in 2008 to approximately RMB 3 billion (estimated) in 2016, with a CAGR of 217%.
>
> According to the company's public transfer prospectus, as of mid-2016, the company had 29 clothing brands, including 18 self-operated, 2 joint venture, and 9 agency-operated brands. In terms of revenue structure, 2016 women's wear, men's wear, children's wear, and e-commerce-related services (agency operations, photography services) accounted for 75.68%, 12.5%, 10.56%, and 1.16%, respectively.
>
> Tmall and Vipshop are the company's main customers, accounting for 66% and 25% of 2016 sales, respectively. Other sales platforms include JD, Beibei, Dangdang, Yihaodian, and the company's official mall. Except for Vipshop, which uses a buyout consignment model (no commission), the company operates on other platforms and pays commissions or service fees.
> The company's Double 11 sales have consistently ranked in the top 3 on Tmall, with transaction volumes of RMB 115 million, 198 million, 284 million, and 362 million from 2013-2016, maintaining rapid growth. However, it is worth noting that **Taobao brands' market share is gradually being squeezed by offline brands' Tmall flagship stores and internet celebrity Taobao stores.** In 2016, except for the company, Taobao brands like Artka, Liebo, and Inman have exited the top 10 women's wear list on Double 11. Even among the top 10, only the company is a Taobao brand; the rest are offline brands, with ranks 6-10 being Ochirly, Veromoda, Bosideng, Peacebird, and Eifini (founded in 2001, with balanced online and offline development, now with nearly 1,100 offline stores).
>
> We believe the company's consistent top 3 Double 11 ranking reflects strong competitiveness, mainly related to its high brand awareness, multi-brand strategy, and low average order value. From 2013 Double 11 sales data, the company's average transaction price per item was RMB 127, and average customer price was RMB 146, the lowest among brands, but with the highest number of items sold and customers, reflecting a high proportion of young customers (e.g., students) and the success of its 'fast, small quantity, multiple styles' model under a flexible supply chain.
> **(2) Internet Brand 'Secondary Ecosystem' Strategy:** With a model of 'single-product full-process operation with group system as the core' and positioning as an 'open e-commerce service platform,' the company promotes the joint development of self-owned and service brands. Since 2015, the company has opened its creative design system, IT system, flexible supply chain system, customer service system, marketing system, warehousing and logistics system, and integrated service system to the outside, gradually opening its internet operation experience to international and offline brands.
>
> The company's current agency-operated brands cover apparel, shoes and bags, small home appliances, food, and other categories, with about 20% being foreign brands, including traditional offline underwear brand Jianjiang, down jacket brand TANBOER, down jacket and windbreaker brand 3·UNUSUL, Korean brand CHUU, Italian handmade women's boots Mantova, Japan's Onward Group brand rosebullet, Japanese women's wear brand 23 Ward, British men's shoe brand Loake, Dutch milk powder brand EkoBaby, furniture brand Huase Youpin, and European e-commerce platform's own brand Zlabels.
>
> The company's e-commerce service revenue grew significantly by 60.38% in 2016, and with a 100% gross margin for this business, it contributed 2.5% of gross profit with only 1.16% of revenue. According to Hongshang.com, the company's agency-operated brands saw Double 11 sales growth of over 400% in 2016, with brands like Tanboer, rosebullet, Mantova, 3·UNUSUL, and Loake growing over 100%.
>
> We believe the company's e-commerce service business just started in 2015, and although it currently contributes little to overall performance, it is expected to expand and cultivate new profit growth points as the company continues to strengthen its 'secondary ecosystem' opening capabilities and expand e-commerce service business.
>
> **(3) Turned Profitable in 2015, Gross Margin Improvement Drove 2016 Net Margin to 6%:** The company's 2016 revenue was RMB 1.432 billion, up 13.67% year-on-year, with women's wear up 17.3%, men's wear down 16.11% due to insufficient inventory, and children's wear up 35.01%. Thanks to strengthened planning for key categories, better matching of materials and outsourced factory capacity, and cost optimization, gross margin improved significantly by 5.9 percentage points to 45.32%.
