October 18, 2012 Sun Art Retail (6808.HK) Target price: HK$ 11 · Guosen Securities (HK) Please...

Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report

1

October 18, 2012

Sun Art Retail (6808.HK)

China’s No.1 hypermarket operator

Summary: We believe China’s hypermarket industry will continue to grow strongly and become more

concentrated in the next few years. We expect Sun Art to maintain its No.1 position given

advantages such as sourcing, inventory management and store network, creating a so-called

‘Matthew effect’ that will continuously put the company ahead of rival operators.

Key attractions. We believe careful store-site selection, product differentiation and

understanding the differences in purchasing habits in various regions of China are key

attributes for Sun Art’s outperformance of peers among fierce competition.

The domestic hypermarket sector is still far from the peak and we forecast sales to reach

RMB1 trillion by 2015 (17.8% CAGR over 2011-15). We expect Sun Art to maintain relatively

rapid growth by leveraging its competitive strengths, creating a virtuous cycle that will

continue to place the company ahead of its rivals.

High productivity and strong stores pipeline. Organic growth is crucial to the continuous

long-term growth for hypermarket operators. Sun Art’s organic growth obviously enjoyed

stronger momentum compared with peers. The company has selected 155 sites for new

store openings in the coming three years. These new hypermarkets will ensure expansion of

its retail network in the next three years

Sensitivity analysis. Based on our sensitivity analysis, gross margin is the most important

driver of Sun Art’s 2012E results. Every 0.5ppt change in its gross margin will have an 10%

impact on 2012E profit, whereas each 1ppt change in same-store sales will affect 2012E

profit by only 2%.

Major assumptions & risks. We forecast Sun Art’s gross profit margin gradually rises over

2012-14 with the expansion of its business, while same-store sales increase by 4.3% and it

opens 45 new stores in 2012. Government crackdown on large retailers that impose

additional charges on suppliers could have a significant impact on Sun Art’s results.

Valuation & recommendation. Given Sun Art’s leading position and growth potential, we

forecast a prospective PE of 31x, which correspond to a target price of HK$11.5 (12.1%

upside potential). As such, we initiate coverage of Sun Art with a “BUY” rating.

Financial summary

Year to Dec 2010A 2011A 2012E 2013E 2014E

Turnover (RMB mn) 56,168 68,084 80,069 95,024 113,706

Chg (%) 23.7 21.2 17.6 18.7 19.7

Net profit (RMB mn) 1,031 1,600 2,507 2,891 3,604

Chg (%) 27.2 55.1 56.4 15.3 24.7

EPS (RMB) 0.190 0.220 0.263 0.303 0.378

CFO per share (RMB) 0.60 0.60 0.86 0.62 1.26

P/E (x) 44.1 38.1 31.9 27.7 22.2

P/B (x) 15.65 5.28 4.73 4.23 3.73

Dividend per share (RMB) 0.00 0.08 0.079 0.091 0.113

Source：Guosen Securities (HK), Bloomberg

Target price: HK$ 11.5 BUY Current price: HK$10.22

Company overview

Background

Sun Art Retail is the largest hypermarket operator

in China. As at the end of 2011, the company had

12.8% market share. It operates 240 hypermarkets

under the brands of Auchan and RT-Mart.

Key data

Market cap (HK$ mn) 97,499

Shares outstanding (mn) 9,540

Major shareholders (%) 51

Free-float (%) 49

Price performance vs HSI

Source: Bloomberg, data as at Oct 17, 2012

Price performance (%)

1M 3M 12M

Sun Art Retail 6.35 19.31 13.94

HSI 4.45 11.84 19.04

Guosen vs Consensus

More optimistic

(RMB) Guosen forecast Consensus

EPS-2012 0.263 0.246

EPS-2013 0.303 0.300

EPS-2014 0.378 0.357

Why?

Our forecast is more optimistic compared with

consensus, as: 1) we are more confident on the

company’s grow potential and long-term

competitive advantages. 2) We believe the gross

margin will rise gradually due to the economies of

scale.

16,000

18,000

20,000

22,000

7 8 9

10 11 12 13

Oct/2011 Apr/2012 Oct/2012

HK

$

6808.HK（HK$,LHS) HSI（RHS）

Analyst

Franco Hong (Retail) Tel: 852-2899 8300 [email protected]

SFC CE No.: ATI031

Sales contact

Roger Chiman Tel: (852) 2248 3598 [email protected]

Managing Director

Sun Art Retail (6808.HK) October 18, 2012 | HK & China


2

Business Overview

Sun Art has replaced Wal-Mart as the largest hypermarket operator in China. Sun Art’s market share increased by 4.3%, from

8.5% in 2005 to 12.8% in 2011. Successful network expansion and rapid organic growth were the two major forces that drove the

company’s rapid development over the past few years. We believe Sun Art enjoys long-term competitive advantages, especially

given the company’s outstanding site selection capability, product-differentiation strategy and understanding of consumers’ taste

in different regions.

The growth in China’s hypermarket sector is still far from the peak. We expect hypermarkets in China to enjoy 17.8% CAGR in

sales volume over 2011-15. The market experienced explosive growth over 2000-10, with sales surging from only RMB18 billion in

2000 to RMB445 billion in 2010, or by a CAGR of 38%. Hypermarket operators’ focus will gradually shift from tier-one and tier-two

cities to tier-three to tier-five cities in the next few years. Most of the hypermarkets that Sun Art plans to open are in non-tier-one

cities. Sun Art has identified 155 locations to open hypermarkets over the next three years, out of which 20% are in tier-two cities,

48% in tier- three, 20% in tier-four, and 12% in tier-one and tier-five cities.

The hypermarket industry will become more concentrated, with industry leaders consolidating their strength. The five largest

hypermarket operators in China accounted for 46% of the domestic market in 2001. In contrast, at present, the combined market

share of the five largest hypermarket operators exceeds 96% in the US, UK and South Korea. Industry leaders in China, e.g. Sun

Art, Wal-Mart and Carrefour, have achieved considerable economies of scale. They enjoy advantages in terms of purchasing

costs, timely inventory replenishment and store locations. These advantages make industry leaders more competitive, and can

help create a so-called ‘Matthew effect’ that will continuously benefit these leaders. We believe the concentration ratio of the

industry will rise.

3 numbers to watch

0.5% Gross profit margin 1% Growth in same-store sales 45 No. of newly opened stores in

2012

We assume Sun Art’s gross profit margin will

gradually rise over 2012-14.

Every 0.5% change in the gross profit margin

will affect the net profit attributable to

shareholders for 2012E by 10%.

Stores opened before 2011 contribute around

80% of the company’s sales income.

Every 1% change in the y-o-y growth of

same-store sales will affect net profit

attributable to shareholders for 2012E by 2%.

We expect the company will open 45, 50 and 55

new stores over 2012-14 respectively.



