2021 results in line with our forecast

Hefei Department Store announced its 2021 results: Revenue rose 0.1% YoY to Rmb6.34bn; attributable net profit grew 32.0% YoY to Rmb181mn, largely in line with our expectation; and recurring net profit increased 15.3% YoY to Rmb95mn. Specifically, revenue gained 9.0% and 2.8% YoY in 1Q21 and 4Q21, but fell 8.2% and 5.0% YoY in 2Q21 and 3Q21. Recurring net profit grew 110.5% and 48.6% YoY in 1Q21 and 4Q21, but declined 18.7% and 190.9% YoY in 2Q21 and 3Q21. Revenue growth improved in 4Q21.

Trends to watch

Revenue remained flat YoY in 2021. Revenue from the firm’s department stores, agricultural products and property business grew 5.9%, 15.8% and 175.3% YoY in 2021, accounting for 36.8%, 6.2% and 4.7% of total revenue. However, revenue from supermarkets decreased 9.9% YoY in 2021, equaling 52.3% of total revenue. The company strengthened marketing and proactively cooperated with brands for its department stores. It introduced 61 key brands and 45 new brands in 2021. We attribute the YoY revenue decline in the supermarket segment to the high base in 2020 amid COVID-19 spread and intensified competition in 2021. The company closed one department store, seven franchised supermarkets, and one electric appliance store on a net basis. It concentrated its resources to enable business transformation and efficiency improvement. The total number of stores was 251 by end-2021, including 25 department stores, 201 supermarkets, and 25 electric appliance stores.

Recurring net profit margin grew 0.2ppt YoY; profitability improved slightly. In 2021, the firm’s overall GM increased 1.9ppt YoY to 30.8%. Specifically, gross margin (GM) of department stores, supermarkets, agricultural products, and property business increased 1.65pp, 0.27pp, 0.55pp, and 9.85pp YoY. The company's GM improved because the share of low-GM supermarkets business declined YoY. In 2021, selling expense ratio fell 0.5ppt YoY to 7.3%, G&A expense ratio rose 0.5ppt YoY to 16.4%, and financial expense ratio grew 0.7ppt YoY to 1.3% due to higher amortized interest expenses under new accounting principles. In addition, attributable net profit rose 0.7ppt YoY to 2.9%, recurring net profit margin increased 0.2ppt to 1.5%, and profitability remained stable in 2021.

Watch outcomes of transformation and innovations. 1) Exploring diverse business models. The firm stepped up efforts to transform cooperation models, improve scenario-based services, and look for new profit models. Joymart (the company’s chain supermarket brand) strengthened proprietary product development and expanded fresh food and dine-in services to more outlets. 2) Enhancing digitalization. Through its “Baida Shopping” WeChat mini program, the company expects consumers to access to multiple services, such as department stores, supermarkets, and wholesale services for agricultural products. The company plans to establish an online platform that integrates shopping, live streaming, and membership services. It expects to integrate businesses and enable client traffic sharing among diversified businesses.

Financials and valuation

We maintain our 2022 EPS forecast of Rmb0.23 and introduce our 2023 EPS forecast of Rmb0.24. The stock is trading at 19.7x 2022e and 19.2x 2023e P/E. We maintain an OUTPERFORM rating and TP of Rmb5.4, implying 23.2x 2022e and 22.6x 2023e P/E, and offering 17% upside.

Risks

Weak consumer demand; fiercer competition; COVID-19 resurgence; tightening policies for the real estate market.