SUNART RETAIL (06808) is not being favored, as it suffered greatly from Alibaba's low-priced clearance.

Performance turned from loss to profit, but unfortunately suffered a low-price clearance by Alibaba, with a nearly 30% drop on the announcement of the next trading day, followed by another over 8% drop on the second trading day. Why is the leading supermarket chain SUNART RETAIL (06808) not being favored? It was found that on December 31st, Alibaba announced the sale of all shares of SUNART RETAIL held by its subsidiary Dehong Capital, including the 73.66% held by Gixin and Taobao, and the 5.04% held by New Retail, totaling up to 7.5077 billion shares. On January 1st, SUNART RETAIL announced that it received an offer to purchase over 7.5077 billion shares of SUNART RETAIL, accounting for approximately 78.7% of the issued shares. The offeror is proposing a cash offer of HK$1.38 per share and a share purchase offer. Compared to the closing price before the announcement, the offer price represents a discount of 44.4%. Due to this information, SUNART RETAIL plummeted on January 2nd, reaching a low of HK$1.6, a 35.5% drop, with a closing drop of 20%, continuing to decrease significantly on the following trading day. Alibaba's low-price clearance sale caused the main funds to flee. Furthermore, after changing the controlling shareholder, the management team may face the issue of potential "bloodshed," which could affect business operations. However, why did Alibaba decide to sell off SUNART RETAIL at a loss, and has there been a change in the fundamentals of SUNART RETAIL? Let's analyze deeply below. Behind the clearance: industry downturn and business strategy adjustment It was noted that Alibaba has been continuously selling off non-core assets recently, with two major retail operating entities being sold within a month, including the sale of Yintai Department Store to a consortium of Youngor Fashion Group and Yintai Management Team members for a total of 7.4 billion yuan, and the sale of SUNART RETAIL this time, resulting in a total of nearly 20 billion yuan in proceeds. However, selling off SUNART RETAIL may result in a huge book loss. It is understood that Alibaba first invested approximately 22.4 billion Hong Kong dollars in 2017 to acquire a 36.16% stake in SUNART RETAIL, and then spent another 28 billion Hong Kong dollars in 2020 to increase the stake to approximately 72%, totaling 50.4 billion Hong Kong dollars. The loss from this sale exceeds 37 billion Hong Kong dollars. Why did Alibaba decide to sell off the retail sector at a huge loss? A careful observation reveals that the retail industry has entered a slump with the macroeconomic downturn, weak consumption leading to a slowdown in retail growth, and the continuous decline in real estate prices affecting the demand for supermarkets and department stores. In the first three quarters of 2024, the overall growth of China's fast-moving consumer goods market slowed down, achieving only a modest growth of 0.8%, with hypermarkets continuing to decline. On the other hand, the valuation of the retail sector has been declining all along, with SUNART RETAIL's market value shrinking by 80% since 2020. Alibaba's performance growth has been relatively stable, with a revenue growth of 8.9% in the first three quarters of this year and a net profit growth of 56% for shareholders. However, it has encountered a growth bottleneck and needs to find new growth points. AI models are penetrating various industries comprehensively, with clear development trends, and Alibaba is actively adjusting its business strategy, focusing on "putting users first and driving AI," to reshape the priority of business strategies, or to reshape core businesses through AI. Of course, when someone sells, there will be someone who sees value. The buyer this time, Dehong Capital, is an international private equity investment institution, focusing on investing in industry leaders, especially in the retail business sector. Over the past 30 years, it has invested in many leading enterprises, including MENGNIU DAIRY, Haier, COFCO Meat, Fujian Sunner Development, and Belle International. As it is a PE investment, it is more financial in nature and is not expected to change the management team at SUNART RETAIL. The core reason why Dehong Capital bought SUNART RETAIL at a low price is that the purchase price is much lower than the stock price, and the PB ratio is less than 0.7 times, which means that they could get more than a 30% premium by selling off all assets, even without selling assets, the dividend yield is 10%, which would still yield a decent return. Furthermore, SUNART RETAIL is a leading supermarket chain with business coverage across the country and has strategic significance in the layout of the industry chain. However, as mentioned earlier, the retail industry is not doing well, and the performance of SUNART RETAIL in recent years has not been impressive, with a long-term low profit margin and significant profit fluctuations. Declining performance: accumulated losses of over 2 billion yuan in four fiscal years Affected by the industry, SUNART RETAIL has been experiencing declining performance for four consecutive fiscal years. In the first half of the 2025 fiscal year, revenue was 34.708 billion yuan, a decrease of 16.4% compared to the first half of the 2021 fiscal year, with a net profit of 2.06 billion yuan for