Equity Research on Suning Commerce Group

Suning Commerce Group(002024.SZ, Specialty Retail Industry)

Shanghai Jiao Tong University Student Research April 13, 2016

1Team 2 |

6

12

18

24

13 Nov, 20 May, 13 Nov, 15 Aug, 11 Feb,

BUY Recommendation

Industry-leading Offline Facility

Sound Company Financials

Proactive Online Strategy

Industry Trend of O2O Integration

Target Price: CNY 20.27

Base Price: CNY 15.5430.4% Upside

Executive Summary

52-Week High/Low CNY 23.54 / 7.64

Average Daily Volume 241.86M

Shares Outstanding 7,383,043,150

Market Cap. CNY 114.732B

Beta 1.09

P/S (TTM) 0.9

P/E (TTM) 58.5

EV/Revenue (TTM) 1.0

1SJTU |

002024.SZ

1

2

3

4

Traditional Offline AdvantageCompany Overview

2SJTU |

Source: Company Data

Procurement LogisticsIT System

Online Platform

Offline Platform

2015 Offline Stores by Location

> 300 200 - 299

100 - 199 < 100

Auto DC

Offline Stores in Mainland by Types

0

450

900

1,350

1,800

2008 2009 2010 2011 2012 2013 2014 2015Q3

• Mainland: 1,577 stores covering 297 cities; 1,011 direct and 1,430 franchise service stations serving rural areas

• Overseas: 28 stores in HK and Macau; 33 in Japan

Company Overview

Financial Analysis Valuation Investment

Risks ConclusionIndustry Overview & Competitive Positioning

Mainland China

HK and Macau

Japan

Community Central Flagship County Others

Offline Extensive Network

Cloud

Proactive Online TransitionCompany Overview

3|

Source: Company Data, iResearch


Online Platform

Offline Platform

Company Overview



Suning.com

Logistics Services

Cloud Stores

20 million SKU O2O Coop. with

Alibaba & Wanda

Financial Services

SJTU

Three Core CompetenciesCompany Overview

4|

Source: Company Data, iResearch


Online Platform

Offline Platform

• Purchasing center: 8 nationwide

• Procurement: 38.5% from Top 5 big-brand manufacturers

• Supply-chain financial services

Experienced Procurement Efficient Logistics Solid IT Support

• Facilities: 4.55 million m2 nationwide, 12 APCs, 42 DCs, and 6,051 delivery points

• Delivery time: 12 hrs in most areas; 2 hrs in 7 major cities

• For 3rd party use

• SAP/ERP/LES Systems

• PC and mobile portals: update constantly

• Big Data and Cloud Computing: Marketing, C2B Customization

Company Overview


Risks ConclusionIndustry Overview & Competitive Positioning SJTU

Industry Overview & Competitive Positioning

Impressive Growth of Retail IndustryIndustry Overview & Competitive Positioning

5

Source: iResearch, IMF, National Bureau of Statistics, Team Calculation

|

Retail Sales Growth of Consumer Goods (in trillions CNY, annual %)

Catering Services Commodities

0

10

20

30

40

2009 2010 2011 2012 2013 2014 2015

3.2

2.82.5

2.32.1

1.82.0

26.823.420.818.416.013.710.5 0%

6%

12%

18%

24%

Company Overview



Growth of Annual Expenses Per Capita by Category

Sales Growth GDP Growth

0%

10%

20%

30%

40%

2013 2014 2015

Daily Commodities

Food and Beverage

Electronics Devices

Home Appliances

SJTU

Distinct Differences between Online and Offline BusinessIndustry Overview & Competitive Positioning

6

Source: iResearch, National Bureau of Statistics, World Bank, Team Calculation

|

Online and Offline Sales Growth (in trillions CNY, annual %)

Online Sales Offline Sales

Online Sales Growth Offline Sales Growth

0

10

20

30

40

2011 2012 2013 2014 2015E 2016E 2017E

6.75.3

4.0

2.81.9

1.20.8

29.327.526.023.421.419.517.3 0%

20%

40%

60%

80%

Company Overview



Distinct Differences between Online and Offline BusinessIndustry Overview & Competitive Positioning

6

Source: iResearch, National Bureau of Statistics, World Bank, Team Calculation

|

Online and Offline Sales Growth (in trillions CNY, annual %)

Online Sales Offline Sales

Online Sales Growth Offline Sales Growth

Sales on Online Shopping Days (in billions USD)

Online Shopping Penetration (as % of Internet population)

