CFA Institute Research Challenge
CFA Institute Research Challenge Hosted in Shanghai Shanghai Jiao Tong University Shanghai Jiao Tong University Student Research Specialty Retail Industry, Consumer Discretionary Sector
Shenzhen Stock Exchange Suning Commerce Group Date: 13 November, 2015 USD/CNY: 6.37 Recommendation: BUY . Ticker: 002024.SZ Current Price: CNY 15.54 Target Price: CNY 20.27 (UP 30.44%)
This report is published for educational Highlights purposes only by students competing in The CFA Institute Research Challenge. We initiate coverage with a BUY recommendation on Suning Commerce Group (Suning) based on a one-year target price of CNY 20.27 using Discounted Cash Flow and Relative Stock Price Movement Multiples Valuation. This target price offers a 30.44% upside from its closing price of CNY 15.54 on November 13th, 2015. Our recommendation is primarily driven by: 002024.SZ 400 CSI 300 Retailing • Promising O2O Layout - The future of retail depends on both online and of line SZSE COMPOSITE 300 business, providing customers with not only convenient access to various ranges of products, but also comprehensive last-mile shopping experience. As one of the largest 200 specialty retailers in China, Suning proactively devotes to the development of Online- 100 to-Of line business, transforming into a competitive retail conglomerate.
0 • Outstanding Advantages - Unlike pure play e-retailers such as JD (JD.OQ), Suning is irmly supported by several strengths, including its nationwide retail chain, veteran 4-Mar-14 1-Aug-14 6-Jan-15 13-Nov-1219-Apr-1324-Sep-13 10-Jun-1513-Nov-15 supply chain management, and logistics bases with leading storage capacity. Looking Source: Market Data beyond of line industry standards, Suning has irst-mover advantage in online expansion, logistics network and inancial services, widening the gap between itself and other traditional retailers. Market Pro ile 52-Week High/Low CNY 23.54/7.64 • Solid Liquidity Position and Operating Ef iciency - Suning’s outstanding liquidity and improving cash suf iciency indicate strong ability in cash low management, which Average Daily Volume 241.86M is crucial to retail companies. Besides, the shortening operating cycle and improving Shares Outstanding 7,383,043,150 inventory turnover rate demonstrate Suning’s high operating ef iciency. Market Cap. CNY 114.732B • Growth Drivers - Prospective growth for Suning is powered by solid revenue growth Beta 1.005 and increasing market share generated by (1) strong consumption growth, (2) O2O layout, (3) strategic corporation with Big Macs including Alibaba and Wanda to P/S (TTM) 0.9 effectively improve e-commerce position and to increase lagship stores coverage. P/E (TTM) 58.5 EV/Revenue (TTM) 1.0 Recent News Source: Team Computation • Robust Performance on Singles’ Day (Nov.11) - 11/13/2015: On this annual online shopping festival, Suning ranks 1st in online sales growth, outperforming Alibaba and Earnings Per Share (CNY) JD. Sales surge 358% YoY, in which 67% orders are from mobile portals, and of line sales solely rise by 153%. Cellphone sales grow at 700%, refrigerator at over 1000% 0.8 and baby products at 620%. 0.6 • Cooperation Deal with Dalian Wanda Commercial (3699.HK) - 09/06/2015: Wanda Group and Suning are deepening cooperation in e-commerce to get greater traction by 0.4 combining their of line and online resources. The deal will allow Suning to open 40 0.2 stores at Wanda Plazas across China by year's end.
0 • Strategic Collaboration with Alibaba (BABA.N) - 08/11/2015: Suning will invest up 2009 2010 2011 2012 2013 2014 to US$2.28 billion for 27.8 million newly issued shares of Alibaba at $81.51/share, Source: Company Data while Alibaba will invest CNY 28.3 billion for 19.99% of the enlarged equity capital of Suning at CNY15.23/share. After the closing of the deal, Alibaba will be the second- largest shareholder, and Suning will hold approximately 1.1% stake in Alibaba. Valuation DCF Multiples Key Statistics 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Total Revenue (M CNY) 98,357 105,292 108,925 129,565 146,573 165,231 186,845 212,396 242,165 Estimated Price 20.17 20.36 Revenue Growth Rate 4.8% 7.1% 3.5% 18.9% 13.1% 12.7% 13.1% 13.7% 14.0% Net Pro it (M CNY) 2,505 104 824 1024 668 412 778 1270 1808 Weights 50% 50% Inventory Turnover 4.69 5.03 5.38 7.18 9.00 10.57 12.05 12.93 12.99 Target Price 20.27 Debt to Total Assets 61.8% 65.1% 64.1% 47.9% 50.7% 53.7% 56.8% 59.8% 62.7% Interest Coverage 32.29 0.59 -3.08 -1.97 -0.10 2.62 4.06 5.79 7.61 Source: Team Computation EPS (CNY) 0.37 0.05 0.12 0.14 0.07 0.04 0.08 0.14 0.19 ROE 8.6% 0.4% 2.8% 1.7% 1.1% 0.7% 1.3% 2.1% 2.9% Online Sales Percentage 15.5% 24.8% 23.7% 22.4% 24.7% 27.4% 30.3% 33.4% 36.7% Source: Company Data and Team Estimation 1 Figure 1: Total Revenue and Gross Business Description Margin (in billions CNY, annual %) 18.9% 120 17.2% 17.4% 17.8% 17.8% Suning Commerce Group, established in 1990 and headquartered in Nanjing, is one of 15.2% 15.3% the largest retailers in China. Formerly known as Suning Appliance Company Limited, the 90 company operates a home appliance retail chain of physical stores. In 2004, Suning went public at Shenzhen Stock Exchange. After opening its online shopping platform 60 “Suning.com” in 2009 along with a series of M&A transactions, Suning proposed an 30 innovative business plan called “Cloud Business” in 2013, marking its thorough transition from of line-only to Online-to-Of line model. Suning currently operates 1,681 0 physical stores across China, in Hong Kong and Japan, and provides an open platform for nearly 23,000 merchants. Suning offers products of 15 million stock keeping units (SKU), 2008 2009 2010 2011 2012 2013 2014 covering not only home appliance, computers, and communication products, but also Source: Company Data online supermarkets, cosmetics, clothing, baby, inance, virtual products, etc. With the rapid online expansion, 26.26% of total revenue comes from online self-operating Figure 2: 2014 Revenue by Product products and 7.23% comes from online open platform in 2015 Q1-Q3.
Other Transition to O2O IT 1.1% As a leader in China’s specialty retail industry, Suning used to pro it by selling products 16.4% on consignment and went through rapid growth. From 2006 to 2015, Suning successfully Telecom Appliance expanded its chain stores in China from 351 to 1,681 stores (Figure 5) and became one 16.7% 53.9% of the most in luential domestic brands. Yet later, Suning met competitive pressure from AC the rise of e-commerce, following the ending of trade-in policies. The inactive growth of 11.9% store base and operating revenue (Figure 6), and huge losses in total pro it indicated that it was urgent for Suning to take action and to adapt to the trend of “Internet+”. Different from its former largest competitor Gome (0493.HK), Suning proactively embraced e- Source: Company Data commerce, aiming to better integrate its resources and to regain market share.
Figure 3: Business Process Operational Strategies Suning operates under the structure of procurement, logistics, online and of line Procurement operations, as well as supportive IT infrastructure, all of which are core competencies for retailing enterprises. Logistics IT Procurement - Running 8 purchasing centers specializing in procurement, Suning has System Platform solid collaboration with headstream manufacturers such as Samsung, Haier, Midea, Apple and Siemens, which guarantee the authenticity of goods and low costs. In 2014, 31% of the procurement amount comes from the ive suppliers mentioned above. As an Online Of line exclusive distributor, Suning also provides a variety of customized products, which not only attach added value to products but also increase pro it margin. Besides, it also Source: Team Analysis provides supply chain inance services including loans to suppliers, factoring, and deferral of payments, to improve supply chain management. Figure 4: 2013 Stores by Region Logistics - Suning has 57 regional distribution centers, 352 city trans-shipment centers, over 1,700 last-mile delivery stations and 4,055 delivery points, covering almost all of Others the 2,800 counties and districts, or nearly 5 million m2 area in both urban and rural (HK & JP) areas. With such solid infrastructure, Suning shortens the delivery time to 12 hours in most areas, and even 2 hours in 8 major cities. Suning also promotes the open strategy > 300 by sharing its logistics network with suppliers and third-party merchants. 200 - 299 100 - 199 < 100 Operations of Of line Chain and Online Platform - In 2015 Q3, Suning’s of line layout Auto DC consists of 1625 chain stores in China, covering 296 cities nationwide, as well as 26 stores in Hong Kong and 30 Laox stores in Japan. In 2014 and 2015, Suning sells and Source: Company Data leases back 25 of its 38 self-owned stores through Real Estate Investment Trust (REIT). The securitization of real estate properties brings Suning short-term pro itability and Figure 5: Number of Stores in China liquidity. With regards to online platforms, Suning intensively carries out promotions Community Central Flagship and expands SKU to offer wider selections for customers. In 2015 Q3, the number of 1,600 339 333 336 330 registered members has reached 214 million, including 45 million active users. 1,200 239 161 437 433 438 IT Infrastructure - By analyzing big data to accelerate R&D of various applications, 112 428 800 364 224 291 Suning is constantly enhancing its comprehensive IT platform to support precision 400 marketing aimed at both customers and suppliers. With constantly updated data 476 489 584 762 777 737 797 supported by the SAP/ERP inventory management systems irst introduced in 2013, 0 Suning is able to perform subsequent analysis to optimize inventory cycle for different products. 2008 2009 2010 2011 2012 2013 2014 Source: Company Data
2 Figure 6: Operating Revenue Corporate Governance and Management Growth (annual %) 32% As one of the most well-known and leading companies in China, Suning has well 24% established corporate governance and management structure (See Appendix D&E) with highlights listed below: 16% 8% • Management - Suning’s management team consists of 4 key executives aging under 41 with decades of experiences in their areas, which guarantees Suning both young and 0% reliable management capabilities. Suning also maintains a lat organizational structure of region – city two terminal management model. 2008 2009 2010 2011 2012 2013 2014 • Employee Incentive Plans - Two phases of employee stock ownership plan (ESOP) Source: Company Data have been implemented since 2014 covering from Board of Directors to front line staff, which helps attenuate principal agency problem. Figure 7: Culture Web • Horizontal Competition Segregation - Although the biggest shareholder Jindong Zhang holds 26.44% stakes of Suning, he, along with several shareholders, has signed
Ritual & the promise of Horizontal Competition Segregation to make sure that other investors’ Stories Routines interests are not harmed.
Control The To further evaluate the corporate governance and management of Suning, we apply the Symbols Systems Paradigm model of Argenti's A Score Analysis (Appendix F) to check Defect, Mistakes, Symptoms and Failure existing in corporate governance and management to see whether Suning Org. Power can specify and deal with possible risks it may face. Based on our analysis, Suning has a Structures Structures low A score and complies with the standard requirements and best practices. Besides, to better understand its corporate culture, we applied a Culture Web analysis on Suning (Appendix G) that includes six interrelated elements. Source: Team Analysis
Figure 8: Retail Sales of Consumer Industry Overview and Competitive Positioning Goods (in trillions CNY, annual %) As one of the fastest-growing industries in China, the specialty retail industry, in Catering Services consumer discretionary sector, is where Suning has gained its strength to become a retail 23.3% Commodities 28 giant. In 2014, the size of the industry, determined by the total retail sales of consumer 17.3% 15.9% 15.5% goods, increased by 12.0% to CNY 23.2 trillion (Figure 8), to which online sales 21 14.3% 13.1% 12.0% contributed about CNY 2.79 trillion (10.6%). Speci ically, in terms of market structure, 14 there exists distinct divergence between online and of line retail market, as the of line market is relatively dispersed (2014 CR10: 6.6%) while the online marketplace presents 7 to be highly concentrated (2014 CR4: 85.8%). The industry growth is highly in luenced 0 by external economic environment and internal factors.
2008 2009 2010 2011 2012 2013 2014 China’s Economic Performance Source: National Bureau of Statistics Moderate Economic Growth With Structural Transformation After decades of high-speed economy expansion, China witnessed its GDP growth rate Figure 9: GDP Growth (annual %) gradually decreased from 10.6% in 2010 to 7.3% in 2014 (Figure 9), as the government has attempted to shift from the export-led economy to a consumer and service-led one 12% since 2013. The contribution to GDP from service sector has surpassed that from manufacturing sector. Consumption is becoming the primary driver of China’s economy, 9% China in replacement of investment. To achieve a “soft-landing” that would further support the 6% long-term growth, several policies, such as the home appliance subsidy program in rural Developing Asia areas, were implemented to promote average wage and to stimulate consumption. 3% World 0% Impact of Demographic Changes on Consumer Discretionary Sector In 2014, with a stable 0.5% growth rate similar to that of some economies, such as
2010 2011 2012 2013 2014 Finland, France and the UK, the Chinese population reached 1.36 billion, of which 10.1% 2015E 2016E Source: IMF are aged over 65. In addition, the dependency ratio slightly bounced back from the lowest 34.2% in 2010 to 36.14% in 2014, while the urbanization rate also increased to Figure 10: Dependency Ratio and 54.8% (Figure 10). These facts indicate that as the necessity of home care elevates and Urbanization Rate (annual %) the urban population keeps rising, people may have greater demand and easier access than before to household goods, revealing a rising importance of discretionary spending 65% and the reason why Suning is having more community stores in rural area. Urbanization Rate 55% Specialty Retail Industry 45% Recent Trends Beneath the Dramatic Growth of Online Shopping Dependency Ratio Online shopping has seen a very strong growth and gradually become one of the major 35% channels for consumer goods, posing a huge threat to specialty retail stores. In 2014, the 25% scale of online shopping grew by 47.4% to CNY 2.79 trillion (Figure 11), and is expected to keep boosting in recent years because both the number of online shoppers and the 2008 2009 2010 2011 2012 2013 2014 penetration rate may remain high. Based on the merits of online shopping—the variety Source: National Bureau of Statistics 3 Figure 11: Online Shopping Growth and availability of goods, competitive pricing strategy and convenient home shopping (in trillions CNY, annual %) experience, the online business can dominate a considerable market share.
8 70.2% Stagnant Condition of Traditional Specialty Retail Stores 59.4% 6 51.3% 47.4% Despite the general downturn in luenced by the rise of online shopping in these brick- 43.1% and-mortar stores, the retail sales growth in specialty retail stores seemed to be 4 33.3% 25.1% especially calm or even stagnant since the beginning of 2015 (Figure 12). To avoid 2 becoming mere “showrooms”, several specialty retail companies, such as Suning and Gome, had taken actions to establish their own online platforms, hoping to promote their 0 revenue by selling various kinds of products including foods, clothes and cosmetics, and to compete against the growth of proper online retail companies. Nevertheless, the result 2011 2012 2013 2014 2015E 2016E 2017E of these efforts had been proved to be limited, as 79.9% of the online sales in 2014 was Source: iResearch still dominated by Alibaba and JD, leaving the rest highly fragmented (Figure 13).
