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Edited Transcript of 6808.HK earnings conference call or presentation 7-Aug-19 1:00am GMT

Half Year 2019 Sun Art Retail Group Ltd Earnings Presentation (Chinese, English)

HK Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Sun Art Retail Group Ltd earnings conference call or presentation Wednesday, August 7, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jean Chausse

Sun Art Retail Group Limited - CFO

* Ming-Tuan Huang

Sun Art Retail Group Limited - CEO & Chairman of RT-Mart China

* Sheng-Yu Hsu

Sun Art Retail Group Limited - CFO of RT-Mart China

* Wai Ling Chan

Sun Art Retail Group Limited - Company Secretary

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Conference Call Participants

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* Chen Luo

BofA Merrill Lynch, Research Division - MD

* Dustin Wei

Morgan Stanley, Research Division - Equity Analyst

* Junhao Fan

China International Capital Corporation Limited, Research Division - Analyst

* Xiaopo Wei

Citigroup Inc, Research Division - Director & Head of Asia-Pacific Consumer Research

* Yan Peng

UBS Investment Bank, Research Division - Executive Director & China Consumer Staples Sector Analyst

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Presentation

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Wai Ling Chan, Sun Art Retail Group Limited - Company Secretary [1]

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Good morning, ladies and gentlemen. On behalf of Sun Art Retail Group, I would like to thank you all for joining our 2019 interim results announcement investor presentation. Before we begin, may I introduce to you key management with us here on stage. Here, we have Mr. Peter Huang, CEO of Sun Art; Mr. Jean Chausse, CFO of Sun Art; Mr. Nelson Hsu, CFO of RT-Mart China; and next to me is Ms. Xiaobei Gu, Head of Investor Relations. Not the least, we are very happy today that we have Chiang Yeong-Fang, Mr. Chiang Yeong-Fang, CEO of RT-Mart China, joining our event today. Thank you, Mr. Chiang.

So to make our introduction short. May I pass the time to Peter to start the presentation.

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Chairman of RT-Mart China [2]

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[Interpreted] Ladies and gentlemen, good morning to you. Allow me to use Chinese to do the presentation. Those of you who do not understand Chinese, we will have headphones for you and simultaneous interpretation.

This is the interim results announcement for 2019 of Sun Art Retail Group Limited. The first half exceed management expectations in terms of performance. There are a number of projects, which are ongoing, which we would want to report to you. First of all, B2C business is now on the right trajectory. The model basically is in smooth progression. And what do I mean by that, smooth progression? Well, it means that we are already in operation, and B2B model will continue to grow healthily. And also, restructuring hypermarkets, we have already seen some early results. And also for the integration of the 2 brands, this had been going on very smoothly in the period.

Now next, I will go through these points one by one with you. First of all, we already have a right trajectory for B2C business. By March of 2019, the distribution area for all our stores have been expanded from 3 kilometers to 5. That is to say we had 3 kilometers in the distribution area of all our stores. It's now extended to 5 kilometers. And in June, the daily order per store was more than 700. And at the promotion event on June '18, it had exceeded 1,000.

So from customers' comments and also any negative complaints, these were less than 0.3%. And fresh products account for more than 50% of our online revenue, and our on-time delivery rate is more than 99%. So our fulfillment rate is proving to be strong. And 1-hour delivery to home model has already been successfully adopted, I can say, by Sun Art. And also, in the second half of the year, we will accelerate the expansion of the B2C business.

Next, we will talk about B2B. For B2B operations, it continues to grow. B2B business includes fresh products and covering a full range of products. In the Mainland of China, there is a lot of B2B businesses, and they are concerned with standard products. They rarely cover fresh products. For our Sun Art B2B business, it also includes fresh products. And it is about 20,000 SKUs, which is covering a full range of the products. And all our stores have rolled out B2B business.

And by June of this year, RT-Mart e Lu Fa has more than 500,000 registered clients, and the development of these clients is mostly concentrated within 20-kilometer radius of our stores. The farthest distance is some 100 kilometers. And by the end of the year, the sales of B2B business is expected to increase by 50%. After 2 years of running, I would say RT-Mart e Lu Fa has moved into the first tier of the industry. And next year, we have reason to believe that RT-Mart e Lu Fa will become one of the 10 billion club members tier.

Apart from B2B business, starting from last year, we had started restructuring our hypermarkets. Hypermarkets in Mainland China basically had already reached certain success. And we have restructured our functions, our categories and also our mindset through the offerings and also the displays in the hypermarkets. We have strengthened products suitable for middle to upper tier of customers and also for online requirements.

Our first restructured shop for hypermarket is in Shanghai, and it's 20 years old. After revenue -- after renovation, the store was rejuvenated and had positive same-store sales growth, 10% better than Shanghai stores not yet refurnished. And fresh product sector, in particular, turned in a double-digit same-store sales growth. This is very encouraging indeed.

And this year, we will have about 40 of our stores being renovated. And the main point of the renovation will be to raise the customer experience so as to reinvent the reason for visiting physical stores.

We have gone through the 3 main areas of our business. Apart from this, this year, for our convergence of the 2 brand names, we have also done very good work. And it had been going on very smoothly. We will continue to do so, and that is to smoothen our convergence and deepen our convergence.

