Company Profile

FUJIAN DONGBAI (GROUP) CO., LTD. is a China-based company principally engaged in commodityretailing, as well as the development and sales of real estates. The Company distributes householdelectrical appliances, cosmetics, cigarettes, wines, general merchandise and others through its regularchain department stores. In addition, the Company is also engaged in property leasing, propertymanagement, supply chain trading, as well as the provision of hotel, catering and advertisinginformation services. The Company principally conducts its businesses within domestic market.

(Source: Reuters)

Investment Highlights

Starting as a department store, FUJIAN DONGBAI (the company) rolled out its business into logistics realestates. Its equity is highly concentrated currently after the exit of state-owned equity.

Established in 1957 and undergoing stages including state-owned enterprise reform, the companyexpanded its businesses from commercial retail to storage logistics.

The company reported CNY 4.1 billion in revenue, a rise of 36.81% year-on-year (YoY); its net profitattributable to shareholders increased by 26.02% YoY to CNY 330 million in 2019 with commercialretail and storage logistics contributing CNY 112 million and CNY 221 million, respectively.

The actual controller of the company in 2013 was changed to ZHENG Shufen, and Mr. SHI Wenyi, herson, is the Chairman of the Board at Zhonglian Real Estate. The equity held by the actual controllerand persons acting in concert totaled 52.62% at the end of Q120.

The market share of its commercial retail business in Fuzhou was 50% and the company expanded themarket in Lanzhou in 2019.

Currently, the company operates 9 shopping malls in four cities including Fuzhou and Lanzhou andthe building areas reach 800,000 square meters with 410,000 square meters holding by itself.

In 2019, the company realized a revenue of CNY 3.187 billion, with the gross margin of CNY 603million.

As the time-honored brand in Fujian Province, the company boasts over 50% market share and the regional advantages of DONGBAI Center, its core store, are irreplaceable.

High-end storage is in short supply with the demand reaching 100 million square meters.

China’s per capita logistics property area was significantly behind the developed economies (China,Japan and the US is 0.7, 4 and 3.7 square meter per capita, respectively).

The booming development of e-commerce makes storages in tight supply, high-standard storageswith higher performance in particular. The current areas of high-standard storages are roughly 50million square meters, but the demand is about 100 million square meters, according to theestimation of CUSHMAN & WAKEFIELD.

ESR, one of logistics property operators floated its securities in HONGKONG in 2019 and the currentareas in development and charge reach 17.2 million square meters, with market value exceeding HKD50 billion and the average PE reaching 30X.

By virtue of “investment—construction—attracting merchants—exit—management” model, theFuzhou-based company further continued its cooperation with the Blackstone Group and expanded itsbusinesses in storage logistics.

As of 2019-end, the company owned and managed 12 projects of logistics with building areasachieving 1.3409 million square meters (including to-be constructed projects and projects inconstruction) and covering Beijing-Tianjin-Hebei Region, the Yangtze River Delta, Guangdong-HongKong-Macao Greater Bay Area and core areas in central and western regions along the Belt and Road.Despite the limited contributions of logistics business with CNY 63 million in revenue in 2019, themature cooperation with the Blackstone Group made the exit project get considerable investmentincomes with CNY 226 million and CNY 331 million in 2018 and 2019, respectively. Through thecombination model of asset-light and asset-heavy, the company is expected to scale up developmentand management by three times in the upcoming three years, contributing more profits.

Earnings forecast and investment recommendationThe company’s commercial retail business is seeking progress while keeping stability and storagelogistics business is developing towards ESR in terms of the medium scale. Based on thesum-of-the-parts valuation, its main assets relocation value is roughly at CNY 13.482 billion, and itsmarket value on June 4th was CNY 4.374 billion.

We estimate its EPS to be CNY 0.42/CNY 0.60/ CNY 0.92 for year 2020/2021/2022, implying a P/Eratio to be 11.62x/8.13x/5.30x. We are upbeat about the development of the company and give it an“Outperform” rating in the first coverage.

Potential risks

a great decline in the demand in retail market and logistics market; a great contraction in land supplyfor logistics; a decrease in property management valuationThis English translation of the original Chinese version <物流地产发展正当时，内在价值待发现>

issued by Industrial Securities on June 04, 2020 is for information purpose only. In case of adiscrepancy, the Chinese original will prevail.