Yonghui’s loss in 2Q22 narrowed YoY, with the loss mainly attributable to the high selling expense ratio and the decline in the fair value of trading financial assets. In the short term, the good recovery trend in 1Q22 has been impacted by regional Covid flare-ups in 2Q22 and 3Q22, and the time when profitability returns to the level before the pandemic (2020) may be postponed. In the long run, the continuous improvement of its digital capabilities will promote the gradual integration of online and offline channels and enable user traffic diversion in both ways to reduce cost and improve efficiency. We assign 38x 2023E PE to arrive at a target price of Rmb4.1 and reiterate our "BUY" rating.
2Q operating revenue increased YoY, while the loss narrowed YoY.
In 1H22, Yonghui's operating revenue was Rmb48.73bn (+4.1% YoY), mainly because the competitive environment improved this year, which has allowed its operations to improve; attributable net profit (ANP) was Rmb-110mn (1H21: Rmb-1.08bn), mainly because it recorded a loss of Rmb440mn from changes in fair value for its stake in Yihai Kerry Arawana (300999.SZ) and in Advantage Solutions (ADV.O) via Karman Topco L.P. (KT LP) due to the decline in stock prices; ex-one-off ANP was Rmb90mn (1H21: Rmb-930mn).
In 2Q22 alone, Yonghui realized operating revenue of Rmb21.49bn (+4.9% YoY), ANP of Rmb-610mn (2Q21: Rmb-1.11bn), and ex-one-off ANP of Rmb-530mn (2Q21: Rmb-1.10bn).
2Q SSS growth was weak, and store openings were under pressure.
Same-store sales (SSS): In 1H22, Yonghui reported SSS growth of +4.2% YoY (1H21: -13.7%), which compares to +2.0% YoY in 1Q22 (+6% YoY in Mar alone) and +12% YoY in Apr. We estimate that SSS in May and Jun were flat YoY off a low base last year. Store openings: In 1H22, Yonghui opened 20 new supermarkets (including 6 new stores in 2Q, and the original annual goal was to open 50 stores) and closed 17 stores (the original annual goal was to close stores at single digits). As of Jun 30, 2022, Yonghui had opened 1,060 stores in 29 provinces and municipalities across the country.
A higher GPM but lower expense ratios Yonghui's blended gross profit margin (GPM) increased by +1.5ppts YoY to 20.4% in 1H22 or +1.1ppts/+2.1ppts YoY to 21.3%/19.2% in 1Q22/2Q22. In a breakdown by product, the GPM of fresh & processed/edible products (including clothing) increased by +1.0ppt/+3.2ppts YoY to 12.7%/16.6% in 1H22. The selling/administrative expense ratio increased by -1.1ppts/-0.1ppts YoY to 16.1%/2.3% in 1H22, respectively. From a quarterly perspective, the selling expense ratio increased by -0.9ppts/-1.5ppts YoY to 14.7%/17.7% in 1Q22/2Q22, respectively.
The online business continued to grow to report narrower losses.
In 1H22, online business revenue was Rmb7.59bn (+11.5% YoY), accounting for 15.7% (1H21: 14.1%) of the omnichannel revenue from the main business; the loss rate was 1.6%, which decreased significantly YoY, mainly because of the continuous improvement in product power and operational efficiency. The self-run to-home business of "Yonghui Life" has covered 93.5% of stores, achieving sales of Rmb4.02bn (+9.2% YoY), implying a daily average of 292k orders (+4.7% YoY) and a monthly average repurchase rate of 51.2% (1H21: 47.4%). During the reporting period, the to-home service via third-party platforms (based on data via JD.com) has covered 86.7% of stores, achieving sales of Rmb3.49bn (incl. other income) with a daily average of 199k orders.
Prospects: Continue to invest in R&D and promote digital transformation In 2Q22, R&D expenses totaled Rmb110mn (+12.8% YoY), implying a R&D expense ratio of 0.5% (+0.05ppts QoQ). Yonghui's R&D investment has achieved remarkable results: The inventory turnover days have been steadily maintained at a historical low (1H22: 43 days), and the proportion of online revenue has continued to rise to a record high (1H22: 15.7%). At present, Yonghui is still in the stage of digital transformation. In the future, it will continue to invest in R&D with a focus on omnichannel digital transformation to improve the operating efficiency of stores and achieve the comprehensive integration of online and offline channels.
Potential risks Sporadic Covid flare-ups, leading to a decline in residents' spending power; intensified industry competition; the profit of Yonghui's online business missing expectations; unsatisfactory results of Yonghui's warehouse membership store transformation; a fall in the fair value of Yonghui's trading financial assets.
Investment recommendation Considering the gap between the interim results and our prior expectations (mainly caused by the sharp decline in the fair value of Yonghui's trading financial assets) and the possible impact on Yonghui caused by the recent scattered resurgence of Covid-19, we maintain our 2022E-24E operating revenue forecast of Rmb95.46bn/100.12bn/105.16bn and lower our 2022E-24E ANP forecast to Rmb0.25bn/0.98bn/1.38bn (the original forecast was Rmb0.83bn/1.27bn/2.02bn), corresponding to 2022E-24E EPS forecast of Rmb0.03/0.11/0.15, respectively. Based on the industry valuation level (per the CITICS Level III sector index, supermarkets and convenience stores are currently trading at 31x 2023E PE based on Wind consensus estimates) and considering the leading position of Yonghui in the industry, which warrants a certain valuation premium, we assign 38x 2023E PE to arrive at a target price of Rmb4.1 and reiterate the "BUY" rating.
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