Click to read the original text for details 2018 was the year of new retail infrastructure, 2019 is the year of scale acceleration, and 2020 will be the year of harvest. Lianshang.com note: On August 7, Sun Art Retail disclosed its operating results for the first half of this year as scheduled. Compared with previous years, this year's two financial reports (interim and annual) are particularly important. There are two reasons: First, amid the bottleneck in the entire hypermarket industry, as the industry leader, Sun Art Retail's development deserves more attention; second, Sun Art Retail first proposed restructuring its hypermarkets in its 2018 annual report, and the results will show whether it can find a breakthrough for the industry. To this end, the Lianshang.com Listed Company Research Center conducted a comprehensive analysis of Sun Art Retail's growth, profitability, and operational capabilities from multiple dimensions, including operating performance, store expansion, and business progress. Core Views

The continuous decline in same-store sales has slowed Sun Art Retail's scale development; The continuous improvement in gross margin has become the biggest highlight in Sun Art Retail's financial reports; In terms of store layout, Sun Art Retail has become more cautious, and will further penetrate lower-tier markets in the future;

The successful model of home delivery business is expected to open new ideas for Sun Art Retail in channel innovation;

The restructuring of hypermarkets has achieved initial results, and the new hypermarket model will effectively boost industry confidence. Operating Performance 1. Revenue Composition Sun Art Retail's revenue sources mainly include sales of goods and rental income. In the first half of the year, revenue from sales of goods was RMB 48.522 billion, a decrease of 7.0% from the same period last year; rental income was RMB 2.064 billion, an increase of 8.8% from the same period last year. The increase was mainly due to improved tenant mix management leading to higher rental income from existing stores, as well as increased leasable area from new stores. It should be noted that since the home appliance department's business model changed from self-operated to consignment by Suning in August 2018, Sun Art Retail added the total sales revenue (total sales receipts) indicator for the first time in its 2018 annual report. In simple terms, this refers to the cash generated from sales in Sun Art Retail stores, including total receipts from merchandise sales, consignment sales, and rental income, while revenue from home appliance sales is commission income. 2. Revenue and Net Profit From the perspective of growth capability, Sun Art Retail experienced accelerated growth in the first three years after listing, with double-digit growth in both revenue and net profit. Net profit growth even exceeded 50% in 2011 and 2012; 2014 became a turning point, with a significant slowdown in revenue and net profit growth; in 2015, net profit declined for the first time; in 2018, both revenue and net profit declined for the first time. An obvious characteristic is that over the past eight consecutive years, revenue has been on a slowing trend, which is a microcosm of the hypermarket industry's development over the past few years. In the first half of this year, this decline was not halted, and revenue even showed a further downward trend. However, net profit improved significantly. 3. Same-Store Sales Same-store sales growth more directly reflects this characteristic. From 2010 to 2013, Sun Art Retail's same-store sales showed positive growth, but in the following five consecutive years, same-store sales were on a downward trend. Interestingly, in 2017, same-store sales growth was -0.98% and -0.26% before and after excluding home appliance category sales, respectively, indicating that the home appliance category was clearly a drag on same-store sales growth. In the first half of this year, same-store sales still declined by 1.76%. Sun Art Retail explained that on the one hand, the integration of the RT-Mart and Auchan brands starting from the beginning of the year affected performance. From the current progress, the integration is largely complete, and store performance is expected to return to normal in the second half of the year. On the other hand, non-food categories faced competition from different channels, putting significant pressure on performance. 4. Gross Margin Despite slowing growth, Sun Art Retail has been significantly improving its profitability, which is also the biggest highlight in its financial reports in recent years. From 20.35% in 2011 to 25.28% in 2018, Sun Art Retail's gross margin has increased by nearly 5 percentage points over the past eight years. In the first half of this year, the gross margin was 24.20%, an increase of 0.3 percentage points from the same period last year. Sun Art Retail attributed the continuous improvement in gross margin mainly to the continuous optimization of product mix. 5. Operating Costs Sun Art Retail's operating costs are mainly reflected in store operations and B2C business operations. In the first half of this year, operating costs were RMB 9.561 billion, an increase of 0.6% from the same period last year, mainly due to store expansion and B2C business development requiring investment in labor costs. The amount accounted for 17.6% of total sales revenue in the first half, basically flat with the same period last year. 6. Cash Flow In the first half of this year, net cash generated from operating activities was RMB 2.431 billion, a decrease of 49.5% from the same period last year, but RMB 1.330 billion of this was related to restricted deposits. Net cash generated from investing activities was RMB 1.089 billion, an increase of 30.3% from the same period last year, mainly due to capital expenditure of RMB 878 million for developing new stores, renovating existing stores, and adding intangible assets, as well as RMB 446 million for settling capital expenditure incurred in 2018. Net cash generated from financing activities was RMB 2.032 billion, a decrease of 1.9% from the same period last year, remaining stable. Store Expansion In terms of store expansion, Sun Art Retail maintained a stable expansion pace in the first six years after listing. Starting from 2017, Sun Art Retail became more cautious in store layout, with the number of new stores in recent years only about half of the previous level. In the first half of this year, only two RT-Mart stores were opened in East China. In addition to slowing expansion, Sun Art Retail has also begun to close stores in recent years. Including one Nanchang store closed in the first half of this year, a total of 7 stores have been closed to date. As of the end of the first half of this year, Sun Art Retail had 485 hypermarket stores nationwide, including 409 RT-Mart stores and 76 Auchan stores, covering 233 cities in 29 provinces and municipalities, with a total construction area of 13 million square meters. Among them, approximately 70.0% were leased stores, 29.8% were self-owned property stores, and 0.2% were contracted stores. In terms of regional distribution, East China (Shanghai, Zhejiang, Jiangsu) had the most stores with 192, accounting for 40%; South China (Guangdong, Guangxi, Fujian, Hainan, Yunnan, Guizhou) followed with 89; Central China (Anhui, Hunan, Hubei, Henan, Jiangxi) had 75; Northeast China (Jilin, Liaoning, Heilongjiang, Inner Mongolia (North)) and North China (Beijing, Tianjin, Shandong, Hebei, Shanxi, Inner Mongolia Autonomous Region (West)) had 52 and 51 stores, respectively; and West China (Sichuan, Gansu, Shaanxi, Chongqing, Ningxia) had the fewest with only 26 stores. In terms of city distribution, approximately 8% of stores were in first-tier cities, 16% in second-tier cities, 46% in third-tier cities, 22% in fourth-tier cities, and 8% in fifth-tier cities. In terms of store reserves, Sun Art Retail identified and acquired 49 locations for comprehensive hypermarkets through signing leases or acquiring land, with 40 under construction. Sun Art Retail also stated that as it will open more new stores in lower-tier cities, it will raise site selection standards to ensure store quality. Business Progress In the financial report, Sun Art Retail mentioned business progress in four areas: B2C, B2B, hypermarket restructuring, and dual-brand integration. The following data is noteworthy:

  • B2C Business: By the end of March 2019, all stores completed the expansion of delivery range to 3-5 kilometers; in June 2019, the average daily orders per store exceeded 700; during the 6.18 promotion, the average daily orders per online store exceeded 1,000; online fresh food performance accounted for over 50%; customer negative reviews and complaint rate were below 0.3%, and delivery punctuality rate reached over 99%. In summary, the one-hour delivery to home model has basically taken shape, and in the second half of this year, it will accelerate scale expansion and increase average daily orders.
  • B2B Business: It has covered all stores; as of the end of June 2019, RT-Mart e-Lufa had over 500,000 registered users; customer development is mainly concentrated within a 20-kilometer radius of stores, with the farthest reach up to 100 kilometers; by the end of 2019, B2B business will achieve revenue growth of 50%. According to Sun Art Retail, RT-Mart e-Lufa is currently in the first tier of the B2B industry, and next year it will join the ranks of the ten-billion-yuan club.
  • Hypermarket Restructuring: Restructured product categories and displays, strengthened products for middle and high-end consumers and products suitable for online sales; the first renovated Shanghai store achieved positive performance growth, with a growth rate nearly 10% higher than other unrenovated Shanghai stores, and its fresh food department achieved double-digit same-store growth. According to the plan, more than 40 stores will be renovated this year.
  • Dual-Brand Integration: At the end of February 2019, a joint headquarters was established, and the headquarters integration has been completed; by mid-April 2019, the IT system upgrade and integration of all Auchan stores was completed; in the first half of 2019, Auchan's product structure, display areas, and store organizational structure were adjusted, inventory was cleared, and logistics centers were integrated; Auchan's online business gradually got on track. In the future, the focus of integration will be on improving performance and gross margin, and reducing controllable store expenses and headquarters expenses. Professor Chen Liping from Capital University of Economics and Business recently said in an interview with Lianshang.com that the decline of hypermarkets in China is mainly in first-tier cities, and there is still broad space in third- and fourth-tier cities and beyond. This is basically in line with Sun Art Retail's future development direction. However, according to Sun Art Retail's development tone of "2018 is the infrastructure year, 2019 is the scale acceleration year, and 2020 will be the harvest year," in the next year or so, Sun Art Retail may need to make more changes. Source: Lianshang Supermarket Home (ID: chaoshirenzhijia)