Sales/NP in line with DB/consensus for 2017

Yonghui announced its 2017 preliminary results after market closed today. NPgrew by 45.1% to RMB1.8bn, which is in line with both DBe/market consensus.NP margin improved from 2.6% in 2016 to 3.1%. Sales grew 18.61% to RMB58bn,also in line with DB forecast and market consensus.

For 4Q17, sales grew by 24% while NP declined by 4% in 4Q17, which is 4%/8%lower than our expectation. This is mainly due to higher than expected opex ratiowhich we believe is due to more stores opened in this period.

NP growth is mainly attributed to 1) GPM improvement resulting from enhancedsupply chain management and lower scrap rate for fresh products; 2) operatingleverage helped by its effective “partnership structure”. Among the regions,Beijing, East China and Sichuan regions outperformed in terms of store efficiencyand profitability; 3) interest income growth.

In our view, sales growth was mainly driven by store opening expansion andSSSg. According to its website, it net opened 141 stores in 2017 and the totalno. of stores reached 597 as of end-2017. This is ahead of its 80-100 guidance.It also saw SSSg acceleration from 2% in 9M17 to 3% in 4Q17 (DBe), despitethe late CNY this year, based on our meeting with management before its resultsblack out period.

Going forward, we believe Yonghui is able to keep the similar store expansionpace in 2018 as it has signed contract with another 170+ stores based on itswebsite. Apart from its traditional Red Label/Green Label supermarkets, it mayopen more Super Species and Yonghui Life stores with Tencent's partnership.

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