Download - Equity Research on Suning Commerce Group
Suning Commerce Group(002024.SZ, Specialty Retail Industry)
Shanghai Jiao Tong University Student Research April 13, 2016
1Team 2 |
6
12
18
24
13 Nov, 20 May, 13 Nov, 15 Aug, 11 Feb,
BUY Recommendation
Industry-leading Offline Facility
Sound Company Financials
Proactive Online Strategy
Industry Trend of O2O Integration
Target Price: CNY 20.27
Base Price: CNY 15.5430.4% Upside
Executive Summary
52-Week High/Low CNY 23.54 / 7.64
Average Daily Volume 241.86M
Shares Outstanding 7,383,043,150
Market Cap. CNY 114.732B
Beta 1.09
P/S (TTM) 0.9
P/E (TTM) 58.5
EV/Revenue (TTM) 1.0
1SJTU |
002024.SZ
1
2
3
4
Traditional Offline AdvantageCompany Overview
2SJTU |
Source: Company Data
Procurement LogisticsIT System
Online Platform
Offline Platform
2015 Offline Stores by Location
> 300 200 - 299
100 - 199 < 100
Auto DC
Offline Stores in Mainland by Types
0
450
900
1,350
1,800
2008 2009 2010 2011 2012 2013 2014 2015Q3
• Mainland: 1,577 stores covering 297 cities; 1,011 direct and 1,430 franchise service stations serving rural areas
• Overseas: 28 stores in HK and Macau; 33 in Japan
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
Mainland China
HK and Macau
Japan
Community Central Flagship County Others
Offline Extensive Network
Cloud
Proactive Online TransitionCompany Overview
3|
Source: Company Data, iResearch
Procurement LogisticsIT System
Online Platform
Offline Platform
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
Suning.com
Logistics Services
Cloud Stores
20 million SKU O2O Coop. with
Alibaba & Wanda
Financial Services
SJTU
Three Core CompetenciesCompany Overview
4|
Source: Company Data, iResearch
Procurement LogisticsIT System
Online Platform
Offline Platform
• Purchasing center: 8 nationwide
• Procurement: 38.5% from Top 5 big-brand manufacturers
• Supply-chain financial services
Experienced Procurement Efficient Logistics Solid IT Support
• Facilities: 4.55 million m2 nationwide, 12 APCs, 42 DCs, and 6,051 delivery points
• Delivery time: 12 hrs in most areas; 2 hrs in 7 major cities
• For 3rd party use
• SAP/ERP/LES Systems
• PC and mobile portals: update constantly
• Big Data and Cloud Computing: Marketing, C2B Customization
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning SJTU
Industry Overview & Competitive Positioning
Impressive Growth of Retail IndustryIndustry Overview & Competitive Positioning
5
Source: iResearch, IMF, National Bureau of Statistics, Team Calculation
|
Retail Sales Growth of Consumer Goods (in trillions CNY, annual %)
Catering Services Commodities
0
10
20
30
40
2009 2010 2011 2012 2013 2014 2015
3.2
2.82.5
2.32.1
1.82.0
26.823.420.818.416.013.710.5 0%
6%
12%
18%
24%
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
Growth of Annual Expenses Per Capita by Category
Sales Growth GDP Growth
0%
10%
20%
30%
40%
2013 2014 2015
Daily Commodities
Food and Beverage
Electronics Devices
Home Appliances
SJTU
Distinct Differences between Online and Offline BusinessIndustry Overview & Competitive Positioning
6
Source: iResearch, National Bureau of Statistics, World Bank, Team Calculation
|
Online and Offline Sales Growth (in trillions CNY, annual %)
Online Sales Offline Sales
Online Sales Growth Offline Sales Growth
0
10
20
30
40
2011 2012 2013 2014 2015E 2016E 2017E
6.75.3
4.0
2.81.9
1.20.8
29.327.526.023.421.419.517.3 0%
20%
40%
60%
80%
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning SJTU
Distinct Differences between Online and Offline BusinessIndustry Overview & Competitive Positioning