> In terms of expenses, the 2016 selling expense ratio decreased by 1.88 percentage points; the administrative expense ratio increased significantly by over 3 percentage points, mainly due to R&D expenses of nearly RMB 48 million. Excluding R&D expenses, the other administrative expense ratio was 2.56%, down 0.31 percentage points year-on-year. The overall period expense ratio was 36.87%, up 0.77 percentage points year-on-year.
>
> Among these, employee compensation, promotion fees, service fees, and express fees are the main expense items, with 2016 expense ratios of 8.86%, 8.06%, 5.86%, and 4.12%, respectively, accounting for over 70% of S&A expenses (Table 11). Compared to offline channels, promotion fees, service fees, and express fees are the main incremental expenses for the company in e-commerce platform operations. In 2015-2016, the combined expense ratio for these three items was 19.52% and 18.04%, respectively, while representative offline apparel and footwear brands have advertising rates of about 3% (Table 12), a difference of 15-16 percentage points, roughly equivalent to the 15-20% commission that department stores typically charge for apparel. **Considering the company's scale effect as a leading Taobao women's wear brand and its strong operational capabilities, it is estimated that other Taobao apparel brands have higher expense ratios for these three items (basically exceeding 20%), and we calculate that there is almost no cost advantage compared to offline channels.**
>
> Promotion fees are mainly for traffic acquisition. Although the expense ratio has declined year by year, it still exceeded 8% in 2016. Service fees are mainly various commission and service fees (including technical service fees) from sales on platforms like Tmall. In 2014, the company participated in many Tmall promotional activities, such as Juhuasuan and brand groups, resulting in higher activity fees.
> **Three Squirrels: Creating IP Effects, Expanding from Online to Offline**
> **(1) Tmall's Top Seller in Nuts, Expanding Offline Stores and Omni-channel Layout:** Since its founding in 2012, the company has been engaged in the R&D, repackaging, and sales of nuts. It expanded to the snack market in 2014 and launched gift box products in 2016. It now offers a multi-category leisure food portfolio including nuts, dried fruits, dried fruit, flower tea, and snacks, with about 200 sub-products, creating an 'internet new agricultural ecosystem.' 2016 revenue was RMB 4.423 billion, net profit RMB 237 million.
>
> The company uses online channels as its core, with group buying and offline channels as supplements, forming an omni-channel sales network. As of the end of 2016, the company had over 38 million cumulative purchasers across online sales platforms, with over 13.5 million users purchasing more than twice, and a repeat purchase rate exceeding 35%.
>
> **Online Channels:** Customer structure is shown in Figure 14. Except for Tmall Supermarket and JD Self-operated, which use a unified warehousing model, other platforms use B2C models, covering mainstream platforms such as Tmall, JD, Suning.com, Yihaodian, and Dangdang. Tmall Mall + Tmall Supermarket together account for over 70% of sales, with JD Mall + JD Self-operated accounting for 14%.
>
> According to Tmall statistics, the company ranked first in transaction volume in the 'snacks/nuts/specialty' category on Tmall from 2014-2016. The company's Double 11 sales have also grown rapidly, reaching RMB 435 million in 2016.
>
> **Mobile:** Since launching its APP platform in 2015, the company has continuously improved functionality and system optimization, creating a more user-friendly, convenient, and category-rich mobile internet leisure food purchasing platform. As of April 2017, the company's APP platform had a maximum monthly sales turnover of over RMB 14 million.
> **Offline Channels:** In the second half of 2016, the company opened one 'Tou Shi' (feeding) store each in Wuhu and Bengbu, Anhui. The company selects street-side commercial plazas in lower-tier cities with relatively low online shopping penetration but dense populations and complete infrastructure, focusing on experience-oriented offline experience centers. Leveraging Three Squirrels' IP elements, innovative 'retail + leisure' area layouts, professional staff training, and rich offline activities, it creates a leisure and entertainment atmosphere highly related to the brand image. To build a synergistic online-offline sales system, the company uses electronic price tag systems to synchronize retail prices in real-time with online channels like the APP, and recommends its self-operated APP to consumers to drive offline consumption behavior online.