The joint operations headquarters was already established and has now been integrated. And in mid-April this year, the upgrade in integration of Auchan store IT systems was completed. And in the first half of the year, we had adjusted our product range for Auchan, store layout and store organization as well as clearing our inventories and integrating our distribution centers.

So we are on the right trajectory. And the future of focus in convergence will be on improving the revenue, gross margin, reducing stores' controllable costs as well as substantially decreasing headquarters expenses.

Next, we will be going into business review. Mr. Hsu, please?

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Sheng-Yu Hsu, Sun Art Retail Group Limited - CFO of RT-Mart China [3]

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[Interpreted] Friends, ladies and gentlemen, good morning to you. I will also be presenting in Chinese. I am going to go through with you the business review expansion status.

First of all, in 2019 first half, we have opened 2 new hypermarket complexes and 1 Frehippo supermarket, and we closed 1 Auchan store. As of end of June, we have 485 hypermarket complexes and 2 Frehippo supermarkets. In July, in Haikou, we also have opened another Frehippo supermarket. So altogether, we have 3 such supermarkets. All our stores cover 233 cities in China and across 29 provinces, autonomous regions and municipalities. We have secured 49 sites to open hypermarket complexes, of which 40 were under construction.

We have 76 Auchan stores and 409 RT-Mart stores. And the gross GFA is over 1.3 million square meters. And if you look at the breakdown for our owned stores, it is about 30% for the GFA breakdown and leased stores is about 70%. As for store number breakdown, self-owned is 22.9%; leased is about 76.7%; and contracted, 0.4%. The hypermarket complexes will continue to increase by about 12, and there will be 5 Frehippo supermarket. If we count He Xiao Ma as well, there will be 10 expanded stores for He Xiao Ma. So that is for the expansion status for you.

And next, let us look at the operating environment of our company. This is a very straightforward chart. So I will just go through this very, very quickly. In terms of the growth of GDP, it had been 6.3% for China. And for the whole year, the projected GDP growth is 6.2% to 6.3%. And for CPI for the first half of 2019, it was 2.2% up year-on-year. For food CPI, it was up 4.7%; nonfood, up 1.6%. For June figures, you can look at the chart here. For food, it is 8.3% and 2.7% for overall CPI year-on-year increase. So that is the macro situation for you.

And if you go to the left-hand bottom, this is the 50 key retailers' sales growth. If we look at the trend, it is a downtrend. There is some pressure. Even though in March to May of the year, there had been some positive growth. But on the other hand, we do see a downtrend for the entire industry. So the pressure is significant.

On the right-hand side, bottom, you will see for the first half for online retail sales growth, it is 21.6% for total retail sales growth in the first half of the year. And online physical product sales is 19.6% compared to end of year last year was 18.4%. So that's 1.2% increase. As mentioned, for this year, the total retail sales is up by over 20%, and we've said that before. And so for retail sales, if we can strengthen the online sales, how can we structure the online sales better to build up the infrastructure and to increase the DNA component for online sales, that becomes important. And Sun Art, we have been leading the way in this regard. In the future, we will be able to sustain our growth.

Next, Jean will be telling us about the financial review. Thank you.

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Jean Chausse, Sun Art Retail Group Limited - CFO [4]

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Good morning, ladies and gentlemen. Concerning the financial review, so if you look for this first half to our revenue, you can see that we have a drop by more than 6% compared to last year. So it can, at first sight, seem alarming. But of course, there is an explanation. You remember, last year, we made an agreement with Suning to give them into consignment of all of our electronics and electronic -- and electric machine in our stores. And we still keep a part of the profit because we share it with them, but we no longer recognize the sales of those electronic and electric machine in our revenue. So that explain the drop.

To enable you to make comparison, that's why we put on the top line called gross sale proceeds. We reinclude the total sales done by Suning in our stores so you can make comparison from 1 year compared to the other. And if you take this line, you can see that we are still positive and that the revenue is still growing as the global sales in our stores is still growing.

In terms of gross profit, gross profit is still going up in RMB and also in percentage. So that's very good. The explanation is this is essentially due to the fact that we have now only one processing entity, one only buying office for the whole company. So we have a better purchasing, bargaining power with our suppliers.

If you look at the EBIT, then we have a second big difference compared to last year. So this year is a year of changes in our accounts. It's the introduction of IFRS 16 for lease accounting. You know that the new rules applies this year, so we have introduced the IFRS for lease accounting. But to enable you to make comparison, we have restated 2018. So the figures you have on this slide are with IFRS 16, both for 2018 and 2019. So you see -- so you can compare when you are comparing to the other, and you see that our EBIT is going up by 3.2%. So that's a very positive trend.

Profit for the period is always up -- is also up. And the profit attributable to shareholder is up. So I consider this year -- this first half year quite positive compared to the same period last year.

Now we should go a bit more into details. So for revenue, I have already explained the difference due to consignment for electronics. So I will not comment again. Concerning gross profit, you see that during the last 8 or 9 years of gross profit, that's growing very steadily year after year. And this time is not an exception. If you compare the first half of 2018 with the first half of this year, we are still in a positive trend. So it shows that we manage year after year to increase our gross margin, which is really very positive for the business.