Figure 12: Retail Sales Growth of Key Transition from Old Competitors to O2O Cooperators 5,000 Key Enterprises (monthly %) But these trends can also be great opportunities for traditional retailers to thrive again. Dept. Stores Supermarkets Now, as the two big online players gain enough strength and the online sales growth 30% Specialty Retail Stores slows, they are expanding sales channels to complete the last mile to better customer 20% experience and to further dominate the market. By considering the cost and the risk of building up their own shops from zero, online retailers are drawing support from 10% traditional retailers who are also interested in developing online business, directing their 0% online customers to these physical shops with full after-sales services and integrating a mutually bene icial and community-based O2O economy. -10% Competitor Analysis Suning Gome Alibaba Jingdong Sep-11 Oct-12 Oct-13 Sep-14 Sep-15 Procurement & Logistics Source: National Bureau of Statistics Inventory Turnover 5.38 5.37 N/A 10.87 Distribution Center 65 21 N/A 14 Figure 13: 2014 Market Share of Transshipment Warehouse 352 407 N/A 123 Online Retail Sales Warehouse Space (thousands m2) 4,030 1,950 N/A Over 2,030 Delivery Point 3,427 Over 2,488 N/A 3,210
Vipshop, 3.0% = Suning, 2.9% Online Operation Other Gome, 1.7% Online Revenue Share 24.1% 6.5% 100% 100% 20.1% … Gross Merchandise Volume (CNY) 25.8B 7.7B 1172.0B 260.2B Stock Keeping Unit 7.91M Over 2M — Over 30M Alibaba Jingdong Paying Members 27.0M 0.5M 334.0M 96.6M 60.4% 19.5% Of line Operation Store in China 1,650 1,132 N/A N/A Store Space (thousands m2) 6,583 3,732 N/A N/A Surface Ef iciency (CNY/m2) 12,600 16,173 N/A N/A Source: iResearch Source: Company Data until the end of 2014
Figure 14: PESTEL Analysis Competitive Positioning Given the trend of O2O and the differences among these major retailers, Suning, with Political over 25 years of experience, rich logistics resources and great brand awareness, is expected to acquire a favorable position in this competitive industry, which has moderate 3 Legal Economic changes in political, economic, social and technological factors (Figure 14 & Appendix H). 3 2 Faced with several levels of competition in the industry (Figure 15 & Appendix I), Suning is taking the advantages in the following aspects to tackle the challenges. 1 3 Environmental Social 3 Better Coherence Between Bricks and Clicks In order to balance the discrepancy in price and experience between online and physical Technological shopping, Suning has gradually reformed its physical stores and pricing strategy. Suning Source: Team Analysis has managed to shift the potential value of its traditional stores to a series of new “Cloud Stores” that, like shopping malls, display not only appliances but also various kinds of Figure 15: Porter Five Forces household goods, based on a convenient price-checking system that enables customers to focus on services and shopping experience. From April to September in 2015, Suning Intensity of Competitive Rivalry had opened 40 cloud stores, and it is going to set up another 40 stores in Wanda Plazas with Wanda Group, China’s biggest property developer, under a cooperation agreement. 3 Threat of Threat of Substitutes New Entrants Sustainable Growth Based on A Larger Customer Base 3 2 Since 2012, Suning’s pivot to online business has led to a massive expansion of its service and SKU, which has exceeded 15 million. The acquisitions of Laox, RedBaby, Manzuo.com, 2 3 etc. represent Suning’s ambition to reach much more customers from different places Bargaining Power Bargaining Power and to seek growth in the boundless retail industry. By the end of 2014, Suning had of Suppliers of Customers acquired more than 167 million members, and is now enjoying a considerable online Source: Team Analysis customer base from Tmall, under a strategic partnership with Alibaba. 4 Strong Connections Through Open Platform Owning the competitive infrastructures mentioned in our Business Description, Suning is Figure 16: SWOT Analysis sharing its capacity in logistics, retail management and advertisement with different roles of supply chain. The Suning Open Platform (SOP) enables third-party merchants to Strengths directly sell products to customers. It aims to help domestic suppliers effectively manage their sales and promote their brands by providing free training courses, comprehensive 21 statistics, and rich resources of customers services. In 2014, the transaction size on SOP had reached 3.20 billion, 12.4% of the total online transactions. Threats 17 12 Weaknesses Investment Summary 14 We issue a BUY recommendation on Suning with a target price of CNY 20.27, using a Opportunities Discounted Cash Flow (DCF) Analysis and a Relative Multiples Valuation. Our research identi ies several main drivers of volatility in Suning’s intrinsic value, including Real GDP Source: Team Analysis Growth, Online Sales Expansion, Revenues from New Business Lines, Sales Expenses, Weighted Average Cost of Capital (WACC) and Terminal Growth Rate, etc. This valuation is supported by numerous merits, as below, and concerns taken into consideration:
Merits Figure 17: GDP Composition (in Promising Growth of Household Expenditure trillions CNY, annual %) With the structural adjustments of China’s economy, and growth stabilization to cushion
Consumption Others C / GDP the slowdown, household expenditure keeps rising steadily. According to National 80 51.2% 50.8% 51.0% Bureau of Statistics, the HFCE per capita on household facilities, articles and service still 50.2% performs quite well, reaching its highest point in 2014, and is likely to continue growing 60 49.1% at a rapid rate. The data indicates a rebalance from growth driven by investments and
40 28.9 31.2 industrial production towards consumption and the services sector. The increasing 26.3 23.9 20.7 proportion of consumption as GDP component provides retail industry, especially Suning 20 who sets foot in both online and of line, with an opportunity for growth (Figure 17). 20.0 24.2 27.2 30.1 32.8 0 2010 2011 2012 2013 2014 Strategy Alliance with Alibaba to Build on Synergies in Retail Ecosystem Suning has entered into a strategic agreement with Alibaba to build on synergies in e- Source: National Bureau of Statistics commerce, logistics and incremental business through joint omni-channel initiatives. This collaboration between No.1 and No.3 e-retailers would help both of them to compete against JD, the No.2 player, and give Suning the following merits:
• Suning has opened a lagship store on Alibaba’s Tmall platform and it will bring Suning Figure 18: Online Sales Growth (in incredible online customer lows that Tmall enjoys. billions CNY, annual %) • Alibaba’s rich online resources and operational experiences would accelerate Suning’s 392% strategic transition from of line-only to O2O. Suning Jingdong 120 • Suning will share Alibaba’s advantages in big data analysis, mobile app portals entrance, third-party payments to provide customers with personalized services. 90 143% 158% 60 93% O2O Layout Boosting Retail Sales 44%66% 62% 3% The future of retail is multi-play, not pure-play, meaning O2O layout that contains multi- 30 channels is the most effective long-term business model, remarkably promoting sales. On 0 the one hand, of line layout shall reach customers irst hand through bricks-and-mortar 2010 2011 2012 2013 2014 chain stores, where Suning provides customized shopping experience, after-sale services, and offers selections of high-end products, which carry a higher pro it margin than that Source: Company Data of online products. On the other hand, online platforms would bring in large customer lows from a wider coverage of Internet and mobile users, through precision marketing.
Concerns Obstacles in Online Expansion as a New Entrant Figure 19: Market Share of Price As a traditional retailer, Suning launched e-commerce transition in 2009. The sluggish War on Double 11, 2014 accumulation of online users and the late initiation of online platform construction might Products with Bottom Price % undermine Suning’s positioning, after competitors including JD and Alibaba have already obtained online market share and established e-commerce ecosystems (Figure 18). As a Products On Sale % new entrant with a lagging position, Suning may face challenges in expanding online market share.
Intensive Price Wars Hold Back Pro it Margin 0% 20% 40% 60% 80% 100% Gross Pro it Margin encounters downward pressure from the three aspects: (1) Suning Tmall Jingdong DangDang 1HaoDian faces quickened paces of price wars (Figure 19) waged by online retailers to expand Amazon Suning Others customer base. After Suning uni ied the prices of online and of line products in 2013, lower online margins dragged down of line margins. (2) Since online business, which Source: B5M.com enjoys a lower pro it margin, has a much higher growth rate than the of line, the 5 Figure 20: Revenue and Sales increasing proportion of online business will gradually drag down gross margin. (3) Growth (in billions CNY, annual%) Increasing manufacturing costs and logistics costs for suppliers are partly transferred to Total Growth Online Of line Suning’s operating costs. 18.9% 300 Ind. Average 17.4% 14.0% 13.1% 12.7% 13.1% 13.7% Uncertainty of Revenue from Other Business Lines 225 7.1% 4.8% 3.5% In building an online ecosystem, Suning has established inance af iliates to provide 150 third-party payments tool (“Yifubao”), consumer credit-line inance and supply chain inancial services. Competition from other mature third-party payments units and from 75 customer inancial service providers like Alibaba and Tencent casts uncertainty on future 0 performance of these business lines.
2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Financial Analysis Source: Company Data, Team Estimation
Financial Condition 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Figure 21: Gross Margin Breakdown Pro itability Gross EBITDA EBIT Net Gross Pro it Margin 17.9% 15.2% 15.3% 16.0% 15.8% 15.5% 15.2% 15.0% 14.7% 20% Ind. Average 19.8% Net Pro it Margin 2.5% 0.1% 0.8% 0.8% 0.5% 0.2% 0.4% 0.6% 0.7% EBIT Margin 3.0% 0.1% -1.1% -0.6% 0.0% 0.6% 0.9% 1.1% 1.3% 15% EBITDA Margin 4.5% 1.6% 0.4% 0.8% 1.3% 1.8% 1.9% 2.0% 2.0% Sales Growth 4.8% 7.1% 3.5% 18.9% 13.1% 12.7% 13.1% 13.7% 14.0% 9% Ind. Average 7.7% Ind. Average 1.3% Liquidity Ind. Average 0.6% Current Ratio 1.30 1.23 1.20 1.57 1.52 1.48 1.44 1.40 1.36 4% Quick Ratio 0.76 0.65 0.60 1.02 1.03 1.03 1.03 1.00 0.97 -1% Cash Ratio 0.73 0.64 0.59 1.00 1.02 1.01 1.01 0.98 0.96 Activity 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Account Receivable Turnover 63.21 108.46 180.54 194.46 188.76 188.61 189.02 189.60 189.97 Source: Company Data, Team Estimation Accounts Payable Turnover 8.52 8.51 9.74 10.28 10.45 10.10 9.80 9.53 9.27 Inventory Turnover 4.69 5.03 5.38 7.18 9.00 10.57 12.05 12.93 12.99 Sales & Management Expenses/Sales 13.1% 13.4% 14.6% 14.9% 14.2% 13.4% 13.0% 12.7% 12.3% Figure 22: Turnover Ratio Operating Cycle 83.60 75.93 68.89 52.68 42.50 36.45 32.23 30.16 30.03 Receivable Payable Cash Conversion Cycle 31.65 32.53 31.91 17.17 7.56 0.31 -5.01 -8.13 -9.35 200 20 Solvency Debt to Total Assets 61.8% 65.1% 64.1% 47.9% 50.7% 53.7% 56.8% 59.8% 62.7% 150 15 Ind. Average 121.57 Non-Current Liability to Liability 19.9% 35.3% 35.7% 19.4% 20.7% 21.7% 22.5% 23.4% 24.4% Interest Coverage Ratio 32.29 0.59 -3.08 -1.97 -0.10 2.62 4.06 5.79 7.61 100 10 Debt Coverage Ratio -13.0% -18.8% -3.8% -25.9% -1.3% -2.1% -1.4% -1.4% -1.4% Financial Leverage 2.62 2.74 2.82 2.21 1.97 2.10 2.24 2.40 2.58 50 5 Investor Ratios Ind. Average 2.19 0 0 Cash Flow to Revenue 5.4% 2.1% -1.3% 3.4% 5.7% 5.6% 5.9% 5.1% 5.4% Cash Flow to Liabilities -8.1% -12.7% -2.4% -14.4% -0.7% -1.2% -0.8% -0.9% -0.9%
2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Cash Flow to Income 5.5% 2.2% -1.3% 3.4% 5.8% 5.7% 5.9% 5.2% 5.4% Source: Company Data, Team Estimation ROCE -8.5% -11.6% -13.0% -15.8% -16.9% -17.8% -19.4% -21.3% -23.5% ROA 3.3% 0.1% 1.0% 0.9% 0.6% 0.3% 0.6% 0.8% 1.1% ROE 8.6% 0.4% 2.8% 1.7% 1.1% 0.7% 1.3% 2.1% 2.9% Figure 23: Operation and Cash Cycle EPS 0.37 0.05 0.12 0.14 0.07 0.04 0.08 0.14 0.19
Operation Cycle Cash Conversion Cycle Source: Company Data and Team Estimation Sales and Management Expenses / Sales Ind. Average 16.23% Rapid Revenue Growth and A Rising Proportion of Online Revenue 14.9% 90 14.6% 14.2% Suning’s revenue consists of two parts, namely traditional of line stores sales revenue 13.1% 13.4% 13.4% 13% 12.7% (72.3%, 2015Q3) and online Suning.com sales revenue (27.7%, 2015Q3) (Figure 20). 60 12.3% Online sales come from both self-operating stores (21.7%, 2015Q3) and merchants on 30 the third-party open platform (6%, 2015Q3). With the transition to O2O, online sales will 0 contribute to a higher proportion of total revenue (36.7%, 2020E), but will slightly reduce gross pro it margin (2015Q3: 15.8%, 2020E: 14.7%). Lower value-added -30 products and accessible online price comparison result in lower margin, but it’s
2012 2013 2014 acceptable considering its position in the phase of expanding market share (Figure 21), 2015E 2016E 2017E 2018E 2019E 2020E which is the key to long-term online business growth. Source: Company Data, Team Estimation Optimistic Outlook for Suning’s Online Business Figure 24: Liquidity Ratio To compete with B2C business providers, Suning’s O2O strategy and online sales growth Current Ratio Quick Ratio Cash Ratio are critical. With regards to online products, SKU increased at a compound growth rate of Cash to Total Assets 49.6% 45.7% 47.7% 55.4% to 15 million (2015Q3), while registered members at 17.8%(214 million, 42.2% 39.5% 39% 1.6 35.6% 2015Q3) and active users at 34.3% (45 million, 2015Q3) (Figure 27). The rapidly- 30.2% 27.1% 1.3 growing customer base contributes to high online sales growth (YoY 25%). Solely for Ind. Average 1.28 third-party platform income originating from 2013 that contains commission fees,
1.0 Ind. Average 0.93 advertising revenue and other business revenue, it grows at a CAGR of 17.2% (23,000 third-party stores, 2015Q3). Suning earns 5% commission fees of merchants’ deal 0.7 Ind. Average 0.73 amount on the platform, instead of charging ixed administrative fees. Thus we estimate 0.4 an increasing value of Suning's platform and a higher proportion of revenue from third- party merchants in total revenue. 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Source: Company Data, Team Estimation 6 Figure 25: Solvency Ratio Of line Layout Guarantees Future Customer Base and Pro it Margin Suning has 1,681 stores globally (2015Q3), while JD and Alibaba don’t have of line stores 40 Debt / Total Assets yet. Although e-commerce has been expanding dramatically, of line stores are still 49.6% 30 45.7% 47.7% 42.2% irreplaceable in the foreseeable future, as the consumption habits of appliance buyers 39.5% 39% 35.6% are still prone to physical experience and services. BAT are also penetrating into of line 20 30.2% 27.1% Interest Coverage market, which indicates the importance of of line resources. Suning’s stores base, 10 particularly the newly-opened “Cloud Stores” that focus on O2O shopping, will support 0 Financial Leverage customers of 59 million visits per year if we assume 100 visits per store per day. As for -10 products in the same category, of line customers are more likely to buy high value-added products, which carry a higher pro it margin than that of online top-sellers. 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Source: Company Data, Team Estimation In comparison, JD had CNY 8.07 billion ful illment expenses (warehouse sorting, distribution and other expenses after order submission) in 2014, as part of total Figure 26: Logistics Related Non- operating costs. If all operating expenses are taken into consideration, the gross pro it current Assets (in millions CNY) margin of JD was almost zero, which is signi icantly lower than that of Suning due to Suning’s of line sales with a higher margin. Suning Close Partnership with Suppliers and Operations of High Ef iciency JD Due to ierce price wars, the prices of products among Suning, JD and Gome are almost Fixed Assets Gome identical. However, payment in advance of Suning (2014: 3,852 million) was signi icantly Intangible Assets lower than Gome (2014: 5,026 million) and a little bit higher than JD (2014: 3,702 0 6000 12000 18000 24000 million). Prepayments from Suning’s top ive suppliers, namely Samsung, Midea, Haier, Source: Company Data Apple and Siemens (2014) have made up more than 10% of prepayments these years. The prolonged relationship with suppliers is based on Suning’s experience of more than Figure 27: Online Customer Base twenty years in supply chain management, which won’t be easily exceeded by (in millions) competitors. Suning’s account receivable turnover (1H2015: 76.69) was higher than JD
Register User Active User SKU (1H2015: 21.06), which serves as a strong indicator of quicker collection of receivables 240 in operations. Besides, sales and management expenses was kept under control (Figure 180 23), showing solid internal costs control capacity. 120 High Liquidity and Cash Cow 60 The current ratio of Suning was always greater than 1, and we estimate an increasing 0 current ratio and quick ratio (2020E: 1.36, 0.97). Suning collects payments much quicker 2014(1H) 2014 2015(1H) 2015(Q3) from customers than paying cash to suppliers. We expect that the cash to total assets Source: Company Data ratio will rise robustly in the forecast period (2015Q3: 27.85%, 2020E: 49.6%) (Appendix L). This trend will be further improved by the company’s consistent ability to Figure 28: Investor Ratio gain higher revenue at CAGR 29.2% from 2014 to 2020E, and also by the improvements in the process of procurement, logistics, operations and IT systems (Figure 24). 9% ROE ROA ROCE
6% Healthy Leverage Condition Bene its Investments in Logistics Suning’s debt-to-total assets is 64.46% (1H2015), slightly higher than that of JD
3% Ind. Average 2.4% (1H2015: 54.81%) and Gome (1H2015: 60.76%). The ratio will drop (2015E: 47.9%) post to CNY 283 million equity investment of Alibaba in 2015. However, the logistics Ind. Average 0.7% 0% related CAPEX investment of Suning is much higher than that of JD and Gome (Figure 25). Currently the healthy gearing ratio permits at least 10% upside potential space for 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E debt to total assets ratio, which means an additional CNY 10 billion debt inancing is Source: Company Data, Team Estimation possible under an acceptable debt structure to raise funds for logistics investments. Compared to JD’s logistics system running at full capacity, Suning’s enlarging logistics Figure 29: Suning Share Prices system will improve its operations ef iciency.
