20151207-光大证券-中国顺客隆-00974.HK-Stroll_the_Aisles_24页_1mb

Shun Ke Long (0974 HK) Summary

Core Content

Shun Ke Long is a leading supermarket operator in Guangdong province, with a strategic focus on third- and fourth-tier cities, as well as retail and wholesale distribution. The company was listed on the Hong Kong Stock Exchange in September 2015, raising HK$189 million. The report initiates coverage with a Buy rating and a target price of HK$4.40, which is based on a DCF model.

Main Points

• Market Position: Shun Ke Long has a significant presence in Foshan and Macau, with 85 supermarkets and hypermarkets as of end-2014. It is ranked among the top supermarket operators in Guangdong based on both retail sales value and number of outlets.

• Strategic Focus: The company focuses on fresh produce and has exclusive supply contracts with suppliers. It also has a customer-oriented approach and plans to adjust its product mix according to consumer demand.

• Growth Strategies:

  • Store Expansion: The company plans to expand its store network, particularly in third- and fourth-tier cities, to achieve greater economies of scale.
  • Online and O2O Strategy: It launched an online supermarket in April 2015 and has developed an O2O platform with a mobile app, QR code technology, and integration with online channels.
  • Distribution Capabilities: It is upgrading and expanding its distribution centres in Foshan and Zhaoqing to support e-commerce development and improve delivery efficiency.

• Financial Performance:

  • Revenue Growth: The company is expected to grow its revenue at a 15% CAGR from FY14 to FY17, driven by store expansion and growth in its wholesale operation.
  • Core Net Profit Growth: A 24% CAGR is projected for core net profit over the same period.
  • Gross Profit Margins: The retail operation's gross margin is expected to expand from 21% in FY14 to 23% in FY15, and then decline slightly to 21.5% in FY17. The wholesale operation's gross margin is expected to remain stable at 5% over FY15-17.
  • Operating Profit: Operating profit grew from Rmb40.4 million in FY13 to Rmb67.1 million in FY14, but the growth rate is expected to decelerate due to increased selling and distribution costs.

• Valuation:

  • The target price of HK$4.40 implies a 19x FY16E P/E and 17x FY17E P/E.
  • The current share price is HK$2.91, which is trading at 12x FY16E P/E, 26% below the sector average.
  • The DCF model assumes a WACC of 9.42%, with a terminal growth rate of 8.92%.

Key Information

Financial Forecasts (FY14-17)

• Revenue (Rmb m): 1,053.4 (FY14), 1,338.4 (FY16E), 1,617.9 (FY17E)
• Core Net Profit (Rmb m): 42.7 (FY14), 55.6 (FY16E), 61.8 (FY17E)
• EPS (Rmb): 0.15 (FY15E), 0.19 (FY16E), 0.21 (FY17E)
• P/B (x): 2.5 (FY15E), 2.1 (FY16E), 1.9 (FY17E)

Risk Factors

• Inability to secure suitable locations for new stores
• Challenges in expanding the network on budget and on schedule
• Rising operating costs that may not be passed on to consumers
• Increasing competition from e-commerce platforms

Investment Highlights

• Shun Ke Long has a unique business model combining retail and wholesale operations, which allows it to cater to a diverse range of customers.
• The company's strategic focus on third- and fourth-tier cities and fresh produce gives it a competitive edge.
• It has experienced management and a customer-oriented culture, which should help it respond effectively to market changes.
• Operational efficiencies from its centralised distribution centres and advanced IT systems are expected to improve profit margins and reduce inventory costs.

Peer Comparison

Conclusion

Shun Ke Long is positioned to benefit from its strategic expansion in third- and fourth-tier cities, its focus on fresh produce, and its dual retail and wholesale operations. The company's customer-oriented approach, effective logistics, and advanced IT systems are expected to drive sustainable growth and operational efficiencies. With a Buy rating and a target price of HK$4.40, the report suggests that the company is undervalued relative to its peers and has significant growth potential.