6
Source: iResearch, National Bureau of Statistics, World Bank, Team Calculation
|
Online and Offline Sales Growth (in trillions CNY, annual %)
Online Sales Offline Sales
Online Sales Growth Offline Sales Growth
Sales on Online Shopping Days (in billions USD)
Online Shopping Penetration (as % of Internet population)
0
10
20
30
40
2011 2012 2013 2014 2015E 2016E 2017E
6.75.3
4.0
2.81.9
1.20.8
29.327.526.023.421.419.517.3 0%
20%
40%
60%
80%
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
0.0
3.0
6.0
9.0
2011 2012 2013 2014
Black Friday (US) Cyber Monday (US)
Singles Day (CN)
2014
2018E 69%
62%
56%
32%
US China
SJTU
Key Transition from Old Competitors to O2O CooperatorsIndustry Overview & Competitive Positioning
7|
Source: iResearch, Team Analysis
Industry Trend 2005 2010 2015 Future
Online
Burst of Chain Stores Market Saturation
Growing E-commerce
Stagnant Sales Growth
Robust Sales Growth
Offline
O2O Integration
Burgeoning Online Start-ups
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning SJTU
Key Transition from Old Competitors to O2O CooperatorsIndustry Overview & Competitive Positioning
7|
Source: iResearch, Team Analysis
• To boost and to fuel sales growth
• To develop the potential of larger customer base
• To improve shopping experience and after-sale services
Why O2O? “Internet Plus” = Online + Offline
O2O Integration
Cost and SKU Advantage
IT-based Sales Analysis
Handy After- sales Services
Full Retail Chain and Stores
Much Larger Customer Base
Complete Experience
Industry Trend 2005 2010 2015 Future
Online
Burst of Chain Stores Market Saturation
Growing E-commerce
Stagnant Sales Growth
Robust Sales Growth
Offline
O2O Integration
Burgeoning Online Start-ups
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning SJTU
An Ideal Business Partner with Definite AdvantageIndustry Overview & Competitive Positioning
8|
Source: Company Data (until 2014), iFinD, Team Analysis
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
Competitiveness Suning Gome Alibaba JD
Procurement & Logistics
Warehouse (‘000 m2)4,030 1,950 — Over 2,300
Delivery Points3,427 Over 2,488 — 3,210
Online Operation
GMV (billions CNY)25.8 7.7 1,172.0 260.2
Active Member (millions)27.0 0.5 334.0 96.6
Offline Operation
Stores1,650 1,132 — —
Stores Space (‘000 m2)4.1 3.2 — —
SJTU
An Ideal Business Partner with Definite AdvantageIndustry Overview & Competitive Positioning
8|
Source: Company Data (until 2014), iFinD, Team Analysis
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
Competitiveness Suning Gome Alibaba JD
Procurement & Logistics
Warehouse (‘000 m2)4,030 1,950 — Over 2,300
Delivery Points3,427 Over 2,488 — 3,210
Online Operation
GMV (billions CNY)25.8 7.7 1,172.0 260.2
Active Member (millions)27.0 0.5 334.0 96.6
Offline Operation
Stores1,650 1,132 — —
Stores Space (‘000 m2)4.1 3.2 — —
SJTU
Financial Analysis
Rapid Revenue Growth and Increasing Proportion of Online RevenueFinancial Analysis
9|
Source: Company Data, Team Estimation
Revenue Growth (in billions CNY, annual %)
0
75
150
225
300
2012 2014 2016E 2018E 2020E0%
5%
10%
15%
20% Online Offline Total Growth
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
Revenue Decomposition (2015)
Offline 70.3%
Self-owned Store
Open Platform
Online 29.7%Total
Revenue5.9%
36.7%
SJTU
Rapid Revenue Growth and Increasing Proportion of Online RevenueFinancial Analysis
9|
Source: Company Data, Team Estimation
Revenue Growth (in billions CNY, annual %)
0
75
150
225
300
2012 2014 2016E 2018E 2020E0%