24 CNY Strategic Improvement of logistics cooperation 22 and online sales with Alibaba 20 The permission of Uncertainty prospect Yifubao's inancial about the acquisition 18 products of PPTV Improvement 2014 ROE of corporate +1.70% 16 governance 14 1H 2013 ROE Q1 2014 ROE 12 -5.13% YOY -3.26% YOY 10 Lifting of Reasonable restricted expectation of 8 shares future growth Foundation of Suning 6 Insurance Company
2012-11-12 2013-03-29 2013-08-15 2013-12-31 2014-05-20 2014-09-26 2015-02-11 2015-06-30 2015-11-13 900 Million 600 300 0 Source: Company Data, iFind 7 Table 1: Sales Revenue Breakdown Recommendation: BUY Valuation Target Price: CNY 20.27(USD 3.18) Business Segment Key Drivers CAGR White Electrical Both a 6-year DCF and a Relative Multiples Valuation have been applied to derive the Income, Population 23.56% Appliances intrinsic value of Suning. Black Electrical Income, Population 5.55% Appliances DCF Model Air Conditioner Income, Population 7.59% We utilized Discounted Cash Flows Model-Free Cash Flows to Firms (FCFF) to generate Communication Income, IT 13.44% the intrinsic value for Suning as CNY 20.17. The whole process includes a 6-year Products investment projection of Income Statements, Balance Sheet and Cash Flows Statement successively Income, IT Digital and IT (Appendix U), WACC Analysis (Appendix T) and FCFF Derivation (Appendix V). The investment, 10.00% Products Internet Access estimation base for this model is built on historic pattern, micro-economy position, Life Electrical incisions on retail industry and key drivers’ interpretation for shifts in speci ic accounts. Appliances and Income, Population 18.47% The DCF model is highly sensitive to the following factors: others Sales Revenue Source：iFinD, CNII, Team Estimation To project sales revenue, we break it down into several parts according to speci ic business lines. For each part, we choose one or two key products as representatives and Table 2: Gross Margin Derivation examine the shifts in industry sales volume, price and relative size of Suning to identify 2015E 2020E revenue growth. Speci ically, industry sales volumes are forecasted based on studies of Proportion of Online Sales 22.4% 36.7% selected key drivers. By taking advantage of the forecasting model built based on Impacts of Policy of One Price 0.5 0.3 regression analysis, we ind growth of household income, population and IT investment Sales Margin 14.8% 13.7% would boost the sales volume of several business lines (Table 1). Furthermore, changes Sales Proportion 97.5% 97.1% in prices and relative size of Suning are forecasted based on formed historic patterns, Installation and Maintenance while the latter one shall also bene it from O2O layout (in line with online expansion) 21.6% 21.6% Services Margin and cooperation with Big Macs in industries. As presented by the results, led by sales of Installation and Maintenance 0.9% 0.9% White Electrical Appliances, Life Electrical Appliances and others, as well as Digital and Services Proportion IT Products, total sales revenue of Suning is going to enjoy a CAGR of 14.2% in the Others Margin 25.0% 25.0% following 6 years. Others Proportion 0.3% 1.2% Margin of Primary Business 14.7% 13.8% Gross Margin Other Business Margin 1.1% 1.1% We divide gross margin into 4 parts in regard to distinct business lines (Table 2). The Other Business Proportion 1.3% 0.8% forecast of sales margin is based on quantitative analysis of two factors including Online Gross Margin 16.0% 14.5% Business Expansion and the Policy of One Price. The former shall drag down sales Source: Team Estimation and Computation margin due to the relative low margin of online sales, while the implementation of the latter would also squeeze margin by lowering down of line prices. For the remaining Figure 30: Capital Expenditure sections, we primarily lay out our projections based on historic pattern. With respect to Declining Trend (in millions CNY) the ongoing quit of the policy started from this year, we expect gross margin shall rise up to 16.0% in 2015. But with quickened paces to expand online business, we anticipate the Added Intangible Assets ratio would gradually drop to 14.5% in the upcoming 6 years. 5,000 Added Fixed Assets 3,750 Capital Expenditure (Figure 30) Capital expenditure mainly covers capital spent on the construction of ixed assets and 2,500 intangible assets. We apply the method of BASE to forecast the accounts of ixed and 1,250 intangible assets with assumptions that new added ixed assets and intangible assets are in portion to operating income. But with respect to Suning’s slowed down construction 0 of physical stores and completion of DC layout nationwide, we anticipate that the ratio
2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E shall decline gradually. In addition, when checking added intangible assets, the Source: Team Estimation and Computation acquisition of land-use right makes up the majority (95%) of it, while purchase and development of software takes about 5% of the whole. We project that the former part Table 3: WACC Analysis shall gradually decline, while the latter shall expand. In general, we project that capital expenditure would relatively decline compared with the growth of revenue. Variable Value Risk Free Rate 3.25% Weighted Average Cost of Capital (WACC) Beta 1.01 The cost of equity is gained applying CAPM model. We take the yield on 1-year China Market Risk Premium 8.10% Government Bonds as the risk-free rate of 3.25%, while Beta of 1.005 is obtained by Cost of Equity 11.39% running a ive-year lineal regression of weekly returns of Suning against Shenzhen Pre-tax Cost of Debt 5.03% Composite Index from 2010 to 2014. Besides, market risk premium of 8.10% is based on Marginal Tax Rate 25% a 2014 study that collected opinions form 8,288 professors, analysts and managers of Post-tax Cost of Debt 3.77% companies. Thus, we calculate cost of equity as 11.39%. In addition, an average post-tax Capital Structure (equity to debt) 70:30 cost of debt of 3.77% is based on the interest rates of short-term and long-term debt as Correlation to Gross Pro it Ratio 9.11% well as proportion of them. With regards to the target capital structure of Suning, we Source: Company Data, Research Paper, calculate its WACC as 9.11% (Table 3). Team Computation Terminal Growth Terminal growth rate for Suning is projected based on two elements: in lation and sustainable industry growth. We assume constant in lation rate to be 1.5% with
8 Table 4: FCFF Summary reference to the level of 2014. While for permanent growth rate of retail industry, we use Enterprise Value and Intrinsic Value US historical growth rate for retail (general) sector of 3.67% from 2010 to 2014 as our (in millions CNY) estimation with an assumption that US retail industry has reached its steady state. Since Sum of FCFF PV 36,137 the average in lation rate for US in past ive years is 1.7%, we calculate terminal growth Terminal growth rate 3.7% rate for Suning as 3.66%. Terminal value 215,904 PV of Terminal Value 137,269 Relative Multiples Valuation Enterprise Value 173,406 Relative multiples valuation mainly focuses on a P/S valuation, because of: +Cash and cash equivalents 22,274 (1) The feasibility of splitting apart online and of line business. (2) +Non-coral Assets 6,555 The existence of negative pro it for some online retailers. (3) The strong correlation between stock price and sales in retail industry. -Total liabilities 52,657 P/S valuation generates a share price of CNY 20.36 (Table 5), which means a premium of -Minority shareholder’s equity 652 31.02%, and is compatible with price target obtained using DCF model. Therefore, this Value of Equity 148,926 result lends further credence to our position. Besides P/S, we also apply an EV/Revenue Common shares outstanding 7,383 valuation (Appendix W). Intrinsic Value 20.17 Source: Team Computation Monte Carlo Simulation and Sensitivity Analysis We apply the method of Monte Carlo Simulation to check how changes in key factors Table 5: P/S Valuation would in luence the intrinsic value for Suning. Key factors we take into account include Variable Value Real GDP Growth, Online Sales Expansion, Revenues from New Business Lines (SOP, Online Median P/S 2.4 x inance, etc.), Sales Expenses, Company WACC and Terminal Growth. After running Online Sales Percentage 21.3% 10,000 random simulations with respect to changes in these factors, we statistically and Online sales revenue per share 3.53 practically interpret the results as probability distribution of Suning’s intrinsic value Of line Median P/S 1.7 x (Appendix Y). We then obtain a 64.27% con idence level in our BUY recommendation. Of line Sales Percentage 78.7% Besides, we conduct sensitivity analysis for each factor, and conclude that factors like Of line sales revenue per share 13.04 Real GDP Growth, Sales Expenses, WACC and Terminal Growth would exercise great impacts on the intrinsic value of Suning, while in luences from Online Sales Expansion Target Price 20.36 and Revenues from New Business Lines are relatively weak. Source: Yahoo Finance, iFinD, Team Computation Monte Carlo Simulations
Table 6: Monte Carlo Statistics Sell Hold Accumulate Buy Statistical Description (CNY) 2.78% 10.53% 22.42% 64.27% Mean 20.36 Standard Deviation 2.29 5% Percentile 16.78 Median 20.24 99% Percentile 24.27
Source: Team Computation Frequency
Table 7: Sensitivity Analysis
Intrinsic Real GDP Growth Value ΔValue -0.50% 18.10 -10.26% Value
-0.25% 19.09 -5.35% Intrinsic 0.00% 20.17 0.00% 0.25% 21.35 5.85% Source: Team Computation 0.50% 22.65 12.30% Price Target and Con idence Interval Terminal Intrinsic We attain the CNY 20.27 price target for Suning mainly based on the DCF model and the Growth ΔRate Value ΔValue P/S valuation, and our BUY recommendation is solidi ied by Monte Carlo simulation. 8.61% -12.57% 18.63 -7.64% This target price means a 30.44% space for appreciation given the price on Nov. 13th, 8.86% -7.10% 19.26 -4.51% 2015. For the sake of valuation robustness, we derive a 90% con idence interval (based 9.11% 0.00% 20.17 0.00% on Monte Carlo Simulation) for intrinsic value of Suning as CNY 16.78 to 24.27. 9.36% 3.83% 20.66 2.43% 9.51% 9.29% 21.45 6.35% Valuation Conclusion From the whole process of valuation, we’ve found that intrinsic value of Suning is irmly substantiated by promising growth of household expenditure (in lines with increasing Intrinsic WACC ΔRate Value ΔValue household income and population growth), O2O layout, cooperation with leading enterprises in industries and implementation of asset-light strategy. And taking into 6.00% -5.49% 22.58 11.95% accounts our projection for the impacts of these factors, which are primarily based on 6.25% -2.74% 21.31 5.65% microeconomic status, industry dynamics, company operation, strategic layout, as well 6.51% 0.00% 20.17 0.00% as historic pattern, we’re expecting to see movements towards price target in the near 6.75% 2.74% 19.09 -5.35% future. In other words, these merits would boost price hike, bringing ideal returns for 7.00% 4.39% 18.51 -8.23% Suning’s shareholders. Source: Team Computation 9 Figure 31: Household Consumption Investment Risks Level (annual %) 16% Economic Risks City Village All Slowdown of China’s Economy (ER 1) 13% Retail industry depends heavily on and GDP and consumption growth. Unfavorable 10% macroeconomic conditions are putting stress on GDP growth. China’s 2015 Q1-Q3 GDP growth slides to 6.9% YoY, down below 7%, the worst since 2009. Q1-Q3 nominal growth 7% rate of Total Retail Sales of Consumer Goods declines to 10.5% YoY (Figure 31). Expected downward trend of overall economic growth below 7% in near future and obstacles in 4% China’s economic transformation would constrain overall demand for consumer goods.
2006 2007 2008 2009 2010 2011 2012 2013 2014 Market Risks Source: National Bureau of Statistics Foreign Economic Factors Risk (MR 1) Suning is developing cross-border e-commerce. 3% of its total assets and 5.6% of its Figure 32: Risk Matrix liabilities is in JPY, HKD and USD, which is relatively a small proportion. Operating revenues from Hong Kong and from Japan respectively account for 7.1% and 3.3% of total operating income. With exchange rates luctuations, pro its will slightly shrink if JPY/CNY depreciates or HKD/CNY appreciates. Suning also has long-term loating-rate OR1 High banks loans tied to LIBOR. With the expectation of rate hike in United States (Appendix Z), an increase in US interest rates and the appreciation of USDCNY would affect Suning’s MR2 OR2 ER1 ability to repay the outstanding balance.
MR1 Financial Markets Risk (MR 2) Medium
Probability Suning invests large sums of idle funds (in 2015 no more than CNY 8 billion) in inancial ET1 OR3 products of inancial institutions or (no more than CNY 3 billion) in money markets funds. In 2015, the money market, stock market and bonds market all witnessed OR4 Low unprecedented volatility, and future uncertainty would cast risk on the value of its
Low Medium High inancial assets investments on the balance sheet. Impact Source: Team Analysis Operational Risks Competition Risk (OR 1) Table 8: Risk Mitigation The rise of E-Commerce poses threats to Suning’s traditional retail business. Intense price wars, as a main approach to expand market share among online home appliance Risk Rating Mitigating Factors retailers, signi icantly squeezed the online pro it margin, and dragged down the overall Economic Risks margin of online and of line from 19.23% in 2011 to 15.51% in 2014 after Suning uni ied Improving GDP growth; strong the online and of line prices in 2013. Also the competition on marketing added pressure growth of inal goods ER1 12 consumption; expanding on expenses. A declining margin due to online expansion in near future and a rising customer inancial services growth of sales expenses are estimated. With adjustments on distribution channels of Market Risks different product lines and more coordination with suppliers, pro it margin is expected Usage of forwards, swaps and to be stabilized. MR1 3 interest rate swaps; deleverage of loating-rate loans in USD Unsustainability of Income from REITs (OR 2) More stringent limitation of Illiquidity of Suning’s real estate assets may affect its short-term net income. After the funds used in investments; MR2 4 transfer of 25 self-owned stores through REITs in 2014 and 2015, only 13 stores are transfer to less-risky inancial products available for disposal. The net income would again drop dramatically if Suning is unable Operational Risks to revitalize 13 stock properties pro itably next year due to the downward demand in Rapid increase in market share; real estate investment or if the operating performance doesn’t improve to cover the gap. OR1 15 high growth in sales of high margin products Collaboration with Alibaba May Underperform (OR 3) Issuance of new pro itable REITs; Suning’s partnership with Alibaba may underperform if its storefront on Tmall fails to OR2 8 substantial increase in operating attract rewarding customer traf ic from other appliance brand stores on Tmall. As income Alibaba becomes the second largest shareholder of Suning (19.99% stake, next to the Managements’ ability to avoid largest shareholder of 21% stake), it will play a decisive role on Suning’s Board. Potential OR3 4 frictions and to utilize Alibaba’s resources frictions between the two management teams may lead to inef iciency. Issuances of new bonds when OR4 3 outstanding bonds mature, Liquidity Risk as Corporate Bonds Mature (OR 4) higher future liquidity ratios Suning has two long-term ixed rate bonds outstanding, of which CNY 4.5 billion matures Other Risks in 2017 and CNY 3.5 billion matures in 2019. If Suning wants to maintain the capital Better structured corporate structure but fails to roll over or issue new bonds, it may face liquidity risk at maturity. government of Board of ET1 2 Directors; policies to protect Other Risks other shareholders’ interests Excessive Control from Board Chair (ET 1) Source: Team Analysis As the board chair, founder and the largest shareholder, Jindong Zhang holds 26.44% of Suning’s shares (21% after deal with Alibaba) and actually controls 45.37% of voting rights, which may represent his excessive power over Suning’s operations, leaving risks in corporate governance.
10 Appendix: Table of Contents
Section Appendix Content Page
All A Glossary of Terms 1
B Pro ile of Major Brands 2 Business Description C Value Chain 3
D Organization Chart 4
E Key Management Personnel Pro ile 6 Corporate Governance and Management F Argenti’s A Score Analysis 9
G Culture Web 10
H PESTEL Analysis 11 Industry Overview and Competitive Positioning I Porter Five Forces Analysis 12
Investment Summary J SWOT Analysis 13
K Balance Sheet 15
L Common Size Balance Sheet 16
M Income Statement 17
N Common Size Income Statement 18
Financial Analysis O Cash Flow Statements 19
P Common Size Cash Flow Statements 20
Q Statement of Changes in Stockholders' Equity Accounts 22
R Dupont Analysis 23
S Altman’s Z Score Analysis 23
T WACC Analysis 24
U DCF Table 25
V DCF Details 25 Valuation W Comparative Valuation 34
X Rating De inition 35
Y Monte Carlo Simulation & Sensitivity Analysis 36
Z Fed Funds Rate Projections 38 Investment Risks AA Risk Matrix 39
All AB Reference 40
1 Appendix A: Glossary of Terms
Argenti’s A Score Model: A qualitative model to judge business failure following a predictable system. The symptoms of failure only become obvious in the later stages of failure, and failure could better be predicted by looking at root causes, laying in management’s ability to lead a business.
Altman's Z Score Model: A model uses inancial measures to predict the probability that a irm will go into bankruptcy within two years. The Z-score uses multiple corporate income and balance sheet values to measure the inancial health of a company. The ive key indicators of the likely failure (or survival) of a business are liquidity, pro itability, activity/ef iciency, leverage and solvency.
BASE – A method used to project the ending value of an account by adding and subtracting speci ic columns from the beginning value in a period of time.
Cloud Store – An upgraded product of the O2O pattern of Suning, combining on-line and off-line channels. The scene experience setting of Suning cloud store can get through off-line experience and on-line marketing, generating synergistic effect.
Dependency Rate - An age-population ratio of those typically not in the labor force and those typically in the labor force. It is used to measure the pressure on productive population.
Household Final Consumption Expenditure (HFCE) – A transaction of the national account's use of income account representing consumer spending.
Johnson's Cultural Web- It provides an excellent way of understanding the elements of culture, which suggests different elements of organizational culture—symbols, power structures, organizational structures, control systems, rituals and routines, stories and myths and the paradigm. These characteristics can again be used as a useful checklist to analysis the corporate governance.
Online to Of line (O2O) - It describes e-commerce service which provides information online about other service of line, whereas B2C is a simple distributional channel where businesses sell goods and service directly to end consumers. O2O is more customer- related and focuses on bringing faster and more convenient services. B2C’s advantage is primarily dependent on the in-person experience it offers to customers. However, in regards to electronics, in-person shopping experiences are generally less important to customers, unlike clothes and luxuries.
Price Con idence Interval – derived by Monte Carlo Simulations, taking corresponding percentiles of price samples.
Property, Plant and Equipment (PP&E) – It includes company assets that are vital to business operations but cannot be easily liquidated.
Real Estate Investment Trust (REIT) - A type of security that invests in real estate through property or mortgages and often trades on major exchanges like a stock.
SAP/ERP systems – SAP/ERP is enterprise resource planning software developed by the German company SAP SE. SAP/ERP incorporates the key business functions of an organization. Business Processes included in SAP/ERP include Operations (Sales & Distribution, Inventory Management, Production Planning, Logistics Execution, and Quality Management), Financials (Financial Accounting, Management Accounting, Financial Supply Chain Management) and Human Capital Management (Payroll, e-Recruiting).
Specialty Retail Industry - The Specialty Retail Industry includes owners and operators of Apparel Retail, Computer & Electronics Retail, Home Improvement Retail, Specialty Stores, Automotive Retail, and Home-furnishing Retail.
Stock Keeping Unit (SKU) - A unique identi ier for each distinct product and service that can be purchased in business.
Suning Open Platform (SOP) – A platform of Suning aiming to help domestic suppliers to effectively manage their sales and to promote their brands by providing free training courses, comprehensive statistics, and rich resources of customers services.
SWOT Scoring – A method used to quantitatively examine the power of Strengths, Weaknesses, Opportunities and Threats by scoring each cross of internal and external factors based on its likelihood and impacts, where “3” is for the strongest and “0” for the least or none.
Urbanization Rate - City and town resident population as a proposition of total population. It is used to examine the process and the degree of urbanization.
Value Chain Analysis - Interlinked value-adding activities that convert inputs into outputs which, in turn, add to the bottom line and help create competitive advantage. A value chain typically consists of inbound distribution or logistics, manufacturing operations, outbound distribution or logistics, marketing and selling and after-sales service. These activities are supported by purchasing or procurement, research and development, human resource development and corporate infrastructure.
1 Appendix B: Pro ile of Major Brands
Logo Description
Founded in 2009, Suning.com is the main B2C online shopping platform of Suning Group, now covering traditional home appliances, 3C appliances, daily necessities and other categories.
Founded in 2004, Redbaby provides online retailing services for baby care and maternal products. It also provides its products through catalog retail. Redbaby was acquired by Suning Commerce Group Co., Ltd. in 2012.
Laox operates a chain of duty-free retail stores in Japan and China. It sells consumer electronics, watches, cosmetics, folk crafts and hobby goods and household products. It is also involved in the development of private brand products. Laox was acquired by Suning Commerce Group Co., Ltd. in 2009.
Binggo.com used to be a sub-brand of Redbaby, and it is now an integrated part of Suning Beauty channel. Binggo.com was acquired by Suning Commerce Group Co., Ltd. in 2012.
Suning Finance is a sub-brand of the whole Suning Service. It has set up for suppliers of small loan companies and commercial factoring companies. Also it provides insurance plans for Suning after-sales service, logistics and other service, as well as fund sales for customers. It also runs Suning consumer inance company providing consumer loans.
Suning Yuntai is an important integrated part of the strategy of Suning Group. It provides online shops, supply chain management, integrated payment and inancing service with Suning brand and logistics advantages, settling for businesses to provide a full range of e- commerce solutions.
Suning Mobile is a virtual operator license independent company. Its of icial website provides users with paragraph 170 of interconnect card reservation, prepayment, mobile phones, tariff packages recommendation, operating room information provision and other services.
Yi Fu Bao is an independent third-party payment for Suning. Suning’s registered members all has easy access to pay by Yi Fu Bao account. Customers can make direct payments, recharge, pay treasure payment available. They can also enjoy the credit card payments, utility fees payment and other applications.
