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Edited Transcript of 6808.HK earnings conference call or presentation 21-Feb-20 1:00am GMT

Full Year 2019 Sun Art Retail Group Ltd Earnings Call

SHANGHAI Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Sun Art Retail Group Ltd earnings conference call or presentation Friday, February 21, 2020 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ming-Tuan Huang

Sun Art Retail Group Limited - CEO & Executive Director

* Sheng-Yu Hsu

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

* Xiaobei Gu

Sun Art Retail Group Limited - Head of IR

* Yigang Fan

Sun Art Retail Group Limited - CFO

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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

* Dylan Chu

CLSA Limited, Research Division - Research Analyst

* Hau-Yee Yan

HSBC, Research Division - Hong Kong and China Consumer Analyst

* Linda Huang

Macquarie Research - Head of Hong Kong & China Consumer Research and Chinese Consumer 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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Unidentified Company Representative, [1]

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Investors, analysts, good morning to you. I am the emcee for this meeting. Welcome to the meeting of Sun Art Retail. We are on the line now. And from the management, we have Mr. Peter Huang, the Chief Executive Officer.

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [2]

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Greetings. Greetings.

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Unidentified Company Representative, [3]

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Yes. And we also have the CFO, Mr. Chris Fan.

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Yigang Fan, Sun Art Retail Group Limited - CFO [4]

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Greetings to you.

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Unidentified Company Representative, [5]

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And also, we have the Chief Financial Officer of RT-Mart China, Nelson Hsu; and we have Ms. Xiaobei Gu, IR Director.

First of all, we would like to ask the Chief Executive Officer of the company, Mr. Peter Huang, to start the presentation.

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [6]

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Ladies and gentlemen, good morning to you. Because of the epidemic, we can only communicate on the line, and I apologize for that.

For 2019, it was a very important year because in 2018, we first started with the transformation of B2C. And also, it was a year, in 2019, a year of rapid increase in terms of our orders. Our original projection, 2020 was the hardest year for B2C business. We didn't expect that for 2019 we had already gone into profitable mode for B2C business. Representing that B2C in terms of the business model for our company is already operating very well. And in particular, for our 1-hour delivery of fresh products, it is also profitable. And this is unique within the industry, and this is still a very good foundation for our future competitiveness.

For B2B business, year-on-year growth is over 50%. And for the hypermarket's restructuring, there is also significant effects. For the non-reformed hypermarkets, there have been significant growth, and fresh products also had double-digit growth. And the double brand integration had very good synergistic effect. So overall speaking, the profit for the year had a double-digit growth. For the full quarter for RT-Mart FL (sic) [RT-Mart LF], there has been positive growth as well. For January until now, for this year, there is also positive growth. So the trend has been very good.

And who would have guessed that the coronavirus has upset our plan, but what is fortunate is that for the new diagnosis outside of the Hubei province has been on the decrease for 16 days consecutive. And also on the 20th of February, there has been an increase to 45 cases. New cases in the country and other provinces are also in the single digit. And also for the Wuhan area, the growth in terms of new cases is also coming down. So we do see some rays of light, but on the other hand, we cannot underestimate the potency of the virus. The local government everywhere is also putting all sorts of measures to stop the spreading of the -- spread of the virus.

Very lucky is that for the hypermarkets that we operate, because they pertain to daily necessities, they continue to be open. For the galleries, because some of them pertain to -- or are selling non-necessity products, in particular, for children, for restaurants and entertainment where people tend to gather, they have stopped operation or suspended because of the epidemic situation. And for the local government, there have been gradual agreements for there to be resumption of businesses apart from restaurant business. And this had partly offset the rental decrease during the period, and this is a big and force majeure situation, which is a risk. But at the same time, this is an opportunity for us. The opportunities knock at the doors only for those who are prepared. At the same time, we see that there have been rapid rise in terms of online orders. And also, it shows that in the past 2 years, our digitalization and also transformation had been significantly successful, and it builds a very good future for our future growth. So opportunity knocks at the doors of those who are prepared.

Yes. Next, we'll have Nelson Hsu talk to us about the operating environment.

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Sheng-Yu Hsu, Sun Art Retail Group Limited - CFO of RT-Mart China [7]

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If you can look at the top-left chart. And we have the growth of the GDP as well as the total retail sales of consumer goods. The black line, if you can look at the black line for 2019, the GDP growth was 6.1%, and the red line is 8%. That is the total retail sales of consumer goods. Compared to the past years, this is a decrease.

As for 2020, we're all concerned about the virus situation and its impact on the GDP. Because we are not experts, so we can only say that we would want to refer to the expert analysis and also the economists on their projections for the year.

If we look at the next chart, top right, this is CPI for 2019 year-on-year growth. For the year, it is a 2.9% growth. For food CPI, it is up by 9.2%. Nonfood CPI up by 1.4%. We noticed that for December, the number is particularly high. CPI was 4.5%, and food was 7.4% and 1.3% for nonfood CPI. And this is because of pork price. Pork, since August, has been increasing significantly. So for third quarter, it was 47.7% increase. Fourth quarter, 108% increase. And also, beef and mutton, because of pork price going up, had also gone up. And it was 21% for beef and 14% price increase for mutton. So pork, beef and mutton and also poultry, it is an upward trend, 0.3%. And that also gives us the number for January 2020. CPI is already at 5.4%. And food is 20.6% up and nonfood 1.6%. And beef and meat and vegetable is up by 10% to 14% and pork increased by 116%. So like-for-like, it has an impact.

Next, let us look at the top -- the bottom-left chart. Downward trend of 50 key retailers' sales growth. For the first 3 quarters, it was negative 0.5%, and this is more or less stable with a slight decrease. That is the situation. Compared to us -- on us, our overall sales growth is 0.5% increase. RT-Mart same period last year comparison is 0.5% growth. So compared to the 50 key retailers' average, our performance is better than that.