Also, if you look at operating margin and net profit. Then just a precision on this graph. We were able to recalculate 2018 as if we have had IFRS 16, which wasn't possible to do it for 10 years. So on these 2 baton charts, the figures are even for 2019 without IFRS so you can compare on the long term what are the trends. So you see that in terms of operating margin last year, we had a slight drop compared to the past. But now we are again up in terms of EBIT compared with the same period of last year. And net profit, the same trend.

Now if we have a look to expenses. In RMB, expenses are still slightly going up. But as a percentage of our total sales, they are in reduction, which is, of course, a very positive trend. There are quite a lot of explanation for it. But essentially, we had a stabilization in the increase in labor cost. You can see on the graph that on the very long term, the labor costs were going up here higher as a percentage of revenue, and now it has stabilized.

We have several explanation for this. First, we are still doing a lot of productivity gains in our stores. The number of staff has decreased by 6% compared to last year. So that's one part of the explanation. The second part is the fact that the government has waived part of the social security costs. So we have less social security cost to pay. And also the convergence between Auchan China and RT-Mart China in terms of head office. So we have now only one head office instead of 2. And so we made economy of staff.

After the statement of income, we can say a few words about the balance sheet. So in terms of balance sheet, if you look at working capital. We have slightly more inventories in terms of days versus total of sales. This can be explained through the new convergence between Auchan China and RT-Mart China. Some of the inventories which were in Auchan China are still to be sell -- to be sold. But in the meantime, we have started supplying Auchan China with the supplies from RT-Mart. So you have a period where you have an increase in number of days, but nothing alarming in the long term.

Concerning the net financial position, we have still a very positive situation with a lot of cash on the balance sheet. So that's good. But I would just remind you that, yes, we have RMB 12.8 billion on the balance sheet. But in the meantime, we have more than RMB 11 billion of prepaid card. So part of this money belongs to our customer. That's why we are very cautious with this cash.

In terms of capital expenditure, we have already spent RMB 878 million in terms of CapEx during the first half of this year. Just be careful. We tend to do more investment at the end of the year in order to have our store open or refreshed before Chinese New Year. So just don't double this figure to have an estimation for the whole year. For the year, the total CapEx should be around RMB 3.5 billion globally.

Thank you, and I'll pass it over to Peter for the conclusion.

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Chairman of RT-Mart China [5]

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[Interpreted] Ladies and gentlemen, early in March of the year, we have talked about the 2018 review, and we said that it is the first year for the New Retail optimization and renovation. And 2020 will be the harvest year for New Retail. And we didn't expect that B2B and B2C models had been early in being profitable. That had exceeded our expectations. And also, the restructuring of hypermarket had continued to be successful, and we will continue in this trajectory.

So New Retail renovation and optimization, that will be our main business strategy, as well, continuously deepening the restructuring of our hypermarkets. And also, we will be developing new formats. There are 3 projects, one of which is sharing of inventory, and that is in the future where orders are received for supermarket, we may be delivering the goods for filling in from our shops. That may be one of the new formats, and this will be our future.

And there are 3 points here. And supply chain delivery and also sourcing are all important. And also, we are working with [Taniao] in China. There are 30,000 spaces. They are natural delivery depots for us. So it is a very natural synergy with them. And here, we have some competitive edge over our competitors.

And also, we have the hub format because we find that the customers these days, more and more, they want convenience. They want to be able to buy their fresh products such as vegetables and other fresh products very conveniently. And we do not have stores for RT-Mart in some of the major city centers, and so we have this hub format. This will be another one of our new formats for development.

And another very important business strategy is the deepening of the integration of our 2 banners. We will continue to be steadfast in these 4 business strategies. And next year will continue to be a harvesting year for our New Retail model.

Thank you, everyone.

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Questions and Answers

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Wai Ling Chan, Sun Art Retail Group Limited - Company Secretary [1]

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Thank you, management, for all the presentations. We now move to the Q&A session. We welcome questions from the floor. And please state your name and the company that you represent. We welcome questions in English and Mandarin as well. (foreign language) Yes. May we take the first questions from the floor, please?

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Xiaopo Wei, Citigroup Inc, Research Division - Director & Head of Asia-Pacific Consumer Research [2]

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[Interpreted] Citibank, Wei Xiaopo. Mr. Huang, I have a question for you. This is a different feeling. Last year, we had this new personnel. And also, we see new structure for the Board. And this is a -- we also see that the independent members of the Board have been put into in responsible positions. And also, we are confident about Mr. Huang being the CEO. But of course, your burden will be much bigger. Now just now, Mr. Huang, you have talked about B2B, B2C, restructuring hypermarket and new business formats. And my question is, compared to the early of the year or last year, what will be the quickening of paces among these different business strategies, please?

Second question. For Suning electrical appliances, et cetera, we see some positive figures. What is the positive -- exactly the figures? And also, what is the whole year projections? And early in the year, there was 4.7 billion. And this first half of the year, we see only 800 million. And so what will the entire year be? Will this number be consistent?