PPLive Corporation’s PPTV provides online video service in China and operates an online video distribution platform that provides live streaming and video-on-demand services. The company also provides online live broadcast, online community, video accelerator, and video search services. It runs as a subsidiary of Suning as of 2013. In 2015 Q3, Suning planned to transfer the ownership of PPLive Corporation at CNY 2.588 billion. Source: Company Data
2 Appendix C: Value Chain
Infrastructure Human Resources
Technology Procurement
Inbound Outbound Sales & Inbound Logistics OperationsOperations Outbound Logistics Sales & Marketing ServicingServing Logistics Logistics Marketing
Primary Activities Inbound Logistics Suning has warehouse and delivery systems throughout the country, which sets the foundation for fast and ef icient inventory inbound logistics.
Operations In terms of inventory managements, Suning mostly builds its own warehouses in contrast to competitors’ renting policies. Additionally, most of the warehouses are shared with suppliers. This system allows Suning to own little actual inventories but products could be distributed directly from suppliers’ inventory to the customers. The ownership of physical warehouses positions Suning for long term growth and pro it.
Outbound Logistics In addition to operating under a more convenient shopping platform for customers, Suning has always been a leader in developing ef icient distribution channels. Stated earlier, Suning’s innovative and adaptive corporate culture propelled them to focus on researching and developing consolidated distribution centers in 2002, further expansions in 2003 and highly automated centers in 2005 and 2009. With e-commerce incorporated into the entire operation, Suning’s able to receive orders and distribute products within hours. With the recent cooperation with Tmall, Suning currently enjoys over 60 large distribution stations across China, covering from municipals to even villages.
Sales & Marketing Together with convenient electronic shopping and fast delivery, customers also could pay online through third party applications such as AliPay, credit cards or others. Throughout the entire process of identifying needs, going through selections and eventually choosing a suitable product, customers could inish the processes within hours on any electronic device. Besides, Suning offers credit loans to customers.
Servicing Unlike its competitors that usually outsource their installation and after-sales services, Suning owns subsidiaries and divisions that specializes and have rich experiences in these two segments. Although installation and after-sales services are merely support divisions, they are the most direct, interactive and communicative segments in the irm with the clients. By owning these two service types rather than outsourcing, Suning can guarantee qualities and raises its trustworthiness with the suppliers as well.
Support Activities Infrastructure Until June 30th, 2015, 3 automatic warehouses renovated in Beijing, Guangzhou and Nanjing; 2 automatic picking center established in Shanghai and Shenyang; 7 automatic picking center in construction in Xi’an, Nanjing, Hangzhou, Wuhan and Chengdu, as well as having 25 regional distributing centers in use; established 12 distributing centers in Shijiazhuang, Taiyuan Zhengzhou, others and 22 engaged centers nationwide.
Human Resources Suning is very keen on raising the overall employee’s wellness. It is focusing on brining quality human resources in IT, distribution, inance and other areas, and has implemented the employee incentive programs in 2014. With a more de ined corporate structure as well as ef icient management policies, employee productivity keeps rising and eventually keeping the overall costs down for Suning.
Technology The usage of ERP system could also attribute to Suning’s ef icient inventory turnover. With constantly updated data, the company is able to keep track of historic data and perform subsequent analysis to obtain the optimal amount of inventory cycle for different products. Along with warehouse ownership and ERP as well as SAP systems later on, Suning has above industry level invested capital and costs in human resources. All of these have positioned Suning in the long term as a potential industry leader specialized in e-commerce, data processing and quality control.
3 Procurement With its already established expertise in operation, products, customer analytics and supply chain, Suning will be able to ensure the quality of its products through diversi ied supplier selection, customized products, simpli ied corporate structure. Appendix D: Organization Chart
A. Equity Structure (as of June 30, 2015)
Jindong Zhang
39.75% 100.00%
Suning Electrical Appliance Group Suning Holdings Group Co., Ltd. Corporation
14.60% 26.44% 4.20%
Suning Commerce Group Co., Ltd. (002024.SZ)
100% 100% 46.81%
Beijing RedBaby Suning Information PPLive Factoring Technology Corporation Co., Ltd. Co., Ltd
100% 100% 75% 30%
Suning Granda Chongqing Maruetsu Commerce Magic Suning Small Hong Kong Co., Ltd. Limited Loans Co., Ltd.
separately established in Beijing, Shanghai, 51% Sichuan, Chongqing and other cities.
Laox Co., Ltd. (8202:TSE)
Source: Company Data
4 B. Equity Structure (Current)
Jindong Zhang
39.75% 100.00%
Suning Electrical Appliance Group Suning Holdings Group Co., Ltd. Corporation
14.60% 26.44% 4.20%
Suning Commerce Group Co., Ltd. (002024.SZ)
100% 100% 100%
Beijing RedBaby Suning Information Factoring Manzuo.com Technology Co., Ltd. Co., Ltd
100% 100% 75% 30%
Suning Granda Chongqing Maruetsu Commerce Magic Suning Small Hong Kong Co., Ltd. Limited Loans Co., Ltd.
separately established in Beijing, Shanghai, Sichuan, Chongqing and 51% other cities.
Laox Co., Ltd. (8202:TSE)
Source: Company Data
5 C. Corporate Governance Structure
Shareholders Meeting
Supervisory Committee
Strategy Committee
Board of Directors Nominating Committee
Remuneration and Secretary of the Board Appraisal Committee
Audit Committee President
Vice President Vice President
President’s Office
Source: Company Data Appendix E: Key Management Personnel Pro ile
Board of Directors Position Name Position Career History in Other Company
Former chairman and general manager of Jiangsu Suning post appliances Ltd., Chinese People Consultative Conference Tenth, Eleventh National Committee, the Standing Committee of China Chairman of The Federation of Industry, Vice-Chairman of the All-China Federation of Board, and Industry, the Eleventh Jiangsu Province Representative People’s Jindong Zhang No Chairman of Congress, the incumbent chairman of Suning Appliance Group Co., Strategy Committee China people's Twelfth National Committee of the Political Consultative Conference, vice president of Chinese folk Chamber of Commerce vice president of the China Association of Listed Companies.
Suning Home Appliances (Group) Co., Ltd. Vice President, President of Vice Chairman, Suning Appliance Co., Ltd. is currently vice chairman of Suning Member of Appliance Group, vice president of China Chain Store & Franchise Nomination Association, Tsinghua University, China retail expert members Committee and Institute, Nanjing CPPCC Standing Committee of Jiangsu Provincial Weimin Sun No Member of Federation of Industry Vice-Chairman. Mr. Sun Weimin also a Remuneration & subsidiary company - Beijing Suning Appliance Sales Co., Ltd., Shaanxi Assessment Suning Appliance Sales Co., Ltd., Shenzhen Suning Appliance Sales Co., Committee Ltd., Jiangsu Suning Commercial Investment Company, Xi'an Metro Trading Company as Suning Appliance legal representative.
6 Position Name Position Career History in Other Company Former Suning Home Appliances (Group) Co., Ltd. Marketing Center President, Director, Director management, vice president of Suning Appliance Co., Ltd., the Member of Audit incumbent Suning Appliance Group Co., Ltd. Director and President. Ming Jin Committee and Mr. Jin Ming is also the Company's subsidiary -GRANDA MAGIC No Member of Strategy LIMITED, GREAT ELITE LIMITED, Hong Kong Suning Appliance Co., Committee Ltd., Hong Kong Hong Kong Ning Advertising Co., Ltd., 36 subsidiaries of the Company as the legal representative.
Vice President, Director, Member of Nomination Committee, Member Former Marketing Manager Haier Pharmaceutical Zhejiang, Nanjing Xiangsheng Meng of Remuneration & No Orient-industry management consultant. Assessment Committee and Member of Strategy Committee Vice President, Secretary, Director, Incumbent Ltd. Director, Vice President, Secretary of the Board, deputy Member of Audit director of the Internet Society of China Internet Financial Work Jun Ren No Committee and Committee, Internet Society of China Internet business applications Member of Strategy working committee chairman Suning Appliance Group. Committee
Intelligent Network and the Institute of Measurement and Control System of the President of Southeast University Southeast University Intelligent Information and Control System and Virtual Institute, Professor. Now he serves as the backbone of a number of academic Junjie Chen Director positions at home and abroad agencies and bodies, the National No Science and Technology Award Assessment Panel expert, the National 863 high-tech project evaluation experts, Jiangsu Province Science and Technology consultants, and international and domestic academic journals and editors freelance reviewer.
Accounting Professor of School of Economics and Managemen, Nanjing Independent University of Technology, the college professor Standing Committee, Director, Chairman Nanjing University of accounting academic leaders, members of Jiu San of Audit Committee, Society of Nanjing University, the Nanjing Xuanwu District CPPCC Member of members. Now he is Branch Accounting Society of China, vice Nomination president of engineering colleges, Jiangsu Province audit Association Guanghua Xu Yes Committee and executive director, chief accountant in Jiangsu Province Association, Member of the National Natural Science Foundation, National Social Science Remuneration & Foundation and the Henry Fok Education Foundation as well as peer Assessment reviewers of "MANAGEMENT" and "Business Accounting". Committee Concurrently Jinling Hotel Corporation and Jiangsu Shuntian Co., Ltd. Independent Directors.
7 Position Name Position Career History in Other Company Independent Professor of Nanjing University College of Engineering, Management Director, Chairman Science and Engineering doctoral tutor, Department of Management of Remuneration & Science and Engineering, Mathematics Department, Operational Assessment Research and Cybernetics Master Instructor. Currently Production and Committee, Member Operations Management Society member, China Operations Research Houcai Shen of Strategy No Society and Director of China Institute of Management production and Committee, Member Operations Management sub-Committee members, China Operations of Nomination Research Society random service and operations management branch Committee and executive director, and "Operations Research and Management" Member of Audit magazine editorial . Committee
Independent Director, Chairman NUBS marketing and e-commerce department, Professor. Independent of Nomination Quansheng Wang directors of the Company, concurrently Shenzhen Hirota Decoration Yes Committee and Group Co., the independent directors. Member of Audit Committee Source: Company Data Board of Supervisors Position Name Position Career History in Other Company
Chairman of Supervisory Board and Director Former radio factory in Nanjing Zijin of ice, a former director of General of Financial Suning Appliance Co. Settlement Center Management, the fourth Jianying Li Management No President of the Board of Supervisors, the Financial Director of the Center - Centre incumbent logistics management company, the ifth chairman. Commodity Operation Head Quarters Director General of Financial Former news Nanjing Development Corporation Of ice, Budget Management Director of the Centre Suning Appliance Co. Financial Management Xiaoling Wang Center - Chain Center, the Fourth Board of Supervisors, Finance Director Financial No Platform Operation Center headquarters support incumbent management company, the Headquarters and Fifth Board of Supervisors. Supervisor
Director-General of The Financial Served as president commissioner for sponsored schemes, the Planning Center - inancial headquarters Director, Manager of Finance and Accounting Zhisong Hua Financial No Department, currently Finance Director of Financial Planning Center Management management headquarters company. Headquarters and Supervisor Source: Company Data Key Executives Position Name Position Career History in Other Company
CFO, and Director Former radio Nanjing eight plants accountant, inance manager of General of Suning Appliance Co., Ltd., Director of Financial Services Center, the Zhongxiang Xiao No Financial Service Fourth Board of Supervisors employee representative supervisor. He is Center currently chief inancial of icer Source: Company Data 8 Appendix F: Argenti’s A Score Analysis
This score measures non- inancial areas in contradiction to Z score about inancial ratios. It digs more into the root cause, which is about the management’s ability to lead a business, and develops a predictable system.
Defect→ Mistakes→ Symptoms→ Failure
Maximum Suning Factor Observation Total score permitted Score score
Autocratic Chief Executive 8 2
Chief Executive is also Chairman 4 0
Passive Board of Directors 2 0 Unbalanced Board of Directors (eg not representing all business Defects: 2 1 Management defects functions, or dominated by one business function) Weak Finance Director 2 0
Poor management in depth 1 0 10 Poor response to change: old-fashioned products; obsolete production facilities; out-of-date marketing methods 15 2
No budgets or budgetary control 3 0
Defects: No cash low forecasts, or not up to date 3 0 Accounting defects No costing system: costs and contribution of each product or service not known 3 0
Defects in Total 43 5
High gearing; inability to service debts 15 1 Overtrading: company expanding faster than funding; capital Mistakes: base too small for level of activity; capital base unbalanced for 15 3 Management mistakes nature and type of business 15 Big project that has gone wrong; any obligation that the 15 1 company will be unable to meet if something goes wrong
Total Mistakes 45 5 Financial analysis appears to indicate failure of dif iculty (eg 4 0 poor Z score)
Symptoms of trouble Creative accounting (eg gaming, misrepresentation) 4 0 0 Non- inancial signs of problems; eg high staff turnover; low 4 1 morale; uncleaned/untidy of ices and factories; rumours
Total Symptoms 12 1
Total A score 11 25 Source: Team Analysis
Suning’s A score is 12, a relative low mark and falls into the region 0-18. Thus there is no risk to indicate the failure of management now. It re lects a healthy inancial condition.
9 Appendix G: Culture Web
Johnson developed a 'Cultural Web' which suggests different elements of organizational culture: A representation of the taken-for- granted assumptions, of paradigm, of an organization and the physical manifestations of organizational culture.
Schein Points Contents Analysis Artifacts Symbols Logo, mission, Suning’s logo-the "king of beasts" lion, the lion's mouth slogan for the cloud shape, symbolizing Suning will use the cloud business model with both online and of line sales platform. Besides, the image attracts young and personalized consumer groups and enhances the consumer experience. Power Structures Distribution of Zhang Jindong, chairman of Suning, with 26.44% holding power, leadership of the company, appeared in the logistics base, joint behavior operations command center and Suning’s restaurant on November 8 and 9 to supervise the preparation of 11.11. This re lects his leadership style is strong and ef icient. Organisational Formal/informal, Suning has a very lat organizational structure with two Structures tall/ lat, levels management of large area- urban terminal. This mechanistic/ greatly enhances regional operations and localization organic service capabilities, also improves operational ef iciency. Control Systems Performance Two phases of employee stock ownership plan (ESOP) measure and have been implemented since 2014, which covers from reward, culture Board of Directors to front line staff, successfully in luences increasing the company morale. strategy Espoused values Rituals and Procedures Suning’s service is market and customer oriented, and Routines focus on continuously enhancing corporate pro itability, diversi ication, information technology, and the pursuit of higher customer satisfaction. It seeks to create the best O2O brand in China. Stories and Success/failure Suning.com online transformation is made under the best Myths story period-rapid development of of line stores in 2011. At the beginning, this transition is under critical criticism and high pressure from investors due to decline of sales revenue and pro its. But it is that decision won the transition time and strategic maneuvering space of Suning. Basic The Paradigm The organization Suning is also very proactive regarding social assumptions exists to ful il responsibilities. Besides being environmental friendly and values charitable with volunteering foundations, Suning’s mission is also objectives. focused on providing customers and suppliers with services of best qualities as well as assisting on regional unemployment rates by specially designed hiring programs. Active in local communities, Suning is known for being charismatic as well as generous to the general public. For instance, donations of 50 million CNY to Wenchuan earthquakes foundations received great compliments from both the customers and the government. Source: Team Analysis
10 Appendix H: PESTEL Analysis
Political
The PESTEL Analysis is conducted in order to 3 Legal Economic evaluate the vitality of China’s specialty retail 3 industry, and to determine the competitive 2 positioning of Suning.
1 This radar chart contains a scale of 0 to 5, in 3 which 5 represents the most dramatic change relevant to companies in the industry, including Environmental Social 3 Suning, and 0 represents the least one.
Technological
Source: Team Analysis
Political: 3 - Moderate Faced with the slowing down economy, the Chinese government regards domestic consumption an effective way to maintain GDP growth, to shift to a modern consumer and service-led economy and to promote the living standards, so it has implemented several policies to stimulate the retail industry. After the home appliance subsidy program had expired in 2013, the government announced “The Implementation Scheme of Energy-ef iciency Leader System” in 2015 that aimed to encourage companies to develop eco- friendly products and consumers to upgrade their home appliances.
Economic: 3 - Moderate The slightly decreasing interest rate, currently at the lowest point in ten years, may encourage spending and therefore stimulate the sales in retail industry. Moreover, based on the powerful demand on household goods and services, the growth of household inal consumption expenditure (HFCE) in China, compared to that in some advanced economies, remains strong and has vast room to continue its momentum. According to McKinsey’s report “Insights China - Meet the 2020 Chinese Consumer”, as more and more consumers in China step out from the poor income class (less than 6000 USD), the discretionary spending is likely to continue its growth, supporting the sales of household goods and services.
Social (and Cultural): 3 - Moderate The society has witnessed an evolving material culture, as the population that can afford premium goods are increasing, and the pace of modernization keeps stimulating people to upgrade their life with modern appliances, such as high de inition TV, mobile phones and tablets, and even cleaning robots. The increase in both the budget for advertisement and the transaction size in retail industry can prove this phenomenon, and the burgeoning brands and activities of promotion, namely the “shopping festivals”, can act as catalysts that encourage domestic consumption.
Technological: 3 - Moderate The rapid change in technology and the enhanced cooperation among banks, suppliers and third parties that enable customers to buy and pay for their products through numerous methods just on their mobile terminals can improve the last mile of supply chain and therefore help more customers to ful ill their orders. This trend can be seen in the rise of e-commerce, and the technology plays an important role in shaping the retail industry, as the population of online users is increasing dramatically.
Environmental: 1 - Insigni icant Unlike industries such as tourism, farming, and insurance, the retail industry is relatively unaffected by the environmental change, especially in China, a country with weaker environmental regulations than those in developed countries. Although in recent years there is an rising environmental awareness, to which lots of retail activities such as logistic services and the construction of infrastructure are generally subject, but in short-term such change can hardly affect the competitive intensity of the industry.
Legal: 2 - Low In order to protect consumers and to support proper development, the government has managed to regulate the retail industry, especially the e-commerce, showing an inclination to implement strict laws. Several discussions and directions has been conducted, yet their effects on either the sales or the shopping patterns remain vague and obscure.