>
> **(2) Turned Profitable in 2015, 2016 Net Margin 5%:** The company's revenue has grown rapidly in recent years, up 121% and 116% in 2015 and 2016, respectively, reaching RMB 4.423 billion in 2016. It turned profitable in 2015, with 2016 net profit of RMB 237 million and net margin of 5.35%. The improvement in profitability is driven by improvements in both gross margin and expense ratios:
>
> **Gross Margin:** Improved from 24.15% in 2014 to 30.2% in 2016, mainly due to increased gross margin for nut products. In the early market cultivation stage, competition was fierce, and the company adopted a low-price strategy to grab market share. Now that the competitive landscape is stabilizing, the company's scale effects are gradually emerging.
>
> **Period Expense Ratio:** Declined from 27.03% in 2014 to 23.28% in 2016, mainly due to a decline in the selling expense ratio. Among these, employee compensation, transportation fees, promotion fees, and platform service fees are the main selling expense items, with 2016 expense ratios of 2.67%, 6.73%, 2.81%, and 3.08%, respectively, accounting for 74% of selling expenses. The decline in the selling expense ratio from 2014-2016 is mainly due to:
>
> (a) Transportation fees: Fell from 9.2% to 6.73%. As of 2016, the company had established 10 logistics distribution centers in Shenyang, Tianjin, Jinan, Wuxi, Wuhu, Chengdu, Wuhan, Guangzhou, Xi'an, and Nanchang. With more distribution centers, lower-cost logistics transfer fees replaced express fees. Additionally, under the warehousing model, the company does not need to pay express fees. In 2016, it added JD Self-operated and Tmall Supermarket channels, accounting for 11.33% of sales.
>
> (b) Promotion fees: Fell from 4.53% to 2.81%. As brand awareness and customer recognition improve, reliance on market promotion has declined year by year. The company also strengthens customer stickiness through precision marketing, vivid corporate image design, and consumer relationship management.
>
> (c) Platform service fees: Fell from 3.73% to 3.08%. In addition to platform service fees, the company also pays certain commission rates for value-added services. The fluctuation in platform service fee ratios is mainly due to changes in sales proportions across cooperative platforms and the increase in warehousing models.
> **(3) Online Gross Margin Lower Than Offline, Company's Main Expense Ratio Lower Than Peers:** Among peers, Baicaowei (acquired by Haoxiangni in 2016) has a comparable product structure and business model. We also select Lai Yifen and Yanjin Shop as representatives of offline leisure food chains.
>
> The company's 2015 gross margin (26.9%) and selling expense ratio (24.35%) were about 2 and 4.5 percentage points higher than Baicaowei, respectively, but both lower than Lai Yifen (gross margin 46.51%, selling expense ratio 31.16%) and Yanjin Shop (gross margin 46.11%, selling expense ratio 26.9%). The difference in gross margins between online and offline companies is mainly related to pricing strategies, i.e., e-commerce's low-price competition to quickly gain market share.
>
> From the main expense items, compared to Baicaowei, the company's 2015 promotion fee ratio (3.99%) and transportation fee ratio (8.4%) were 0.6 and 0.5 percentage points lower, respectively, while the platform service fee ratio (3.91%) was nearly 1 percentage point higher.
>
> Combined with the two offline companies, Lai Yifen and Yanjin Shop's 2016 transportation fee ratios were only 1.41% and 3.52%, respectively, far lower than the company's 6.73%, consistent with online and offline operating characteristics. Lai Yifen's 2016 advertising ratio was only 2.18%, slightly lower than the company's 2.81%, and both were far lower than Yanjin Shop's 8.72% (including promotional and contract-based promotions; the higher ratio may be related to its sales model of driving regional distributors through direct-operated supermarkets).