0

10

20

30

40

2011 2012 2013 2014 2015E 2016E 2017E

6.75.3

4.0

2.81.9

1.20.8

29.327.526.023.421.419.517.3 0%

20%

40%

60%

80%

Company Overview



0.0

3.0

6.0

9.0

2011 2012 2013 2014

Black Friday (US) Cyber Monday (US)

Singles Day (CN)

2014

2018E 69%

62%

56%

32%

US China

SJTU

Key Transition from Old Competitors to O2O CooperatorsIndustry Overview & Competitive Positioning

7|

Source: iResearch, Team Analysis

Industry Trend 2005 2010 2015 Future

Online

Burst of Chain Stores Market Saturation

Growing E-commerce

Stagnant Sales Growth

Robust Sales Growth

Offline

O2O Integration

Burgeoning Online Start-ups

Company Overview



Key Transition from Old Competitors to O2O CooperatorsIndustry Overview & Competitive Positioning

7|

Source: iResearch, Team Analysis

• To boost and to fuel sales growth

• To develop the potential of larger customer base

• To improve shopping experience and after-sale services

Why O2O? “Internet Plus” = Online + Offline

O2O Integration

Cost and SKU Advantage

IT-based Sales Analysis

Handy After- sales Services

Full Retail Chain and Stores

Much Larger Customer Base

Complete Experience

Industry Trend 2005 2010 2015 Future

Online

Burst of Chain Stores Market Saturation

Growing E-commerce

Stagnant Sales Growth

Robust Sales Growth

Offline

O2O Integration

Burgeoning Online Start-ups

Company Overview



An Ideal Business Partner with Definite AdvantageIndustry Overview & Competitive Positioning

8|

Source: Company Data (until 2014), iFinD, Team Analysis

Company Overview



Competitiveness Suning Gome Alibaba JD

Procurement & Logistics

Warehouse (‘000 m2)4,030 1,950 — Over 2,300

Delivery Points3,427 Over 2,488 — 3,210

Online Operation

GMV (billions CNY)25.8 7.7 1,172.0 260.2

Active Member (millions)27.0 0.5 334.0 96.6

Offline Operation

Stores1,650 1,132 — —

Stores Space (‘000 m2)4.1 3.2 — —

SJTU

An Ideal Business Partner with Definite AdvantageIndustry Overview & Competitive Positioning

8|

Source: Company Data (until 2014), iFinD, Team Analysis

Company Overview



Competitiveness Suning Gome Alibaba JD

Procurement & Logistics

Warehouse (‘000 m2)4,030 1,950 — Over 2,300

Delivery Points3,427 Over 2,488 — 3,210

Online Operation

GMV (billions CNY)25.8 7.7 1,172.0 260.2

Active Member (millions)27.0 0.5 334.0 96.6

Offline Operation

Stores1,650 1,132 — —

Stores Space (‘000 m2)4.1 3.2 — —

SJTU

Financial Analysis

Rapid Revenue Growth and Increasing Proportion of Online RevenueFinancial Analysis

9|

Source: Company Data, Team Estimation

Revenue Growth (in billions CNY, annual %)

0

75

150

225

300

2012 2014 2016E 2018E 2020E0%

5%

10%

15%

20% Online Offline Total Growth

Company Overview



Revenue Decomposition (2015)

Offline 70.3%

Self-owned Store

Open Platform

Online 29.7%Total

Revenue5.9%

36.7%

SJTU

Rapid Revenue Growth and Increasing Proportion of Online RevenueFinancial Analysis

9|


Revenue Growth (in billions CNY, annual %)

0

75

150

225

300

2012 2014 2016E 2018E 2020E0%

5%

10%

15%

20% Online Offline Total Growth

Company Overview



Offline: Logistics Related Non-current Assets (2015, in billions CNY)

Suning

JD

Gome

0 6 12 18 24

Intangible Assets Fixed Assets

Online: Suning’s Customer Base (in millions)

0

60

120

180

240

20141H 20142H 20151H 20152H0

5

10

15

20 Register User Active User SKU

Revenue Decomposition (2015)

Offline 70.3%

Self-owned Store

Open Platform

Online 29.7%Total

Revenue5.9%

36.7%

Optimistic Outlook for Suning’s Online Business Large Offline Investment Guarantees Logistics Capacity

SJTU

10|


Higher Profit Margin than JD’s

ProfitabilityFinancial Analysis

-6%

1%

7%

14%

20%

2012 2014 2016E 2018E 2020E

Company Overview



Suning’s Gross Margin JD’s Gross Margin

JD’s Net Profit Suning’s Net Profit

Lower gross profit margin in 2020 due to: • Profit margin: online < offline • Lower value-added products • Accessible online price comparison In comparison, JD has 13.92 billion fulfillment expenses in 2015, which narrow its gross profit margin to -1.9%