The fourth chart, and that is the online physical product sales, it is a total -- of total retail sales in 2019 was up 19.5%. And for physical products sales accounted for online, it is 20.7%, which is in line with our earlier released numbers. But for year-on-year increase, there is a decrease in that growth. So for the future years for online, the percentage will not be as much. What I want to mention is that for 2019 for Sun Art, online is 10% for the full year. For the fourth quarter, it is 17%. We project for 2020, online proportion will be over 20% of the total. So we are already a e-commerce retailer, and we are a flagship operation of companies for online business.

Next page, an analysis of the coronavirus disease and the trend. Top-left chart is the ex Hubei number of new diagnosis per day, and we can see that it has come down to 45 cases. So this trend is a straight line going down. That is the situation. And the top right is the number of new diagnosis per day in Hubei, ex Wuhan. On the 20th, it was negative 266 cases. And there is a dotted line there, and this is because of the statistical compilation change. From the 12th of February, it has been a downward trend since then.

The third chart is the number of new diagnosis per day in Wuhan. From the 19th of February, it was 600-plus. And yesterday, the new number is 319. So that is half of the original number.

And the fourth chart is the number of new diagnosis per day in China. Feb 19 is 390-plus people. So from these trends, we can see that the coronavirus situation has been controlled significantly. We would want this trend to be able to continue. And we, of course, would want to see early arrival of spring with the sun shining and flowers opening, and everything will be growing strongly healthily again.

This closes my report here. Mr. Huang will come back on the business review.

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [8]

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Ladies and gentlemen, let's look at Page 8 of our PPT for 2019. There has been opened 7 new hypermarkets and closed 5 loss-making stores. As of the end of the year December, the group has 486 hypermarket complexes. And with the overall GFA area, with over 1,300 square kilometers and the self-owned is 29.7%; leased, 70%. And the store numbers, self-owned is 22.8%.

Next page, Page 9, our B2C business. The number of users exceeded 33 million. The number of active users exceeded 10 million. 2019 average daily order per store was 640. In November, average DOPS was 880. And in December 800. By the end of December 2019, average ticket size excluding VAT was RMB 64. Double 11 total orders doubled compared to that of last year, and on-time delivery ratio was more than 99.5%. Revenue growth, more than 150%. Fulfillment costs per order was constantly optimized and reduced.

Next page, Page 10, B2B business. The number of users exceeded 530,000. The number of active users exceeded 240,000. Revenue growth was 50%. Ticket size, more than RMB 1,000. E-voucher, Tmall Campus stores and other new initiatives will become the growth points of B2B business. In 2020, revenue of B2B business will continue to grow.

Next, Page 11, concerning hypermarkets. Restructuring the hypermarket includes restructuring our functions, categories and our mindset. In 2019, we have restructured 10 stores. The same-store sales growth of fresh segment has improved double-digit growth. In 2020, we will accelerate the restructuring initiative and upgrade 50 existing stores. Our positioning is for delivering professional, fashionable and value for money and to become experts in the field of fresh and food.

Page 12, deepening our integration of the 2 banners. Our headquarters costs under Auchan banner have been reduced significantly, and gross profit margin has been rising month by month. Benefits of integration has greatly improved. In 2020, we will further deepen the integration, reduce HQ costs, improve revenue and gross profit and enhance efficiency and reduce controllable expenses or costs. Performance of Auchan banner will be further improved in the future.

Next, we will have our CFO, Chris, talk to us about our financial highlights.

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Unidentified Company Representative, [9]

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Thank you, Mr. Huang. We will have Mr. Fan to talk to us about the financial highlights.

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Yigang Fan, Sun Art Retail Group Limited - CFO [10]

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Greetings, everyone. I'm very happy to have this opportunity to report to you the financial highlights for the year.

If you will refer to Page 14. For 2019, our gross sales proceeds compared to last year was an increase of 0.5% to RMB 101,868 million. Because of Suning impact for home appliances, there has been a negative 4%. If we take that off, it is about negative 1.6 -- 1.0%. And gross profit was an increase of 0.3%, and the EBIT is 4.1% to RMB 4,890 million. And the profit for the year had increased 12.8% to RMB 3,045 million. And the earnings per share is RMB 0.3, which is RMB 0.13 sic [RMB 0.03] higher than last year.

Next page, we have a new adoption of HKFRS 16, and there have been some adjustments for this year. If we take away the FRS 16 impact, it is RMB 360 million in terms of profit, and this is an increase of 10.4%. Now with FRS 16 adoption, there is the detailed discussion in our disclosure. So please refer to the details there. I'll not go through it here.

So next to -- next page, let us look at the revenue. It is a 4.3% CAGR revenue during the period. And because of the home appliances impact, if we take that off, it is 5.2% CAGR revenue. And there have been some impacts on our e-commerce development in O2O, for instance, after 2018 adjustment. In 2019, it has been stable. Rental income is increasing. 12.9% is the CAGR rental income. 2019 compared to 2018 was 7.1% growth and for our continued store opening and also with our optimization of our operation of the stores that is the reason. For gross profit, it is 25.3%, and it is from rental income and also our competitiveness in the supply chain.

Page 17. In the past 8 years, our operating profit had increased by 5.2% and also for our net profit and margin as well. And it is about 4.3% for our operating profit; and net profit margin 3.1%.

Page 18. If we look at the expenses, this is basically because of new store. We have increased from 230 stores to 486 stores during the period. And also, platform costs and also delivery costs and, at the same time, the administration expenses had been decreasing in the past 2 years. And as the number of stores increased, it had been -- our operating lease charges have been stable at 2.8% despite the number of stores increased. Staff costs was because of more online business and more stores, and it has, therefore, increased.

On next page, 19. For our working capital days 2019, it is 85 days inventory and 97 days for trade payable. The growth is because of the CNY -- early arrival of CNY by 2 weeks compared to 2018. And there has, of course, been preparation for the inventory for CNY and therefore, accounting for the inventory increase. And during the peak period of sales for CNY, inventory had already been sold out. So this is seasonal, and it does not affect our overall operation and cash situation.