5%
10%
15%
20% Online Offline Total Growth
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
Offline: Logistics Related Non-current Assets (2015, in billions CNY)
Suning
JD
Gome
0 6 12 18 24
Intangible Assets Fixed Assets
Online: Suning’s Customer Base (in millions)
0
60
120
180
240
20141H 20142H 20151H 20152H0
5
10
15
20 Register User Active User SKU
Revenue Decomposition (2015)
Offline 70.3%
Self-owned Store
Open Platform
Online 29.7%Total
Revenue5.9%
36.7%
Optimistic Outlook for Suning’s Online Business Large Offline Investment Guarantees Logistics Capacity
SJTU
10|
Source: Company Data, Team Estimation
Higher Profit Margin than JD’s
ProfitabilityFinancial Analysis
-6%
1%
7%
14%
20%
2012 2014 2016E 2018E 2020E
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
Suning’s Gross Margin JD’s Gross Margin
JD’s Net Profit Suning’s Net Profit
Lower gross profit margin in 2020 due to: • Profit margin: online < offline • Lower value-added products • Accessible online price comparison In comparison, JD has 13.92 billion fulfillment expenses in 2015, which narrow its gross profit margin to -1.9%
Offline Layout Guarantees Stable Profit Margin
SJTU
10|
Source: Company Data, Team Estimation
Higher Profit Margin than JD’s Improving Operational Ability
Lower gross profit margin in 2020 due to: • Profit margin: online < offline • Lower value-added products • Accessible online price comparison In comparison, JD has 13.92 billion fulfillment expenses in 2015, which narrow its gross profit margin to -1.9%
Offline Layout Guarantees Stable Profit Margin
• Strong bargaining power: prolonged relationship with suppliers (>20 years)
• Supply chain management: won’t be easily exceeded by competitors
Close Partnership with Suppliers; Operations with High Efficiency
ProfitabilityFinancial Analysis
Efficiency
2015 (times) Receivable Payable Inventory Suning 180.5 9.7 5.4 JD 30.4 7.0 9.6
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
0
5
10
15
20
25
0
50
100
150
200
250
2012 2014 2016E 2018E 2020E
Receivable Inventory PayableTimes
Suning’s Gross Margin JD’s Gross Margin
JD’s Net Profit Suning’s Net Profit
-6%
1%
7%
14%
20%
2012 2014 2016E 2018E 2020E
SJTU
11|
Source: Company Data, Team Estimation
Favorable Liquidity
Shorter Operation Cycle
Financial Analysis
Liquidity
Current Quick Cash
Operation Cycle Sales and Management Expenses / Sales
Cash Conversion Cycle
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
0.4
0.8
1.2
1.6
2.0
2012 '14 '16E '18E '20E
Suning0.4
0.8
1.2
1.6
2.0
'12 '13 '14
JD
Days
-30
0
30
60
90
2012 2014 2016E 2018E 2020E
10%
12%
14%
16%
SJTU
11|
Source: Company Data, Team Estimation
Favorable Liquidity Solvency Ratios
Shorter Operation Cycle
• D/A ratio will drop by 16% post to CNY 283 million equity investment of Alibaba in 2016
• Healthy financial leverage permits at least 10% upside potential space for D/A ratio
Healthy Leverage Condition Benefits Investments in Logistics
Financial Analysis
Liquidity Capital Structure
2015 Suning JD Gome
Debt-to-total assets 63.8% 64.0% 60.1%
Current Quick Cash
-10
0
10
20
30
40
2012 2014 2016E 2018E 2020E0%
20%
40%
60%
80%
Financial Leverage
Interest Coverage
Debt to Total Assets
-30
0
30
60
90
2012 2014 2016E 2018E 2020E
10%
12%
14%
16%
Operation Cycle Sales and Management Expenses / Sales
Cash Conversion Cycle
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
0.4
0.8
1.2
1.6
2.0
'12 '13 '14
JD
Days
0.4
0.8
1.2
1.6
2.0
2012 '14 '16E '18E '20E
Suning
SJTU
Valuation
DCF AnalysisValuation
12|