11 Appendix I: Porter Five Forces Analysis
Intensity of Competitive Rivalry The Porter Five Forces Analysis is conducted in 3 order to evaluate the vulnerability of China’s Threat of Threat of specialty retail industry, and to determine the Substitutes New Entrants 3 competitive positioning of Suning. 2 This radar chart contains a scale of 0 to 5, in which 5 represents the most serious threat 2 relevant to companies in the industry, including 3 Suning, and 0 represents the least one. Bargaining Power Bargaining Power of Suppliers of Customers
Source: Team Analysis
Intensity of Competitive Rivalry: 3 - Moderate The competition between online and of line retailer through price wars has formed a rather intense rivalry within the industry. Although the brands of physical stores, such as Suning and Gome, used to burgeon and dominate a considerable market share, the rise of online business had become the new drivers of the industry and caused huge losses in revenue and net pro it to those traditional brands with far more competitive pricing strategy and larger customer base. Before the industry really develop into the mutually bene icial O2O environment, based on the continuous promotion activities, the competitive rivalry is going to maintain in short term.
Threat of Substitutes: 3 - Moderate The products and service that each retailer offers are similar, so customers can therefore switch between different systems with little transition cost. For instance, customers can pay with any inancial services provided by retailers at same price. But for some services such as delivery and after-sales, retailers with speci ic advantage can stand out and become customer’s irst choice.
Threat of New Entrants: 2 - Low Although many retailers have tried to establish their own retail business, not everyone succeeds to gain market share or strategic partnership, because the industry has already been dominated by several online and of line major brands that already have most of customer base, various products and best prices, making it hard for new entrants to develop full strength and in luence. Even though some new entrants with speci ic technology or niche market had gradually gained sales growth, they are still too small to attract mainstream customers and major retailers.
Bargaining Power of Suppliers: 2 - Low The retail concentration, known as the market share belonging to the top 4 or 5 companies, of both online and of line business is high and has balanced the bargaining power of suppliers. Major players such as Suning, Gome, Alibaba, and Jingdong all dominate a considerable market share, and with rich retail resources and customer base they can ensure the sales and further negotiate lower prices. By contrast, there are numerous suppliers that sells different products occupying different local markets in China, and decentralizing the bargaining power.
Bargaining Power of Customers: 3 - Moderate With transparent price-checking and product information, customers have more selections on where to buy and gain certain bargaining power to retailers. To promote its own services or sales, retailers will also try to offer price discounts. But the concentration of market share and cooperation with brands also make it easy for retailers to perform monopoly.
12 Appendix J: SWOT Analysis
Strengths
21
Threats 17 12 Weaknesses
14
Opportunities Source: Team Analysis
Strengths Wide Coverage Physical Stores Physical stores, having boosted the sales growth since the establishment of the company, are the strategic resources of Suning. Nowadays at the turning point, they play even more signi icant roles as the key drivers for O2O layout, and, combining with expansion of online business, the trumps to help Suning stand out among other retailers. With more than 1600 physical stores across the country and around the globe, Suning offers its customers irst-hand store experiences and chances to right away pick up goods purchased. Besides, inancial services as well as maintenance and other after-sale services are conveniently provided in physical stores, together making it a better shopping experience.
Veteran Management of Supply Chain With more than 20 years’ operation in retail industry, Suning has gained prominent edges in management of supply chain over its competitors. Rich accumulation of networks and cooperative partners in supply chain enables Suning to weaken bargaining power of suppliers (lower down cost of goods purchased) and run timely and accurate procurement plans, which improves sales projections, inventories management and cost performance.
Strong Support from Logistics Bases Compared with other online retailers, Suning excels in construction of logistic bases and ranks the irst in storage space and automation rate of warehouse. To be more speci ic, Suning mostly builds its own warehouses in contrast to competitors’ renting policies. Additionally, most of the warehouses are shared with suppliers. This system allows Suning to own little actual inventories but products could be distributed directly from suppliers’ inventory to the customers. The ownership of physical warehouses positions Suning for long term growth and pro it. Besides, the usage of ERP system could also attribute to Suning’s ef icient inventory turnover.
Favorable Liquidity Position Suning possesses and keeps improving favorable liquidity position with its dominant voice in supply chain. Gaining nearly instant revenues from customers and delaying debt-paying to suppliers, Suning is capable of shortening cash conversion cycle and expanding business with abundant cash surplus. The current ratio of Suning is always greater than 1 and above the industry average level, the quick ratio is gradually increasing, which substantiates Suning’s salient and kept-bettering liquidity position, as well as its strong competitiveness in retail industry.
Weaknesses Limited Online Traf ic Flows Due to the relative late launch of online business compared with JD, BABA and other pure online retailers, Suning’s lagging behind accumulation of online users and construction of online platform might undermine its O2O positioning. To elaborate, the reputation as an online retailer is that robust, at least not compatible with its long-built fame as a brilliant of line retailer, leaving some space to improve online user experience and further promote company image.
Need-to-Improve Express Delivery Though gaining strong support from logistics bases around the country, Suning has still been left behind by its main opponents, like JD and BABA, in the ield of express delivery. And this is especially true for the distribution of small items including tiny life electrical appliances and other daily consumer goods. Besides, the last-mile distribution of goods also needs to be polished up since compared with JD, the retailer that is deemed to have the best express delivery services in the industry, Suning lacks self–owned distribution network directly linking to customers.
13 Opportunities Promising Growth of Household Expenditure With the gradual recovery of the macroeconomic led by the effects of structural readjustment, growth stabilization and corresponding expansionary iscal and monetary policies, household income shall rise steady and robustly, leveling up consumer con idence and household expenditure. In addition, according to National Bureau of Statistics of China, the HFCE per capita on household facilities, articles and service still performs quite well, reaching its highest point in 2014, and is likely to continue its growth as the demand mentioned above remained strong. The more active role of consumption as GDP component provides Suning a great opportunity to expand sales and pro it.
Cooperation with Big Macs In the past 6 months, Suning has successively announced its cooperation with BABA, the No.1 online retailer in China and Wanda, a global real estate tycoon. Such cooperation with big macs shall bring Suning desirable chances to increase online traf ic lows, and at the same time, solidify of line expansion. With the trend of channel-sinking in China’s online retail industry and active transition of real estate companies, Suning shall expect further and more comprehensive collaboration with these big names.
Threats Intensive Price War Situated in the highly competitive retail industry, Suning shall face quickened paces of price wars waged by online retailers. Directly or indirectly, gross pro it of Suning would encounter downward pressure due to the lower-down prices in order to attract more customers. This might result in the narrowing down pro it margin and poor operational performances, serious threats to Suning.
Declining Loyalty of Customers Declining loyalty of customers shall remain a great threat to the company if Suning failures to improve consumer services and it would hold back online revenue. Suning has higher customer complaint rates than competitors on the user-unfriendly online experience, delayed delivery and unsatisfactory after-sale services, which would upset consumer stickiness and loyalty.
On basis of the SWOT analysis above, we derive following SWOT matrix, demonstrating possible interactions between internal factors (strengths and weaknesses) and external factors (opportunities and threats).
Strength Weakness S1 Wide Coverage Physical Stores W1 Limited Online Traf ic Flows
S2 Veteran Management of Supply W2 Need-to-Improve Express Chain Delivery ̴ S3 Strong Support from Logistics Bases
S4 Favorable Liquidity Position
O2+S1=Solidify cooperation with O2+W1+W2= Gain experience and O1 Promising Growth of Household these strategic resources lows from big macs Opportun Expenditure
ities O1+S2+S3+S4= Expand business O1+W1= Increase lows in O2 Cooperation with Big Macs taking advantages of these strengths promising growth
S1+S2+S3+S4+T1= Use these to T1+W1= Improve this to catch up T1 Intensive Price War stand out among price war with of rivals Threat T2 Declining Loyalty of Customers S1+S3+T2= Use these to improve T2+W2= Improve this to increase customer experience customer stickiness
To quantitatively examine the power of Strengths, Weaknesses, Opportunities and Threats, we score each cross of internal and external factors based on its likelihood and impacts, where “3” is for the strongest and “0” for the least or none. For special illustration, when checking crosses of Strengths and Threats, the power of Strengths is “0” at starting stage and increase with their enhancing effectiveness to soften threats they meet with, while the power of Threats starts at 3, and decline by the amount the power of the Strengths they encounter. So is for cases when Opportunities cross with Weaknesses, the power of Opportunity is “0” at starting stage and increase with their rising effectiveness to improve weaknesses they meet with, while the power of Weaknesses starts at 3, and drop by the amount the power of the Opportunities they encounter. (In crossing cases mentioned above, scores for rows are listed leftward and scores for columns are listed rightward).
14
Source: Team Computation Appendix K: Balance Sheet
Historical Projected As of December 31, in millions CNY 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Assets Cash and cash equivalents 30,067 24,806 22,274 40,638 47,408 54,874 64,033 72,708 82,924 Financial assets held for trading 0 2,862 2,645 2,645 2,645 2,645 2,645 2,645 2,645 Accounts and notes receivable 1,273 672 536 648 733 826 934 1,062 1,211 Advances to suppliers 3,105 4,121 3,852 5,458 6,174 6,960 7,870 8,947 10,201 Inventories 17,222 18,258 16,039 14,252 13,192 13,218 13,079 14,868 16,952 Other current assets 1,759 2,783 5,302 4,146 4,690 5,287 5,979 6,797 7,749 Total Current Assets 53,427 53,502 50,647 67,786 74,842 83,811 94,541 107,025 121,681
Available-for-sale inancial assets 1 268 1,550 15,550 15,550 15,550 15,550 15,550 15,550 Long-term receivables 500 482 503 598 677 763 862 980 1,118 Long-term equity investments 574 2,107 1,347 1,347 1,347 1,347 1,347 1,347 1,347 Investment real estates 1,270 1,015 1,014 1,014 1,014 1,014 1,014 1,014 1,014 Fixed assets-net 8,579 10,750 12,155 13,053 13,397 13,236 12,845 12,590 12,476 Intangible assets-net 6,040 6,723 7,015 6,866 6,673 6,411 6,056 5,793 5,620 Goodwill 185 420 462 462 462 462 462 462 462 Deferred tax assets 756 1,131 1,664 1,684 1,612 1,487 1,495 1,699 1,937 Other non-current assets 4,829 5,853 5,836 5,836 5,836 5,836 5,836 5,836 5,836 Total Assets 76,162 82,252 82,194 114,197 121,408 129,916 140,008 152,297 167,040 % Growth 8.0% -0.1% 38.9% 6.3% 7.0% 7.8% 8.8% 9.7%
Liabilities Short-term borrowings 1,752 1,110 1,837 725 0 0 0 0 0 Accounts and notes payable 34,688 35,767 30,870 32,642 38,277 44,683 52,273 61,415 72,309 Payments received in advance 542 508 1,452 544 617 698 792 903 1,033 Other payables 3,743 5,292 6,920 8,224 9,261 10,388 11,735 13,327 15,181
15 Historical Projected As of December 31, in millions CNY 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Other current but non-operating 520 738 1,039 1,039 1,039 1,039 1,039 1,039 1,039 liabilities Total Current Liabilities 41,245 43,414 42,117 43,175 49,195 56,808 65,839 76,683 89,562
Long-term borrowings 0 594 914 1,635 2,178 2,546 2,823 3,138 3,497 Debt securities issued 4,465 7,946 7,961 7,961 7,961 7,961 7,961 7,961 7,961 Deferred tax liabilities 163 186 159 218 247 279 317 361 413 Long-term operating liabilities 1,176 1,409 1,505 1,741 1,976 2,234 2,534 2,890 3,306 Total Liabilities 47,050 53,549 52,657 54,729 61,557 69,828 79,474 91,033 104,739 % Growth 13.8% -1.7% 3.9% 12.5% 13.4% 13.8% 14.5% 15.1%
Owners' Equity Common stock and capital reserves 12,063 12,064 12,063 41,406 41,406 41,406 41,406 41,406 41,406 Retained earnings 16,427 16,430 17,297 17,879 18,258 18,492 18,934 19,656 20,683 Other comprehensive income 0 0 (77) (77) (77) (77) (77) (77) (77) Converted difference in foreign (30) (124) 0 0 0 0 0 0 0 currency statements Total Common Equity 28,459 28,369 29,282 59,207 59,587 59,821 60,263 60,984 62,012 % Growth -0.3% 3.2% 102.2% 0.6% 0.4% 0.7% 1.2% 1.7%
Minority shareholders' equity 652 334 255 261 265 267 271 279 289
Total Owners' Equity 29,112 28,703 29,537 59,468 59,851 60,088 60,534 61,263 62,301 % Growth -1.4% 2.9% 101.3% 0.6% 0.4% 0.7% 1.2% 1.7%
Total Liabilities and Owners' Equity 76,162 82,252 82,194 114,197 121,408 129,916 140,008 152,297 167,040 % Growth 8.0% -0.1% 38.9% 6.3% 7.0% 7.8% 8.8% 9.7% Source: Company Data, Team Estimation Appendix L: Common Size Balance Sheet
Historical Projected As of December 31, in millions CNY 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Assets Cash and cash equivalents 39.5% 30.2% 27.1% 35.6% 39.0% 42.2% 45.7% 47.7% 49.6% Financial assets held for trading 0.0% 3.5% 3.2% 2.3% 2.2% 2.0% 1.9% 1.7% 1.6% Accounts and notes receivable 1.7% 0.8% 0.7% 0.6% 0.6% 0.6% 0.7% 0.7% 0.7% Advances to suppliers 4.1% 5.0% 4.7% 4.8% 5.1% 5.4% 5.6% 5.9% 6.1% Inventories 22.6% 22.2% 19.5% 12.5% 10.9% 10.2% 9.3% 9.8% 10.1% Other current assets 2.3% 3.4% 6.5% 3.6% 3.9% 4.1% 4.3% 4.5% 4.6% Total Current Assets 70.1% 65.0% 61.6% 59.4% 61.6% 64.5% 67.5% 70.3% 72.8%
Available-for-sale inancial assets 0.0% 0.3% 1.9% 13.6% 12.8% 12.0% 11.1% 10.2% 9.3% Long-term receivables 0.7% 0.6% 0.6% 0.5% 0.6% 0.6% 0.6% 0.6% 0.7% Long-term equity investments 0.8% 2.6% 1.6% 1.2% 1.1% 1.0% 1.0% 0.9% 0.8% Investment real estates 1.7% 1.2% 1.2% 0.9% 0.8% 0.8% 0.7% 0.7% 0.6% Fixed assets-net 11.3% 13.1% 14.8% 11.4% 11.0% 10.2% 9.2% 8.3% 7.5% 16 Historical Projected As of December 31, in millions CNY 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Intangible assets-net 7.9% 8.2% 8.5% 6.0% 5.5% 4.9% 4.3% 3.8% 3.4% Goodwill 0.2% 0.5% 0.6% 0.4% 0.4% 0.4% 0.3% 0.3% 0.3% Deferred tax assets 1.0% 1.4% 2.0% 1.5% 1.3% 1.1% 1.1% 1.1% 1.2% Other non-current assets 6.3% 7.1% 7.1% 5.1% 4.8% 4.5% 4.2% 3.8% 3.5% Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Liabilities Short-term borrowings 2.3% 1.3% 2.2% 0.6% 0.0% 0.0% 0.0% 0.0% 0.0% Accounts and notes payable 45.5% 43.5% 37.6% 28.6% 31.5% 34.4% 37.3% 40.3% 43.3% Payments received in advance 0.7% 0.6% 1.8% 0.5% 0.5% 0.5% 0.6% 0.6% 0.6% Other payables 4.9% 6.4% 8.4% 7.2% 7.6% 8.0% 8.4% 8.8% 9.1% Other current but non-operating 0.7% 0.9% 1.3% 0.9% 0.9% 0.8% 0.7% 0.7% 0.6% liabilities Total Current Liabilities 54.2% 52.8% 51.2% 37.8% 40.5% 43.7% 47.0% 50.4% 53.6%
Long-term borrowings 0.0% 0.7% 1.1% 1.4% 1.8% 2.0% 2.0% 2.1% 2.1% Debt securities issued 5.9% 9.7% 9.7% 7.0% 6.6% 6.1% 5.7% 5.2% 4.8% Deferred tax liabilities 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% Long-term operating liabilities 1.5% 1.7% 1.8% 1.5% 1.6% 1.7% 1.8% 1.9% 2.0% Total Liabilities 61.8% 65.1% 64.1% 47.9% 50.7% 53.7% 56.8% 59.8% 62.7%
Owners' Equity Common stock and capital reserves 15.8% 14.7% 14.7% 36.3% 34.1% 31.9% 29.6% 27.2% 24.8% Retained earnings 21.6% 20.0% 21.0% 15.7% 15.0% 14.2% 13.5% 12.9% 12.4% Other comprehensive income 0.0% 0.0% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.0% Converted difference in foreign 0.0% -0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% currency statements Total Common Equity 37.4% 34.5% 35.6% 51.8% 49.1% 46.0% 43.0% 40.0% 37.1% Minority shareholders' equity 0.9% 0.4% 0.3% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% Total Owners' Equity 38.2% 34.9% 35.9% 52.1% 49.3% 46.3% 43.2% 40.2% 37.3%
Total Liabilities and Owners' Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Company Data, Team Estimation; common size gained by dividing each account by total sales revenue of corresponding year