shareholders, turning from loss to profit, but swinging between losses and profits in the past four years, even with profits, the profit margin is very low, less than 1%. From the 2022 fiscal year to the first half of the 2025 fiscal year, the company has accumulated a net loss of 2.029 billion yuan for shareholders. SUNART RETAIL's business model mainly operates hypermarkets, medium-sized supermarkets, and member stores under the brands "RT-Mart," "RT-Mart Super," and "M VIP Store." As of September 2024, the company owned 466 hypermarkets, 30 medium-sized supermarkets, and 6 M VIP stores, with hypermarkets and medium-sized supermarkets mainly concentrated in third- and fourth-tier cities, accounting for 67.8%. In the first half of the 2025 fiscal year, the company's sales of merchandise and rental income accounted for 95.6% and 4.4% respectively. In fact, in March 2024, Shen Hui took over as CEO of the company and brought a new management team for business transformation, including the iteration of the second-generation medium-sized store model, some indicators turned positive and became growth drivers, and continuous refinement of the supply chain in the member stores. In terms of market strategy, continued optimization of hypermarket physical stores, focusing on the layout in the East and Central China regions, and expanding the outlets.The share of member stores has increased significantly, with the number of member stores increasing to 6 in the first half of the 2025 fiscal year, a year-on-year increase of 5.High-end paid membership stores are an important attempt at the company's business model exploration, but development progress has been slow. Referencing the Sam's Club and Costco membership store models, it may take a longer adaptation time. However, from the performance in the first half of the year, the decrease in revenue has narrowed, same-store sales have recorded growth, and turning losses into profits has highlighted the positive effects of the transformation. This is mainly due to the optimization of sales expenses under the physical store strategy, with the sales expense ratio at 22.09% during the period, a decrease of 2.28 percentage points compared to the previous year. Although the new management is making efforts to improve the business situation, SUNART RETAIL's fundamentals are still in a weak development trend due to industry constraints, with new growth points yet to be formed. The membership store model needs further exploration, and under the hypermarket model, performance still requires a recovery drive from the macro consumer environment. Additionally, the company continues to reduce inventory levels, increase cash on hand, and enhance risk defense capabilities. As of September 2024, the company had 11.908 billion yuan in cash and cash equivalents. Privatization expectations: Large short-term price fluctuations In the capital market, SUNART RETAIL's continuous decline in performance has led to a decline in market value, but the company has never repurchased to stabilize its stock price. It is worth mentioning that the company's dividend policy is less affected by performance, with a high dividend payout ratio every year, even in the years of losses in 2022 and 2023, it adheres to the principle of rewarding shareholders. According to Oriental Choice data, the company has paid dividends 14 times since 2018, with a dividend payout ratio of 63.35%. The company's dividend policy is relatively attractive to investors, and the current valuation is also very low with a dividend yield of 10%. After Alibaba's clearing out, the company's controlling shareholders have changed, bringing two main uncertainties: first, the new controlling shareholder as a financial investor may threaten the stability of operations in the future; second, the possibility of privatization and delisting, or suspension of trading due to public shareholders not meeting listing requirements. SUNART RETAIL has received favorable views from many investment banks, with Macquarie's research report predicting a net profit of 478 million yuan for the company in the 2025 fiscal year, a significant reversal from the previous forecast of a loss of 77 million yuan, leading to a 22% increase in the company's target price. Regarding Alibaba's recent sell-off, investment banks have mixed opinions, with some believing that the deadline for the equity transaction is September 30, 25 years, and requires approval from the Market Regulatory Administration. After the transaction, the company's team is expected to stabilize and continue to advance various transformation measures, promoting a steady improvement in profitability. In summary, Alibaba's clearance of SUNART RETAIL is based on its bearish outlook on the industry, as well as its own business focus and strategic development needs, causing a sell-off at a low price and impacting investor sentiment. Under the expectation of potential privatization and delisting, the company's price fluctuations are exacerbated, and the uncertainties surrounding the new controlling shareholder, a PE institution, may still affect management stability. As it stands, the company's performance continues to deteriorate, new growth points have not been formed, and the sustainability of profitability still needs further observation. However, with a low valuation and a stable dividend policy, the company still retains significant attractiveness.