Yonghui Superstores:Poised to be the new retail pioneer;Buy
A series of new retail initiatives roll out
Yonghui announced Tencent's investment in December. This surprised the marketalong with Tencent's partnership with Vipshop. We believe Tencent is an idealpartner for Yonghui as Yonghui should have more flexibility and independence,given that Tencent is not a retailer by nature. Yonghui should benefit from itsonline traffic and increase its online capability.
More recently, it teamed up with Hongqi chain, a regional offline chain, by takinga 21% stake in the company. In addition, YH, Hongqi and CMIG Futurelife (aproperty management company in West China) signed a strategic agreement totap into a community retail network. We believe this regional corporation shouldboost its growth in the Southwest market where it has a solid track record.
Valuation and risks
Yonghui rolled out a series of initiatives internally and externally over the pasttwo months. We regard these moves as farsighted preparation for the new era ofthe retail market. We also believe that its solid offline merchandising capabilitiesemployed by new technology and new business models will potentially createnew growth drivers for Yonghui. We lift our target price by 4% to RMB10.5afterfactoring in the Hongqi stake that it acquired in December.
Seeking online strategic partner and soliciting offline resources
We factor this deal into our model and derive a new RMB10.5target price (vs.RMB10.14). Our primary valuation methodology is DCF, employing 9.5% COE,1.0beta and a 1.5% TGR, which is in line with the 1-2.5% range we apply to theconsumer sector. Downside risks: 1) failure to achieve its three-year plan; 2) M&Acapability (having control as the second-largest shareholder); 3) challenges in themultichannel strategy.