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Maintain BUY and USD2.61 TP, 34% upside and c.5% yield. We maintain our positive stance on DFI Retail Group on the back of recovery expectations and attractive valuation. The divestment of Yonghui Superstores Co reduces future earnings risks and we continue to anticipate earnings recovery into FY25F. Dividend yield is decent due to parent company Jardine Matheson Holdings’ (JM SP, NR) practice of uplifting dividends back to the group level. The stock currently trades at an attractive 11x FY25F P/E.
Divests Yonghui for c.CNY4.5bn. DFI has announced the divestment of its entire c.21% stake in Yongshui to MINISO Group Holding Limited’s subsidiary for c.CNY4.5bn. This will allow DFI to concentrate its efforts to grow its subsidiary businesses across all of its markets. The transaction is subjected to MINISO shareholders’ approval and other regulatory approvals. MINISO will acquire another c.8% from e-commerce company JD.com for close to a 30% eventual stake in Yonghui. DFI invested c.USD1.1bn into Yonghui in 2015 and 2016 for an approximately 20% stake, increasing to 21.4% in FY23 due to Yonghui’s share buyback.
Less drag from future earnings risks. We view the disposal as positive such that the absence of Yonghui’s dismal contribution would lift the drag and earnings risks on DFI’s future earnings. Yonghui contributed USD36m losses to DFI in FY23. Since FY21, Yonghui itself has registered net losses due to declining sales and lower margins. Based on Bloomberg’s consensus estimate, Yonghui is still expected to register operating losses of CNY6.1bn in FY24F. The carrying value of Yonghui on DFI’s balance sheet was c.USD1bn in FY16, but marked to only USD765m in 1H24. DFI’s share of net assets in Yonghui also fell from USD648m to USD285m from FY16 to FY23.
TP and estimates largely unchanged. Post adjustment of cash proceeds from the sale of shares, reduction of book value from Yonghui and absence of earnings contribution, we see a negligible core earnings change (+2% in FY25F’s earnings, neutral for FY24F and FY26F). The higher cash balance would yield better interest income which offsets the loss of Yonghui’s future earnings contribution. Similarly, the absence of Yonghui’s share price value in our SOP-based TP is compensated by a higher cash balance factored into the core business. Our investment thesis remains intact, with DFI still an earnings recovery play driven by the turnaround and improvement of its core business.
Downside risks to our recommendation: Slower-than-expected recovery in consumer spending and higher-than-expected costs, which could ultimately lead to lower margins and earnings. As DFI’s ESG score is below the country median of 3.1, we apply a 2% ESG discount to its intrinsic value to derive our TP.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....