>
> To comprehensively consider the main expense ratios online and offline (excluding labor), we calculate: 1 Using 'transportation + promotion + platform service fees' as the main online expense items, the company's 2015 online main expense ratio was 16.29%, 0.12 percentage points lower than Baicaowei, and in 2016 it decreased significantly by 3.67 percentage points to 12.62%, driving the selling expense ratio down 3.6 percentage points to 20.75%. 2 Using 'transportation + promotion + other main expenses (store decoration + rental fees, etc.)' as the main offline expense items, Lai Yifen and Yanjin Shop's 2016 offline main expense ratios were 14.24% and 13.21%, respectively, and relatively stable compared to 2015. **The company's 12.62% main expense ratio is lower than both online and offline peers, reflecting strong expense control capabilities.**
>
> **Comparing the three-year average main expense ratios from 2014-2016, Three Squirrels is 15.46%, Baicaowei (2014-2015 average) is 16.13%, Lai Yifen is 14.04%, and Yanjin Shop is 12.83%. Considering that Three Squirrels and Baicaowei are already relatively excellent leisure food e-commerce brands, the comparison of main expense ratios does not show significant differences in operating costs between online and offline for this category.**
> **5**
**Trends and Recommendations: Expecting Deepening of New Retail and Results, Prefer Leading Retailers like Yonghui Superstores**
> **Drivers: Consumption Upgrade + Channel Integration**
> **In traditional retail, 'people, goods, and places' are separate. Under New Retail, these three core elements have all changed and are dynamically influencing each other. The driving factors of New Retail come from the demand side, with changes in people and consumer demand, as the rise of the 90/95 generation and the middle class drives consumption upgrades, with greater pursuit of individuality, quality, and experience. On the supply side, new technologies, new thinking, and new balance drive channel transformation and integration, putting customers first, upgrading formats, product supply chains, logistics systems, business models, and service awareness, committed to delivering the best products and services to the most suitable users with optimal supply chain efficiency.**
>
> **(1) Consumption Upgrade:** We analyze that several major factors supporting consumption upgrades will exist and strengthen in the medium to long term: (A) Per capita GDP has approached USD 8,000, and first-tier cities have exceeded USD 16,000. In 2016, urban per capita disposable income reached RMB 33,600 with steady growth. Consumer spending is shifting from necessities to discretionary items, and from goods to services. (B) The rise of the middle class and the post-90s generation, with stronger self-awareness and pursuit of diversity and personalization, is driving changes in lifestyle and consumption habits, emphasizing quality, experience, and health. Meanwhile, young people from big cities returning to third- and fourth-tier cities also drives the flow of wealth and consumption culture. (C) Technological development makes information dissemination smooth and efficient, and marketing methods more diverse, bringing attention to quality long-tail products and niche brands. Financial development also makes payments more convenient, diverse financial services more accessible, and consumption propensity higher. (D) Brand and channel changes will improve product cost-effectiveness, narrow regional gaps in product supply, and targeted services provide the possibility of small-level jumps in consumption tiers.
>
> The medium-to-long-term trend of accelerated consumption upgrades requires retail channels to have higher efficiency, be able to quickly capture, explore, and respond to changes in consumer preferences. Those who win consumers win the world. In recent years, physical retail has promoted format innovation, enhanced experience and service capabilities, and optimized supply chains, which are positive measures to cater to consumption upgrades.
>
> We have always emphasized our preference for shopping malls with higher experience, convenience stores with network advantages, outlet and discount stores with high cost-effectiveness, and new growth from quality services. Yonghui's Super Species, Alibaba's Hema Fresh, and Miniso have emerged as competitive leaders under the consumption upgrade trend.
>
> **(2) Online-Offline Channel Integration:** Through the previous comparison and analysis, we find that online retail market growth has slowed, and against the backdrop of the end of traffic dividends, high traffic costs, and consumers' increasing demands for experience and quality, online and offline retail market growth rates are likely to converge and develop in a balanced manner. Financially, e-commerce expense ratios are higher than physical retailers, and profitability and stability are weaker (many are even loss-making). At the same time, e-commerce leaders like Alibaba and Taobao brands like Three Squirrels are actively trying or using equity participation/control to expand offline markets for omni-channel layout. New leaders are winning larger markets, and new formats are constantly emerging to replace traditional channels.