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Chairman of RT-Mart China [3]

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[Interpreted] I will answer the first 2 questions, and Nelson will answer the third question. The first question you asked, you are correct in saying that for our business strategies, they will continue to be executed. This year, actually, we wanted to -- for B2C business, we were still thinking that we will be working on it, and only next year will we be profitable. But we didn't know that we are already profitable. So we will, indeed, go faster. By the end of June, the DOPS is 700. By end of year, it will be 1,000. So it will be going up. B2B will also be growing. B2B, we hope by next year, we will be over 10 billion.

And for hypermarkets, as mentioned just now, we already have restructured 2 hypermarkets. And there are 5 to 6 in progress. Next year, we will have Darunfa -- or RT-Mart and also for Auchan continued restructuring. And by next year, we want the pace of restructuring of hypermarkets to quicken because we want there to be a new format hypermarket. Through this 1 year or half year of attempts and trials, we see that we can be pretty confident. The customers, they want a convenient and better consumption experience in the hypermarket. And I went to the Yangpu store recently, and I see a lot of young customers coming into the stores, and the number of customers are also increasing. That is because of the shopping experience.

And we have just only started with this project. In the future, there will be big growth. And how fast will the growth be? Let us not put our aims too high at this moment because we will have to work on it still next year. And next year, we will be adjusting our delivery service. Next year, we may be charging slightly for delivery. Right now, it's free of charge. So it is small collection. Whether it's RMB 2 or RMB 3, we do not know yet. So we are still guessing. But definitely, there will be growth.

As for like-for-likes, it is negative 1 -- just over 1%. And this is mainly because we are still in an integration period and changing period. And a lot of staff of Auchan, for example, are not used to the systems, the new system. As for RT-Mart, it is just even, breakeven. As for the Suning part, it is 4.4% growth, more or less. So last year, for home appliances, we have included Suning in our formula. And we think that this is the right decision because Suning is definitely more professional, very professional in this particular area. In the first half of the year, I would say, it will just even. It is not as good as expected, but at the same time, we are reviewing it, why like-for-like is performing that way.

We see a lot of online orders come from our existing customers. In the past, we have been tracking whether there is any cannibalization and how much overlap is online and offline. We think maybe 20%. So we have been reviewing and reviewing. And I think online customers are actually converted from offline, about 50%, I would say. In the past, our customers have been family unit. And offline, perhaps a parent will be buying offline. As for the young people, they will be buying online or placing the orders online. And how we review the offline purchases? We use the telephone numbers. And this is actually not exactly the best way of looking at it. But on the other hand, that is our guess.

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Sheng-Yu Hsu, Sun Art Retail Group Limited - CFO of RT-Mart China [4]

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[Interpreted] As for CapEx, it is less than expected for a few reasons. At first, we thought that the remodeling of our stores was 60 stores. But in fact, it is about just over 40 stores for renovation or remodeling. And that is RMB 300 million in terms of less in CapEx. And also, we project that there will be 18 stores expansion, but that had fallen short by 6 stores. And therefore, that is another RMB 300 million less in CapEx. And also for automation for our stores, we thought that the speed would have been faster. But by end of this year, 150 stores would have successfully installed the conveyer belt, et cetera. And our original projected was 210 stores. So again, there is less CapEx. So RMB 7.4 billion. We definitely will be deducting RMB 700 million from it. And therefore, it is less in terms of CapEx. That is the reason.

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Chairman of RT-Mart China [5]

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[Interpreted] Let me just supplement on that. We thought that it will be RMB 12 million for renovation of one store. But now looking at the remodeling, the remodeling cost is actually lower. It is less than RMB 10 million in actual fact. And therefore, the CapEx had been lower as a result. And also, as mentioned just now, the speed of our renovation is lower.

But in fact, we have put in all our effort in renovation. But it is not an easy job. We have to renovate in the night time because in the daytime, there are customers in the shop. And also, there are different stories to the shop. So you have to go through the floor boards. You have to go through the floors, the different levels of the building. And that is difficult and not as easy as we originally thought.

But it also means something that is very good. Our competitors will also find it hard to renovate because my team, our team is excellent, very professional, going through the different levels of the building. Do you know there are many, many pipes, many wires going through the ceiling and the floor? To pierce through this is not easy. You have to find spots where there are no wires, no lighting, no conduit. It is really very difficult. We will be renovating 200 stores this year out of the 400-plus stores, and that is already remarkable. And next year, we'll be renovating 100 stores. And therefore, our CapEx had been lower as expected. But that is a good thing as well, lower CapEx in itself.

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Unidentified Company Representative, [6]

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[Interpreted] Next question, please.

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Yan Peng, UBS Investment Bank, Research Division - Executive Director & China Consumer Staples Sector Analyst [7]

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[Interpreted] Christine Peng. I have 3 questions to ask you. The first question about B2C next year profit expectation. We heard Peter saying just now that for this year, you have already found the model for being profitable. So my question is for next year, the management for your B2C projections. What is the profit rate, please? What is the profitability? And what are the assumptions to sustain that kind of profit outlook?

