Description

Yuwushang(000501.SZ) operates shopping malls, supermarkets and other retail outlets in Hubei province, central China. It might seem strange to recommend a retailer given fierce competition this sector is facing from online competitors. But we think Yuwushang is a solid investment with margin of safety and catalysts to unlock value. Also incentives of the insiders are well aligned. One can purchase Yuwushang via the Hong Kong – Shen Zhen connect mechanism.

Yuwushang operates in Hubei province especially in Wuhan, the state capital. It has four shopping malls located in the center of Wuhan, and six department stores with total area of 1.4 million square meters. It also has thirty-six supermarkets in Wuhan and forty-two supermarkets in other major cities of Hubei province with total area of 760 thousand square meters. The company generated revenue of 17.69 billion RMB in 2016 and net profit of 1 billion RMB. The current market cap is about 13.7 billion which implies PE of 13.6, PB of 2.11 and PS of 0.76. As indicated below, current valuations are significantly lower than comps.

In a recent deal, Alibaba acquired Yintai group, a retail enterprise with similar business mix as Yuewushang for $27.3 billion HKD, about 20x PE.

Additional margin of safety comes from the company’s asset value. The company currently owns about 1.2 million square meters property, with most of them located in the heart of Wuhan, the most prosperous city in Hubei province.

As shown in above table, the top four properties, which are all located in prime locations of the city, offer a combined value of about 12 billion RMB, which is 90% of the current market-cap. If we assign realistic valuations to all the other owned properties, add cash and take out all liabilities, we get a book value of about 21 billion RMB.

We think one of the most important competitive advantages the company has is its location: geographically Hubei province is at the center of China. It is a major traffic hub and one of the most developed provinces in the region. In 2016, total GDP of Hubei province was 32 trillion RMB, increasing 8% from previous year. Total retail sales were about 15 trillion, increasing 12%. The city of Wuhan is the state capital and the eighth largest city in China with a population of 11 million and GDP of 11 trillion, almost 40% of the whole province. It plays a very important role as China’s integrated transportation hub with most of the country’s major logistic companies having their headquarters in the city. The city also has 82 colleges and 1.8 million students. Its population has the highest college student density in China and these students are not peanut butter sandwich eating, cash poor students, they are the new generation with cash (from parents of course) and willing to spend.

Per capita GDP of Wuhan is 112,301 RMB in 2016, and per capita disposable income of urban residents is 39,737, up by 9.06% from last year. Per capita consumption expenditure was 26,535 RMB, up 10.8%. The total retail sales of consumer goods reached 561.1 billion RMB, an increase of 10.0% compare to 2015, and the total retail sales ranked the fifth in all major cities, next to Beijing, Shanghai, Guangzhou and the city of Chengdu.

The above table shows retail property vacancy rate among major Chinese cities, Wuhan is at the lowest level. Three of the company’s main shopping malls are located in the busiest streets of the city.

The company’s recent performance can be summarized with the following two tables:

flat revenue, higher gross margin, lower expenses, and growing profit. We think the following factors contributed to the relatively positive picture:

The company focused on selling more high end products and premium brands, and on categories such as cosmetics, jewelry, and watches which are more resistant to online sales. The company added more entertainment elements such as restaurants and movie theaters in its malls to create overall shopping experience online retailers can’t provide. Company also took a number of cost reduction initiatives such as closing down under-performing supermarkets, re-negotiate rent agreements for about thirty stores, and optimizing the size and structure of its workforce. As a result of these strategies, average sales per square meter reached 8,800 RMB, far exceeds competitors.

The company is investing about 8 billion RMB to build Wushang Dream World Plaza, which is expected to open in 2019. The location of this new development is excellent: it is surrounded by a major railroad station, the most famous historical interest site everyone visits and several major universities. This part of town is also relatively under-served when it comes to retail offerings.

Management and insiders own 7% of total equity so their incentives are well aligned. To unlock shares from restricted employee plan they need to continue to improve company performance.

The company’s second largest shareholder (16% of total equity) is Yintai group which is owned by Alibaba. Yintai was an independent company operating 29 department stores and 17 shopping centers around country but was acquired by Alibaba in May this year.  Alibaba acquired Yintai to pursue the so called “new retail” strategy: comprehensive access of data from consumers, payments, inventories, and services. Alibaba and Yintai have developed a number of sales efforts to enable Yintai to sell Alibaba’s products in offline stores and vice versa.  In the same time, Yintai used Alibaba’s wealth of user information to analyze and attract customers within store range. In May 2017, Jack Ma has openly expressed interest of further cooperation with Wushang group.

Risks:

Chinese economy hard landing

New development project goes wrong

Online retailers futher erode sales

Catalyst

New shopping mall starts to contribute to bottom line

Close partnership with Alibaba