Morningstar

Morningstar, Inc.

Equity Bottom-Up

As operating costs continue to rise and the offline retail sector faces ongoing challenges from the e-commerce sector, one of no-moat Sun Art’s hypermarket competitors, Carrefour, made the headlines after selling 80% of its Carrefour China business. We see this strategy as a small threat to Sun Art, given the latter is backed by the much larger Internet giant Alibaba and the transformation of Sun Art has been progressing well. According to online media, after Taoxianda launched in Sun Art’s…

Sun Art Retail is the leading hypermarket operator in China with the highest market share of 15.7% in 2018. However, Sun Art has been facing headwinds, including intensifying competition from e-commerce and existing offline players and the emergence of new retailing formats. Sun Art’s same store sales growth excluding electronic appliances decreased from negative 0.26% in 2017 to negative 1.72% 2018. Sun Art has ambitious plans to revert the declining trend. To be a leader in all categories, Sun…

We have increased the fair value estimate of Sun Art Retail to HKD 8.0 per share from HKD 7.8 per share purely on time value of money. After being overvalued for most of 2018, the recent share price decline now leaves the shares fairly valued, in our view. We forecast operating income to begin to accelerate in 2019 to 7% on benefits from its cooperation with Alibaba. We expect average operating income growth of 11% over our five-year forecast period due mainly to Alibaba, compared with a 3% per…

We maintain our HKD 7.80 fair value estimate for no-moat Sun Art and believe the shares are fairly valued at the moment. We continue to see progress resulting from Sun Art’s partnership with Alibaba and do not expect a major financial uplift this year. We expect revenue growth to accelerate to midsingle digits starting next year with a fiveyear revenue compound annual growth rate of 5% while net income should see a high-single-digit increase starting next year with a five-year net income CAGR of…

Sun Art’s first-half result was below our expectations on a run-rate basis, with both revenue and underlying operating profit broadly flat. Reported operating profit fell 7.7%, but the previous period included revenue from aged unutilized prepaid phone cards, which had accrued over several years, whereas this half-year included only the usual six months of this revenue. Revenue from food and fast-moving consumer goods, or FMCG, increased while electronic appliances was down. Sun Art has entered…

Hong Kong

Sun Art Retail Group Ltd. operates hypermarkets.  The Company retails food and offers amenities such as restaurants, automated teller machines, pharmacies and dry cleaners.

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