Source: Company Data, iFinD, Team Estimation and Calculation
Sales Revenue Breakdown (in billions CNY)
Boost Industry Sales
• Household Income • Population Growth • IT Investment
Increase Market Share
• Cooperation with Big Macs
• O2O Layout
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
0
75
150
225
300
White Black IT Comm Life TOTAL
14.2%
18.5%10.0%5.6%18.4%
2014A 2020E CAGR
13.4%
SJTU
DCF AnalysisValuation
12|
Source: Company Data, iFinD, Team Estimation and Calculation
Sales Revenue Breakdown (in billions CNY)
Capital Expenditure (in millions CNY)
Boost Industry Sales
• Household Income • Population Growth • IT Investment
Increase Market Share
• Cooperation with Big Macs
• O2O Layout
0
1,250
2,500
3,750
5,000
2012 2014 2016E 2018E 2020E
Added Fixed Assets Added Intangible Assets
Risk-free Rate 2.58% Beta 1.09 Market Risk Premium 8.10% Cost of Equity 11.39% Pre-tax Cost of Debt 5.03% Marginal Tax Rate 25% Post-tax Cost of Debt 3.77% Capital Structure 70:30 WACC 9.10%
WACC Analysis
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
0
75
150
225
300
White Black IT Comm Life TOTAL
14.2%
18.5%10.0%5.6%18.4%
2014A 2020E CAGR
13.4%
SJTU
DCF AnalysisValuation
12SJTU |
Source: Company Data, iFinD, Team Estimation and Calculation
Sales Revenue Breakdown (in billions CNY)
Capital Expenditure (in millions CNY)
Boost Industry Sales
• Household Income • Population Growth • IT Investment
Increase Market Share
• Cooperation with Big Macs
• O2O Layout
0
1,250
2,500
3,750
5,000
2012 2014 2016E 2018E 2020E
Added Fixed Assets Added Intangible Assets
Risk-free Rate 2.58% Beta 1.09 Market Risk Premium 8.10% Cost of Equity 11.39% Pre-tax Cost of Debt 5.03% Marginal Tax Rate 25% Post-tax Cost of Debt 3.77% Capital Structure 70:30 WACC 9.10%
WACC Analysis
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
0
75
150
225
300
White Black IT Comm Life TOTAL
14.2%
18.5%10.0%5.6%18.4%
2014A 2020E CAGR
13.4%
CNY 20.17
Multiples AnalysisValuation
13SJTU |
Source: iFinD, Thomson Reuters, Team Calculation, Yahoo Finance
Peers P/S (TTM) Position Peers EV/Revenue (TTM) Position
• The feasibility of splitting apart online and offline business
• The existence of negative profit for some online retailers
• The strong correlation between sales and price in retail industry
P/S Reasoning
Sum of the Parts (in CNY)
0 6 12 18 24
Offline Retailer Online Retailer
GomeWFJBBG
Intime 2.5x1.2x
0.6x0.4x Median: 0.9x
DANGAMZN
JDEBAY 3.4x
2.5x2.3x
0.6x Median: 2.4x
DANGWFJ
JDEBAY
BBGGomeAMZN 2.8x
2.2x1.8x
1.5x1.4x
0.8x0.2x Median: 1.5x
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
Offline Sales Online Sales
9.47 11.89
Target PriceValuation
14SJTU |
DCF Analysis: 50%
Multiple Analysis: 50%CNY
20.27
CNY 20.17
CNY 20.36
Target Price
Recommendation: BUYUpside 30.44% from
13 Nov, 2015 closing price
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
Monte Carlo Simulation and Sensitivity AnalysisValuation
15SJTU |
Source: Team Calculation
Monte Carlo Simulation
Checking List of Sensitivity Tests
New Business Operation Total Revenue
WACC Cost of Capital
Real GDP Growth Sales Revenue
Sales Expenses Net Profit
Online Sales Growth Gross Profit Margin
Terminal Growth Terminal Value
2.78% 10.53% 22.42% 64.27%16.3213.18 CNY 17.87 19.43 29.89
SELL HOLD ACCU BUYMean 20.36
SD 2.295% Percentile 16.78
Median 20.2495% Percentile 24.27
0
500
400
300
200
100
times
• Based on 10,000 random simulations
• 64% confidence level for BUY recommendation
• 90% confidence interval: CNY 16.78 to 24.27
