Suning Commerce Group:Online sales likely to grow rapidly

Alliance with Alibaba boosting online sales

    Suning has completed a private placement of shares to Alibaba at a price of Rmb15.17each, raising a total of Rmb29.2bn, in June. After the private placement, Alibaba holdsa 20% stake in Suning. We believe with the alliance formed, Suning and Alibaba willcooperate on the online platform, information system, logistics distribution and aftersalesservice fronts, and Suning's Tmall flagship store will benefit from the Alibabaplatform's huge traffic. Furthermore, Suning has been improving customer experience(e.g., logistics service) in recent years. We estimate Suning will maintain rapid onlinesales growth in the next three years, generating Rmb200.3bn in gross merchandisevolume (GMV) in 2018, up from Rmb50.3bn in 2015.

    Committed to improving offline stores; operating loss to narrow sharply

    Poor management of offline stores in previous years caused losses to widen at Suning'sstores. The weighting of loss-making stores has fallen to 10% after several years ofstore closures and store mix adjustments, with the weightings of Internet-enabledphysical stores built on the back of Suning Egou, flagship stores, community stores andcounty/township-level stores stabilizing. We expect Suning's operating loss to narrowsharply this year, as: 1) online and offline integration is becoming a trend; 2) offlinestores' product mix is improving and evaluation is focusing on profitability; and3) money-losing PPTV is being hived off to the group.

    Faster appliance replacement and more product types to boost Suning's sales

    A UBS Evidence Lab survey found the replacement cycle for appliances in Chinaaverages 4-5 years in 2016, below market expectations of 7-10 years, meaning demandfor appliance replacement will grow. Also, it found the average household owns 16.6units of appliances and plans to buy more. We expect this to boost overall appliancesales. Currently, Suning derives the majority of its revenue from appliances, and weestimate it will benefit from growth in the domestic appliance market.

    Valuation: Cutting earnings estimates and PT; maintain Neutral

    Given that: 1) Suning will control the gross margin of the online segment after formingan alliance with Alibaba to expand sales; and 2) employee headcount and salaries in theonline segment will rise, we revise our 2016-18E EPS to Rmb0.04/0.09/0.14 fromRmb0.04/0.10/0.15. We derive our DCF-based price target of Rmb11.5 (from Rmb12.1)assuming WACC of 7.8% and maintain our Neutral rating.