3

Contents

Overview .......................................................................................................................................................... 4

1 Set to benefit from the booming hypermarket sector and the growing concentration ratio ............................................ 4

1.1 No.1 hypermarket operator in China ................................................................................................................................. 4

1.2 Industry wide growth potential and rising concentration ratio to fuel development ........................................................... 5

Catalysts .......................................................................................................................................................... 7

1 Sun Art: an industry leader ...................................................................................................................................................... 7

1.1 Double-drivers: organic and inorganic growth ................................................................................................................... 7

1.2 Long-term competitive advantages ................................................................................................................................. 10

2 Growth in the hypermarket segment is far from hiting a ceiling ........................................................................................ 11

2.1 Modern grocery retailers will gradually replace traditional stores .................................................................................... 11

2.2 Hypermarkets’ sale revenue is estimated to grow at a CAGR of 17.8% during 2011-15 ................................................ 12

3 Leading players will benefit, as the sector is becoming more concentrated ................................................................... 15

3.1 Foreign names dominate currently, but no genuine leader has emerged so far ............................................................. 15

3.2 ‘Economies of scale’: the strong players will become even stronger .............................................................................. 15

Forecasts & Valuation ................................................................................................................................... 17

1 Profit forecasts ........................................................................................................................................................................ 17

1.1 Forecasts ......................................................................................................................................................................... 17

1.2 Sensitivity analysis ........................................................................................................................................................... 17

1.3 Valuation screening ......................................................................................................................................................... 18

2 Risks ......................................................................................................................................................................................... 18

3 Closing notes to the buy-side analyst .................................................................................................................................. 19


Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report Overview 4

Overview

1 Set to benefit from the booming hypermarket

sector and the growing concentration ratio

1.1 No.1 hypermarket operator in China

Sun Art operates hypermarkets under the Auchan and RT-Mart brands. In 2011, the

company operated 230 hypermarkets (45 Auchan stores and 185 RT-Mart outlets) with

12.8% market share. Ten new stores were opened in 1H12, and its retail network

covered 21 provinces and three municipalities. Out of the 230 hypermarkets, 13% are in

tier-one cities, 17% in tier-two cities and 70% in tier-three to tier-five cities.

Exhibit 1: Sun Art’s retail network in China

Source: Company data

Sun Art generated RMB68.08 billion in sales in 2011. Turnover enjoyed a CAGR of 21.65%

over 2008-11, above the industry average of 16.1%. Sun Art’s market share has

gradually risen, growing from only 8.5% in 2005 to 12.8% by 2011. Sales per store

totaled RMB321 million, significantly exceeding that of peers (Exhibit 2).

Xinjiang Uygur Aotonomous Region

Northern China

Southern China

Northeastern China

Central China

Tibet Autonomous Region

Eastern China

Qinghai

Sichuan

Yunnan

Guangxi

Guizhou Hunan

Jiangxi

Hubei

Inner Mongolia

Heilongjiang

Gansu

Shaanxi Henan

Shanxi Hebei

Liaoning

Jilin

Shandong

Anhui

Fujian

Guangdong

Jiangsu

Zhejiang

Hainan

Ningxia

Sun Art, which operates

hypermarkets under the Auchan

and RT-Mart brands, significantly

outperformed peers in terms of

store productivity.



Exhibit 2: Comparison of sales per store among the major retailers in China

Sun Art Retail

C.P.Lotus Carrefour Tesco Yonghui

Superstores CRE

Lianhua Supermarket

Renrenle Commercial

Wumart

Sales of hypermarkets (RMB mn) 66,540 10,000 39,192 13,569 17,732 54,669 16,082 12,092 12,461

The number of stores by end-2011 230 52 203 124 153 509 152 127 127

Sales per store (RMB mn) 321 204 204 125 115 111 109 105 102

Source: Company data, Guosen Securities (HK)

The average y-o-y growth in same-store sales of Sun Art, China Resources, Lianhua

Supermarket, CP Lotus and Carrefour reached 8.2%, 7.6%, 5.2%, 4.8% and 3.7%

respectively over the past four years, indicating Sun Art outperformed peers in terms of

organic growth. Based on our observation, Sun Art’s robust organic growth is mainly

driven by its excellent site selection and product mix. We believe the company can

continue to generate rapid same-store sales growth going forward.

Exhibit 3: Comparison of the y-o-y growth in major retailers’ same-store sales and

CPI y-o-y


We believe the leading hypermarket operators in China will thrive and gain in strength. As

such, highly efficient network expansion is crucial to the long-term prospects of

hypermarket operators. Sun Art has identified 155 locations to open hypermarkets over

the next three years, out of which 20% are in tier-two cities, 48% in tier-three, 20% in

tier-four, and 12% in tier-one and tier-five cities. This means the company will steadily

expand its retail network over the next three years, and most of the stores that it plans to

open are in non-tier-one cities. We believe the company’s store-opening strategy will be

conducive to its future development.

1.2 Industry wide growth potential and rising concentration ratio to fuel

development

The sales of China’s hypermarkets surged from RMB18 billion in 2000 to RMB445 billion

in 2010, or by a CAGR of 37.9%. The number of hypermarkets in China rose from only 96

in 2000 to 3,222 in 2010. Under our base-case scenario, the number of hypermarkets in

China could rise to 5,040, equivalent to an annual increase of 364 over 2011-15 (Exhibit

4). We expect the overall sales in China’s hypermarket industry could reach RMB1 trillion

by 2015, representing a CAGR of 17.8% over 2011-15.

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

2008A 2009A 2010A 2011A

Sun Art Retail China Resources Carrefour

C.P.Lotus Lianhua Supermarket CPI y-o-y

Hypermarket operators’ focus

will gradually shift away from

tier-one and tier-two cities in

terms of store expansion.

We forecast hypermarket sales

in China to reach RMB1 trillion

by 2015, or grow by a 17.8%

CAGR over 2011-15.

Sun Art also topped its peers in

terms of organic growth over the

past four years.



Exhibit 4: Forecast of the no. of hypermarkets in China by 2015

Assumption Bear case Base case Bull case Notes

Total population as at the end of 2015 (million)

1,390 1,390 1,390 Based on the target outlined in the 12th Five-Year Plan

Urbanisation rate as at the end of 2015 (%)

53 55 58 Urbanisation rate of China was 51.3% by the end of 2011

Annual income at BEP per hypermarket (RMB million)

200 200 200

No. of people per household

3.1 3.1 3.1 Based on data released by the China National Bureau of Statistics, the average No. of people per household was 3.1 person in 2010

Purchase frequency per week

1.0 1.0 1.0

Average sales per transaction (RMB)

70 80 90 Data from CCFA showed that average sales per transaction was RMB78 in 2011

The maximum number of hypermarkets that could be opened in China

4,227 5,040 5,947

No. of hypermarkets per 1 million urban citizens

5.7 6.6 7.4

Source: Guosen Securities (HK), CCFA

After many years of intense competition, no hypermarket operator has managed to gain a

dominant market share so far in China. Wal-Mart、Tesco and Shinsegae captured a

market share of 80.5%, 37.5% and 39.4% in the US, UK and South Korea respectively in

2010, while Sun Art, which is the largest hypermarket operator in China, had only 12.8%

market share. Over 2005-10, the combined market share of the five largest hypermarkets

in China grew from 35.8% to 46%, corresponding to an annual increase of 1.3%. We

believe the concentration ratio of the hypermarket sector will continue to increase over

the next few years, with larger operators going from strength to strength.