Another related question. I have noticed that you said B2C ticket size is RMB 62 per order compared to RMB 80 offline. There is still a gap there. So I would like to ask about the ticket value. What do you think would be a reasonable and sustainable order level? So that's for B2C.

Another question about rental income. I see for the first half of the year, there had been a rental income 8.8% growth, but off-line traffic is lessening. So what is the reason behind rental income growth and the sustainability of that? Can you analyze these, please?

The third question is an old question. You mentioned just now the hypermarket restructuring. There is a difficulty in structuring of hypermarket, and that is in bazaar and apparel. These 2 are still dropping. What would be your plans for these 2 areas, please?

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Unidentified Company Representative, [8]

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[Interpreted] Okay. These are very important issues for operation. First of all, B2C. Next year, what would be the profitability? Just now, I mentioned that at this point in time, B2C is profitable. Next year, we have charge for delivery. All of this would be profit. Next year, let's say, RMB 2.5 per order. We will have another 3% in profitability. So you can think of it this way. It will be profitable.

You may ask, why are you already profitable? Well, one, our gross margin is higher than expected, 22.5%. But actually, for the first half, it was 24%. So you would ask, why is the gross margin that high? Well, online, it's all packaged goods. And the gross margin in itself is higher. And also, we have a lot of ready-to-eat, ready-to-cook goods. And these are processed goods. And the gross margin there is also higher. So it is higher than expected. This model is good.

And also, our fulfillment order. We thought that the cost for fulfillment was RMB 2.8. But actually, it's RMB 2.7. So our profit will continue to increase. And also, it is 1.6 in terms of the -- our depreciation for each order. So each order had been more profitable all in all and then better than expected. The profitability is better than we had expected. And next year, this will continue to grow.

You asked about ticket size. The ticket size is good. For home appliance, for example, it is RMB 500 or maybe RMB 1,000, closing about RMB 100. So these are bigger ticket items. And for our online business, it is more fresh products, et cetera -- our off-line is more on fresh products, et cetera. So you ask me, what is a reasonable ticket size? Well, we are still attracting new customers at this stage of our development. And the new customers just buy a couple of items because they're still not used to the system yet. Maybe given another half year, this will increase at least to RMB 65, not including tax, RMB 65 per order.

Outside, you see our competitors, they say they have over RMB 70 per ticket order, but that is because they include tax. And next year, there will be an increase, especially if we charge for delivery because they are paying for delivery anyway. They will increase the ticket size.

And also, for like-for-like, it is about 6.2% increase. We expected 8.8%. So that is outside of our expectations. Last year, it was 5-point-something percent. And we thought that -- well, as I mentioned to you, the demand is really very strong still. So that is the reason for our lease income. And for a lot of offline brands, they want there to be -- the online brands, they want there to be offline physical stores as well. So there is a lot of demand, and people are eager for stores. And we still have very few unleased stores.

Now another question about restructuring of our hypermarket. Part of our GFA will be devoted to fresh. So fresh products will increase in terms of GFA, and textile is difficult. As you have pointed out, clothing or textile is more difficult. But we want to increase our orders, and the clothing would still be a bit of an issue. But in the future, for textiles or clothing, it is very competitive in the online market for branded clothing. We want there to be good value for money. And in the future, maybe we will go for brandless clothing.

Some people ask, can we bring in a Japanese clothing or textile brand? We are looking at it. Our team is continually looking at the different offerings in our hypermarket, including clothing.

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Chen Luo, BofA Merrill Lynch, Research Division - MD [9]

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[Interpreted] Mr. Huang. Merrill Lynch, Luo Chen. We have 3 questions -- I have 3 questions for you. The first 2 questions about same-store sales. Now just now, we mentioned for B2C orders by June, it is about 700 average per day. Can you give an estimate for RT-Mart, Tao Xian Da, [Ma Xiao] and different venues, how -- what the number will be? And if it is to reach 1,000 orders next year, where would the growth points come from? And second half, you mentioned you will be -- there will sharing of inventory with Ma Xiao . And given that, are you confident about 1,000 -- reaching 1,000 next year? And also, what part -- what are the components of that?

And also offline part, if I may ask a question. Same-store sales last year, for B2B, B2C, off-line had dropped 5% to 6% perhaps, I would say. So for new business, it is growing. Old business is dropping. And it depends on which is faster in its change. As for the dropping, I think it is already stabilized. Or has it stabilized? Or are you thinking that there are certain risks, for example, in April of last year or the November 11, everybody was buying? But right after that, it dropped significantly. So my question is, how do you contain offline sales drop?

Last question. Next year, you said will be a harvest here, Mr. Huang. How do you define harvest year from financials? For example, from profits, from same-store sales numbers, what do you define as harvest?

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Chairman of RT-Mart China [10]

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[Interpreted] First of all, 700 orders for B2C. The main channel would be 5. One, Tao Xian Da. For RT-Mart, 700 orders or so to date. 300 or 400 come from Taobao. And about 100 to 200 from our own RT-Mart. And the third channel is [KODA] -- is the 3 kilometers extended to 5 kilometers, and that accounts for 100 of the orders. And the other one is -- and the third one is (inaudible). We will be working together with them, cooperating with them this year. 70 orders come from this channel. And (inaudible) that is Tmall supermarket, that would be about 20 to 30 orders. That's a very good question, actually, you raised.