Our net financial position is RMB 136 million -- RMB 13,267 million, and this is partly from our prepaid card measures. And there have been government regulations on that set there as well. So that is part of the impact. If we take that off, in fact, this is an increase in our net financial position compared to 2018 by RMB 600 million.

For investment return, CapEx, it is lower than the year before because the number of new stores is lower in terms of number. In the past 2 years, our business direction had been online development and O2O development, and new stores, relatively speaking, have been lower. But in the future, we will continue to grow our number of physical stores. For 2019, apart from the 7 stores, we also have RMB 1 billion in terms of investment into our digitalization of stores and hypermarkets. And ROE was 11.6% and which is basically more or less the same as previous years.

And next, Mr. Huang will come back to talk about the business strategy.

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Unidentified Company Representative, [11]

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Thank you. Mr. Huang will come back to talk about the future strategy.

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [12]

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Ladies and gentlemen, would you please refer to Page 22 of the B2C business strategy. For 2019, we have successfully executed our business strategy, and there are a number of areas here. First of all, it is the development of multi-format and also omnichannel. And this includes Tmall and also the major future developments, including group purchase as well as mid-hypermarket. And further, there will be further digital operating and transformation and online business so that we will be completely, comprehensively digitalized. And also, there will be acceleration of restructuring hypermarkets. And we have been very successful in restructuring of our hypermarkets. There was 1 last year, and there will be another 50.

And also for our business strategy, there will be a deepening of integration of our 2 banners. On the basis of integration of the 2 banners, we will further deepen that. And our cost for the headquarters will increase, and the gross margin will therefore further increase. So this will be another impetus for growth for Sun Art going into the future.

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Unidentified Company Representative, [13]

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Thank you very much. Next, we will have the Q&A session.

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Questions and Answers

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Unidentified Company Representative, [1]

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Our first question comes from Morgan Stanley, Dustin Wei.

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Dustin Wei, Morgan Stanley, Research Division - Equity Analyst [2]

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My first question is about 2019 in terms of the operation profit, some detailed figures. If we look at Page 15 of the PPT, there is the after FRS 16 operating profits. I would like to know, for the RMB 430 million for 2019, it is about RMB 200 million more than 2018. And in my calculations for 2019, including online and including last year's impact on this year's figures and also from our rentals, there should be about RMB 200 million increase. And Suning 2018 adjustment in the second half, there was about a RMB 100 million loss from that. My feeling, it seems that this operating profit growth is relatively low. So I'm just thinking, is there some reason behind that? Is there some one-offs, for instance?

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [3]

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If I can answer the question for one-offs. The main item would be in prepaid card breakage. What we call it the consumer prepaid card, when it is not used for 5 years or over, we have a calculation model, and there would be some revenue amortization. And in the 2019 figures for long-term non-used prepaid card, there are some changes to the calculation. And as a result, in our model, the calculation had resulted in certain revenue recognition, which is lower than 2018 by about RMB 140 million.

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Dustin Wei, Morgan Stanley, Research Division - Equity Analyst [4]

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Because for other revenue, whether it is a prepaid card, et cetera, it is, in total, a drop of RMB 200 million year-on-year. But if we look at other areas, for instance, this year, we have impairment from closure of stores, and that is RMB 100 million more or less. And our rentals income had increased by RMB 100 million. And Suning, there had been some impact in 2018 and the -- with the adjustment of households, good sales, et cetera. And it seems that also in rentals as well -- and Auchan had a contribution of RMB 100 million. But does it mean that there are still some other areas of expenses or loss?

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [5]

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Well, you said impairments just now. And there is a savings of RMB 100 million compared to last year, but there are other additional provisions as well. For instance, for property-related litigation, this -- that is a litigation with a landlord, it is about RMB 100 million in terms of impact. So this is not -- you do not see in the financial statement.

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Dustin Wei, Morgan Stanley, Research Division - Equity Analyst [6]

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Is this new? For 2019, not seen in 2018?

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [7]

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That is correct. There is one store. It pertains to one store, where there is a litigation. It is about RMB 100 million in terms of impact.

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Dustin Wei, Morgan Stanley, Research Division - Equity Analyst [8]

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So if we look forward into 2020, because the financial statement does not break down the profit into the different business lines. So for the outlook for 2020, can you break it down to, let's say, off-line sales, B2B, B2C and Auchan integration leading to profits? So how do you see the profit growth year-on-year for 2020 along the business lines?

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [9]

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Well, basically, for 2020, for Auchan integration contribution, it will continue to increase. We believe for the headquarters, it would be a contribution of RMB 100 million. And for the stores, so contribution in terms of the gross profit margin, for the Auchan part, it would be about RMB 200 million. That is our management estimate. And also for our operation, B2C, B2B, they will both grow in terms of orders proportionally. These will both grow along these proportions and lines.

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Dustin Wei, Morgan Stanley, Research Division - Equity Analyst [10]

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And next question, if we look at the top line, the GSP, if we estimate sales of commodities or products in 2019 that would be a decrease of 8%. And we closed 5 stores and off-line sales would be a drop of 7%. So for 2020 for same-stores off-line, how do you look at that situation for 2020? Because from the amount of sales, if we don't look at the percentage, but from the amount of sales, 2019 compared to 2018 for the consumers, whether it's offline or online, it seems that there is a decrease. So whether it's B2B or rental income, it seems that it had helped to recover that decrease for sales, especially for off-line. So for 2019, how do you see the same-store sales, off-line included?

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [11]

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For the management, well, you -- I'm not sure how you came up with your estimate. It seems overly high. But that is your calculation. For ourselves, we believe, off-line, there will be certain negative growth because the consumers will be going online. Some of the consumers will be going online. They'll be moving online. So we think, overall, off-line will be a drop of 3%. That is our estimate.