Exhibit 5: Changes in the combined market share of the five largest hypermarkets

2005 2006 2007 2008 2009 2010

China 38.5% 38.9% 42.1% 44.2% 45.1% 45.1%

Britain 100% 100% 100% 100% 100% 100%

US 95.7% 95.9% 96.0% 96.5% 94.5% 96.1%

S.Korea 81.8% 88.4% 89.9% 97.1% 97.7% 97.9%

Source: Euromonitor

Large companies will become

even stronger.



Stock-price drivers 7

Catalysts

1 Sun Art: an industry leader

Sun Art became the largest hypermarket operator in China in 2011, as it captured a 12.8%

market share. Between 2005 and 2011, the market share of Wal-Mart and China

Resources increased by 2.8% and 3.8% respectively, while that of Carrefour declined by

1%. In contrast, Sun Art’s market share grew 4.3% during the same period.

Exhibit 6: Changes in market share of the four largest

hypermarket operators in China

Exhibit 7: Market share of hypermarket operators in 2011

Source: Euromonitor Source: Company data

1.1 Double-drivers: organic and inorganic growth

Sun Art’s turnover totaled RMB37.85 billion in 2008. By 2011, the turnover surged to

RMB68.08 billion, representing a CAGR of 21.6%, which is significantly higher the

industrial average of 16.1% (Exhibit 8). The increase in Sun Art’s market share was

mainly driven by rapid network expansion.

1) Sun Art accelerated retail network expansion over 2008-11, opening 125 stores

within four years. As of June 2012, the number of stores the company operated

reached 240. In comparison, Carrefour and Wal-Mart opened 89 and 145 new

stores during the same period respectively. Sun Art managed to expand its market

share despite the fierce competition.

2) New stores can contribute profit to Sun Art soon after they open for business. The

average sales income per store of the 27 new stores the company opened in 2008

and the 24 stores it launched in 2009 were RMB55 million and RMB58 million

respectively during the first year of business, and the amount exceeded and

approached RMB200 million respectively for the second year.

6%

8%

10%

12%

14%

2005 2006 2007 2008 2009 2010 2011

Sun Art Retail Wal-mart(including Trust-Mart) China Resources Enterprise(CRE) Carrefour

12.8%

11.2%

10.1%

8.1%

3.8%

3.5% 2.9% 2.9%

2.8%

2.3%

39.6% Sun Art Retail Wal-mart CRE Carrefour Bailian group A Best Tesco Yonghui Superstores C.P.Lotus Renrenle Commercial Others

Sun Art’s market share rose 4.3%

over 2005-11 vs a decline of 1%

by Carrefour during the same

period.

Sun Art managed to expand its

market share despite the fierce

competition from the likes of

Carrefour and Wal-Mart.




Exhibit 8: Sun Art’s sales revenue (2008 – 2011) Exhibit 9: No. of new stores by Sun Art (2008 – 2011)

Source: Company data, Euromonitor Source: Company data

Among Sun Art’s 240 stores, 45 are under the Auchan brand and 195 are RT-Mart outlets.

Its retail network covers 21 provinces and three municipalities.

Sun Art has much fewer stores than China Resources (00291.HK) (including Suguo) and

Wal-Mart (including Trust-Mart), which operate 507 and 370 outlets respectively.

However, Sun Art enjoyed the highest sales per store of RMB320 million in 2011, versus

other hypermarkets of all below RMB200 million, except Carrefour and CP Lotus (slightly

exceeding RMB200 million). In addition, Sun Art’s turnover per square metre totaled

RMB36,500 in 2011, 23% higher than the industry average (RMB29,600).

Exhibit 10: Peer comparison of sales per store

Sun Art Retail

C.P.Lotus Carrefour Tesco Yonghui

Superstores CRE

Lianhua Supermarket

Renrenle Commercial

Wumart

Sales of hypermarkets (RMB mn) 66,540 10,000 39,192 13,569 17,732 54,669 16,082 12,092 12,461

The number of stores by end-2011 230 52 203 124 153 509 152 127 127

Sales per store (RMB mn) 321 204 204 125 115 111 109 105 102


Organic growth is crucial to the continuous long-term growth for hypermarket operators.

Sun Art’s same-store sales grew by 6.8%, 5.6%, 11.4% and 8.8% y-o-y for 2008/09/10/11

respectively. The company’s organic growth obviously enjoyed stronger momentum

compared with peers, as the average growth in same-store sales for Sun Art, China

Resources (00291.HK), Lianhua Supermarket (0980.HK), CP Lotus (0121.HK) and

Carrefour (CA:FP) was 8.2%, 7.6%, 5.2%, 4.8% and 3.7% respectively during the past

four years.

The growth in same-store sales is subject to economic conditions, the CPI, per capita

disposable income and product mix. We believe Sun Art’s organic growth is mainly driven

by its advantages in store-site selection and product-mix optimisation, which constitute its

core competency. We expect the company to maintain relatively rapid growth in

same-store sales going forward.

37,852

45,394

56,168

68,084

20%

24%

21%

13%

17% 18%

0%

5%

10%

15%

20%

25%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2008 2009 2010 2011

RM

B m

illio

n

Sun Art Retail's sales revenue (RMB mn, LHS) The y-o-y growth in Sun Art Retail's sales revenue(RHS）

The y-o-y growth in the total revenue of the industry (RHS)

105

27

24

28

45

0

50

100

150

200

250

300

07A 08A 09A 10A 11A

Sun Art’s organic growth was

above the industry average,

mainly due to its store-site

selection and product-mix

optimisation.

Sun Art’s sales per store in 2011

was RMB320 million,

considerably above most peers

of below RMB200 million.




Exhibit 11: Peer comparison of growth in same-store sales


The company’s gross profit margin and EBIT margin were 18.5% and 4.3% respectively

in 2011, better than industry average. According to statistics from the China Chain Store

and Franchise Association, the average gross profit margin of the hypermarket sector in

China was only 12.9% in 2011.

Its gross profit margin increased gradually from 17.1% in 2008 to 18.5% in 2011 (up

about 0.46ppt per annum), as the company continuously expanded its business

operations during the past few years.

We noted that the company maintained stable profitability during 2008-2011, when a

large amount of new stores were opened, as its EBIT margin was 4.0%-4.4% during that

period. It showed the company’s strong competitive edges in store-site selection and

operation & management.

