2021 results in line with the preannouncement

Dashang announced its 2021 results: Revenue declined 2.3% YoY to Rmb7.93bn and net profit attributable to shareholders rose 40.6% YoY to Rmb702mn; recurring net profit grew 12.1% YoY to about Rmb560mn, in line with the firm's preannouncement. Its non-recurring income mainly came from the sale of non-current assets and income from financial investments. By quarter in 1-4Q21, its revenue recorded YoY growth rates of 19.1%, 0.6%, -12.4%, and -16.1%, and its recurring net profit saw YoY growth rates of 707.1%, -18.9%, -29.6%, and -70.4%. Its 2H21 results were under pressure due to the COVID-19 resurgence in China.

The firm proposes distributing a cash dividend of Rmb20 for every 10 shares, with a dividend payout ratio of 109.54% (including the 28.48% dividend payout ratio in 2021 when the firm bought back shares in cash), beating our forecast.

Trends to watch

Revenue fell 2.3% YoY due to fiercer competition and pandemic resurgence. By business, revenue from the department store and supermarket businesses dropped 1.3% and 13.1% YoY, and that from the household appliances store business rose 6.6% YoY. We attribute the decline in supermarket revenue to a high base in 2020 and fiercer competition in 2021. By region, revenue from business operations dropped 6.3% YoY in the city of Dalian and rose 0.9% and 12.4% YoY in the cities of Daqing and Mudanjiang. In 2021, Dashang improved its business layout and resource allocation, closing stores that incurred losses. The number of its stores in business dropped to 122 stores at end-2021, implying a net reduction of six stores. The net reduction of stores had a negative impact on its revenue.

Profitability improved in 2021, thanks to higher GM. In 2021, the firm's gross margin (GM) rose 6.1ppt YoY to 39.7%, mainly due to: 1) a higher proportion of products sold under the centralized purchasing and direct selling model; 2) a higher proportion of high-GM products; and 3) a YoY decline in the revenue proportion of the low-GM supermarket business. Dashang's selling expense ratio dropped 0.2ppt YoY to 12.2% and its G&A expense ratio rose 1.8ppt YoY to 10.1%. Its financial expense ratio rose 2.7ppt YoY to 2.3%, mainly due to about Rmb240mn in amortized financial charges not recognized under the new lease standards. The firm's attributable net margin rose 2.7ppt YoY to 8.9%, and its recurring net margin edged up 0.9ppt YoY to 7.1%, showing its profitability improved in 2021.

Watch progress in fine-tuning of business operations. First, Dashang plans to expand its presence in higher-tier cities. It has established a trading company in Beijing, and is set to build business entities in Shanghai and other first-tier cities. Second, the firm plans to increase its product categories. In order to mitigate horizontal competition, Dashang intends to establish a wholesale company in Shanghai, specializing in the wholesale of scarce products. Such a move will likely improve its traditional business, in our view. Third, Dashang is fine-tuning the structure of its product mix to meet consumer demand. It plans to increase the proportion of food products to over 60% as measured by gross floor area (GFA) in its stores, and cut the proportion of clothing and other products to about 40%. We think this will increase income per store.

Financials and valuation

We maintain our 2022 EPS forecast of Rmb2.07, and introduce a 2023 EPS forecast of Rmb2.19. The stock is trading at 10x 2022e and 9x 2023e P/E. We maintain an OUTPERFORM rating and our target price of Rmb22. Our TP implies 11x 2022e and 10x 2023e P/E, offering 9% upside.

Risks

Weak consumer demand; recurrence of COVID-19 pandemic; fiercer competition.