As for 2019, the negative for off-line same-store is -- the negative is contracting. So bit by bit, it is coming back up. The trend is optimistic and good. If I may supplement, I would say that for off and online, you have to understand it as a whole. We treat it as a whole because customers go from offline to online. So there is a trade-off. You cannot say singularly that off-line is decreasing. But rather, you should be looking at it holistically on an off-line.

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Unidentified Company Representative, [12]

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Yes. I agree with Mr. Huang. Yes. For the management, yes, we focus on off-line -- we focus on online. But on the other hand, for the stores management, we look at it holistically, on and off-line. For 2019, Auchan had gone into a transformation stage, and the impact -- there is some impact, including the major renovation of certain stores and all these impact off-line sales as well. Maybe this is the 2019 calculations, and that is the off-line impact for 2019.

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Dustin Wei, Morgan Stanley, Research Division - Equity Analyst [13]

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Okay. So one last question. In the circular, you say that there is rental income pressure because of the coronavirus situation. So if you're saying that it will continue to recover in the future, then can we have some figures as to, let's say, if you close stores for however many days, then the rental income would come down by however much. So this is the assumption for model calculations. For the 50 stores for the transformation and reform, will there be delays, but the overall target will still be 50 for the year?

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Unidentified Company Representative, [14]

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To answer your question, first of all, just on the stores' reform, yes, there may be delay. But on the other hand, we will be going according to plan for the 50.

And then your second question was about the coronavirus epidemic and its impact on the situation for rental income. Well, it depends on how long the epidemic will last, how many months, but we seem to be optimistic. And for some of the areas, let's say, for Hubei, it is already 30 or 40 cases. And some of them are even low in some of the provinces, just 1 or 2 cases. Compared to Taiwan, Korea and Japan, it seems to be even better. So some of the local governments are already allowing us to reopen our business. So it depends on the epidemic situation, but I am optimistic.

And for the suspension, for example, for February 15, it was 80% suspension for the galleries, but it's come up by 30%. So it is now just 50%. And who knows, maybe next week, it will be 60% or 70%. And so it depends on the epidemic situation. And also, the local governments are providing us with support and subsidies, including the landlord subsidies. So with all these factors, I would say these all impact our calculation. But as far as I can see, I would not be overly pessimistic about the epidemic situation.

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Unidentified Company Representative, [15]

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UBS, Christine Peng.

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Yan Peng, UBS Investment Bank, Research Division - Executive Director & China Consumer Staples Sector Analyst [16]

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I have 3 questions concerning the 2019 results. I see for same-store sales for RT stores, it is positive. Can you give us some details and the forward-looking in terms of RT stores? And can you talk about the traffic and also the consumption in terms of how much people spend?

And for Auchan, the same-store for last year, what was the impact? And also, what would be the contribution for this year?

And also, what do you see for 2020? As we all know, for RT stores, since 2018, they have been approaching end of these new plans. So what would be the plan for the future? Will there be further adjustments? And where will they be if there are adjustments for the plan? And in the past 2 years, what has been the conversion rate? Can you talk about these and give us some color?

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [17]

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In terms of like-for-like, RT is positive 0.5%, in particular, in the fourth quarter. Last quarter was positive 3.6%. As for this year, as of now, the like-for-like is 6.8% for the 2 banners. So the situation is good.

For like-for-like for Auchan, for February like-for-like, it is higher than RT. So Auchan, after the half year integration, I would say that the 2 banners now do not have any differences.

As for subsidy, well, you cannot call this a subsidy, but rather the acquisition of new customers. It's a cost. And in the future, we will continue to increase it. So this is -- for this year, it is more or less the same as last year. It is about RMB 140 million. So this is for acquisition of new stores -- new customers.

And also, there was a question about traffic.

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Unidentified Company Representative, [18]

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Well, basically, for off-line customer traffic for same-store, offline, you -- we see that there is a narrowing for off-line. It is about negative 2.5%. And our ticket size is increasing 0.5%. So that is the situation.

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Yan Peng, UBS Investment Bank, Research Division - Executive Director & China Consumer Staples Sector Analyst [19]

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Mr. Huang, you talked about the February Auchan and RT. You're talking about this year?

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [20]

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4.8%.

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Yan Peng, UBS Investment Bank, Research Division - Executive Director & China Consumer Staples Sector Analyst [21]

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Did you say 6.8% or 4.8%?

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [22]

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4.8%. So that is to say, for February, Auchan has outperformed RT, which proves that we have been successful in terms of our transformation.

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Yan Peng, UBS Investment Bank, Research Division - Executive Director & China Consumer Staples Sector Analyst [23]

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Is it -- does it include the one-off impact from coronavirus? Or can we extrapolate for the entire year on this basis?

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [24]

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It was in February that we were impacted by the coronavirus. And orders have increased because a lot of the shopping malls have closed. So in that sense, the virus has helped us in terms of the online orders for February. And like-for-like had also been performing well. That is even before the virus. Before and after, it's both been positive.

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Unidentified Company Representative, [25]

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Well, let me supplement. I would say that the virus helped us in terms of the number of orders. But off-line, it had impacted us negatively. So the 2 together for the virus impact, it is, overall speaking, still positive. But the off-line and online do offset each other to a certain extent.

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Unidentified Company Representative, [26]

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HSBC, Lina Yan.

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Hau-Yee Yan, HSBC, Research Division - Hong Kong and China Consumer Analyst [27]

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I would like to know about the virus epidemic, what is its (inaudible) income. Just now you mentioned that there are some shops which are impacted, where some closed for some time and they may be reopening again now. And how does it impact our negotiations in terms of rental?

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [28]

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On the 15th of February, around that time, it has been 80% in closing stores. And on the 20th, it is about 50%. So some of the shops have already reopened.

As for rental, because of the coronavirus, we worry whether some of the retailers would find it difficult and how do we help these partners and tenants of ours. But overall, I don't think the impact will be big. We cannot say that there will be no impact, though, because we want to be mutually beneficial. And some of the shops -- the colleagues in the shops, we have put them on to the Auchan hypermarket as well. So we want to share the resources.