Exhibit 12: Peer comparison of gross profit margin Exhibit 13: Peer comparison of EBIT margin

Source: Company data, Wind Source: Company data, Wind

The company has selected 155 sites for new store openings in the coming three years,

out of which 20% are in tier-two cities, 48% in tier-three, 20% in tier-four, and 12% in

tier-one and tier-five cities. These new hypermarkets will ensure expansion of its retail

network in the next three years. As most of its new hypermarkets are located in tier-2 to 5

cities, we believe the company has adopted a wise store-opening strategy because:

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

2008A 2009A 2010A 2011A

Sun Art Retail China Resources Carrefour

C.P.Lotus Lianhua Supermarket CPI y-o-y

5%

10%

15%

20%

25%

2008 2009 2010 2011

Sun Art Retail Wumart

Lianhua Supermarket Renrenle Commercial

Yonghui Superstores

0%

1%

2%

3%

4%

5%

6%

2008 2009 2010 2011

Sun Art Retail Wumart Lianhua Supermarket Renrenle Commercial Yonghui Superstores

Sun Art has selected 153 sites for

new hypermarkets. This will

ensure its growth in the coming

three years, as the company has

adopted a sound store-opening

strategy by focusing on tier 2-5

cities.

Sun Art’s profitability is in the

upper range of the industry

average and its gross profit

margin is expected to continue to

rise going forward.




1) The hypermarket segment in tier-1 cities has become saturated, and tier-2 and

smaller cities will be major markets for hypermarkets over the next few years. We

believe there is considerable potential in tier-2 and smaller cities for the company to

tap into, as the growth in GDP and per capita disposable income in these cities are

much more rapid than tier-1 cities after many years of industrial transformation.

2) The rental cost and wages in tier 2-5 cities are relatively lower than other cities.

Sun Art has established distribution centers in eastern, northern and southern China.

This will ensure strong logistics support for the rapid expansion of its retail network.

1.2 Long-term competitive advantages

We believe Sun Art enjoys long-term competitive strengths, as the company has the

capability to select sites for new stores, differentiate its product mix from its peers and

understanding customers’ needs.

1. Site selection: We believe selecting the appropriate sites is crucial to the success

of hypermarkets.

Generally speaking, one needs to take into consideration the population density,

customer flow and vehicle traffic, accessibility, development trends and prospects

when selecting sites for hypermarkets. Hypermarket operators’ site selection

capabilities diverge to some extent, but we believe the company enjoys strong

advantages in site selection and it has a unique perspective on it.

According to publicly disclosed information, Carrefour shut down two stores,

Lianhua Supermarket six stores, and Yonghui Superstores and Renrenle

Commercial Group one store each in 2011. However, Sun Art has only closed one

store since 1988, when it opened the first store in Shanghai, and it has not shut

down any stores since 2008.

2. Competitive differentiation: based on our observation, although there are various

brands in the market for the same type of products, RT-Mart usually chooses

medium to low-end products, which are not sold in other hypermarkets. Therefore,

the company, to some extent, avoids direct competition with Carrefour and Wal-Mart.

We believe this strategy is working in China, as Chinese customers’ brand

awareness and brand loyalty are relatively low. According to a report on consumer

behaviour in China by Bain & Company and Kantar Worldpanel covering 26 types of

fast-moving consumer goods (including four major categories: beverage, packaged

food, personal and household care products), customers usually tend to try more

brands or choose various brands for the same kind of product, when their frequency

of buying that type of product increases.

3. Understanding customers’ needs: identifying the marketable products has

material impact on hypermarket operators’ performance. Given China’s vast

geography, selecting products that cater to local customers’ taste is crucial, as

consumers in each region have different consumption preferences in terms of food

flavours and household products etc. Tesco entered the Chinese market in 2004, but

management conceded in its 2011 annual report that it was still vital for Tesco to

improve its understanding of customers’ taste in different regions in China.

We believe careful site selection,

product differentiation and deep

understanding of customers’

taste are key attributes for Sun

Art to outperform peers amid

fierce competition.

Understanding the distinct

differences in purchasing habits

and taste of consumers in

different regions of China is

crucial for the success of

hypermarket operators.




Leveraging off its advanced IT and operation management systems, which have

programs to monitor purchases, sales and inventories, Sun Art can better cater to

consumers’ needs by adjusting its product mix in a timely manner.

2 Growth in the hypermarket segment is far from

hiting a ceiling

2.1 Modern grocery retailers will gradually replace traditional stores

In China, the grocery retail sector can be divided into modern retailers (including

hypermarkets, supermarkets and convenience stores) and small traditional stores

(including grocery stores, farmers’ markets, food/beverage/tobacco specialty stores and

newspaper stands) in terms of sales channels. Driven by urbanisation and increase in

per capital disposable income, modern retailers accounted for 62% of total grocery sales

revenue in 2011, up considerably from just 15% in 2005. This indicates that the modern

grocery retail segment has become the major growth driver for the sector.

Exhibit 14: Changes in the sales proportion of modern sales channels to

traditional sales channels in the grocery retail sector

Source: Euromonitor

Traditional grocery retailers do not have other obvious advantages besides convenience

and flexible pricing, in our view. We believe the share of sales of the modern grocery

retailers versus the traditional operators in China will rise, as per capita disposable

income, food-safety awareness and the penetration rate of cars in China are all

increasing. This proportion in developed countries exceeded 80% in 2011; however, in

China the share was still small even compared to Japan and South Korea, where habits

and customs are similar to China. Euromonitor forecasts this proportion in China will

reach 68.7% in 2016.

15%

60% 69%

85%

40% 31%

0%

20%

40%

60%

80%

100%

2000 2010 2015

Modern sales channel Traditional sales channel

Modern retailers in China are

forecast to account for 68.7% of

grocery sales by 2016.

Modern retailers accounted for

62% of total grocery sales in

China in 2011, up considerably

from only 15% in 2005.




Exhibit 15: Sales contribution from modern sales channels by country in 2011

Source: Euromonitor

2.2 Hypermarkets’ sale revenue is estimated to grow at a CAGR of 17.8%

during 2011-15

The modern grocery retail segment in China experienced explosive growth over the past

10 years. By segment, the sales revenue from hypermarkets increased at a CAGR of

37.9% from RMB18 billion in 2000 to RMB445 billion in 2010. Its rapid growth in the past

10 years was mainly driven by “inorganic growth” – retail network expansion. Carrefour

and Wal-Mart entered the Chinese market in 1995 and 1996 respectively, and China

gradually entered ‘the Age of Hypermarkets’ since then. After 10 years of development,

the number of hypermarkets in China had surged from 97 in 2000 to 3,222 in 2010.

Exhibit 16: Sales revenue of modern grocery retailers Exhibit 17: The growth in sales revenue of the modern grocery

retail sector by segment (2000-10)

Source: Euromonitor Source: Euromonitor

The growth in hypermarkets’ sales revenue was much more rapid than convenience

stores (23.3% y-o-y) and supermarkets (22.3% y-o-y) during 2000 to 2010. But as at the

end of 2010, hypermarkets’ sales accounted for only 23.4% of the total sales of modern

grocery retailers. The figure was less than half of South Korea’s, the UK’s and France’s,

and also less than 35.5% of the US. Based on comparison among countries, we estimate

the proportion of hypermarket’s sales revenue to the total sales revenue of modern

grocery retailers is likely to further increase.

