SINGAPORE (Feb 14): Online shopping is booming in Asia, but brick and mortar retail isn’t going away anytime soon. Outlet malls, for one, are gaining popularity in China as shopping and buying is an activity that comes in more variety and format. For consumers, these outlet malls, located in the suburban areas, are the places to go to pick up discounted goods, which are off-season, and also because rental for the retailers is cheaper.
For years, Zhongmin Baihui Retail Group (ZMBH), a Singapore-listed operator of department stores in China, was operating only within cities of China’s Fujian province, particularly Quanzhou and Xiamen. Last year, it ventured outside Fujian for the first time to Hunan province. This new store is located within Changsha Sasseur, an outlet mall which is owned by Sasseur Group, sponsor of another Singapore-listed entity, Sasseur REIT.
Time to grow
ZMBH’s inroads into Hunan, via an outlet mall, came at a time when the company was on an active expansion bid. Between 2016 and 2019, the company did not open any new stores. Earnings during that period dipped. For FY2016 ended December 2016, the company reported earnings of RMB97.8 million, which dropped to RMB54.2 million and RMB40.4 million for FY2017 and FY2018 respectively.
However, in 2019, ZMBH has been reporting improved earnings, as the newly-opened stores contribute to both the top and bottom lines. For the most recent 3QFY2019, the company reported earnings of RMB19.0 million, up 97.3% y-o-y. For the nine months to Sept 30, 2019, earnings rose 21.6% y-o-y to RMB58.0 million. Revenue in 3QFY2019 grew 12.6% y-o-y to RMB 279.1 million from RMB 247.8 million a year ago.
The four new stores, which opened in the second and third quarters of 2019, are Maluanwan Store, Yongchun Store, Luncang Store and Jinfeng Store. The company now has a total of 18 stores, with a total gross floor area of 211,400 sq m.
“We were waiting for an opportunity to expand. We found that 2019 was the perfect time to do so, and we took the opportunity to open four new outlets,” says ZMBH’s executive chairman, Lee Swee Keng in an interview with The Edge Singapore.
According to Lee, the reason why the company’s new store growth remained relatively staid was because of prohibitive rental the city shopping malls were charging. As China’s economy grew and income levels and spending power rise, mall owners have a good reason to jack up their rental rates. At the same time, more shopping malls were popping up in the cities, causing an oversupply of shopping malls.
By the time many of the malls had progressively opened, e-commerce had taken hold in China, supplanting a lot of spending in physical retail stores. Market research company eMarketer has predicted that by 2023, retail e-commerce sales will represent 63.9% of China’s total retail sales. Hence, the new malls are struggling to increase their occupancy rate and footfall. From January 2017 to June 2018, about 744 new malls opened in China, while 41 shut down; 72 new departmental stores opened and 118 closed; and 77 new hypermarkets sprung up while 100 closed for good, according to data from retail and demographic data provider Local Gravity.
To keep occupancy rates high, mall owners have begun to lower rental so that retailers will be drawn to take up space with them. In the face of stiff competition, some malls owners went as far as to waive base rental, taking a cut of the profit only instead. ZMBH enjoys such an arrangement at its Changsha Sasseur outlet mall.
Besides eyeing additional stores in the outlet malls, the company is constantly refining its product mix. For example, it can explore the possibility of earning better margins by devoting a bigger proportion of its products to its supermarket section.
There might be another reason for ZMBH’s period of lying low in the few years after 2016. In February 2016, Singapore Exchange issued a “trade with caution” on ZMBH’s shares. According to SGX, ZMBH shares remained steady from Oct 26, 2015 to Feb 4, 2016, despite the Straits Times Index (STI) declining during that period. This was especially apparent from Jan 4, 2016 to Feb 4, 2016, when ZMBH’s share price was stable even after the STI fell by 11.25%.
Investigations by SGX showed that a small group of individuals were responsible for more than 90% of the on-market buy volume of ZMBH shares during the STI’s 11.25% fall period. Further investigations showed that this group of individuals were all employees of ZMBH.
Lim Kok Tong, one of the founding members of ZMBH, was also a broker for CIMB Securities. After the company listed in 2011, more than 100 employees and company officers signed up as Lim’s clients. As of March 2016, 16 of the 30 largest shareholders in ZMBH were Lim’s clients. Lim was later fined $180,000, suspended from trading for six months with effect from Oct 27, 2016, and ordered to attend an education programme on securities regulation.
Safety precautions
Currently, China is battling the spread of an infectious disease that has been inflicted on at least 4,104 people and taken the lives of 1,018 worldwide as at Feb 11. The coronavirus outbreak is said to have started in Wuhan, a city located in Hubei province. The virus had plenty of chances to spread outside Hubei to more than two dozen countries, including Singapore.
Large swathes of China’s normally bustling economy came to a standstill. Cities were quarantined, manufacturers were told to stop work temporarily, and retailers told to close. For example, CapitaLand on Jan 29 announced that it had to shut down six of its malls in Wuhan and Xi’an, as required by the Chinese government. However, supermarkets remained open to ensure the supply of food and daily essentials. The rest of CapitaLand’s 45 retail malls across China remain open, but with shorter opening hours.
Sasseur REIT also on Jan 28 announced that it has temporarily closed all four of its retail outlet malls in the cities of Chongqing, Bishan, Hefei and Kunming. The Changsha Sasseur outlet, which houses ZMBH’s departmental store, has also been closed since Jan 26. But its supermarket remains open. Incidentally, extra spending by people hoarding daily necessities and food from the supermarkets might help offset some of the foregone revenue from the department stores.
On Feb 3, ZMBH announced that in line with directives issued by the authorities, the operating hours of all of its stores were shortened to 10am to 6pm. The normal operating hours of 9am to 10.30pm is expected to resume from Feb 9. But in a Feb 10 announcement, the group extended its shortened operating hours until Feb 12. The normal operating hours will resume from Feb 13.
“The virus outbreak, although it started in December 2019, only became serious after 2019 and hence FY2019 results are not affected by the virus attacks. However, 1QFY2020 results should be negatively affected by the coronavirus outbreak. Fortunately, the month starting from the Lunar New Year period is typically the slowest period for the group,” says Lee.
In a Feb 5 announcement, the group said that the virus outbreak has disrupted its regular financial reporting work in China, as the Lunar New Year holiday was extended by the Chinese government, while travel bans within the country have been imposed. Hence, the release of its FY2019 results will be delayed.
Lee remains upbeat about the company’s prospects. He believes that the outbreak is unlikely to thwart the group’s expansion plans for this year. “At the moment, the new store openings are not affected as construction works have effectively been delayed by about a week from schedule. We do not expect a significant delay at the moment based on the current situation,” he says.
Since the start of 2019, ZMBH’s share price has lost some 26.3% to close at 59 cents on Feb 11. At this level, the company is trading at 11.21 times historical earnings, and valuing the company at $124.7 million.