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Hau-Yee Yan, HSBC, Research Division - Hong Kong and China Consumer Analyst [29]

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When you say stop the operation of the shop, you do say 8% increase to 50%?

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [30]

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No, no. We said 80% increase to 50%. That is the -- it was in January, 80%. Now it increased to 50%.

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Hau-Yee Yan, HSBC, Research Division - Hong Kong and China Consumer Analyst [31]

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So you're talking about the galleries being closed so...

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [32]

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That is correct.

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Hau-Yee Yan, HSBC, Research Division - Hong Kong and China Consumer Analyst [33]

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The CFO, for 2019 profit margin, I still don't understand that one part because it has been discussed just now but I don't understand. In the second half of 2019, for the impairment, it is RMB 100 million less year-on-year. And also, the sales profit is increasing and that's RMB 200 million plus. And other operating revenue for second half had decreased by RMB 100 million year-on-year. So -- and Suning, second half of last year, it was a loss and that has stopped. And you also talked about the legal -- the litigation, RMB 100 million. So for the 3 points, RMB 200 million increase and the impairment of RMB 100 million less and other operating, less by RMB 90 million. So overall, operating profit should be over RMB 230 million, but now we are seeing only RMB 100 million. What is the difference? What have I missed? Is it because for the second half, new business had been bigger in terms of the overall percentage? But still, it doesn't account for this uncertainty.

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Unidentified Company Representative, [34]

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For the second half, I have mentioned that there had been a litigation, CNY 100 million.

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Hau-Yee Yan, HSBC, Research Division - Hong Kong and China Consumer Analyst [35]

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I have already put that into legal provision. The negative provision of CNY 100 million, I have already accounted for that but there is still this discrepancy. Why? If you look at offline same-store sales, there have been no growth there. Have you put that into account?

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Unidentified Company Representative, [36]

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It would also have about CNY 100 million in terms of impact. The merchandise GP margin 2019-2018, the profit margin is increasing year-on-year over CNY 200 million. And also for our O2O, whole year, customer acquisition cost is no longer a loss. And last year, second half, there has been no loss there. And also...

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Hau-Yee Yan, HSBC, Research Division - Hong Kong and China Consumer Analyst [37]

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I still don't understand the discrepancy.

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Unidentified Company Representative, [38]

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Well, here and there, there are some expenses. And Auchan for the suppliers, there had been changes. The original supplier had exited and there have been some losses in terms of some litigation as well. So here and there this item and that. Inventory, for instance, provision for inventory and because the supplier had exited so there had been some long-term inventory which had also been resulting in a loss.

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Hau-Yee Yan, HSBC, Research Division - Hong Kong and China Consumer Analyst [39]

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Now for inventory provision, that should be reflected in the gross margin?

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Unidentified Company Representative, [40]

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Lina, let me answer your question. Yes, first of all, for the Suning, for the home appliances, there had been savings of CNY 130 million. And the 2 brands, there had been a savings of CNY 200 million from integration. And I mentioned just now there had also been a CNY 200 million profit and also the tax concession CNY 130 million. And also prepaid costs CNY 140 million less and also the supplier offline. And offline, if you look into the rentals as well, if we take out the rental, then compared to 2018, you can look at the impact, and that is about CNY 120 million. So overall speaking, it is about CNY 300 million in terms of impact.

If you look at gross margin, it has increased. And also online, this opening has also increased our costs. And for the year, it is about CNY 400 million more in terms of such costs. Platform costs had also increased. So as the margin increases, these costs also increased in tandem. I have not segregated the first half from the second half. But overall, there had been an offsetting effect, as I have mentioned.

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Unidentified Company Representative, [41]

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BofA, Chen Luo.

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Chen Luo, BofA Merrill Lynch, Research Division - MD [42]

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I have a question, a follow-up question about same-store sales. For the first quarter, it had been impacted by the impact of the epidemic and also CNY. So for the entire CNY to yesterday compared to last year like-for-like, overall speaking, well, how do you compare? If you can give us that information, we will be able to tease out the CNY impact and also tease out the impact for the coronavirus if you can compare to previous CNY. Can you do that for us?

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Unidentified Company Representative, [43]

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Well, we can look at it this way, the first 2 weeks of CNY, the second 2 weeks of CNY. Compared to last year, they're basically the same. 1 week or 2 weeks before CNY, the same-store sales growth had been 4% for the week. And this is about 6% this year. And 1 week after CNY, it is 3%. And 2 weeks after CNY 5%. So overall speaking, it is basically between 3% or 4% to 5%, more or less the same. So this is a period comparison for CNY, more or less the same.

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Chen Luo, BofA Merrill Lynch, Research Division - MD [44]

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So 2 weeks after CNY, there is still 4-point-something percent growth?

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Unidentified Company Representative, [45]

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Yes.

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Chen Luo, BofA Merrill Lynch, Research Division - MD [46]

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And year-to-date, can you also tease out the offline and online in terms of the growth?

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Unidentified Company Representative, [47]

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No. We have not done that separation for offline and online. This is overall. In the future, we will supplement.

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Unidentified Company Representative, [48]

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Yes. For the same-store increase 4% to 5%. Groceries and also textile had been growing significantly. And it is -- and also fresh product, it is a high single-digit growth.

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Chen Luo, BofA Merrill Lynch, Research Division - MD [49]

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Year-to-date, 4.8%. Is this a whole year guidance? For whole year same-store, would it be slightly weaker or how do you see it as the epidemic continues or develops?

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Unidentified Company Representative, [50]

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No. We are optimistic, actually. As mentioned just now, before and after the epidemic, I think we -- even though before the epidemic, we had been -- well, actually, for the epidemic, we had been impacted. Even though some of the stores stay open, but the operation hours had shortened. So for the virus, yes, there had been negative growth offline. And online, there had been increase. So this is more or less even as before the virus. So it's even.

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Chen Luo, BofA Merrill Lynch, Research Division - MD [51]

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And for the year, how do you see, will it be mid-single-digit growth?