87.4% 87.4% 86.5% 86.4%

76.1% 73.4%

61.7%

50%

55%

60%

65%

70%

75%

80%

85%

90%

France UK Germany U.S.A Japan Korea China

8%

10% 11%

7%

8%

10% 9%

9% 9% 8%

0%

2%

4%

6%

8%

10%

12%

0

1,000

2,000

3,000

4,000

5,000

6,000

20

05

20

06

20

07

20

08

20

09

20

10

20

11

F

20

12

F

20

13

F

20

14

F

20

15

F

RM

B b

illio

n

Sales (RMB billion) Y-o-y sales growth (%)

37.9%

23.3% 22.3%

12.0% 8.5%

-0.1% -0.3% -10%

0%

10%

20%

30%

40%

Hyp

erm

ark

ets

Con

ve

nie

nce

Sto

res

Su

pe

rma

rke

ts

Fo

od

/Dri

nks/T

ob

acco

sp

ecia

lists

To

tal g

roce

ry

reta

il sa

les

Ind

ep

en

de

nt sm

all

gro

ce

rie

s

Oth

er

gro

ce

ry

reta

ilers

Hypermarket sales in China

surged to RMB445 billion in 2010,

from RMB18 billion in 2000.




Exhibit 18: The sales contribution from various modern grocery retail segments

Segments China U.S.A Japan Korea Britain France Germany

Hypermarket 23.4% 35.5% 0.0% 59.8% 51.6% 48.1% 21.9%

Supermarket 73.8% 42.3% 59.0% 23.6% 25.1% 38.0% 31.9%

Convenience store 2.0% 2.6% 40.9% 16.5% 16.3% 3.2% 0.4%

Discount stores 0.2% 2.9% 0.0%

3.7% 9.6% 40.2%

Others 0.7% 16.7% 0.1% 0.1% 3.3% 1.1% 5.7%

SUM 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Source: Euromonitor

As at the end of 2010, the number of hypermarkets per 1 million population in the urban

areas of China was 4.8, which was far less than 25.8 France and 12.3 in the US. This

number was close to that in South Korea in 2001. Therefore, we believe there will still be

ample room for growth for hypermarkets in China in the next few years, mainly driven by

urbanisation, increase in per capital disposable income and the growing penetration rate

of cars.

Exhibit 19: The no. of hypermarkets per 1 million population in urban areas

By end-2010 No. of hypermarkets No. of hypermarkets per

million urban citizens

France 1,570 25.8

US 3,810 12.3

Korea 368 9.9

China 3,222 4.8

Source: Euromonitor, the National Bureau of Statistics

The urbanisation rate in China exceeded 50% for the first time in 2011, and the urban

population increased by 190 million from 2002 to 2011. According to the 12th Five-Year

Plan, China’s population is estimated to reach 1.39 billion by 2015. Assuming the

urbanisation rate is 55% in 2015, the urban population in China will increase by 74 million

from 2011 to 2015. Compared with standard supermarkets (＜2,500 sq m), hypermarkets

need more customer traffic to stay profitable. Increase in the urban population will help

expand the room for hypermarket growth.

Generally speaking, one hypermarket can effectively cover a circular area with a

diametre of 2-3 kilometres, but its effective coverage could be increased by providing

shuttle bus services. Besides, the rising penetration rate of cars in China will also help to

further expand supermarkets’ coverage.

The penetration rate of

hypermarkets in China remains

low versus the likes of the US,

France and even South Korea.

Urbanisation, increase in per

capital disposable income and

growing penetration rate of cars

are the major growth drivers for

hypermarkets in China.




Exhibit 20: The urbanisation rate in China Exhibit 21: The private car population in China

Source: the National Bureau of Statistics Source: Wind

Under our base-case analysis, the sustainable number of hypermarkets in China is 5,040,

which means 364 new hypermarkets will be opened each year during 2011-15. We

estimate the number of hypermarkets per 1 million population at the end of 2015 will be

6.6, which implies that each hypermarket will be supported by a population of 150,000,

basically in line with the industry average of 100,000-150,000 per hypermarket.

Assuming a sales CAGR is 17.8% during 2011-15, we forecast the hypermarket industry

in China will become a RMB1 trillion market by 2015.

The hypermarket segment in tier-1 cities has become largely saturated, and tier-2 and

smaller cities will be major markets for hypermarkets in the next few years. The growth in

GDP and per capita disposable income in these cities are much more rapid than in tier-1

cities after many years of industrial transformation in China. According to data from the

National Bureau of Statistics, there were at least 165 tier-2 and smaller cities in China in

2011, whose GDP per capita exceeded US$3,000. We estimate the hypermarket

segment in China can still maintain strong growth momentum going forward.

Exhibit 22: Forecast of the no. of hypermarkets in China in 2015

Assumption Bear case Base case Bull case Notes

Total population by end-2015 (million) 1390 1390 1390 The target of the 12th Five-Year Plan

Urbanisation rate by end-2015 53% 55% 58% Urbanisation rate of China was 51.3% by 2011 end

Breakeven annual income per hypermarket (RMB million) 200 200 200

Average household size (person) 3.1 3.1 3.1 Based on China National Bureau of Statistics data, the average size of a household was 3.1 person in 2010

Purchase frequency per week 1.0 1.0 1.0

Per purchase amount (RMB) 70 80 90 Data from CCFA show that per purchase amount of each customer was RMB78 in 2011

The maximum number of hypermarkets that could be opened in China

4227 5040 5947

The number of hypermarkets per million urban citizens 5.7 6.6 7.4

Source: Guosen Securities (HK), CCFA

39% 41% 41%

43% 44%

46% 47%

48%

50% 51%

30%

35%

40%

45%

50%

55%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

32.4

38.9

46.2

70.0 72.1

0

10

20

30

40

50

60

70

80

2Q07 2Q08 2Q09 2Q10 2Q11

Million

We estimate the hypermarket

industry in China to become a

RMB1 trillion market by 2015




3 Leading players will benefit, as the sector is

becoming more concentrated

3.1 Foreign names dominate currently, but no genuine leader has

emerged so far

The hypermarket segment in China is basically dominated by foreign names, as the

combined market share of Sun Art, Wal-Mart, Carrefour, Tesco and CP Lotus totaled 37.8%

in 2011. China Resources (00291.HK) increased its market share from 6.3% in 2005 to

10.1% in 2011 through a series of acquisitions, while the market share of major domestic

players, such as Bailian Group, A best and Yonghui Superstore, are all below 4% in 2011.

Despite many years of development and competition, no genuine industry leader has

emerged in China yet. The top hypermarket operator in the US, UK and South Korea

were Wal-Mart, Tesco and Shinsegae respectively, whose market shares amounted to

80.5%、37.5% and 39.4% respectively in 2010. However, the top hypermarket operator in

China, Sun Art, had only 12.8% market share in 2011 (Exhibit 23).