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
Investment Risks
Risk Matrix and Mitigation FactorsInvestment Risks
16SJTU |
Source: Team Analysis
Online Competition
FX & Interest Rate Risk
Uncertainty of REITs
Financial Market
Volatility Slowdown
of Economy
Excessive Control from Board Chair
Alibaba’s Influence in Managemen
t
Liquidity Risk at Bond
Maturity
Low Medium HighImpact
Med
ium
High
Prob
abili
tyLo
w
Economic Risk
Market Risk
Operational Risk
Other Risk
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
OR1 - Cut-throat Online Competition Impedes Suning’s ExpansionInvestment Risks
17SJTU |
Source: Company Data, Team Analysis, iResearch
An increase in online sales growth rate and online market share • Alliance with Alibaba to attract online customer flows • Eye-catching performance in 2015 Singles Day Promotion
Mitigation Factors
372%60%
Price Wars Narrow Margins
Suning
Tmall
JD 22%
18%
31%OR1
Prob
abili
ty
Impact
Significant
Risk Level
Risk Matrix
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
High Market Concentration
2014 Online Market Share
0%
20%
40%
60%
80%
Alibaba JD Vipshop Suning Gome
3.0% 2.9% 1.7%
60.4%
19.5%
Discount on 2015 Singles Day
OR2 - Uncertainty of REITs and Income CliffInvestment Risks
18SJTU |
Source: Team Estimation and Calculation
OR2
Prob
abili
ty
Impact
Significant in short-term
Risk Level
• Improving operating income • Disposal of all 13 available self-owned stores in 2016 (25 already sold)
Mitigation Factors
Income Cliff in 2016 (in millions CNY)
-2,000
0
2,000
4,000
-2,000
0
2,000
4,000
2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Total Income EBIT Pre-tax Gain from REITs
Risk Matrix
Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
Conclusion
Suning — The Leader of China RetailersConclusion
19SJTU |Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
Extensive chain store network, logistics and supply-chain management
Offline
Suning — The Leader of China RetailersConclusion
19SJTU |Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
Extensive chain store network, logistics and supply-chain management
Proactive online strategy to develop larger customer base
Offline Online
Suning — The Leader of China RetailersConclusion
19SJTU |Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
Extensive chain store network, logistics and supply-chain management
Great opportunity to cooperate and to keep pace with market growth
Proactive online strategy to develop larger customer base
Offline Online
O2O Integration
Suning — The Leader of China RetailersConclusion
19SJTU |Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
Extensive chain store network, logistics and supply-chain management
Great opportunity to cooperate and to keep pace with market growth
Proactive online strategy to develop larger customer base
Improving profitability and increasing operation efficiency
Offline Online
O2O Integration Sound Financials
Suning — The Leader of China RetailersConclusion
19SJTU |Company Overview
Financial Analysis Valuation Investment
Risks ConclusionIndustry Overview & Competitive Positioning
Extensive chain store network, logistics and supply-chain management BUY
Recommendation
Great opportunity to cooperate and to keep pace with market growth
Proactive online strategy to develop larger customer base
Improving profitability and increasing operation efficiency
Offline Online
O2O Integration30.4%
Up
CNY 20.27
CNY 15.54 Sound Financials
Shanghai Jiao Tong University Student Research April 13, 2016
Thank You