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Unidentified Company Representative, [52]

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Well, I think we cannot be overly optimistic. We have to look at the development of the virus and also the pork price. Same period increase in pork price had been high. So overall for the year, we will say positive growth. It will be positive growth. But we cannot be overly optimistic. There is impact online and offline. We -- so for the entire year, the target would be positive growth. That would be realistic.

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Chen Luo, BofA Merrill Lynch, Research Division - MD [53]

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I understand. And for last year same-store, food and meat had been 0.3% growth. For this year as of now, what is it?

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Unidentified Company Representative, [54]

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Well, we haven't made that calculation because the numbers have only just come out. We do not have that segregation yet.

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Chen Luo, BofA Merrill Lynch, Research Division - MD [55]

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Concerning rental income, I have another question. Mr. Huang, you mentioned that as of the 20th of February, we have -- the shops are basically opening, are dropping from 80% to 50% closure. Now if we use this as a starting point, we will have about 1 month of rental loss.

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [56]

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How do you mean -- what do you mean by 1 month?

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Chen Luo, BofA Merrill Lynch, Research Division - MD [57]

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Well, I'm saying for the entire year. Because of the epidemic, some of the shops have to be closed. So from this point of view, if we look at the stopping or closing of the shops and if we make a calculation on the consolidated basis, would you say that the impact would be about 1 month in terms of the shop negative impact?

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [58]

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Well, I say you have your reasoning. But on the other hand, we are still developing in terms of the virus situation. I cannot project into that. I'll just say that your reasoning is founded. I can only say that.

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Chen Luo, BofA Merrill Lynch, Research Division - MD [59]

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And beginning of the year, we have already negotiated and agreed on the rental level. And for a like-for-like rental increase, how much will it be? And as the shops reopen, for like-for-like, do you see any room for a decrease for the like?

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Ming-Tuan Huang, Sun Art Retail Group Limited - CEO & Executive Director [60]

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For this year, you are correct for continuation of the lease. Because of the epidemic situation, we will see more difficulty for ourselves. But as I have mentioned, it is already 50% in terms of shop closure. For February, we also see that the trend is optimistic. And last week, we have also conducted some discussions and negotiations. And we see that some of our shop tenants are not as difficult as we had imagined.

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Chen Luo, BofA Merrill Lynch, Research Division - MD [61]

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And what about negotiations with the landlord?

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Unidentified Company Representative, [62]

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70% of our GFA is leased. And I believe there is a point that as we share with our landlord. So when we discuss with our landlord for any changes in rental that where there are share or profit sharing with the landlords, there will not be any room for negotiation.

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Chen Luo, BofA Merrill Lynch, Research Division - MD [63]

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Well, for the sharing of sales. So there will still be room for waiving of lease or rental?

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Unidentified Company Representative, [64]

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Yes, indeed. Even for sharing of profit, there will be room for waiving of rental partially.

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Chen Luo, BofA Merrill Lynch, Research Division - MD [65]

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So if we're looking at subsidies from the government and our own cost increase, et cetera, do you think that the rental loss can be completely digested or do you think that we will not be able to digest all of the rental loss?

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Unidentified Company Representative, [66]

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Well, there will be extra cost. There will be a lot of extra cost as well. So rental loss, we will just have to recognize it as rental loss. We're not looking to completely offset or digest it.

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Chen Luo, BofA Merrill Lynch, Research Division - MD [67]

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I have a question about mid to long term. And this virus may be an impact of 1 to 2 months, but how would it impact consumer behavior for the long term, that is the habit of consumption. There will be more online behavior. Is that true? So for deliveries and online, that would increase. Is that right? And also, with this epidemic, there will be a lot of investment into online retail. And how does that impact our hypermarket? So a lot of retailers are also operating online and also delivery. And would that be more fracturing of the market? And will there be any adjustments in the market as a result of that? For example, the 1,000 orders per shop, would this be increased? Will there be a new target for orders per shop, for instance? And also in the future for offline shop restructuring if indeed we are impacted in this way by more online behavior, what is our new strategy, please, if there is any?

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Unidentified Company Representative, [68]

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Well, first of all, for online orders, it will continue to increase because the consumer behavior is changing, yes, as you've mentioned. The traditional market will also be impacted because people will be paying more attention on punctuality and things like that. And this is exactly our strong point with 2 years of New Retail transformation. So now we are prepared, especially for fresh food and delivery, we are prepared. And we are unique in the market in terms of income in this area. You are correct in pointing out that there are a lot of community areas, and they are also transforming. And I say, opportunities knock on the doors of those who are prepared. We are uniquely prepared.

I also believe that after the epidemic, from my point of view, Sun Art, we are the most prepared in the industry because we have been fully geared in terms of offline. So for the impact of the epidemic, of course, we have to watch as we go. But on the other hand, the offline business had already been -- the impact there is significantly up.

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Unidentified Company Representative, [69]

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Citi, Xiaopo, your question, please?

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Xiaopo Wei, Citigroup Inc, Research Division - Director & Head of Asia-Pacific Consumer Research [70]

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I have 2 questions. For Tao Xian Da, we go too much into the details and not meaning, that's my thinking because if this is 1 month, it will subside, the effect. But from this epidemic my question is, what do you see? That is for 2018, 2018 for the company's future, there had been directional strategy, for example, omnichannel. But with this epidemic for online business, how do you see the trend? What do you see in terms of online and offline? What is the meaning of this? Where do you see that we have prepared well and there are opportunities and where do you see the opposite, for instance? And the strength and weaknesses, will they continue in the future? That's for the strategic point of view and the industry point of view.

And secondly for online sales, it will be 20%, you mentioned just now. Because the modeling is different for everyone and I would like to -- when you say 20%, maybe segregate B2B, B2C and Tmall markets. Under these 3 areas, which one will be benefiting most, which one leads? And also for Tao Xian Da and Tmall stores, if there is a situation and that is if the supply is particularly difficult, how would that impact, in particular, our cooperation with Tmall to the market?