Exhibit 23: Market share of hypermarket operators in China in 2011

Source: Euromonitor

3.2 ‘Economies of scale’: the strong players will become even stronger

The top five hypermarket operators in China increased their market share from 35.8% in

2005 to 46% in 2011, up 1.3ppt on average each year.

Exhibit 24: Growth of the top five hypermarket operators’ market share in China

Source: Euromonitor

12.8%

11.2%

10.1%

8.1%

3.8% 3.5% 2.9% 2.9%

2.8%

2.3%

39.6% Sun Art Retail

Wal-mart

CRE

Carrefour

Bailian group

A Best

Tesco

Yonghui Superstores

C.P.Lotus

Renrenle Commercial

Others

38.5% 38.9%

42.1%

44.2%

45.1% 45.1%

46.0%

38%

39%

40%

41%

42%

43%

44%

45%

46%

2005 2006 2007 2008 2009 2010 2011

Major domestic hypermarket

operators accounted for less than

4% of market share in 2011.




We believe the hypermarket sector will become more concentrated in the next few years,

and the strong will become even stronger, mainly as:

1) In 2010, the top five hypermarket operators in the UK monopolised the market and

the top five in the US had as much as 96.1% market share. Besides, the market

share of the top five operators in South Korea reached 81.8% as early as 2005. As

such, the hypermarket sector in China is not highly concentrated compared to other

countries.

Exhibit 25: Changes of the top 5 hypermarket operators’ market share by country

2005 2006 2007 2008 2009 2010

China 38.5% 38.9% 42.1% 44.2% 45.1% 45.1%

Britain 100% 100% 100% 100% 100% 100%

US 95.7% 95.9% 96% 96.5% 94.5% 96.1%

S.Korea 81.8% 88.4% 89.9% 97.1% 97.7% 97.9%

Source: Guosen Securities (HK)

2) Economies of scale: the larger a hypermarket’s business scale is, the stronger its

bargaining power will become – i.e. more favourable terms (lower prices and more

timely delivery). This allows the retailer to offer products of a higher quality at lower

prices to attract more consumers. This in turn would boost revenue and profitability,

further expanding operation scale.

3) In terms of the industry chain, the grocery retail sector offers various types of

products, and there are a large number of brands available even for the same kind

of product. The grocery suppliers/distributors usually do not have very strong

bargaining power, and their scales are not very large. This situation will normally

help the large grocery retailers to consolidate their leading position.

The hypermarket sector in China

will become increasingly

concentrated in the next few

years.



Bringing it together 17

Forecasts & Valuation

1 Profit forecasts

1.1 Forecasts

We forecast operating revenue will be RMB80 billion, RMB95 billion and RMB113.7

billion for 2012/13/14 respectively; its profit attributable to shareholders will be RMB2.5

billion, RMB2.9 billion and RMB3.6 billion for 2012/13/14 respectively; and its EPS will be

RMB0.263, RMB0.303 and RMB0.378 for 2012/13/14 respectively.

Exhibit 26: Earnings forecasts

Item 2012E 2013E 2014E

Revenue (RMB mn) 80,069 95,024 113,706

y-o-y chg (%) 17.4 18.5 19.6

Pre-tax profit (RMB mn) 3,742 4,315 5,380

y-o-y chg (%) 32.8 15.3 24.7

Profit attributable to shareholders (RMB mn) 2,507 2,891 3,604

y-o-y chg (%) 56.4 15.3 24.7

EPS (RMB) 0.263 0.303 0.378


1.2 Sensitivity analysis

We believe Sun Art’s profits attributable to shareholders are the most sensitive to its

gross margin and growth in same-store sales. Its gross margin continued to pick up over

the past few years, and we estimate it will increase gradually in the coming three years

with the expansion of its business. We conducted sensitivity analysis on the gross profit

margin (excluding rental income) and growth in same-store sales and its profit

attributable to shareholders (Exhibit 27-28).

Exhibit 27: Sensitivity analysis on its gross profit margin (excluding rental income)

& growth in same-store-sales and its profit attributable to shareholders (RMB mn)

Gross profit margin（assuming benchmark for gross profit margin is 19%）

18% 18.5% 19% 19.5% 20%

Growth in same-store sales (%)

2.3 1,876 2,134 2,391 2,649 2,906

3.3 1,930 2,190 2,449 2,709 2,968

4.3 1,984 2,245 2,507 2,769 3,031

5.3 2,038 2,301 2,565 2,829 3,093

6.3 2,091 2,357 2,623 2,889 3,155

Source: Source: Guosen Securities (HK)




Exhibit 28: Sensitivity analysis on its gross profit margin (excluding rental income)

& growth in same-store sales and its profit attributable to shareholders (%)

Gross profit margin（assuming benchmark for gross profit margin is 19%）

18% 18.5% 19% 19.5% 20%

Growth in same-store-sales (%)

10.0 -25% -15% -5% 6% 16%

5.0 -23% -13% -2% 8% 18%

0.0 -21% -10% 0% 10% 21%

-5.0 -19% -8% 2% 13% 23%

-10.0 -17% -6% 5% 15% 26%


Based on our sensitivity analysis, gross profit margin is the most important growth driver

for Sun Art’s 2012E results. Every 0.5ppt change in its gross profit margin will have a 10%

impact on its 2012E profit, while every 1ppt change in same-store sales will only impact

its 2012E profit by 2%.

1.3 Valuation screening

The counter is trading at a prospective PE of 31.9x and 27.7x for 2012/13 respectively,

much higher than that of peers (Exhibit 29). But given Sun Art’s leading position in the

industry and its growth potential, we forecast a prospective PE of 31.0x, which

correspond to a target price of HK$11.5, representing 12.1% upside potential. We initiate

coverage with a “BUY” recommendation.

Exhibit 29: Valuation comparison

PE 2011A 2012E 2013E

Sun Art Retail (6808.HK) 42.4 31.9 27.7

Lianhua Supermarket (0980.HK) 10.2 11.3 10.5

Wumart Stores (1025.HK) 23.6 20.5 17.6

China Resources Enterprise (0291.HK) 21.2 21.3 19.6

Beijing Jingkelong Company (0814.HK) 7.2 6.2 5.3

Aeon Stores (0984.HK) 12.6 22.4 17.2

Springlan International (1700.HK) 13.9 12.0 10.5

Average 18.7 18.0 15.5

Source: Sun Art’s data is from Guosen Securities (HK), and other statistics are from

Bloomberg

Closing price at August 17, 2012

2 Risks

Macroeconomic risk: the company faces considerable pressure, as economic growth

in China continues to slow and disposable income is declining.

Policy risk: The Ministry of Commerce, the National Development and Reform

Commission and other ministries jointly issued rules and regulations on how much

major retail enterprises should charge their suppliers. The company’s performance

will be negatively affected, if it is banned from charging suppliers or if it’s ordered to

reduce charges going forward.