Appendix M: Income Statement
Historical Projected As of December 31, in millions CNY 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Revenues Operating revenue 97,007 103,921 107,260 127,850 144,789 163,357 184,860 210,271 239,870 Other income 1,350 1,372 1,666 1,716 1,784 1,873 1,986 2,125 2,295 Total Revenues 98,357 105,292 108,925 129,565 146,573 165,231 186,845 212,396 242,165 % Growth 7.1% 3.5% 18.9% 13.1% 12.7% 13.1% 13.7% 14.0%
Operating costs (80,775) (89,240) (92,261) (108,807) (123,476) (139,634) (158,403) (180,631) (206,597) Business tax and extra (313) (330) (357) (412) (467) (526) (595) (676) (771)
17 Historical Projected As of December 31, in millions CNY 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Sales expenses (10,852) (11,777) (13,202) (16,042) (17,103) (18,017) (19,692) (21,613) (23,789) Management expenses (2,001) (2,306) (2,675) (3,239) (3,664) (4,131) (4,671) (5,310) (6,054) EBITDA 4,416 1,640 430 1,065 1,864 2,922 3,485 4,166 4,954 % Growth -62.9% -73.8% 147.6% 75.0% 56.8% 19.2% 19.6% 18.9%
Depreciation (598) (733) (937) (1,045) (1,123) (1,152) (1,138) (1,105) (1,083) Amortization (820) (769) (671) (797) (780) (758) (728) (688) (658) EBIT 2,998 138 -1,178 -777 -39 1,012 1,618 2,374 3,213 % Growth -95.4% -954.6% -34.0% -95.0% -2729.4% 59.8% 46.7% 35.3%
Financial expenses 186 149 (67) (321) (382) (487) (626) (753) (906) Gain from disposal of non-current assets 0 0 2,449 1,370 1,273 0 0 0 0 Other non recurring gains and losses 57 (143) (232) 1,040 0 0 0 0 0 Pre-tax Income 3,242 144 973 1,312 853 525 993 1,621 2,307
Income taxes (736) (40) (149) (287) (185) (114) (215) (351) (500) Net Income 2,505 104 824 1,024 668 412 778 1,270 1,808 % Growth -95.8% 690.0% 24.3% -34.8% -38.4% 89.0% 63.3% 42.3%
Minority interest income (171) (267) (43) 10 7 4 8 13 18 Net Income Attribute to Shareholds 2,676 372 867 1,014 661 407 770 1,257 1,790 of Parent Company % Growth -86.1% 133.2% 17.0% -34.8% -38.4% 89.0% 63.3% 42.3%
Other comprehensive income Other comprehensive income attribute 0 0 63 0 0 0 0 0 0 to shareholders of parent company Other comprehensive income attribute 0 0 (33) 0 0 0 0 0 0 to minority shareholders Source: Company Data, Team Estimation Appendix N: Common Size Income Statement
Historical Projected As of December 31, in millions CNY 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Revenues Operating revenue 98.6% 98.7% 98.5% 98.7% 98.8% 98.9% 98.9% 99.0% 99.1% Other income 1.4% 1.3% 1.5% 1.3% 1.2% 1.1% 1.1% 1.0% 0.9% Total Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating costs -82.1% -84.8% -84.7% -84.0% -84.2% -84.5% -84.8% -85.0% -85.3% Business tax and extra -0.3% -0.3% -0.3% -0.3% -0.3% -0.3% -0.3% -0.3% -0.3% Sales expenses -11.0% -11.2% -12.1% -12.4% -11.7% -10.9% -10.5% -10.2% -9.8% Management expenses -2.0% -2.2% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% EBITDA 4.5% 1.6% 0.4% 0.8% 1.3% 1.8% 1.9% 2.0% 2.0%
Depreciation -0.6% -0.7% -0.9% -0.8% -0.8% -0.7% -0.6% -0.5% -0.4%
18 Historical Projected As of December 31, in millions CNY 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Amortization -0.8% -0.7% -0.6% -0.6% -0.5% -0.5% -0.4% -0.3% -0.3% EBIT 3.0% 0.1% -1.1% -0.6% 0.0% 0.6% 0.9% 1.1% 1.3%
Financial expenses 0.2% 0.1% -0.1% -0.2% -0.3% -0.3% -0.3% -0.4% -0.4% Gain from disposal of non-current assets 0.0% 0.0% 2.2% 1.1% 0.9% 0.0% 0.0% 0.0% 0.0% Other non recurring gains and losses 0.1% -0.1% -0.2% 0.8% 0.0% 0.0% 0.0% 0.0% 0.0% Pre-tax Income 3.3% 0.1% 0.9% 1.0% 0.6% 0.3% 0.5% 0.8% 1.0%
Income taxes -0.7% 0.0% -0.1% -0.2% -0.1% -0.1% -0.1% -0.2% -0.2% Net Income 2.5% 0.1% 0.8% 0.8% 0.5% 0.2% 0.4% 0.6% 0.7%
Minority interest income -0.2% -0.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Net Income Attribute to Shareholds 2.7% 0.4% 0.8% 0.8% 0.5% 0.2% 0.4% 0.6% 0.7% of Parent Company
Other comprehensive income Other comprehensive income attribute 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% to shareholders of parent company Other comprehensive income attribute 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% to minority shareholders Source: Company Data, Team Estimation; common size gained by dividing each account by total sales revenue of corresponding year
Appendix O: Cash Flow Statements
Historical Projected As of December 31, in millions CNY 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Operating Activities Net income 2,505 104 824 1,024 668 412 778 1,270 1,808 Depreciation 598 733 937 1,045 1,123 1,152 1,138 1,105 1,083 Amortization 820 769 671 797 780 758 728 688 658 Gain from disposal of non-current 0 0 (2,449) (1,370) (1,273) 0 0 0 0 assets Other non-recurring gains or losses (57) 143 232 (1,040) 0 0 0 0 0 Financial expenses (186) (149) 67 321 382 487 626 753 906 Decrease (increase) of OWC 2,991 119 (2,219) 3,393 6,461 6,110 7,460 7,034 8,440 Decrease (increase) of long-term (23) 17 (20) (95) (79) (86) (100) (118) (137) operating assets Increase (decrease) of long-term 242 233 96 236 235 259 300 356 415 operating liabilities Decrease (increase) of deferred tax (244) (375) (533) (20) 72 125 (8) (204) (238) assets Increase (decrease) of deferred tax (20) 22 (26) 58 29 32 38 44 52 liabilities Other cash lows from operating (1,326) 621 1,040 0 0 0 0 0 0 activities Net cash lows from operating 5,299 2,238 (1,381) 4,349 8,398 9,248 10,960 10,927 12,986 activities % Growth -57.8% -161.7% -414.9% 93.1% 10.1% 18.5% -0.3% 18.8%
Investing Activities
19 Historical Projected As of December 31, in millions CNY 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Added intangible assets (2,491) (1,452) (963) (648) (586) (496) (374) (425) (484) Added ixed assets (1,830) (2,903) (2,343) (1,943) (1,466) (991) (747) (850) (969) Gain from disposal of non-current 0 0 2,449 1,370 1,273 0 0 0 0 assets Other non-recurring gains or losses 57 (143) (232) 1,040 0 0 0 0 0 Decrease (increase) in goodwill 42 (235) (42) 0 0 0 0 0 0 Decrease (increase) of non-coral assets (3,244) (5,431) (286) (14,000) 0 0 0 0 0 Other cash lows from investing 1,330 116 (591) 0 0 0 0 0 0 activities Net cash lows from investing (6,136) (10,048) (2,007) (14,181) (779) (1,487) (1,121) (1,274) (1,453) activities % Growth 63.8% -80.0% 606.6% -94.5% 90.9% -24.6% 13.6% 14.1%
Financing Activities Payment for beginning inancial gap 0 0 0 0 0 0 0 0 0 Financial expenses 186 149 (67) (321) (382) (487) (626) (753) (906) Increase (decrease) of short-term (59) (425) 1,028 (1,111) (725) 0 0 0 0 liabilities Increase (decrease) of long-term 4,465 4,074 336 720 543 368 277 315 359 liabilities Increase (decrease) of common stock 4,549 1 (1) 29,343 0 0 0 0 0 and capital reserves Dividends attribute to shareholders of 0 0 0 (432) (282) (174) (328) (536) (762) parent company Dividends attribute to minority 0 0 0 (4) (3) (2) (3) (5) (8) shareholders Other cash lows from investing (975) (926) (666) 0 0 0 0 0 0 activities Net cash lows from inancing 8,167 2,874 629 28,195 (848) (295) (680) (979) (1,317) activities % Growth -64.8% -78.1% 4385.8% -103.0% -65.2% 130.4% 44.0% 34.5%
Adjustments of exchange rate and 33 (135) 289 0 0 0 0 0 0 others on cash and cash equivalents Net cash low 7,295 (5,126) (2,821) 18,363 6,770 7,466 9,159 8,674 10,216 Beginning cash and cash equivalents 22,740 30,067 24,806 22,274 40,638 47,408 54,874 64,033 72,708 Ending cash and cash equivalents 30,067 24,806 22,274 40,638 47,408 54,874 64,033 72,708 82,924 Source: Company Data, Team Estimation Appendix P: Common Size Cash Flow Statements
Historical Projected As of December 31, in millions CNY 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Operating Activities Net income 2.5% 0.1% 0.8% 0.8% 0.5% 0.2% 0.4% 0.6% 0.7% Depreciation 0.6% 0.7% 0.9% 0.8% 0.8% 0.7% 0.6% 0.5% 0.4% Amortization 0.8% 0.7% 0.6% 0.6% 0.5% 0.5% 0.4% 0.3% 0.3% Gain from disposal of non-current 0.0% 0.0% -2.2% -1.1% -0.9% 0.0% 0.0% 0.0% 0.0% assets Other non-recurring gains or losses -0.1% 0.1% 0.2% -1.1% 0.0% 0.0% 0.0% 0.0% 0.0% Financial expenses -0.2% -0.1% 0.1% 0.2% 0.3% 0.3% 0.3% 0.4% 0.4% Decrease (increase) of OWC 3.0% 0.1% -2.0% 2.6% 4.4% 3.7% 4.0% 3.3% 3.5%
20 Historical Projected As of December 31, in millions CNY 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Decrease (increase) of long-term 0.0% 0.0% 0.0% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% operating assets Increase (decrease) of long-term 0.2% 0.2% 0.1% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% operating liabilities Decrease (increase) of deferred tax -0.2% -0.4% -0.5% 0.0% 0.0% 0.1% 0.0% -0.1% -0.1% assets Increase (decrease) of deferred tax 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% liabilities Other cash lows from operating -1.3% 0.6% 1.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% activities Net cash lows from operating 5.4% 2.1% -1.3% 3.4% 5.7% 5.6% 5.9% 5.1% 5.4% activities
Investing Activities Added intangible assets -2.5% -1.4% -0.9% -0.5% -0.4% -0.3% -0.2% -0.2% -0.2% Added ixed assets -1.9% -2.8% -2.2% -1.5% -1.0% -0.6% -0.4% -0.4% -0.4% Gain from disposal of non-current 0.0% 0.0% 2.2% 1.1% 0.9% 0.0% 0.0% 0.0% 0.0% assets Other non-recurring gains or losses 0.1% -0.1% -0.2% 1.1% 0.0% 0.0% 0.0% 0.0% 0.0% Decrease (increase) in goodwill 0.0% -0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Decrease (increase) of non-coral assets -3.3% -5.2% -0.3% -10.8% 0.0% 0.0% 0.0% 0.0% 0.0% Other cash lows from investing 1.4% 0.1% -0.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% activities Net cash lows from investing -6.2% -9.5% -1.8% -10.9% -0.5% -0.9% -0.6% -0.6% -0.6% activities
Financing Activities Payment for beginning inancial gap 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Financial expenses 0.2% 0.1% -0.1% -0.2% -0.3% -0.3% -0.3% -0.4% -0.4% Increase (decrease) of short-term -0.1% -0.4% 0.9% -0.9% -0.5% 0.0% 0.0% 0.0% 0.0% liabilities Increase (decrease) of long-term 4.5% 3.9% 0.3% 0.6% 0.4% 0.2% 0.1% 0.1% 0.1% liabilities Increase (decrease) of common stock 4.6% 0.0% 0.0% 22.6% 0.0% 0.0% 0.0% 0.0% 0.0% and capital reserves Dividends attribute to shareholders of 0.0% 0.0% 0.0% -0.3% -0.2% -0.1% -0.2% -0.3% -0.3% parent company Dividends attribute to minority 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% shareholders Other cash lows from investing -1.0% -0.9% -0.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% activities Net cash lows from inancing 8.3% 2.7% 0.6% 21.8% -0.6% -0.2% -0.4% -0.5% -0.5% activities
Adjustments of exchange rate and 0.0% -0.1% 0.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% others on cash and cash equivalents Net cash low 7.4% -4.9% -2.6% 14.2% 4.6% 4.5% 4.9% 4.1% 4.2% Beginning cash and cash equivalents 23.1% 28.6% 22.8% 17.2% 27.7% 28.7% 29.4% 30.1% 30.0% Ending cash and cash equivalents 30.6% 23.6% 20.4% 31.4% 32.3% 33.2% 34.3% 34.2% 34.2% Source: Company Data, Team Estimation; common size gained by dividing each account by total sales revenue of corresponding year
21 Appendix Q: Statement of Changes in Stockholders' Equity Accounts
Total equity attributable to the shareholders of parent company Converted Common stock Other Minority difference in Retained Total Owners' and capital comprehensive shareholders' foreign currency Earnings Equity reserves income equity statements 2011 Ending 7513.3 0.0 14.7 14800.4 702.2 23030.5 Net income 2676.1 (170.7) 2505.5 Other comprehensive income (0.2) (43.4) (43.7) Converted difference in foreign currency (45.1) (45.1) statements Shareholder input and capital decrease 4549.5 164.3 4713.7 Pro it disposition (1049.4) (1049.4) 2012 Ending 12062.5 0.0 (30.4) 16427.0 652.4 29111.5 Net income 371.8 (267.5) 104.3 Other comprehensive income (93.6) (70.9) (164.4) Shareholder input and capital decrease 0.3 21.7 22.0 Pro it disposition (369.2) (2.1) (371.3) 2013 Ending 12064.0 0.0 (124.0) 16429.7 333.6 28702.1 Net income 866.9 (42.9) 824.0 Other comprehensive income (77.3) (33.2) Converted difference in foreign currency 124.0 statements Shareholder input and capital decrease (1.3) (2.7) Pro it disposition 2014 Ending 12062.6 (77.3) 0.0 17296.6 254.9 29536.8 Net income 1014.0 10.2 1024.2 Pro it disposition (431.9) (4.4) (436.3) 2015 Ending 12062.6 (77.3) 0.0 17878.6 260.8 30124.7 Shareholder input and capital decrease 29343.2 29343.2 Net income 661.5 6.7 668.1 Pro it disposition (281.8) (2.8) (284.6) 2016 Ending 41405.8 (77.3) 0.0 18258.3 264.7 59851.4 Net income 407.5 4.1 411.6 Pro it disposition (173.6) (1.8) (175.3) 2017 Ending 41405.8 (77.3) 0.0 18492.1 267.0 60087.7 Net income 769.9 7.8 777.7 Pro it disposition (328.0) (3.3) (331.3) 2018 Ending 41405.8 (77.3) 0.0 18934.1 271.5 60534.1 Net income 1257.5 12.7 1270.2 Pro it disposition (535.7) (5.4) (541.1) 2019 Ending 41405.8 (77.3) 0.0 19655.9 278.8 61263.2 Net income 1789.6 18.1 1807.7 Pro it disposition (762.4) (7.7) (770.1) 2020 Ending 41405.8 (77.3) 0.0 20683.1 289.1 62300.8 Source: Company Data, Team Estimation
22 Appendix R: DuPont Analysis
We use DuPont analysis to evaluate Suning’s pro itability and return on shareholders. In 2014, Suning exhibited low return on equity (2.8%). The main driver of pro itability was total assets turnover, as well as equity multiplier and net income margin. This indicated that the company had a healthy gearing and ef icient performance. In 2020, we forecast ROE can be higher mainly due to higher net income margin. We expect levels of ROE to be attractive comparing to historical performance of the Company (Figure 29). We forecast ROE in 2020E to be 2.9%.
DuPont analysis suggests the most important driver for sustaining future level of return on equity to be inancial leverage, calculated as ratio of asset divided by equity. Hence, we forecast increase of the company’s leverage to have positive in luence on pro itability. Second driver appears to be asset turnover, which indicates the better utilization of Company’s resources.
ROE 2012A 2020E 1.33 1.45
Asset Turnover Net Pro it Margin Asset/Equity 2012A 2020E 2012A 2020E 2012A 2020E 1.33 1.45 -0.9% 1.3% 2.78 2.68
Net Income/EBT EBT/EBIT EBIT/Revenue 2012A 2020E 2012A 2020E 2012A 2020E 1.33 1.45 0.94 1.28 -1.1% 1.3%
Source: Company Data, Team Computation Appendix S: Altman’s Z Score Analysis
The coef icients were estimated by identifying a set of irms which had declared bankruptcy and then collecting a matched sample of irms which had survived, with matching by industry and approximate size (assets).
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5
Factor Calculation Measure of 2012 2013 2014
X1 Working capital/total assets Liquidity 2.53 2.44 2.53
X2 Retained earnings/total assets Pro itability 0.16 0.12 0.10
X3 EBIT/total assets Ef iciency 0.22 0.20 0.21
X4 Market value of equity/book value of total debt Leverage 0.04 0.00 0.02
X5 Revenue/total assets Solvency 104.35 124.50 126.19
Z Score Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5 Generating 1.29 1.28 1.36 Source: Company Data, Team Computation
KEY Z-score Prediction
> 3.0 Financially sound and relatively safe (i.e. non- failure)
< 1.8 Likely to fail (i.e. failure)
1.8 < Z < 3.0 “Grey area‟: failure or non-failure cannot be predicted with any certainty
The Z score has proven successful in the real world. It correctly predicted 72% of bankruptcies two years prior to the event. Z score pro iles for failing businesses often indicate a consistent downward trend as they approach bankruptcy. Suning’s Z score is around 23 2.5 in the past three years, which is in a grey area. Further investigation is likely to be required to assess whether they are inancially sound or in danger of failing. This may re lect a relative stable inancial situation, but with some warning signs about ratios like X3—EBIT/total assets. It is lower compare to that of the competitors. But according to our forecast, it will be much better and in good shape in the future period. Appendix T: WACC Analysis
Cost of Equity We gain cost of equity for Suning mainly based on the model of CAPM.
1. Risk-free Rate We take the yield on 1-year China Government Bonds on December 31st ,2014, which is 3.25%, as the risk-free rate.
2. Beta Beta is obtained by running a lineal regression of Suning stock share weekly returns against weekly returns of Shenzhen Composite Index, time range here is from January 2010 to December 2014 (a 5-year span). The result presents to be 1.005.
3. Market Risk Premium According to the paper “Market Risk Premium used in 88 countries in 2014: a survey with 8,228 answers” by Pablo Fernandez, Pablo Linares and Isabel Fernandez Acín of IESE business school, we apply 8.10%, which is the average number responded by inance and economics professors, analysts and managers of companies around the globe, as the market risk premium for Chinese stock market.
According to building blocks of CAPM listed above, we calculate cost of equity as 11.39%
Cost of Debt We take the weighted average debt cost of short-term debt and long-term debt as cost of debt for Suning.
1. Short-term Debt Short-term debt for Suning mainly covers short-term borrowings, we use the average interest rate of 3.75% in 2014 as the cost for this part.
2. Long-term Debt Long-term debt includes long-term borrowings and debt securities issued, the average interest for these two in 2014 is 5.30%, so we use this as the cost for long-term debt.
3. Marginal Tax Rate According to SAT (China) State Administration of Taxation, marginal tax rate for corporation is 25%.
So we calculate the after-tax weighted average cost of debt as 3.77%.
