1Q22 results in line with our forecast

Dashang announced its 1Q22 results: Revenue declined 10.5% YoY to Rmb2.20bn and net profit attributable to shareholders fell 19.2% YoY to Rmb234mn; recurring net profit dropped 13.9% YoY to about Rmb210mn, largely in line with our forecast. Non-recurring items mainly include financial investment income.

Trends to watch

Revenue fell 10.5% YoY due to fiercer competition and COVID-19 resurgence. Revenue from the department store, supermarket and household appliance businesses dropped 13.2%, 8.1% and 14.0% YoY in the city of Dalian in 1Q22. In the city of Daqing, revenue from department stores fell 13.9% YoY, while revenue from supermarket and household appliance businesses rose 8.7% and 6.2% YoY in 1Q22. In the city of Mudanjiang, revenue from the department store, supermarket and household appliance businesses dropped 13.1%, 21.0% and 14.2% YoY in 1Q22. Overall, Dashang’s revenue from department stores and supermarkets declined YoY in most regions, which we attribute to a smaller number of offline customers due to the resurgence of COVID-19 and fiercer competition. The number of its brick-and-mortar stores reached 123 in 1Q22, with a net increase of 1 store.

Recurring net margin fell 0.4ppt YoY; profitability down slightly. In 1Q22, the firm's gross margin (GM) edged down 0.8ppt YoY to 41.3%. Dashang's selling expense ratio dropped 1.5ppt YoY to 12.8% and its G&A expense ratio rose 1ppt YoY to 9.9%. Financial expense ratio declined 0.5ppt YoY to 1.8%. Overall, the firm’s attributable net margin fell 1.1ppt YoY to 10.6% and recurring net margin fell 0.4ppt YoY to 9.5%, implying slightly weaker profitability.

Watch the progress of reforms. 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. Dashang intends to establish a wholesale company in Shanghai to focus on the wholesale of scarce products in order to improve its traditional business. Third, Dashang is fine-tuning 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 the firm’s store efficiency.

Financials and valuation

We maintain our earnings forecasts of Rmb609mn for 2022 and Rmb640mn for 2023. The stock is trading at 10x 2022e and 10x 2023e P/E. We maintain an OUTPERFORM rating and our target price of Rmb22. Our TP implies 11x 2022e and 10x 2023e P/E and offers 6% upside.

Risks

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