Industry risk: we should not overlook the impact from online shopping on physical

retail stores. That said, we believe the impact from online shopping will be limited in




the short term due to relatively higher delivery expenses and smaller business

scales.

Business-model risk: Sun Art is operating two major hypermarkets through the

Auchan and RT-Mart brands in China, and RT-Mart’s presence is much larger than

RT-Mart’s. The company is currently operating the two brands separately. The gap

between the performances of the two brands might widen going forward, so the

company may adjust its structure. As such, its performance might be affected.

The development of Sun Art in the coming three years will be adversely impacted, if

construction of its properties falls behind schedule. The company’s network

expansion is heavily dependent on the progress of the construction of the properties.

Food-safety risk: the company’s brand reputation and performance might be

adversely affected, if it is hit by food-safety scandals.

3 Closing notes to the buy-side analyst

We believe investors might underestimate Chinese consumers’ purchasing power,

which should be reassessed after the government has extended the healthcare and

social security coverage.

We believe investors should not be pessimistic about the outlook for the hypermarket

segment. There is still ample room for hypermarkets to grow in tier-2 and smaller

cities, although the market in tier-1 cities is saturated. Based on our observation, the

grocery retail sector is not highly developed in tier-3 and tier-4 cities. Besides, we

believe hypermarkets will be popular among customers, as: 1) they offer various

high-quality products at low prices; 2) the comfortable shopping environment will

enable hypermarket operators to attract customers; and 3) consumers’ brand

awareness will gradually increase.

We should not underestimate the importance of economies of scale in the

hypermarket segment, where strong retailers will consolidate their position. There are

a large number of suppliers for the same kind of products, given the low entry barrier

of the food manufacturing sector. Thus, the fierce competition among suppliers will

help hypermarket operators to leverage their advantages in their retail channels.

We think the company’s scale is much more important than short-term profit margins.

Sun Art has already overtaken Wal-Mart as the biggest hypermarket operator in

China. We believe its market share will rise gradually in the next few years, given its

robust organic and inorganic growth.

We believe Sun Art is competent to maintain its competitive strengths over the long

term, as the company has the ability to select the right store location (which is highly

critical for capturing the passing trade), differentiate its product mix versus peers and

understand the intricate difference in taste and flavours in different regions across

China.



20

Appendix 1: Income statement

As at Dec (RMB mn) 2008A 2009A 2010A 2011A 2012E 2013E 2014E Note

Sales of goods 37,115 44,445 54,924 66,540 78,131 92,619 110,752 12-14E CAGR at 18.5%

Rental income 737 949 1,244 1,544 1,938 2,405 2,953

Revenue 37,852 45,394 56,168 68,084 80,069 95,024 113,706 12-14E CAGR lower than that in 08-11

Costs of sales -30,763 -36,814 -45,200 -54,227 -63,407 -74,893 -89,339

Gross profit 7,089 8,580 10,968 13,857 16,663 20,132 24,367 Gross profit margin is expected to increase gradually in the coming three years due to economy of scale

Other revenue 259 277 274 414 617 544 579

Staff costs -1,917 -2,383 -3,247 -4,412 -5,514 -6,727 -8,140 Staff-cost-to-income ratio is expected to rise due to the increasing minimum wage

Depreciation and operating lease charges -1,443 -1,770 -2,285 -2,900 -3,500 -4,385 -5,286

Others -2,461 -2,751 -3,236 -4,053 -4,508 -5,233 -6,125

Total operating costs -5,821 -6,904 -8,768 -11,365 -13,522 -16,345 -19,551

Profit from operations (EBIT) 1,527 1,953 2,474 2,906 3,758 4,331 5,395 EBIT margin is expected to above 4.3% in the next three years

Financial expanses -147 -149 -83 -90 -15 -15 -15

Profit after deduction of financial expenses 1,380 1,804 2,391 2,816 3,742 4,315 5,380

Associates and jointly controlled entities 0 0 0 0 0 0 0

Profit before taxation 1,380 1,804 2,391 2,816 3,742 4,315 5,380

Income tax -364 -550 -777 -831 -1,103 -1,272 -1,586 With effective tax rate at 29.7%

Minority interests -336 -443 -583 -385 -132 -152 -190 As at ~5%

Net profit attributable to shareholders of the company

680 811 1,031 1,600 2,507 2,891 3,604 12-14E CAGR of 28.3%

EPS(RMB) 0.190 0.220 0.263 0.303 0.378

Dividend per share(RMB) 0.080 0.079 0.091 0.113 With payout ratio maintain at 30% in the coming three years

Outstanding shares (mn) 211.5 9539.7 9539.7 9539.7 9539.7

Revenue growth (%) 19.9 23.7 21.2 17.6 18.7 19.7

Net interest income/(cost) -94 -69 -33 2 111 139 109

EBIT 1,527 1,953 2,474 2,906 3,758 4,331 5,395

EBITDA 2,244 2,757 3,614 4,372 5,440 6,527 8,135




21

Appendix 2: Balance sheet

2008A 2009A 2010A 2011A 2012E 2013E 2014E Note

Fixed assets 9,763 12,200 14,814 19,015 23,047 27,575 32,623

Goodwill 84 99 99 99 99 99 99

Associate and jointly-controlled entities 0 0 0 0 0 0 0

Rental prepayment 381 469 560 433 528 628 737 Rental payments grow as the company expands its retail network

Other non-current assets 171 166 178 207 337 371 251

Non-current assets 10,399 12,934 15,651 19,754 24,012 28,673 33,710

Inventories 4,930 5,146 7,383 10,259 10,587 13,214 14,199 We expect inventory turnover period to be maintained at 59 days

Account receivable 66 50 131 256 301 357 428

Other account receivable 646 875 1,314 1,238 1,456 1,728 2,068

Other current assets 1,843 1,864 1,912 2,322 2,322 2,322 2,322

Cash 2,630 2,799 3,462 7,517 9,202 7,581 10,915

Current assets 10,115 10,734 14,202 21,592 23,868 25,203 29,931

Accounts payable 7,869 9,081 12,060 15,034 17,972 19,782 24,276 We expect accounts payable turnover period to be maintained at 91 days

Prepayment from clients 2,062 2,727 4,046 5,949 6,996 8,303 9,935 As about 8.7 of revenue