WACC Taking the target capital structure (70% equity, 30% debt, taken into account SOE in 2015) as the capital structure for following years, we calculate WACC for Suning as 9.11%.
To summarize, the process to calculate WACC for Suning are listed below:
Variable Value Basis Risk Free Rate 3.25% Yield on 1-year China Government Bonds Regression of weekly share returns against Shenzhen Composite Index Beta 1.01 weekly returns (2010-2014) According to “Market Risk Premium used in 88 countries in 2014: a Market Risk Premium 8.10% survey with 8,228 answers” by Pablo Fernandez Cost of Equity 11.39% Team calculations Pre-tax Cost of Debt 5.03% Historical statistics and team calculations Marginal Tax Rate 25% Regulation of SAT (China) Post-tax Cost of Debt 3.77% Team calculations Capital Structure (Equity to Debt) 70:30 Historical statistics, taken into account SOE in 2015 WACC 9.11% Team calculations Source: Company Data, Research Paper, Team Computation 24 Appendix U: DCF Table
2015—2020 FCFF 2015E 2016E 2017E 2018E 2019E 2020E EBIT -777 -39 1,012 1,618 2,374 3,213 - Adjusted income tax -170 -8 219 350 514 696 EBIAT -607 -30 793 1,268 1,860 2,517 + Depreciation 1,045 1,123 1,152 1,138 1,105 1,083 + Amortization 797 780 758 728 688 658 - Increase of OWC (3,393) (6,461) (6,110) (7,460) (7,034) (8,440) - Added intangible assets 648 586 496 374 425 484 - Added ixed assets 1,943 1,466 991 747 850 969 - Increase of long-term operating assets 95 79 86 100 118 137 + Increase of long-term operating liabilities 236 235 259 300 356 415 + Increase of deferred tax assets -20 72 125 -8 -204 -238 - Increase of deferred tax liabilities (58) (29) (32) (38) (44) (52) FCFF 2,216 6,539 7,656 9,704 9,490 11,337 WACC 9.11% 9.11% 9.11% 9.11% 9.11% 9.11% PV of FCFF 2,216 6,131 5,708 5,627 5,401 5,250 Source: Team Computation
Enterprise Value and Intrinsic Value (in millions CNY) Sum of FCFF PV 36,137 Terminal growth rate 3.7% Terminal value 215,904 PV of Terminal Value 137,269 Enterprise Value 173,406 + Cash and cash equivalents 22,274 + Non-coral Assets 6,555 - Total liabilities 52,657 - Minority shareholder’s equity 652 Value of Equity 148,926 Common shares outstanding 7,383 Intrinsic Value 20.17 Source: Team Computation Appendix V: DCF Details
Revenue To project, as precisely as possible, the upcoming operating revenue for Suning, we break it down into several parts according to speci ic business lines, which includes sales revenues, installation and maintenance services, other products, (the previous 4 constitute revenue from main business) and revenue from other business. Furthermore, we take governmental subsidy and gain from disposal of non-current assets (generating from leaseback transaction and corresponding REITs) as sustainable, at least in the following 6 years, bonus for revenue.
25 Sales Revenues For sales revenues, we divide them into revenues from White “Electrical Appliances”, “Black Electrical Appliances”, “Air Conditioner,” “Communication Products”, “Digital and IT Products” and “Life Electrical Appliances and Consumer Goods”.
Then, we take “Washing Machine” and “Refrigerator” as the coral representatives for White Electrical Appliances, “Television” for Black Electrical Appliances, “Microcomputer” for Digital and IT Products. By examining drivers, as well as trends, of sales volumes, prices and the ratio of industry sales to Suning corresponding revenues for these 4 products (including air conditioner), we’ve achieved the goal of revenue forecasting with relevant calculation. In addition, for Life Electrical Appliances and Consumer Goods, we directly examine the revenues.
Business Line Coral Products White Electrical Appliances Washing Machine, Refrigerator Black Electrical Appliances Television Air Conditioner Air Conditioner Communication Products Mobile Phones Digital and IT Products Microcomputer Source: Team Estimation
Sales Volume Sales volume study is carried out mainly by applying the method of Key Driver Prediction, which includes processes of picking up possible drivers, justifying the correlation, identifying key drivers and subsequent forecasting. Firstly, we’ve chosen several potential drivers for each products, shown in the list below:
Products Potential Drivers
Refrigerator
Washing Machine Real Estate Climate, GDP per capita, Population Air Conditioner
Television Real GDP per capita, Consumer Con idence (CCI), Mobile Penetration Rate, Social Fixed Mobile Phone Assets Investment in IT Industry Real GDP per capita, Consumer Con idence (CCI), Mobile Penetration Rate, Social Fixed Microcomputer Assets Investment in IT Industry Source: Team Estimation
Then, we run lineal regression for these possible drivers separately against sales volume of each product. For mobile, we take the form of YoY (year on year percentage) on each side of the equation. Data samples cover years from 1998 to 2014. The results are listed below:
Y X R-square T-statistic p-value
Refrigerator Real Estate Climate 0.551 -4.147 0.001
Refrigerator Real GDP per capita 0.983 29.455 0.000
Refrigerator Population 0.941 14.907 0.000
Washing Machine Real Estate Climate 0.555 -4.180 0.001
Washing Machine Real GDP per capita 0.982 28.688 0.000
Washing Machine Population 0.944 15.366 0.000
Air Conditioner Real Estate Climate 0.482 -3.608 0.003
Air Conditioner Real GDP per capita 0.944 15.968 0.000
Air Conditioner Population 0.957 17.661 0.000
26 Y X R-square T-statistic p-value
Television Real Estate Climate 0.567 -4.281 0.001
Television Real GDP per capita 0.954 17.541 0.000
Television Population 0.952 16.581 0.000 Real GDP per capita Mobile Phone (YoY) (YoY) 0.650 2.359 0.100 Mobile Phone (YoY) Consumer Con idence 0.067 0.465 0.674 Mobile Penetration Rate Mobile Phone (YoY) (YoY) 0.504 1.747 0.179 IT Fixed Assets Mobile Phone (YoY) 0.749 2.996 0.058 Investment Microcomputer Real GDP per capita 0.973 23.289 0.000
Microcomputer Consumer Con idence 0.652 -5.125 0.000 Household Internet Microcomputer 0.969 16.828 0.000 Access IT Fixed Assets Microcomputer 0.928 10.758 0.000 Investment Source: Team Computation
From the table above, taking into account R-square and corresponding p-value we can identify key drivers for each products as followed:
Products Key Drivers
Refrigerator
Washing Machine Household Income, Population Air Conditioner
Television
Mobile Phone Household Income, IT Fixed Assets Investment
Microcomputer Household Income, Household Internet Access, IT Fixed Assets Investment Source: Team Evaluation
Further, we project Household Income, Population, IT Fixed Assets Investment and Household Internet Access separately according to past growing pattern and current economic situation. To be more speci ic, we anticipate that real GDP growth rate for the following 6 years will be below 7% (See table below) according to IMF World Economic Outlook (WEO), October 2015, population growth rate will be 0.55%, while the growth rate for IT Fixed Assets Investment and households with internet access will be 0.1% and 6%. The forecasted key drivers in the next 6 years are presented in the following list:
2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E 2020E Real GDP growth rate (YoY) 7.70 7.70 7.30 6.80 6.30 6.10 6.30 6.30 6.30 Real GDP per capita (YoY) 7.17 7.17 6.84 6.22 5.72 5.42 5.52 5.72 5.72 Population (YoY) 0.50 0.49 0.52 0.55 0.55 0.55 0.55 0.55 0.55 IT Fixed Assets Investment (YoY) 0.12 0.21 0.11 0.15 0.15 0.15 0.15 0.15 0.15 Household Internet Access(YoY) 15.46 10.91 7.91 7.00 6.50 6.40 6.00 6.00 6.00 Source: IMF, Team Computation
In the next run, by taking advantage of the adjusted regression model (put all key drivers in one equation for each products), as well as the anticipated changes of key drivers, we are able to project the sales volume for each product.
27 Prices After the projection of sales volume, we then focus on prices of each product. We mainly put forward our forecast based on price pattern of previous years. Since the nearer the year to 2014, the closer it’s to the future 6 years, so we give the year of 2014 a weigh of 75%, while the year of 2013 a weigh of 25%. The results are presented below:
Annual Price Growth 2013A 2014A Following Years
Refrigerator (YoY) 3.47 5.05 4.66
Washing Machine (YoY) 4.90 1.74 2.53
Air Conditioner (YoY) -0.76 -2.10 -1.77
Television (YoY) 3.55 -9.01 -5.87
Mobile Phone (YoY) 0.36 2.61 2.05
Microcomputer (YoY) -5.15 -2.38 -3.07 Source: Team Computation
Relation between Industry Sales and Revenue Till now, with the projection of sales volume and price, we can forecast the volume or growth rate of industry sales for products mentioned above. The next step is to ind the link between industry sales and corresponding revenues of Suning. We take the ratio of industry sales to Suning corresponding revenues as the linkage. Due to the fact that what we care about is the relative relation between revenues and industry sales, with the assumption that sales of coral products are in portion to sales of the entire market, we can take the ratio mentioned above as a rational bridge.
We then examine year-on-year percentage change of the ratio for each product, and form our projection mainly based on previous changing pattern. Since the nearer the year to 2014, the closer it’s to the future 6 years, so we give the year of 2014 a weigh of 75%, while the year of 2013 a weigh of 25%.
On the basis of the growth rate projected above, we further take into account the impacts of O2O strategic layout and strong support from logistic bases, which are supposed to offer Suning bonus market share.
With respect to O2O Layout, we anticipate that WEA, BEA and AC shall bene it greatly from O2O, since they are more durable electrical appliances whose functions and features can only be examined by in-store experience. Combining with expanding customer traf ic through wide-area coverage and precision marketing guaranteed by online layout, we expect market share of these products would bene it greatly from O2O strategy. Besides, concerning CP, we assume that the effects of in-store selection shall decline due to the not-that-durable trait and concentrated purchase of certain products (like IPhone), but the introduction of online traf ic lows would strengthen the capacity of Suning to seize larger market in this ield. Finally, for D&ITP, since products in this business line are relatively standardized, the importance of pre-purchase experiences would pale, but by the same logic mentioned above, the trend of online shopping for these products has already been secured, we expect online expansion would boost the market share of Suning in this business lines. In general, all of the ive business lines would bene it great from O2O Layout, and the bonus goes in lines with online expansion, equaling proportion of online sales (to total sales revenue) times O2O premium, and we assume O2O premium in reference to the advantages listed above.
For bonus offered by cooperation with Big Macs in industries, all of the business lines would bene it great form it with expanding traf ic lows, and both collaboration with Alibaba and Wanda would, through online channel or of line channel, increase the capacity of Suning to seize larger market. We assume bonus from Big Macs.
Annual Price Growth 2013A 2014A Historic Pattern
White Electrical Appliances (YoY) 0.60 4.64 3.63
Black Electrical Appliances (YoY) -2.35 -4.89 -4.26
Air Conditioner (YoY) 10.60 -7.08 -2.66
Digital and IT Products (YoY) 3.79 0.08 1.01
Communication Products (YoY) 0.13 2.98 2.27 Source: Team Computation
Revenue Before calculating sales revenue for each business lines mentioned above, we irst check sales revenues of Life Electrical Appliances 28 and Consumer Goods. Applying the same method of Key Driver Prediction, we choose several possible drivers for this business line as presented below:
Business Line Potential Drivers
Life Electrical Appliances and Consumer Goods Household Income, Population, Consumer Con idence Source: Team Estimation
Then we examine the correlation between revenues and potential drivers by running lineal regression model of the latter against the former and list the results below:
Y X R-square T-statistic p-value
Life EA & CG Real GDP per capita 0.988 31.380 0.000
Life EA & CG Population 0.942 13.994 0.000
Life EA & CG Consumer Con idence 0.684 -5.098 0.000 Source: Team Computation
So we take real GDP per capita and population as the key drivers for revenues of Life Electrical Appliances and Consumer Goods.
Business Line Key Drivers
Life Electrical Appliances and Consumer Goods Household Income, Population Source: Team Evaluation
Till now, we’ve prepared each block to forecast sales revenues, further algorithmic calculations bring us sales revenues for each business line as following:
Products (in millions CNY) 2015E 2016E 2017E 2018E 2019E 2020E CAGR White Electrical Appliances 24,458 29,899 36,524 44,810 55,287 68,469 23.56% Black Electrical Appliances 23,610 24,823 25,997 27,163 28,325 29,450 5.55% Air Conditioner 14,754 15,848 16,913 17,947 18,942 19,868 7.59% Digital and IT Products 18,421 21,783 25,343 29,136 33,170 37,497 13.44% Communication Products 20,361 22,301 23,879 25,863 28,576 31,678 10.00% Life Electrical Appliances and Consumer 24,714 28,256 32,364 36,972 42,116 47,796 18.47% Goods Total Sales Revenues 126,318 142,911 161,020 181,890 206,415 234,758 14.15% Source: Team Computation
Other Revenues For other revenues from main business and revenues from other revenues, we project them based on following assumptions.
Account Assumption
Installation and maintenance services Percentage of sales revenue Increase at the rate of 50% with reference to the year of 2014 and company’s strategy Revenues from other main business to keep expanding business in inance and SOP. Revenue from other business Increase at in lation rate Source: Team Estimation
Gross Margin To forecast Suning’s gross margin for the next 6 years, we focus on the projection of gross pro it ratio (depreciation and amortization have been removed from operating costs). To achieve this goal, we break it down into sales margin, margin for installation and maintenance services, margin for other primary business, as well as margin for other business. For the latter 4 accounts, we assume them to be constant as the level of 2014, and for sales margin, we project it based on analysis on key ratios.
29 According to recent 5 years’ annual reports, we extract mainly two factors that would exercise great impacts on sales margin rate: Online Business (self-operating part) Expansion and the Policy of O2O One Price (which lowered down sales margin remarkably in 2013). We then, on the one hand, take the ratio of online business revenue to total sales revenue to describe the status and achievements of Online Business Expansion. We assume that Suning’s online expansion would continuously drag down sales margin since the margin for online business is relatively low compared with of line sales. On the other hand, for in luences of the Policy of One Price, we construct a variable whose value varies between 0 and 1. 0 means the weakest impacts, like 2012 when the policy hadn’t been actually exercised out, and 1 indicated the strongest impacts in 2013 and 2014. Since the year of 2015, Suning has reached out to loosen up the restriction of same price for online and of line, we expect this variable shall decline before reaching a steady rate of 0.3, resulting in lasting leveled up sales margin.
To quantitatively identify impacts on gross pro it ratio of these two factors, we apply the method of lineal regression to construct a forecasting model that incorporates both of the two factors as independent variables, and we apply it to predict forward sales margin.
To highlight, historical data seems to reveal that Suning’s online expansion has already reached a deceleration strip with sharp dropping and low growth rate. But we anticipate, in regard to performance in early 2015, that with the improvement of logistics and customer experience, the implementation of multi-channel strategic layout, the cooperation with Alibaba, and for the most important part, the accumulation of practical experience, online business should enjoy an average year-on-year growth rate of 25% in the next 6 years.
Annual Price Growth 2012A 2013A 2014A Following Years
Online Sales Revenue (YoY) 157.90 43.86 3.24 25.00 Source: Team Computation
According to precious projections and elaboration, we calculate gross pro it rate for the next 6 years as followed:
Products (in millions CNY) 2015E 2016E 2017E 2018E 2019E 2020E Proportion of Online Sales 22.4% 24.7% 27.4% 30.3% 33.4% 36.7% Impacts of Policy of One Price 0.5 0.4 0.3 0.3 0.3 0.3 Sales Margin 14.8% 14.6% 14.4% 14.1% 13.9% 13.7% Sales Proportion 97.5% 97.5% 97.5% 97.4% 97.3% 97.1% Installation and Maintenance Services Margin 21.6% 21.6% 21.6% 21.6% 21.6% 21.6% Installation and Maintenance Services Proportion 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% Others Margin 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% Others 0.3% 0.4% 0.5% 0.7% 0.9% 1.2% Margin of Primary Business 14.7% 14.5% 14.3% 14.2% 14.0% 13.8% Other Business Margin 1.1% 1.1% 1.1% 1.1% 1.1% 1.1% Other Business Proportion 1.3% 1.2% 1.1% 1.0% 0.9% 0.8% Total Sales Revenues 16.0% 15.7% 15.4% 15.1% 14.8% 14.5% Source: Team Computation
Business Tax and Extra, Management Expenses & Sales Expenses We remove depreciation and amortization part from sales expenses and management expenses, and projection for these accounts are based on following assumptions. Due to the fact that the primary business of Suning is retail, we break down sales expenses into speci ic accounts and project them one by one.
Account and Intermediate Variable Assumption
Business tax and extra Percentage of sales revenue
Management expenses Percentage of operating revenue
Sales expenses Percentage of sales revenue, but the ratio shall rise up due to the Salary and welfare quicken paced of talent introduction. 30 Account and Intermediate Variable Assumption
Insurance In proportion to sales revenue
Travel expense Increase at in lation rate Increase remarkably due to the added rent paid for stores Rent running in REITs model. Percentage of sales revenue, but the percentage would expand in lines with concentrated promotion programs for the coming 2 Advertisement years, but shall decline in the following years when corporate image has been positively set and reputation has been built. Transpotation Increase at in lation rate
Others Increase at the growth rate of 2014 Source: Team Estimation
Depreciation, Amortization & Financial Expenses Depreciation and amortization are collected from operating costs, sales expenses and management expenses, we form our prediction for these two based on followed assumptions and later on projection for Fixed Assets and Intangible Assets. And for inancial expenses, we forecast them based on followed assumptions and subsequent projection for Cash & Cash Equivalents and Debt Financing.
Account and Intermediate Variable Assumption
Depreciation Percentage of beginning ixed assets-net
Amortization Percentage of beginning intangible assets-net Drawn from short and long term borrowings, as well as debt Interest expenses securities issued Including interest from bank reserves and other inancial Interest revenue products Other inancial expenses Including bank charges and net loss of exchange
Interest rate for short-term borrowings Average rate of year 2014
Interest rate for long-term borrowings The average level of the previous year
Debt capitalization rate The rate of 2014
Interest rate for cash and cash equivalents Equal to demand deposits interest rate at the end of 2014
Other interest revenue Equal to 2014 nominal amount
Bank charges Percentage of cash and cash equivalents
Net loss of exchange Equal to 0 Source: Team Estimation
Other Accounts of Income Statement In early 2015, Suning has launched the second round of REITs, generating CNY 1,370 million gain from disposal of non-current assets, since Suning only has 13 self-owned physical stores, we expect gains from REITs is not sustainable. We expect Suning will launch the last round of REITs in 2016 which will bring in gains of CNY 1,273 million (calculated with the assumption that each store will generate the same gains).