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Unidentified Company Representative, [71]

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For Tao Xian Da, one must invest today. And Tmall, at present, I think we have the capability there. We have the capability and we have the inventory. I particularly said, there is no particular limitation there. I don't think there is a problem with supply.

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Xiaopo Wei, Citigroup Inc, Research Division - Director & Head of Asia-Pacific Consumer Research [72]

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The capability for these 2 parts, there should not be any conflict between the 2?

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Unidentified Company Representative, [73]

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No, I cannot think of any conflict between these 2 areas.

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Xiaopo Wei, Citigroup Inc, Research Division - Director & Head of Asia-Pacific Consumer Research [74]

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And Xiaobei, can you segregate B2B and Tmall?

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Xiaobei Gu, Sun Art Retail Group Limited - Head of IR [75]

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B2C would be higher. About 10% to 12% B2C and Tmall, 1% to 2%. B2C, 9% to 10%; Tmall, 1% to 2%. So the B2C about 9% to 10%. This epidemic, it has given us a test. We talked about this path. And also for some of the fresh product, the supply comes from the rural areas but the transport had been difficult because of traffic controls and all that. So the transport affects the entire industry. So for the e-commerce, there is pressure. And all the operators in the industry have to deal with it. So this is an operation issue that we have to overcome. I'm not worried about the business, but the difficulties that we are meeting with is also being faced by the competitors. So we are confident that our operations will be good. And after the epidemic, the Sun Art overall will be overall coming back to the track that we had projected last year. So really, it is about the virus that it will blow over as soon as possible, we'll be back on track.

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Unidentified Company Representative, [76]

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As for online orders, the volume is 2x more. That is during the epidemic, it is 2x more in terms of the size of each online order. It's about 2x the order of the -- of online order during the epidemic situation.

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Xiaopo Wei, Citigroup Inc, Research Division - Director & Head of Asia-Pacific Consumer Research [77]

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So you're saying given this transport difficulty, is it still 2x more?

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Unidentified Company Representative, [78]

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That is correct.

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Xiaopo Wei, Citigroup Inc, Research Division - Director & Head of Asia-Pacific Consumer Research [79]

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Is transportation affecting the supply? Does it impact which part most?

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Unidentified Company Representative, [80]

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The -- Nelson Hsu will...

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Sheng-Yu Hsu, Sun Art Retail Group Limited - CFO of RT-Mart China [81]

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Well, Tmall had been performing well as well as Tao Xian Da.

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Xiaopo Wei, Citigroup Inc, Research Division - Director & Head of Asia-Pacific Consumer Research [82]

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Can you talk about Tmall a little bit more because we started in August and there had been significant development. Can you give us some information if there is any instruction from Alibaba? Can you give us some numbers?

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Sheng-Yu Hsu, Sun Art Retail Group Limited - CFO of RT-Mart China [83]

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Yes. It started August of last year and that's all we got.

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Xiaopo Wei, Citigroup Inc, Research Division - Director & Head of Asia-Pacific Consumer Research [84]

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Has there been explosive growth?

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Sheng-Yu Hsu, Sun Art Retail Group Limited - CFO of RT-Mart China [85]

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Yes. We were very optimistic. It is a new model of operation. And will it live up to our targets? We will see. And this year, we believe that it may be -- we do not know yet, but we will continue for this year. But from the orders that we have received so far, we see that this can be on track in terms of our internal targets.

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Unidentified Company Representative, [86]

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Macquarie, Linda Huang.

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Linda Huang, Macquarie Research - Head of Hong Kong & China Consumer Research and Chinese Consumer Analyst [87]

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Management, I have a few questions. First of all, still on rental, you mentioned just now for rental, for Suning rental, given the epidemic situation, has that been influenced or impacted? That's the first question. And secondly, can you talk about the rental, our customers, how many of them are fixed rental, please, and how many not? And also you mentioned just now that consumption behavior changed because of the epidemic so more people are getting used to online shopping. But then for the retail gallery, how will we think about that because this will also affect our long-term rental income? So what do you think about gallery and leases?

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Unidentified Company Representative, [88]

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Let me answer this question. So after the epidemic, consumption behavior, we believe, will change. More people will go online. For this year what we will do, we will do an overall digitalization. That is to say a comprehensive digitalization even of our gallery. So this is our strategy for this year. And also for Suning, how would that be impacted or not. Yes, there will be some impact because Suning has certain shops or stores which have to be closed. The Suning part will be impacted as well. But exactly how much the impact will be, well, actually, for us, most of the rental leases are already fixed as they are mostly fixed. For restaurants, those are moving, not fixed, but for the majority are fixed.

Do we have a proportion on the number? I remember -- how much would that be? Do you have the number?

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Unidentified Company Representative, [89]

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About 70% to 80% will be fixed. Floating would be the minority.

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Linda Huang, Macquarie Research - Head of Hong Kong & China Consumer Research and Chinese Consumer Analyst [90]

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Pork price have increased significantly. In the second half, there is belief that pork price may be low. We would like to know for this kind of product, is it a big part of our overall sales? And also during this period for same store, the performance is fine, but I'm concerned about profit margin. For high profit margin product, including Suning product, they have not been selling well. And online profit margin is lower than offline. So how do you see the profit margin, gross profit margin?

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Unidentified Company Representative, [91]

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Why do you say the gross profit margin is low? Linda, where did you get that impression from?

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Linda Huang, Macquarie Research - Head of Hong Kong & China Consumer Research and Chinese Consumer Analyst [92]

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All right. Just from the overall analysis.

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Unidentified Company Representative, [93]

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Now let me give you a number. Our online gross profit margin is slightly higher than offline so it's not as you have mentioned. So gross profit margin, I do not feel that for this year our gross profit would come down. I don't think it will come to that, no. And last year, same period, it is a very different period. It's not exactly comparable. I think it was up. Last year, January was low. And therefore, for January this year, comparatively, this is high. And because last year in June and August it had increased. And therefore, the comparison had been -- well, the growth will be lower. And for meat is about, including pork, it is 5% of our overall sales, meat, 5% overall.