Recently, we have been working on sharing of inventory with Tmall supermarket, that's [Ma Xiao]. And for B2C orders, in the future, they will be able to contribute 200 orders. So that is the growth there. We are still testing right now, but I think even for this month, this system will be going online. So because the technology is not easy, it really is not easy, so we are in this trial period because there are a lot of changeables to Ma Xiao Tmall supermarket. So there are a lot of technical parts which are not easy, and we have had some recent trials. We hope that this month or next month, we will finish, complete all the trials.

Sharing of inventory also includes half-day delivery. 15 kilometers or 20 kilometers distance, we will be providing half-day delivery, not only 1-day delivery. So this also will be increasing our sales. We -- people in the Internet business are always optimistic, but their projection is that there will be huge growth there. These are young people. And now I feel that I'm old because every time the young people talk about projections, they are so optimistic. They are so energetic. But it is good that they're very supportive.

In September, with Ma Xiao , we will have the [Ma Half Day]. That's what they call it. And [Ma 1] is 1-hour delivery. So these -- this kind of delivery service will definitely be able to help us. But of course, they are not rolled out yet. So if they are not rolled out yet, we cannot be raising your expectations too high. So we're not going to talk about this too much.

Now for like-for-like, we think that it is okay because B2B, B2C, they balance out each other. Like-for-like is -- because it is too much. That is why there is this drop. Now if you're in Shanghai, you would know (foreign language). And what is that? It is about community shopping, shopping for fresh products. These are new competitors. Can you really say that they are real competitors? No. But on the other hand, they do take away some of our customers. Maybe out of 200 customers, 2 or 3 customers will be attracted away by these new operations. And also, they have been -- they are subsidized as well.

So our competitors come from all over. In the past, it is Carrefour and some clear competitors. Nowadays, we don't know where the competitors come from. Let's say all of a sudden, in this community, there is this competitor. And it's new. And there are always these new models popping up. People are so creative these days. So you ask me, Peter, will this kind of model be successful? I cannot tell you because these are all subsidized, subsidized by investor money. And they can pop up here and pop up there and take away some of our business.

But on the other hand, they are not sustainable. So if you look at the physical store increase, it is encouraging. But the young people nowadays, young consumers, they really like online shopping. And therefore, offline is indeed under pressure, and that is exactly the reason why we restructure our hypermarket. And this is the right way forward. I have been to the hypermarket. And the -- my staff tell me there are more young customers coming back to the physical store, coming back to our hypermarket. So the customer flow is growing and growing, and it is getting better. And this is a shop manager telling me this.

So for -- also for our fresh products, the Yangpu store is growing significantly. And we also have a deli shop, which is growing by 15% to 20% for fresh products. So we have to be -- we have to know that these are major contributions. And this year, we will be extending and renovating a number of our hypermarkets. And as a result, there will be more sales revenue from them. I am sure of that. And that is the reason why we have this major project.

Next year, harvest year, that was your other question. New Retail, we thought that, that would be harvesting next year, but in fact, this year. And if we charge for delivery, New Retail will be even more profitable. We can already tell you that. As for how profitable it will be, I cannot give you the number here. Of course, you can understand. But you can see that it will be pretty good.

And also, our integration of the 2 brands and also the headquarters cost, it will be decreased by RMB 100 million. And next year, we will come down significantly as well. So the integration of the 2 banners is important. And also, our gross margin is also closing the gap. Next year, you can all expect another harvest year. I would say it's a harvest year. You can surely be able to see that.

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Unidentified Company Representative, [11]

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[Interpreted] Next question, please.

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Junhao Fan, China International Capital Corporation Limited, Research Division - Analyst [12]

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[Interpreted] Fan Junhao. Three questions. First question about Tao Xian Da. Just now, you said that it is already running. But last year, it was loss-making. Can you give us more information about first half? If it is a loss, what exactly is a loss? And how do you see it going future?

Second question about same-store sales. Our net profit is 3.5%, an increase for the first half. And I've been following Yonghui and other supermarkets. I would like to ask for this level, just now you mentioned that you have been raising same-store sales. My question is, do you think that for some of the pricing, to lower the pricing so as to increase same-store sales growth? Can you analyze and comment on that possibility?

Thirdly, about integration of 2 banners. In the first half, we see that as you have mentioned, that there have been some changes to the senior management. And next year or this period of time, what are some of the specifics you've done in integrating the 2 banners. And in integrating, how had we decreased the costs and expenses? And therefore, there can be, let's say, RMB 100 million or RMB 200 million savings coming from the integration. And in the second half, would that be even more in terms of savings?

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Chairman of RT-Mart China [13]

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[Interpreted] Let me answer the last question first, integration. I've already said to the directors, what need to be closed should be closed, what need to be stopped has to be stopped and what had to be changed had to be changed because for some projects, if it's basically loss-making, we delete that. And what need to be closed need to be closed. For example, we have closed 2 shops. By the end of July, we will be closing the second shop. And Sun Art had not been closing that many stores. For that company, which starts W, you know which one, they have closed 100 shops. And there is another company, starting with the letter C, they have closed 60 shops.