>
> We believe that channels will integrate around goods and services, and the industry will fully return to the essence of goods and services. Offline channels will move from heavy to light, embracing internet thinking and technology with advantages in stores, product supply chains, warehousing and logistics. Online platforms will move from light to heavy, leveraging internet capital and talent to bring superior technology and internet thinking offline. In the current context of channel integration, we also look forward to more and more 'New Retail' models leading the retail industry forward and exploring.
>
> With Alibaba proposing New Retail, taking a stake in Sanjiang Shopping, privatizing Intime Retail, and strategic cooperation with Bailian Group, the New Retail market has been catalyzed from different angles since the end of 2016. We highly recognize this inevitable industry trend, whose essence lies in starting from internet thinking and service awareness, using technology upgrades and capability improvements to meet consumption upgrades, and maximizing efficiency, output, and value. In addition to the 'Alibaba+' path, for example, **Yonghui Superstores** has also created Super Species (with 2 stores opened) through its own capability building and active innovation, which has been highly recognized by the industry and capital markets.
> **Investment Recommendations: Prefer Leading Retailers like Yonghui Superstores, Expect New Formats and Evolution of Traditional Retailers**
> **Leading offline retailers such as Yonghui Superstores, Intime Retail, and Tianhong Co. have seen their transformation effects gradually emerge after years of effort. In their integration and interaction with online e-commerce platforms, they are also driving the industry toward deeper transformation, giving rise to new formats, new services, and new, good business models, providing capital markets with more and better research and investment targets.** For example, discount stores like Miniso, convenience stores like Meiyijia and Bianlifeng, 'supermarket + dining' formats like Hema Fresh and Super Species, and new supply chain services and e-commerce models like Alibaba Retail Link, Shanguangou, NetEase Yanxuan, and Mijia have all attracted widespread market attention.
>
> **In addition to the two major e-commerce leaders listed in the US, Alibaba and JD, among A-share retailers, we favor two types of companies:**
>
> **First, leaders that have shown initial transformation results: Yonghui Superstores, Tianhong Co., and Suning Commerce. Among them: [Yonghui Superstores] has reached a critical point in comprehensive capabilities and is entering a new stage of value growth. Long-term first choice, short-term target market cap of RMB 70.2 billion. [Suning Commerce] has been profitable for two consecutive quarters, with a logic of marginal improvement after the performance inflection point, target market cap of RMB 148.8 billion. [Tianhong Co.] is a representative comprehensive retailer mainly focused on department stores, leading transformation around content and channels, target price of RMB 19.48.**
>
> **Second, targets in new formats and new services: First choice is Qingdao Kingking. In the medium to long term, we continue to recommend Zhongbai Group, which is transforming into convenience store formats, Dongbai Group, which is accelerating transformation into logistics real estate services, and Jiangsu Guotai, a high-quality supply chain service provider. Pay attention to Kuaixun Tong, Nanji E-commerce, etc.**
>
> **For regional retailers mainly owned by state capital, we first recognize their rich resources accumulated over years of operation. We hope they can usher in substantive state-owned enterprise reform, improve performance, and release value. We particularly look forward to their use of their own resources as a basis to reform mechanisms, reshape teams, update thinking, and execute firmly, accelerating into the new era of New Retail transformation. We recommend a portfolio of Hefei Department Store, Inzone Group, Bailian Co., etc.**
>
> Below are our investment views on some key recommended stocks since the beginning of the year:
>
> **[Yonghui Superstores] We published an in-depth report on April 19, 'Standing at a New Starting Point, Entering a New Stage of Value Growth':** Since its listing, the company has gone through stages of scale growth and supply chain integration. It is currently actively promoting management reform, process optimization, and format innovation, with significant results. Its core competitiveness is continuously strengthening, and it is at the inflection point of accelerated growth over the next three to five years. We expect the revenue growth center to rise to around 20%, net margin to gradually improve to 3% or higher, and ROE to continue to rise, ushering in a new stage of efficient growth and value creation.