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Linda Huang, Macquarie Research - Head of Hong Kong & China Consumer Research and Chinese Consumer Analyst [94]

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And last question concerning e-commerce. You mentioned just now the average daily order. I don't know for this year how does it compare and also what is our target for RT-Mart and also Auchan for the target and also for the Tmall warehouse? After the epidemic for delivery Tao Xian Da, for RT and also Tmall, He Ma, how do you see for each of them? If we continue with this sharing of inventory or sharing of warehouse with Tmall, will it affect our working capital?

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Unidentified Company Representative, [95]

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All right. For inventory, as I mentioned, for our each store inventory, we are at good level. That's the first point. As for the order, daily order, the size of the daily order, for our old long-term customers, they are added to the number. We have more and more new customers. So compared to first quarter last year, we will grow on that basis. So this is our projection.

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Linda Huang, Macquarie Research - Head of Hong Kong & China Consumer Research and Chinese Consumer Analyst [96]

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I have another question just now about Tmall for the platform order. How do we see this being allocated to, let's say, Tao Xian Da, Tmall supermarket or our own RT shops, et cetera? Is there an allocation of the orders to each of these? Do you have the information?

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Unidentified Company Representative, [97]

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Let's say if our platform is 1, then Tao Xian Da would be 2 to 3, Tmall shops would be 0.7% to 0.8%. So that would be the proportion more or less.

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Linda Huang, Macquarie Research - Head of Hong Kong & China Consumer Research and Chinese Consumer Analyst [98]

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Do you see some overlapping of customers between Tao Xian Da and Tmall and/or are people switching from Tao Xian Da to Tmall?

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Unidentified Company Representative, [99]

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You are correct. There are overlapping of customers for Tao Xian Da and also Tmall supermarket. So we have to omit then the customers because -- but on the other hand while there is overlapping, Tmall has their own customers as well so it is not a negative.

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Linda Huang, Macquarie Research - Head of Hong Kong & China Consumer Research and Chinese Consumer Analyst [100]

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What about each day sales, what is the profit contribution?

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Unidentified Company Representative, [101]

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I will have to make that analysis later, but it is a positive contribution. It is a positive contribution.

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Unidentified Company Representative, [102]

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Dylan Chu.

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Dylan Chu, CLSA Limited, Research Division - Research Analyst [103]

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I have a few questions. First of all, I want to understand more clearly about the food and how it is a part of our same-store sales. Last year, there was an increase of 3%, cost up 3%, and the inflation is high single digits for food. And this is 50% of our hypermarket. This year may be even higher. So how do we see this? And can you give us a better or more information?

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Unidentified Company Representative, [104]

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The 3% that we've given is for the whole year. And just now the numbers we mentioned was just the meat, the meat, not overall for food. That was in answer to the question on that one. For meat, how much is it a part of our results? And the CPI, how much is that? And from that, we calculated the overall impact. But for the fourth quarter, meat for our CPI was 0.8%. It was 0.8% for the fourth quarter. So it's come up significantly in the first quarter. CPI was only 0.8%. And overall for same-store increase it was 3-point-something percent.

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Dylan Chu, CLSA Limited, Research Division - Research Analyst [105]

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Second question, Tao Xian Da, 2 questions. Last year and this year, we took off the CNY 140 million expenses. What is the overall results for last year and this year? What is the 2020 projection?

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Unidentified Company Representative, [106]

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We took away the RMB 140 million overall speaking.

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Dylan Chu, CLSA Limited, Research Division - Research Analyst [107]

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So you're saying that it will be even with the tax concession impact? And what about this year? Do you have a target for this year?

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Unidentified Company Representative, [108]

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I think it will be upward trending because it still will increase our depreciation cost and also the unit cost will come down. So overall, this number should be trending up.

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Dylan Chu, CLSA Limited, Research Division - Research Analyst [109]

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And for Tao Xian Da latest trends, can you talk about the order size and what about the transport cost? And the beginning of the year, now that we are 2 months into this year, how do you see the order size, the gross margin and transport cost? And also going forward, do you see that there will be any changes in terms of transport cost? Can you share this kind of information or projection? That's for Tao Xian Da.

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Unidentified Company Representative, [110]

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That's very detailed, your question. First of all, around the CNY, the CNY impact, we should not allow too many opportunities for our competitors, but we are in a special situation now. The orders are different. The transport fee, we're charging a transport fee. But in the future, this will be waived. The transport fee will be waived. But this will be -- for January, it had been about 700. So the -- everyday, there is a few hundred, a few hundred, about 500 to 600 orders. So it has more or less doubled, but this is not for future reference. This is a special period of time.

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Dylan Chu, CLSA Limited, Research Division - Research Analyst [111]

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Another question about financials, our profit tax rate. And because we are using tax credit so last year that's an improvement. And for this year, how should we look at it? Is there any loss that we can use to offset this year's tax burden?

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Unidentified Company Representative, [112]

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Yes. The answer is yes. As we improve our profitability and in the past there had been some loss-making operation in terms of the tax, yes, they can contribute in terms of rebate and concession. And also we have some tax optimization that had been put into place last year and this year, the positive effects will be evident. So from tax, it will be more or less the same as last year, but it will be good.

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Dylan Chu, CLSA Limited, Research Division - Research Analyst [113]

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For the entire year, will it be -- whole year 2020, are you talking about whole year 2020?

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Unidentified Company Representative, [114]

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Yes. Just now you asked about Tao Xian Da, but we also have Auchan to home. And Auchan to home, in fact, is even performing better than Tao Xian Da.

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Unidentified Company Representative, [115]

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This is the last question. So we are closing the Q&A session here. I would want to thank you for coming to the 2019 investor and analyst telephone conference. And we hope that we will be able to meet face-to-face soon. And if you want to ask further questions, would you please approach our IR. Wishing you good health and good luck. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]