Offline Layout Guarantees Stable Profit Margin

SJTU

10|


Higher Profit Margin than JD’s Improving Operational Ability

Lower gross profit margin in 2020 due to: • Profit margin: online < offline • Lower value-added products • Accessible online price comparison In comparison, JD has 13.92 billion fulfillment expenses in 2015, which narrow its gross profit margin to -1.9%

Offline Layout Guarantees Stable Profit Margin

• Strong bargaining power: prolonged relationship with suppliers (>20 years)

• Supply chain management: won’t be easily exceeded by competitors

Close Partnership with Suppliers; Operations with High Efficiency

ProfitabilityFinancial Analysis

Efficiency

2015 (times) Receivable Payable Inventory Suning 180.5 9.7 5.4 JD 30.4 7.0 9.6

Company Overview



0

5

10

15

20

25

0

50

100

150

200

250

2012 2014 2016E 2018E 2020E

Receivable Inventory PayableTimes

Suning’s Gross Margin JD’s Gross Margin

JD’s Net Profit Suning’s Net Profit

-6%

1%

7%

14%

20%

2012 2014 2016E 2018E 2020E

SJTU

11|


Favorable Liquidity

Shorter Operation Cycle

Financial Analysis

Liquidity

Current Quick Cash

Operation Cycle Sales and Management Expenses / Sales

Cash Conversion Cycle

Company Overview



0.4

0.8

1.2

1.6

2.0

2012 '14 '16E '18E '20E

Suning0.4

0.8

1.2

1.6

2.0

'12 '13 '14

JD

Days

-30

0

30

60

90

2012 2014 2016E 2018E 2020E

10%

12%

14%

16%

SJTU

11|


Favorable Liquidity Solvency Ratios

Shorter Operation Cycle

• D/A ratio will drop by 16% post to CNY 283 million equity investment of Alibaba in 2016

• Healthy financial leverage permits at least 10% upside potential space for D/A ratio

Healthy Leverage Condition Benefits Investments in Logistics

Financial Analysis

Liquidity Capital Structure

2015 Suning JD Gome

Debt-to-total assets 63.8% 64.0% 60.1%

Current Quick Cash

-10

0

10

20

30

40

2012 2014 2016E 2018E 2020E0%

20%

40%

60%

80%

Financial Leverage

Interest Coverage

Debt to Total Assets

-30

0

30

60

90

2012 2014 2016E 2018E 2020E

10%

12%

14%

16%

Operation Cycle Sales and Management Expenses / Sales

Cash Conversion Cycle

Company Overview



0.4

0.8

1.2

1.6

2.0

'12 '13 '14

JD

Days

0.4

0.8

1.2

1.6

2.0

2012 '14 '16E '18E '20E

Suning

SJTU

Valuation

DCF AnalysisValuation

12|

Source: Company Data, iFinD, Team Estimation and Calculation

Sales Revenue Breakdown (in billions CNY)

Boost Industry Sales

• Household Income • Population Growth • IT Investment

Increase Market Share

• Cooperation with Big Macs

• O2O Layout

Company Overview



0

75

150

225

300

White Black IT Comm Life TOTAL

14.2%

18.5%10.0%5.6%18.4%

2014A 2020E CAGR

13.4%

SJTU


12|



Capital Expenditure (in millions CNY)





• O2O Layout

0

1,250

2,500

3,750

5,000

2012 2014 2016E 2018E 2020E

Added Fixed Assets Added Intangible Assets

Risk-free Rate 2.58% Beta 1.09 Market Risk Premium 8.10% Cost of Equity 11.39% Pre-tax Cost of Debt 5.03% Marginal Tax Rate 25% Post-tax Cost of Debt 3.77% Capital Structure 70:30 WACC 9.10%

WACC Analysis

Company Overview



0

75

150

225

300


14.2%

18.5%10.0%5.6%18.4%

2014A 2020E CAGR

13.4%

SJTU


12SJTU |



Capital Expenditure (in millions CNY)





• O2O Layout

0

1,250

2,500

3,750

5,000

2012 2014 2016E 2018E 2020E

Added Fixed Assets Added Intangible Assets

Risk-free Rate 2.58% Beta 1.09 Market Risk Premium 8.10% Cost of Equity 11.39% Pre-tax Cost of Debt 5.03% Marginal Tax Rate 25% Post-tax Cost of Debt 3.77% Capital Structure 70:30 WACC 9.10%