>
> We estimate 2017 net profit of RMB 1.605 billion, up 29.2% year-on-year, with non-recurring items adjusted growth of about 48%. **Target price of RMB 7.34, corresponding to RMB 70.2 billion market cap, Buy rating.**
>
> Risks and uncertainties. Risks of cross-regional expansion, including selection of expansion areas and speed; uncertainty in e-commerce business development; uncertainty in incentive mechanism improvement.
>
> **[Suning Commerce]** In the New Retail era, the company is the industry leader with the deepest and best cooperation with Alibaba, and has reached inflection points in performance and online GMV growth, at its best stage since the 2013 transformation. It is ushering in inflection points in performance and online GMV growth, and its store, logistics, and financial value is being re-recognized and revalued!
>
> We forecast 2017-19 attributable net profit of RMB 802 million, 856 million, and 903 million, respectively, with EPS of RMB 0.086, 0.092, and 0.097, up 13.89%, 6.67%, and 5.57% year-on-year. **Target price of RMB 16, corresponding to RMB 148.8 billion market cap, Accumulate rating.**
>
> Risks and uncertainties. Poor performance of new business; unclear results from cooperation with Alibaba; lower-than-expected sales on Yigou and platform; potential adverse changes in market competition structure.
>
> **[Tianhong Co.] We published an in-depth report on March 16, 'Accelerating Transformation Around Content and Channels, Expecting SOE Reform Opportunities':** 1 Shenzhen commercial leader, operating 71 stores, also expanding 160 convenience stores, with high network value; 2 Achieved online-offline integrated omni-channel integration, expanding from single department store to 'department store + shopping mall + convenience store' multi-format, actively transforming for high growth; 3 Emphasizes brand management and merchandise operation reform, optimizing product supply chain through self-operated and buyer models, with strategic direction and enthusiasm worthy of recognition; 4 Affiliated with AVIC, with low business synergy with the group, SOE reform trends worth watching. We estimate 2017 net profit growth of 19%, with current P/E of 18x. Target price of RMB 19.48, Accumulate rating.
>
> Risks and uncertainties. External expansion lower than expected; longer new store incubation period; intensified competition risk.
>
> **[Bailian Co.] We published an in-depth report on February 17, 'Shanghai Commercial Aircraft Carrier, Expecting SOE Reform to Bring New Opportunities':** The company is Shanghai's commercial aircraft carrier, with good resource value and competitive advantages, reasonable format structure, high network value, and RNAV of about RMB 52.6 billion, 1.9 times its market cap. With SOE reform progress, it is expected to shed institutional shackles and make breakthroughs in incentive mechanism improvement, asset integration, and mixed-ownership reform, stimulating internal vitality. Meanwhile, its subsidiary Lianhua Supermarket's mixed-ownership reform introduced Alibaba-affiliated Yiguo Fresh, with the two giants joining hands to explore 'New Retail' business models, which is expected to bring new growth. **Target price of RMB 21.54, Buy rating.**
>
> Risks and uncertainties: Uncertainty in SOE reform progress; industry downturn; continued diversion from online channels.
>
> **[Qingdao Kingking]** 1 The cosmetics market is large at RMB 500 billion, still growing 10-20% annually; 2 Channels have inherent needs for integration, and the company integrates around e-commerce agency operations and distributors, with a good track; 3 Online and offline growth and accelerated integration, with the Matthew effect beginning to show; 4 Distributor integration and industry chain resource synergy, with large space for future brand introduction.
>
> The stock price has fallen 18.6% year-to-date to RMB 24.42, below the employee stock ownership plan cost (RMB 25/share); Zhongzhi Group's transfer of 5.3% equity has been completed at a transfer price of RMB 32, providing a strong safety margin; acquisitions are progressing smoothly, strategy execution is fast, and high performance growth is certain. Q1 2017 net profit grew 65%, and we expect full-year growth of about 100%. **Target price of RMB 40.2, Buy rating.**
>
> Risks and uncertainties. Uncertainty in cosmetics channel, brand, and other M&A and integration.
>
> **Industry risk factors:** Continued weak consumption; SOE reform progress falling short of expectations; uncertainty in transformation and innovation progress.
**Source: Haitong Retail**


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