1H22 results largely in line with our expectations

Dashang announced its 1H22 results: Revenue fell 12.7% YoY to Rmb3.82bn, attributable net profit declined 14.4% YoY to Rmb426mn, and recurring attributable net profit dropped 24.5% YoY to Rmb322mn, largely in line with our expectations. The firm’s non-recurring gains mainly came from the Rmb89mn gain from the disposal of non-current assets.

Revenue fell 10.5% YoY in 1Q22 and 15.4% YoY in 2Q22. Attributable net profit declined 19.2% YoY in 1Q22 and 7.8% YoY in 2Q22. Recurring net profit dropped 13.9% YoY in 1Q22 and 38.5% YoY in 2Q22.

Trends to watch

1H22 revenue fell 12.7% YoY due to COVID-19 resurgence. Revenue from department stores, supermarkets, household appliances, and other businesses dropped 13.1%, 8.9%, 28.9%, and 3.9% YoY in the city of Dalian in 1H22. In the city of Daqing, revenue from department stores, supermarkets, and other businesses fell 6.6%, 12.9%, and 27.0% YoY, while that from household appliances increased 4.7% YoY. In the city of Mudanjiang, revenue from department stores, supermarkets, and household appliances dropped 20.0%, 15.4% and 12.6% YoY in 1H22. We attribute the decline in revenue to the firm’s temporary shutdown of stores due to the pandemic prevention policies and disrupted supply chains amid the COVID-19 resurgence in some regions of China. The firm closed 3 stores in 2Q22 on a net basis, bringing the total number of stores to 120.

Profitability declined in 1H22. The firm’s gross margin fell 1.6ppt YoY to 39.8% in 1H22, mainly due to a sharp decline in gross margin of the department store business. Expense ratio dropped 0.4ppt YoY to 12.7%. G amp;A and R amp;D expense ratio grew 1.0ppt YoY to 10.1%. Financial expense ratio fell 0.7ppt YoY to 1.6%, mainly due to decreased interest expenses on lease liabilities and increased FX gains. Attributable net margin fell 0.2ppt YoY to 11.1%, and recurring net margin dropped 1.3ppt YoY to 8.4%. The firm’s profitability declined in 1H22.

Watch business adjustment and innovation. The firm has adjusted its store deployment and enriched its product portfolio. Meanwhile, it has improved store operations for food and entertainment projects. The firm leverages the 51tiangou.com app and Weixin mini program to develop various innovative sales strategies in order to bring more customer traffic to offline stores. In 1H22, Dashang acquired six stores from its controlling shareholder. It has improved corporate management and built a complete store network in order to enhance its competitive advantages.

Financials and valuation

We maintain our attributable net profit forecasts of Rmb609mn for 2022 and Rmb640mn for 2023. The stock is trading at 8x 2022e and 8x 2023e P/E. We maintain an OUTPERFORM rating and a target price of Rmb22, implying 11x 2022e and 10x 2023e P/E and offering 26% upside.

Risks

Resurgence of COVID-19 pandemic; fiercer competition; weak consumer demand.