China food retailing:Target prices revised based on DB’s latest RMB assumptions

Target prices revised on RMB deprecation forecast for 2015-16

    USD/RMB is now expected to reach 6.5/6.9 by end-2015/2016 (vs. 6.3/6.5 before). Please refer to the note “The RMB depreciation series 2: CNY forecast revision” published by Zhiwei Zhang, DB’s chief economist, on 14 August. This translates into new RMB/HKD forecasts of 1.192/1.123 for the same period.We therefore revise down our target prices for Sun Art and Wumart by 3.9%/6.4%, respectively, as we change our assumed RMB/HKD rate in the DCF model, which translates RMB-based NPV into an HKD-based target price. We keep the target price for Yonghui unchanged, as Yonghui’s reporting currency (RMB) is the same as its trading currency.

    RMB depreciation has less impact on food retailers’ business operation

    Food retailers’ business operation is 100% in mainland China and their sourcing is mainly from local distributors. We believe they are less sensitive to RMB depreciation (Figure 1). The sales of imported merchandise including infant formula, meat, and fruit account for a small portion (1-2%) of their sales revenue. We believe they have the capability to pass through the increased sourcing cost to end users. However, this may take some time.

    Valuation and risks

    Our primary valuation methodology is DCF, which captures the future cash flow of consumer companies. We also use trading multiples in the China/HK consumer sector. Downside risks are low CPI, rising operating costs, intensified competition from foreign players and online channel, and slower-than-expected expansion plans.