Sun Art Retail Group'ss 2H not likely to shoot up

2H SSS guidance is zero like-for-likes.

Sun Art Retail Group guided down SSS guidance for 2H from 2% SSS growth to zero like-for-likes, even though revenue and SSS comps ease substantially going into 2H14.

According to a research note from Barclays, as a result, it has reduce its estimates for Sun Art for the full year by around 4%, cutting its price target from HK$11 to HK$10.6.

However, Barclays maintains its relative Overweight rating in the China Staples space given lower-than-sector valuations, long-term competitive advantages and the potential unlocking of value from a) higher payouts and b) value build-up at Feiniu.com.

Here’s more from Barclays:

Margins remain rock solid: Management highlighted that margins remain solid and their pricing remains more attractive than both traditional and online competitors.

The opening of a new distribution centre (DC) in 2H and continued advantages of scale should help bolster gross margins, as should strength in rental income.

The company has been able to sharply reduce headcount/stores to manage wage inflation better. About 80 stores have seen a revamp of their Fresh Food sections to bolster traffic.

Online scare: The company launched its own online operations Feiniu.com to compete with Food e-commerce operators like Yihaodian.

No numbers were provided for Feiniu other than that its losses were small and its gross margins similar to those of the traditional business.

But management has no view on how large a threat e-commerce could be to its asset-intensive traditional business and it is this uncertainty that remains the key overhang on the stock for now, in our view.

Valuation and risks: While we cut our earnings forecasts and price target by close to 3-4% each, we maintain our relative Overweight rating on the stock given the lower-than-sector-average valuations, the strengthening competitive advantage vs peers and the potential to unlock value via a) higher payout and b) a value build-up at Feiniu.com.

The key risk to our rating, we believe, is the ease with which e-commerce operators are raising capital to expand in China, making it easy for them to ignore profitability for now and add to the sector's deflationary woes.