SUN ART RETAIL GROUP Alert:1H16results in line DBe;offline earnings up by 2%yoy

First take on 1H16 results – NP declined 3% yoy, on 4% yoy growth in revenue.

    Revenue grew 4% yoy, with a 6%/2% increase in 1Q/2Q16, mainly driven bynew store openings. Rental income rose 12% yoy to RMB1.7bn (14%/9% yoyin 1Q/2Q16), due to an increase in rentable area and tenant mix change.

    Excluding losses from online and Oney Accord, earnings rose by 2.2% yoy. Nointerim dividend, as before. Net cash was RMB6.4bn vs. RMB5.9bn by 2015.

    Key highlights of 1H16 results.

    SSSG improved to -0.3% from -3.4% in 1H15, thanks to: 1) its effort to attracttraffic and 2) the increase in CPI for food. To recap, it was +1.1% in 1Q16.

    Store expansion: it added 8/4 stores in 1Q/2Q16 to have 421 stores by June.

    Total GPM improved by 0.3ppts to 22.8%. Merchandise GPM decreased1.6ppts yoy in 1Q, while it increased 0.4ppts yoy in 2Q.

    The opex ratio increased by 0.3ppts to 16.5% due to store expansion and theinvestment in e-commerce.

    ETR was 33.1% (30.4% in 1H15) due to losses from new entities and ecommerce.

    E-commerce: Feiniu has 16m registered members including 3m activemembers. Its O2O projects cover 35 stores in 23 provinces. Field GMV rose50% yoy.

    Appointment of new CFO.

    The company announced that Mr. Jean Chausse will be appointed as the newCFO and Mr. Jean Paufichet will resign as CFO, both effective from 14 Nov.

    Deutsche Bank comments.

    1H16 NP and revenue are in line with the Deutsche Bank forecast. Thecompany will have an analyst briefing at 9am on 11 Aug. We believe the keyfocus will be: 1) outlook in SSS and rental; 2) GPM trend and 3) online business.