And can we cut down on shop closing? Can we turn around some of the stores and make them profitable instead of loss making? But we see that if it is impossible to achieve that, to turn it around, then we close them. So that's what I've been telling the Board, the directors. This year, we may have 1 or 2 or some shops to be stores (sic) [closed]. But I cannot give you the specifics because I give you the specifics, our staff members will get very nervous. So yes, but we will be closing some loss-making stores. And just now, you asked a good question.

The second half, yes, we will see the results in the second half. First half, we have seen some. And the integration effects, integration benefits, will be more evident in the second half. As for Tao Xian Da, you said first half was loss-making. That is actually not true. It is actually profit-making even in the first half. I can tell you that. That also exceeded my own expectation. And originally, it was RMB 1.5 loss per order. But in fact, for the first half, we have already turned it around. It's profit-making.

As for net profit, on the one hand, we want net profit to be higher. But on the other hand, we also want sales to be higher as well. But it is a perpetual balance. As CEO, we always have to balance these 2. So should we push at a certain period of time to increase sales? Or should we go for net profit. That is always a tug of war. But you see that our gross margin had increased by 0.3% for first half. And we have a figure. I don't know whether you've noticed a figure, and that is our expenses ratio. It has come down, and it's come down by 0.1% approximately. And that exceeds our expectation. We thought that delivery cost would increase that. But in fact, our cost control had been very good.

Our EBIT margin should be 0.4% increase. If we have RMB 50 billion in terms of sales, it would be even higher. Well, for our prepaid card, this year compared to last year was about RMB 50 million less. So that is another extra income for us. And there was another point. This year, we have some waste paper. And this year, the paper costs had come down. And that is another RMB 50 million savings. And then there are other areas as well. So altogether, RMB 100 million in terms of savings. So from actual situation, I can say that we are doing pretty well. We are already in a profitable position. A lot of investors say, "Why are you making not so much?" But in fact, I can say 3.5% net margin is pretty good.

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Dustin Wei, Morgan Stanley, Research Division - Equity Analyst [14]

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[Interpreted] Morgan Stanley, Dustin. First of all, B2C orders, 3 kilometers to 5 kilometers, it is 700 orders. So that have been climbing from 100 orders. So does it mean that B2C ceiling will be raised? Next year, if you charge for delivery, how would this impact it? Will it come down in terms of orders? What is your feeling? And for, let's say, how many of the B2C ceiling will be raised?

And secondly, for hypermarket, about 40 stores will be renovated. Can you talk about the location? Is it around Yangpu or some of the core locations? Or are they shops in the third tier cities or where population is not that dense and it is easier for renovation and you would see more same-store sales growth, if you renovate these? So what is your strategy? Are there less well-performing stores you want to renovate first or the other way around? And in -- you've used 1 to 2 years for this strategy. Now just now, you talked about the first half performance. Or are you talking about the -- when you say renovation of source performance, are you talking about the cumulative performance?

And dividend payout. Because you have basically high CapEx projections, but when we look at the first half cash position and minus the loan -- liability from prepaid cards, then for the second half, if we have less CapEx, then perhaps is it possible to increase the dividend? Would the Board approve that, increasing over 44%? And Suning and Carrefour, after they have merged, will there be any change with our cooperating relationship with Suning? Because they also want to go into a hypermarket themselves, right?

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Chairman of RT-Mart China [15]

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Let's talk about same-store sales first. In July, in the RT-Mart, there had been small growth. And Suning and Carrefour situation, that will not affect us. Our relationship with Suning, how can I characterize that? Suning -- Ali is a shareholder of Suning. And why did we sign up with Suning at the time? Our contract with Suning has a guaranteed result for RT-Mart. It is 2017 based. It's based on 2017. And the contract has to be followed by Suning. So for Suning, for every store, they will not be operating or opening their own store against us. And Nelson will be talking about -- answering your third question.

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Sheng-Yu Hsu, Sun Art Retail Group Limited - CFO of RT-Mart China [16]

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As for -- about expansion from 3 kilometers to 5 kilometers, it is about over 10% of our total. But it will be increased to about 30%, extending to over 5 kilometers. So there is a lot of growth -- or room for growth yet. If we assume that there will be delivery charge, we believe that it will be -- it will come to about 700 orders. And beginning of this year, there were 500 orders. And therefore, if we -- on that basis, there will be even higher growth for the entire year.

And also, [Ma Xiao], as I have mentioned, at a Tmall supermarket, given that, there will be even higher growth. And also, we believe that offline customers would increase. And also, delivery charge would also increase our profits. For customers, after they have changed their everyday habit, you can only see that their habit will grow stronger and stronger. And this is the same as in some e-commerce operators.

For hypermarket, you have asked a good question because we also have a tug of war within our heart. So when we renovate, does it mean that all hypermarkets are good for restructuring or renovation? So maybe for mid-to-higher-tier income hypermarkets, we prioritize those. And that had been our strategy. And internally, we are also talking about for the lesser-tier cities, we are still finding the way forward. But they may not need the right hypermarkets to be restructured. So we are still considering.

