Supermarkets are the clear beneficiaries during pandemic. We believe the surge in online and home delivery consumers is the trigger and foundation for better growth ahead in 2H20E. Also, consolidation will certainly be favorable to industry leaders. We initiate BUY on Yonghui and Sun Art, and rate HOLD for Jiajiayue and SH Bailian. Our top pick is Yonghui for its attractive valuation of lower PEG.
- Industry figures in 5M20 were robust despite pandemic. According to NBS, 5M20 retail sales growth for food/ beverage categories were 13.4%/ 8.5% YoY, far better than 13.5% decline in overall retail sales. Growth were robust for almost all leading players in 1Q20. For instance, Walmart China/ Carrefour Asia SSSG sky-rocketed to 11.7%/ 6% in 1Q20 (vs 3.5%/ 1.3% in 4Q19), while Yonghui sales growth also speed up to 32% in 1Q20 (vs 20% in FY19).
- Positive on 2H20E thanks to surge in active users for home delivery and greater stimulus from government. Sales generated thru various APP (e.g. Taoxinda, Eleme, Tmall, JD.com, Yonghui Life) was more than doubled in 1Q20, for both Yonghui and Sun Art. We believe user stickiness is high once the habit been built, esp. for those newly registered users, who we expect to become solid growth drivers onward. Moreover, various local government (e.g. Beijing, Shanghai) had announced massive plans of consumption coupons, which shall likely be leveraged into better retail sales in 2H20E.
- Supermarket sector may experience another round of consolidation. During SARS period, sales mix of modern grocery retailer (vs traditional) climbed from 36% in 2003 to 51% in 2006, based on Euromonitor’s data, and we expect to see consolidation accelerate in FY20E-22E.
- Initiate BUY on Yonghui, better home delivery on top of its solid offline and store expansion. Supported by store expansion (esp. additions of Yonghui Mini) and stores revamp (from red label to Bravo Green), plus the home delivery sales growth, we forecast a 42% NP CAGR in FY20E-22E. Our TP is based on 37x FY21E P/E, at about 1.2x PEG.
- Initiate BUY on Sun Art, online and store restructuring to lead the growth. With support from Alibaba, we expect more in-store and digital infrastructure upgrades to spark a new round of growth in FY20E-22E (13% NP CAGR). Our TP is based on 35x FY21E P/E, at the high end of forward P/ E band.
- Initiate HOLD for SH Bailian and Jiajiayue, due to their rich valuation. Discretionary demand bottoming out is positive for SH Bailian. However, given its relatively high valuation of 36x FY21E P/E (vs its 5 years average of 20x), we rated HOLD. Jiajiayue’s valuation is at 2.2x PEG and 7.8x P/B, the highest among peers. Hence we find that rich and assign a HOLD rating.