Besides, according to Oct 31st, 2015 announcement, we anticipate that Suning shall sell PPTV out in the coming fourth quarter, create CNY 1,040 million non-recurring gains.
Non-recurring gains and losses apart from these two, due to uncertainty and discontinuity, should be equal to 0 for inancial soundness. The same logic is applied to other comprehensive income. Besides, we assume subsidiaries of Suning, excluding PPTV, would get rid of inancial predicament and start to make pro its in the next 6 years, when adaptive phase of the previous 2 years has passed and business synergies begin to work. So we lay out our assumption that the ratio of minority interest income to net income would turn positive and be equal to the ratio of minority shareholders' equity to total equity.
31 Account and Intermediate Variable Assumption
Tax ratio Equal to average effective tax ratio of the past 3 years
Minority interest income Percentage of net income, turns positive in the following years
Other comprehensive income Equal to 0 Source: Team Estimation
Fixed Assets and Intangible Assets We apply the method of BASE to forecast ixed and intangible assets with the assumptions that new added ixed assets and intangible assets are in portion to operating income. But for Suning’s asset-light strategy which can be aptly illustrated by the launch of REITs, we anticipate that the ratio mentioned above shall decline gradually. In addition, when checking added intangible assets, the acquisition of land-use right makes up the majority (95%) of it, while purchase and development of software takes about 5% of the whole. By the same logic, we project that the former part shall gradually decline (more sharply in amount) while the latter one shall expand, which, altogether, leads to the decline of the ratio of added intangible assets to operating income. This part shall help inish processes of forecasting depreciation and amortization.
Account (in millions CNY) 2015E 2016E 2017E 2018E 2019E 2020E Fixed Assets Balance at beginning of year 12,155 13,053 13,397 13,236 12,845 12,590 Addition 1,943 1,466 991 747 850 969 Subtraction (depreciation) 1,045 1,123 1,152 1,138 1,105 1,083 Ending Balance 13,053 13,397 13,236 12,845 12,590 12,476 Intangible Assets Balance at beginning of year 7,015 6,866 6,673 6,411 6,056 5,793 Addition 648 586 496 374 425 484 Subtraction (depreciation) 797 780 758 728 688 658 Total Sales Revenues 6,866 6,673 6,411 6,056 5,793 5,620 Source: Team Computation
Operating Working Capital This part mainly discusses the projection of current assets (excluding non-operating current assets like “ inancial assets held for trading”) and current liabilities (excluding non-operating current assets like “long term liabilities due within a year”). We mainly rely on linkage between these accounts to revenue and operating costs to put forward our forecast.
Account and Intermediate Variable Assumption
Accounts and notes receivable Percentage of total revenue
Advanced to suppliers In proportion to operating costs Percentage of sales revenue, but the ratio shall decline due to Inventories the improvement of logistics and inventories management specialization Other operating current assets Percentage of total revenue
Accounts and notes payable Increase in line with operating costs
Payment received in advance In proportion to total revenue
Other payables Percentage of total costs Source: Team Estimation
Debt Financing This section studies accounts related to debt inancing and most of them shall generate interest expenses or interest revenue. We mainly form our projection based on followed assumptions:
32 Account and Intermediate Variable Assumption
Added short term borrowings Percentage of change in OWC
Added long term borrowings Percentage of added ixed assets
Debt securities issued Equal to 2014 nominal amount Source: Team Estimation
Other Assets and Liabilities In early 2015, Suning incorporated PPTV as a dominating share holding company, which generated CNY 1,708 million goodwill for Suning, but we expect, according to Oct 31st announcement, Suning is going to sell PPTV out in the coming 4th quarter, thus the added goodwill would be moved out also. We assume there is no goodwill impairment.
Account and Intermediate Variable Assumption Works as a balance item and is obtained after building overall linkages among Balance Cash and cash equivalents Sheet, Income Statement and Cash Flow Statements. Financial assets held for trading Equal to 2014 nominal amount
Available-for-sale inancial assets Increase by the amount of CNY 14,000 million for investment in Alibaba
Long-term receivables Percentage of total revenue
Long-term equity investments Keeps constant at the level of the previous year of 2014
Investment real estates Equal to 2014 nominal amount No goodwill impairment, added goodwill from incorporating PPTV would be removed Goodwill off due to the selling out followed Percentage of total revenue, but the ratio shall decline in lines with the reduction of Deferred tax assets deductible losses Other non-current assets Equal to 2014 nominal amount
Other current but non-operating liabilities Remain constant as the value of 2014
Deferred tax liabilities Percentage of operating costs, Source: Team Estimation
Owners’ Equity We project that in the fourth quarter of 2015, Suning will inish the new round of SOE to Alibaba, so the account of common stock and capital reserves would expand correspondingly. We further assume that there’s no change in “other comprehensive income” and “converted difference in foreign currency statements”.
To continue, we apply the method of BASE to project “retained earnings” and “minority shareholders' equity”. Processes mentioned above would cover dividends paid both to shareholders of patent company and minority shareholders. We anticipate that Suning shall keep a dividend ratio of 42.6% to shareholders of parent company, as the year of 2014. And since we previously assumed that subsidiaries of Suning would start to make pro it, the absence of dividends paid to minority shareholders would be ended next year, and we also assume a dividend ratio of 42.6% for minority shareholders. The calculation processes are listed below:
Account (in millions CNY) 2015E 2016E 2017E 2018E 2019E 2020E Retained Earnings Balance at beginning of year 17,297 17,879 18,258 18,492 18,934 19,656 Addition 1,014 661 407 770 1,257 1,790 Subtraction (depreciation) 432 282 174 328 536 762 Ending Balance 17,879 18,258 18,492 18,934 19,656 20,683 Minority Shareholders' Equity Balance at beginning of year 255 261 265 267 271 279 Addition 10 7 4 8 13 18
33 Account (in millions CNY) 2015E 2016E 2017E 2018E 2019E 2020E Subtraction (depreciation) 4 3 2 3 5 8 Total Sales Revenues 261 265 267 271 279 289 Source: Team Computation
Appendix W: Comparative Valuation
To carry out comparative valuation, or multiples analysis, we irst choose several comparable companies of Suning according to similarities in primary business. Since Suning is now implementing an O2O-oriented strategy which covers retail business both online and of line, we correspondingly pick up comparable companies in both of the two blocks, that are online retailing and of line retailing. For online retailers, we pick up JD, eBay, Dangdang and Amazon, while for of line retailers, we choose Gome, Wangfujing, Intime and Bubugao (the latter three all have plans to develop and expand O2O business). Besides, according to characters of retail industry, we choose to check P/S and EV/Revenue for comparative valuation. Table below shows the key statistics of these chosen companies on November 12th, 2015.
JD.O EBAY.O AMZN.O DANG.N Suning
5
3.75
2.5
1.25
0
GOME WFJ BBG INTIME Suning
5
3.75
2.5
1.25
0 2014-11-13 2015-05-14 2015-11-11
Company 12 Month Averaged P/S(TTM) EV/Revenue
Online Retailers
JD 2.5 x 1.4 x
EBAY 3.4 x 1.5 x
AMZN 2.3 x 2.8 x
DANG 0.6 x 0.2 x
Of line Retailers
GOME 0.4 x 2.2 x
WFJ 0.6 x 0.8 x
BBG 1.2 x 1.8 x
INTIME 2.5 x 18.76 x Source: Thomson Reuters, Yahoo Finance, iFinD
34 P/S For comparative valuation applying P/S as the indicator, we divide it into two separate parts, one for online business and one for of line. We then apply the sales revenue (TTM, Sep. 30th) of Suning to run P/S valuation. The intrinsic value generated by this is CNY 20.36, which goes in lines with the result of DCF valuation.
P/S Valuation Online Median P/S 2.4 x Online sales percentage 21.3% Online sales revenue per share 3.53 Of line Median P/S 1.7 x Of line sales percentage 78.7% Of line sales revenue per share 13.04 Target Price 20.36 Source: Team Computation
EV/Revenue For this part, we also take Suning as a whole for both online and of line business. To get rid of the undesirable effects generated by abnormal high EV/Revenue, we take INTIME away from our calculation list in this part. We generate the intrinsic value for Suning as CNY 19.57 which further solidify the DCF and P/S valuation.
EV/Revenue Valuation
Median EV/EBITDA 1.5 x Revenue 108,925 EV 168,590 + Cash and cash equivalents 22,274 + Non-coral assets 6,555 - Total liabilities 52,657 - Minorities shareholders’ equity 255 Value of Equity 144,507 Common shares outstanding 7,383 Target Price 19.57 Source: Team Computation Appendix X: Rating De inition
Benchmark: Shenzhen Stock Exchange Composite Index Time horizon: 12 months
Rating De inition
Buy Stock expected to outperform benchmark by more than 15%
Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15%
Hold Expected stock relative performance ranges between -5% and 5%
Sell Stock expected to underperform benchmark by more than 5% Source: iFind
35 Appendix Y: Monte Carlo Simulation & Sensitivity Analysis
Monte Carlo Simulation The Monte Carlo Simulation examines the impacts of 6 factors on intrinsic value of Suning, including Real GDP Growth, Online Sales Expansion, Revenues from New Business Lines, Sales Expenses, Company WACC and Terminal Growth. For each factor, we assume it to conform a normal distribution and shall change randomly. We then create 10,000 simulations and obtain corresponding intrinsic values on each scenario. In-detail descriptions of these factors are presented below:
Affected Factors Statistical Parameters Interpretation Account
Mean 0% This factor checks the sensitivity of sales Real GDP Growth Rate Sales Revenue to macroeconomic status. Std 0.25%
Mean 10% This factor examines how sensitive gross Online Sales Growth Rate Gross Pro it Margin pro it margin and sales revenue are to Std 4.0% online sales expansion.
Revenues from New Mean 50% This account tests the impacts of revenues Total Revenue Business Lines Growth Rate from new business lines on toatl revenue. Std 5.0%
Gains from REITs Growth Mean 0% This account examines the sensitivity of Total Revenue Rate EBIT to sales expenses. Std 2.0%
Mean 9.11% This factor checks the impacts of cost of WACC Cost of Capital capital on intrinsic value of the company. Std 0.25%
Mean 3.66% This factor increase sensitivity of the Terminal Growth Rate Terminal Value terminal value to terminal growth rate. Std 0.40% Source: Team Estimation and Computation
Monte Carlo Simulations Sell Hold Accumulate Buy 2.78% 10.53% 22.42% 64.27% Frequency Value Intrinsic
Source: Team Computation
The simulations produce a series of intrinsic values of Suning, with the mean of CNY 20.36, median of CNY 20.24, which are quite close to our target price of CNY 20.27. Besides we derive a 90% con idence interval for intrinsic value as CNY16.78 to CNY 24.27.
36 Statistical Description Mean (CNY) 20.36 Standard Deviation 2.29 5% percentile (CNY) 16.78 Median (CNY) 20.24 95% percentile (CNY) 24.27 Source: Team Computation
Sensitivity Analysis We then check the factors mentioned above one by one when holding others constant, testing the sensitivity of intrinsic value to changes in each factor. Then we conclude that factors like Real GDP Growth, Gains from REITs, WACC and Terminal Growth would exercise great impacts on the intrinsic value of Suning, while in luences from Online Sales Expansion and Revenues from New Business Lines are relatively weak. The results are listed below:
Real GDP Growth Rate Intrinsic Value % Change in Value Recommendation Return from Stock -0.50% 18.10 -10.26% Accumulate 16.47% -0.25% 19.09 -5.35% Accumulate 22.84% 0.00% 20.17 0.00% Buy 29.79% 0.25% 21.35 5.85% Buy 37.39% 0.50% 22.65 12.30% Buy 45.75%
Online Sales Growth % Change in Rate Intrinsic Value % Change in Value Recommendation Return from Stock Rate 15.0% -40.00% 20.69 2.58% Buy 33.14% 20.0% -20.00% 20.46 1.44% Buy 31.66% 25.0% 0.00% 20.17 0.00% Buy 29.79% 30.0% 20.00% 19.80 -1.83% Buy 27.41% 35.0% 40.00% 19.32 -4.21% Accumulate 24.32%
Revenues from New Business Lines Growth % Change in Rate Intrinsic Value % Change in Value Recommendation Return from Stock Rate 40.0% -20.00% 19.71 -2.28% Buy 26.83% 45.0% -10.00% 19.92 -1.24% Buy 28.19% 50.0% 0.00% 20.17 0.00% Buy 29.79% 55.0% 10.00% 20.47 1.49% Buy 31.72% 60.0% 20.00% 20.82 3.22% Buy 33.98%
Sales Expenses Deviation Intrinsic Value % Change in Value Recommendation Return from Stock -4.0% 21.77 7.93% Buy 40.09% -2.0% 20.97 3.97% Buy 34.94% 0.0% 20.17 0.00% Buy 29.79% 2.0% 19.37 -3.97% Accumulate 24.65% 4.0% 18.57 -7.93% Accumulate 19.50%
WACC % Change in Rate Intrinsic Value % Change in Value Recommendation Return from Stock 8.61% -5.49% 22.58 11.95% Buy 45.30% 8.86% -2.74% 21.31 5.65% Buy 37.13% 9.11% 0.00% 20.17 0.00% Buy 29.79% 9.36% 2.74% 19.09 -5.35% Accumulate 22.84% 9.51% 4.39% 18.51 -8.23% Accumulate 19.11%
37 Terminal Growth Rate % Change in Rate Intrinsic Value % Change in Value Recommendation Return from Stock 3.20% -12.57% 18.63 -7.64% Accumulate 19.88% 3.40% -7.10% 19.26 -4.51% Accumulate 23.94% 3.66% 0.00% 20.17 0.00% Buy 29.79% 3.80% 3.83% 20.66 2.43% Buy 32.95% 4.00% 9.29% 21.45 6.35% Buy 38.03% Source: Team Computation
Appendix Z: Fed Funds Rate Projections
Each dot represents a prediction of the federal funds rate by a member of the Federal Open Market Committee (FOMC). The Fed’s dot plot is the best predictor of the future path of short-term interest rates. While the prevailing target range is still between 0-0.25, which is set in December of 2008, the FOMC has taken a hawkish stance in their predictions on the federal funds rate in the most recent meetings of the FOMC, referring to a “possible rate hike” in 2015.
Source: Board of Governors of the Federal Reserve System, on September 17, 2015
38 Appendix AA: Risk Matrix
OR1 High
MR2 OR2 ER1
MR1 Medium Probability ET1 OR3
OR4 Low
Low Medium High Impact
Risk Explanation Rating Economic Risks
Indicators have shown that the economy of China is slowing down, which may inevitably affect the demand for consumption. Other signs show mitigation. Even though the growth rate of retail sales is sliding year by year, the nominal growth rate of total retail sales of household appliances and communication devices in Slowdown of ER1 Q1-Q3 are relatively stable. Online retail sales show a strong growth rate of 12 China’s Economy 36.2% in Q1-Q3, where online retail sales account for 10.0% of total retail sales. Also the contribution of inal consumption to GDP growth is increasing. These indicators show that economic impact on Suning, as both an online and an of line retailer, may be mitigated. Market Risks
All items below are calculated in the currency of CNY. Assets in foreign currencies account for 3.0% of total assets. Liabilities in foreign currencies account for 5.6% of total liabilities. Operating revenue from Hong Kong and from Japan Foreign Economic MR1 respectively account for 7.1% and 3.3% of total operating income. The impact of 3 Factors Risk foreign exchange rates volatility on Suning is relatively limited because of low proportions of foreign currency assets, liabilities and sales, but the possibility is high due to unstable foreign exchange markets this year. Approved by the Board of Directors in 2015, the company can invest no more than CNY 3 billion of its own idle funds in money market funds, and no more than CNY 8 billion (compared to a CNY 5 billion limitation in 2014) in inancial Financial Markets MR2 products. Due to unprecedented volatility of China’s inancial markets, the high 4 Risk uncertainty of the value of inancial assets on balance sheet poses risks. Considering that most of the investments involve low-risk products, the impact would be relatively small.
Operational Risks Suning ranked third in China online retailers market shares, next to Tmall and JD. Online retailers take price war as an important way to expand market share and OR1 Competition Risk to boost sales. Price wars take place on certain days every year such as November. 15 11 and August.15. The cutting-price strategies signi icantly increase sales at the cost of lower pro it margin.
In May 2015, Suning announced that it would launch a new round of REITs, securitize 14 real estate assets and generate a predicted after-tax net income of Unsustainability of 800 million yuan. Suning can possibly continue this asset-light strategy in the OR2 8 Income from REITs next year to avoid negative net income, considering its huge operating losses in past few years. But since only 13 self-owned stores are available for disposal, the net income may drop signi icantly after all the self-owned stores are securitized.
39 Risk Explanation Rating As Alibaba becomes the second largest shareholder of Suning (19.99% stake, next Collaboration with to the largest shareholder of 21% stake), it will play a decisive role on Suning’s OR3 Alibaba May Board. Potential frictions between the two management teams may lead to 4 Underperform inef iciency. It will be mitigated if the cooperation turns out rewarding in events such as Singles’ Day and management teams show signs of smooth collaboration.
Suning has two long-term ixed rate bonds outstanding, of which CNY 4.5 billion Liquidity Risk as matures in 2017 and CNY 3.5 billion matures in 2019. Since Suning keeps it credit OR4 Corporate Bonds 3 rating of corporate bonds at AAA with negative prospect, it may be not dif icult Mature for Suning to issue new bonds to raise funds. Other Risks
As Board Chair, founder and the largest shareholder, Jindong Zhang holds 26.44% Excessive Control of Suning’s shares (21% after deal with Alibaba) and actually controls 45.37% of ET1 2 from Board Chair voting rights, which may represent his excessive power over Suning’s operations, including decisions on investing and inancing.
Appendix AB: Reference
Damodaran, Aswath, Historical Growth Rates by Sector, NY: NYU, 2015 - Terminal Growth Rate
Fernandez Pablo, Linares Pablo and Isabel Fernandez Acín, Market Risk Premium Used in 88 Countries in 2014: A Survey with 8,228 Answers: Ssrn Electronic Journal, 2014 -WACC
The World Economic Outlook (WEO): IMF, 2015 -Valuation
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