For Yangpu store, it's been renovated. And for this year, the August time compared to August of last year, if we compare, it's a same month comparison. So it's a month-to-month comparison. Yangpu store have used so much time for restructuring. And we have to use the same amount of time to restructure the other shops? No, because it's already been systemized. It will take just 1 to 2 months. Well, maybe 2 months, 2 months to be conservative. Or maybe 1.5 months will suffice for restructuring of the other hypermarkets. And there's a shop which will be finished, completed restructuring by end of September. So I would say, maybe 1.5 months for restructuring period.

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Chairman of RT-Mart China [17]

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As for our cash, yes, we have sufficient cash. We've always been so. But our shareholder and especially for Ali, for dividend payout, this is their philosophy. People say, Ali, if you have money, if you have cash, grow your business, not necessarily repatriate or share with shareholders because what they think is the appreciation of share value, stock price, not dividend. And so we have been affected by that because if we have money, we should invest in more business growth or acquire business. So that is one thinking.

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Jean Chausse, Sun Art Retail Group Limited - CFO [18]

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Concerning dividend, I, of course, agree with what Peter says. Just 1 or 2 precision. There is a commitment in the shareholder agreement of a minimum of 30% of dividend. At least you can be sure to have at least this level of dividend. For the rest, you look at the last 2 years, we had a 47 -- 45% ratio, and we do not expect any change in the shareholder policy. So the shareholder, as Peter has mentioned, want to give the company all the way to develop and increase on the long term the value of the company.

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Wai Ling Chan, Sun Art Retail Group Limited - Company Secretary [19]

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Due to time constraint, we take the last question from the floor.

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Unidentified Analyst, [20]

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[Interpreted] [Gwang Fa] analyst. I have 2 questions. Our stores in the different tiers of cities, I would like to know for the different tiers of cities, what are the same-store sales performance, please? And Mr. Huang talked about (inaudible), and they are establishing creative formats in the different tiers of cities. So for the different tiers of cities, my question is in their development, what are your answer to these different creative models, formats of retail?

The second question about integration online, off-line, Peter mentioned next year that the orders will be daily 1,000 orders. And it will be over 10% of our total sales, and it is already profitable. In being profitable, if we use other Internet or e-commerce operations, we -- different from other e-commerce operations, we will be controlling the growth for off-line because it would affect our online. That is to say online and offline balance out or affect each other. So is it true that given that, you kept -- or you go slower on online increase because you want to preserve offline?

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Chairman of RT-Mart China [21]

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[Interpreted] Well, you are correct in saying that online demand, this is always true, this will always grow. Online business, we must not give up on that, of course. But at the same time, we don't want all our customers to go online. And no customers coming into our physical store, we don't want that either because it is important, our offline sales as well. And therefore, we think B2C is fine as a model because we provide this as a choice and a service to our customers. So of course, we can't burn money or be loss-making in developing this business. We want to -- we want to provide this choice and service to those customers who have the real need for online buying. Those who want to go off-line can still come to our physical stores. That is our strategy.

As for like-for-like, the lower-tier cities, the like-for-like drop will be lower. And the fiercest competition comes from the first-tier company -- cities like Beijing, Shanghai, Guangdong. All these creative new formats are all in Shanghai and Hangzhou, Suzhou, Guangzhou, et cetera, not so for the lower-tier cities. And that's why for our hubs and also the fresh products, this is the right strategy because there's a lot of entrepreneurship in China. Everybody is so energetic coming up with creative formats of retail.

And our answer is that we have to look at these creative formats because maybe one of these formats will be very successful in the future, and we will have to be ready for them. Maybe one day, if they are not profitable but the format is good, we may actually acquire them. So one day, if they abandon that, as in our hub system, we may stand ready to acquire them if it is indeed a good format. So we have to pay attention to them.

Yes, it is true that customers all want convenience, great convenience. And this is only right for human nature. So for these creative new formats, we are looking into them. And we are trying out some of them. We have RT-Mart Mini. I have not talked to you about that so far today. This is a new format. But this is something that we're discussing internally. When we look at a new format, what do we discuss internally? I would ask our team to create the model, don't be suffering from a fever and just burn money trying out a new model. We don't do that. For any model, let's say, for the B2B or B2C model, we started the first day right. And every actual execution is very close to our original plan. Of course, we will review and adjust. But on the other hand, we think through.

For example, (inaudible), did you know, we always thought that difficulty was that the order size was way too small. People just may buy vegetables, RMB 2, RMB 3. And delivery cost money. So I've always wondered about their profitability. But they told us that they've been doing well. So we have our own model and they have theirs.

For example, our B2C. First, when we first started, we had certain order size and profit margin projections. And we have to be able to at least break even in our planning. And the gross margin turned out to be 20%, and that was pretty good because the orders, the goods, were mainly products were ready-to-eat products. And that's why our margin was higher. But if you sell products which are only gross margin, less than RMB 1 per order, that's not sustainable. So it is after testing that we found that we -- this is a model that we follow, and we have been true to it.

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Wai Ling Chan, Sun Art Retail Group Limited - Company Secretary [22]

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Thank you very much. Thank you for management's detailed explanations, and this comes to the end of our investor presentations today.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]