Accruals and other payables 1,241 1,265 1,609 2,442 2,872 3,408 4,078

Construction costs payable 1,110 1,311 1,613 1,691 1,691 1,691 1,691

Short term borrowings 2,330 2,462 2,401 199 199 199 199

Other current assets 666 239 966 384 654 823 1,137

Current liabilities 15,278 17,085 22,695 25,699 30,385 34,206 41,316

Long-term borrowings 349 270 181 0 0 0 0

Other non-current liabilities 92 87 87 85 85 85 85

Deferred tax liabilities 7 34 70 45 45 45 45

Minority interests 1,597 2,187 2,417 378 470 577 710

Non-current liabilities 2,045 2,578 2,755 508 600 707 840

Total equity attributable to equity shareholders of the company

3,191 4,005 4,403 15,139 16,894 18,918 21,441

NAV per share (RMB) 1.59 1.77 1.98 2.25

Outstanding shares (mn) 211.5 9539.7 9539.7 9539.7 9539.7

Capital employed 1,683 3,679 3,777 5,713 8,648 10,580 11,923

Net debt ratio 5.5 Net cash

Net cash

Net cash

Net cash

Net cash

Net cash

We estimate the company will maintain net cash


Appendix 3: Cash flow

2008A 2009A 2010A 2011A 2012E 2013E 2014E Note

EBITDA 2,244 2,757 3,614 4,372 5,440 6,527 8,135

Changes in working capital 481 1,319 1,968 2,183 3,616 490 5,196

Others 0 0 0 0 0 0 0

Cash from operations 2,725 4,076 5,582 6,555 9,057 7,017 13,331

Prepaid income tax -401 -466 -684 -791 -831 -1,103 -1,272

Net cash from operations 2,324 3,610 4,898 5,764 8,226 5,913 12,059

Capital expenditures -3,022 -2,953 -3,808 -5,360 -5,838 -6,875 -7,913

Interest income 53 80 50 92 126 154 127

Sale of assets 50 15 8 22 0 0 0

Others -7 -133 7 -17 0 0 0

Net cash employed in investment activities -2,926 -2,991 -3,743 -5,263 -5,712 -6,721 -7,785

Outstanding shares 158 0 0 7,625 0 0 0

Share buyback 0 0 0 0 0 0 0

Interest expense -147 -149 -83 -90 -15 -15 -15

Dividend paid to non-controlling shareholders 0 -142 -180 -291 -40 -46 -57

Dividend paid to controlling shareholders 0 -257 -315 -1,546 -775 -752 -867

Changes in net bank loans 982 -91 -195 -2,157 0 0 0

Others 80 156 169 189 0 0 0

Net cash from financing activities 1,073 -483 -604 3,730 -829 -813 -940

Net increase in cash and cash equivalents 471 136 551 4,231 1,685 -1,620 3,334

Free cash flow -602 622 1,158 504 2,514 -807 4,273

Free cash flow per share

0.604 0.862 0.620 1.264




22

Information Disclosures

Stock ratings, sector ratings and related definitions

Stock Ratings:

Buy: A return potential of 10 % or more relative to overall market within 6 – 12 months.

Neutral: A return potential ranging from -10% to 10% relative to overall market within 6 – 12 months.

Sell: A negative return of 10% or more relative to overall market within 6 –12 months.

Sector Ratings:

Buy: The sector will outperform the overall market by 10% or higher within 6 –12 months.

Neutral: The sector performance will range from -10% to 10% relative to overall market within 6 –12 months.

Sell: The sector will underperform the overall market by 10% or lower within 6 – 12 months.

Interest disclosure statement

The analyst is licensed by the Hong Kong Securities and Futures Commission. Neither the analyst nor his/her associates serves as an

officer of the listed companies covered in this report and has no financial interests in the companies.

Guosen Securities (HK) Brokerage Co., Ltd. and its associated companies (collectively “Guosen Securities (HK)”) has no disclosable

financial interests (including securities holding) or make a market in the securities in respect of the listed companies. Guosen Securities

(HK) has no investment banking relationship within the past 12 months, to the listed companies. Guosen Securities (HK) has no

individual employed by the listed companies.

Disclaimers

The prices of securities may fluctuate up or down. It may become valueless. It is as likely that losses will be incurred rather than profit

made as a result of buying and selling securities.

The content of this report does not represent a recommendation of Guosen Securities (HK) and does not constitute any buying/selling or

dealing agreement in relation to the securities mentioned. Guosen Securities (HK) may be seeking or will seek investment banking or

other business (such as placing agent, lead manager, sponsor, underwriter or proprietary trading in such securities) with the listed

companies. Individuals of Guosen Securities (HK) may have personal investment interests in the listed companies.

This report is based on information available to the public that we consider reliable, however, the authenticity, accuracy or completeness

of such information is not guaranteed by Guosen Securities (HK). This report does not take into account the particular investment

objectives, financial situation or needs of individual clients and does not constitute a personal investment recommendation to anyone.

Clients are wholly responsible for any investment decision based on this report. Clients are advised to consider whether any advice or

recommendation contained in this report is suitable for their particular circumstances. This report is not intended to be an offer to buy or

sell or a solicitation of an offer to buy or sell the securities mentioned.

This report is for distribution only to clients of Guosen Securities (HK). Without Guosen Securities (HK)’s written authorization, any form

of quotation, reproduction or transmission to third parties is prohibited, or may be subject to legal action. Such information and opinions

contained therein are subject to change and may be amended without any notification. This report is not directed at, or intended for

distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution,



23

publication, availability or use would be contrary to applicable law or regulation or which would subject Guosen Securities (HK) and its

group companies to any registration or licensing requirement within such jurisdiction.



24

Research Coverage (H-Shares)

Analyst Sector Desk line E-mail

Michael Wu Responsible Officer 0086-755-28995338

Albert Xu Quantitative Analysis & Market Strategy 00852-28996158 [email protected]

Peter Cao Property, Hospitality & Gaming 0086-755-61865385 [email protected]

Helena Qiu Healthcare 00852-28998328 [email protected]

Stephy Wong Consumer & Retail 00852-28993141 [email protected]

Todd Yang Food & Beverage 0086-755-61865350 [email protected]

Bill Fan Electronics & Home Appliances 00852-28998331 [email protected]

Eric Qiu Media, Software & Internet 00852-28993120 [email protected]

Steven Lu Oil & Gas 00852-28998327 [email protected]

Ethane Cheng Construction & Building Materials 00852-28998329 [email protected]

Maggie Zheng Furniture & Office Supplies 0086-755-61865397 [email protected]

John Lu Machinery & Transport Equipment 0086-755-61865359 [email protected]

David Lam Coal & Steel 00852-28993130 [email protected]

Richard Gao Non-Ferrous Metals & Futures 00852-28993141 [email protected]

Thomas Zhang Futures & Non-ferrous Metal 00852-28996756 [email protected]

Vivian Fu Power & New Energy 00852-28993143 [email protected]

Dominique Li Textile & Apparel 0086-755-61865341 [email protected]

Franco Hong Department stores & Retail 0086-755-61865379 [email protected]

Sales Contact

Roger Chiman Managing Director +852 2248 3598 [email protected]

Gary Wong Analyst +852 2248 3548 [email protected]

Joe Chan Director +852 2248 3578 [email protected]

Ma Ning Sales Assistant +852 2248 3536 [email protected]

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October 18, 2012 Sun Art Retail (6808.HK) Target price: HK$ 11 · Guosen Securities (HK) Please...

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Transcript of October 18, 2012 Sun Art Retail (6808.HK) Target price: HK$ 11 · Guosen Securities (HK) Please...