WACC Analysis

Company Overview



0

75

150

225

300


14.2%

18.5%10.0%5.6%18.4%

2014A 2020E CAGR

13.4%

CNY 20.17

Multiples AnalysisValuation

13SJTU |

Source: iFinD, Thomson Reuters, Team Calculation, Yahoo Finance

Peers P/S (TTM) Position Peers EV/Revenue (TTM) Position

• The feasibility of splitting apart online and offline business

• The existence of negative profit for some online retailers

• The strong correlation between sales and price in retail industry

P/S Reasoning

Sum of the Parts (in CNY)

0 6 12 18 24

Offline Retailer Online Retailer

GomeWFJBBG

Intime 2.5x1.2x

0.6x0.4x Median: 0.9x

DANGAMZN

JDEBAY 3.4x

2.5x2.3x

0.6x Median: 2.4x

DANGWFJ

JDEBAY

BBGGomeAMZN 2.8x

2.2x1.8x

1.5x1.4x

0.8x0.2x Median: 1.5x

Company Overview



Offline Sales Online Sales

9.47 11.89

Target PriceValuation

14SJTU |

DCF Analysis: 50%

Multiple Analysis: 50%CNY

20.27

CNY 20.17

CNY 20.36

Target Price

Recommendation: BUYUpside 30.44% from

13 Nov, 2015 closing price

Company Overview



Monte Carlo Simulation and Sensitivity AnalysisValuation

15SJTU |

Source: Team Calculation

Monte Carlo Simulation

Checking List of Sensitivity Tests

New Business Operation Total Revenue

WACC Cost of Capital

Real GDP Growth Sales Revenue

Sales Expenses Net Profit

Online Sales Growth Gross Profit Margin

Terminal Growth Terminal Value

2.78% 10.53% 22.42% 64.27%16.3213.18 CNY 17.87 19.43 29.89

SELL HOLD ACCU BUYMean 20.36

SD 2.295% Percentile 16.78

Median 20.2495% Percentile 24.27

0

500

400

300

200

100

times

• Based on 10,000 random simulations

• 64% confidence level for BUY recommendation

• 90% confidence interval: CNY 16.78 to 24.27

Company Overview



Investment Risks

Risk Matrix and Mitigation FactorsInvestment Risks

16SJTU |

Source: Team Analysis

Online Competition

FX & Interest Rate Risk

Uncertainty of REITs

Financial Market

Volatility Slowdown

of Economy

Excessive Control from Board Chair

Alibaba’s Influence in Managemen

t

Liquidity Risk at Bond

Maturity

Low Medium HighImpact

Med

ium

High

Prob

abili

tyLo

w

Economic Risk

Market Risk

Operational Risk

Other Risk

Company Overview



OR1 - Cut-throat Online Competition Impedes Suning’s ExpansionInvestment Risks

17SJTU |

Source: Company Data, Team Analysis, iResearch

An increase in online sales growth rate and online market share • Alliance with Alibaba to attract online customer flows • Eye-catching performance in 2015 Singles Day Promotion

Mitigation Factors

372%60%

Price Wars Narrow Margins

Suning

Tmall

JD 22%

18%

31%OR1

Prob

abili

ty

Impact

Significant

Risk Level

Risk Matrix

Company Overview



High Market Concentration

2014 Online Market Share

0%

20%

40%

60%

80%

Alibaba JD Vipshop Suning Gome

3.0% 2.9% 1.7%

60.4%

19.5%

Discount on 2015 Singles Day

OR2 - Uncertainty of REITs and Income CliffInvestment Risks

18SJTU |

Source: Team Estimation and Calculation

OR2

Prob

abili

ty

Impact

Significant in short-term

Risk Level

• Improving operating income • Disposal of all 13 available self-owned stores in 2016 (25 already sold)

Mitigation Factors

Income Cliff in 2016 (in millions CNY)

-2,000

0

2,000

4,000

-2,000

0

2,000

4,000

2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Total Income EBIT Pre-tax Gain from REITs

Risk Matrix

Company Overview



Conclusion

Suning — The Leader of China RetailersConclusion

19SJTU |Company Overview



Extensive chain store network, logistics and supply-chain management

Offline






Proactive online strategy to develop larger customer base

Offline Online






Great opportunity to cooperate and to keep pace with market growth


Offline Online

O2O Integration








Improving profitability and increasing operation efficiency

Offline Online

O2O Integration Sound Financials





Extensive chain store network, logistics and supply-chain management BUY

Recommendation



Improving profitability and increasing operation efficiency

Offline Online

O2O Integration30.4%

Up

CNY 20.27

CNY 15.54 Sound Financials

Shanghai Jiao Tong University Student Research April 13, 2016

Thank You

Investor Relations

Equity Research on Suning Commerce Group