DFI Retail Group

You basically need a lot of moving parts to get it right. DFI is not just a case of divesting one poor-performing asset to turnaround.

- Consolidated groceries at an operating profit of less than $50 million, a far cry from the $150-200 million in the past. Yonghui is at the associate level so the losses removal is irrelevant here.
- Convenience stores already close to pre-pandemic profits of about $90 million so not more low-hanging fruit left but a function of future outlet growth
- Health & Beauty is close to pre-pandemic at $210 million but good days were able to earn close to $300 million (2018 & 2019). The question is whether today's or tomorrow's market conditions resemble 2018/19.
- Home Furnishing probably has the biggest lever for turnaround. In addition, they have been growing home furnishing (more than doubled store count in HK & ID but not sure in floor space; incremental stores in ID are smaller in size)
- On associates, Maxim's also recovered back to 2023 levels while Yonghui divestment will see loss removal of $48 million.

My very rough guess-estimate is that core earnings are around $200 million which is basing on 2023 core adjusted for one-offs and Yonghui loss removal. This is at around 14x earnings which is not exactly screaming buy especially Big Toe's comment on the management's quality. I guess it will be cheap if they hit a home run on groceries AND home furnishing.

(24-09-2024, 12:37 PM)Big Toe Wrote: DFI made a significant loss in Yong Hui. Sale price was lower than what they paid for about 10years ago and that is before factoring inflation. Let us put things in perspective and try to roughly gauge if market is right. What I present is not the complete picture but enough info for me.

1. Lost out in the supermarket space both in SG and MY.
2. Made a bad investment in Young Hui.
3. Relatively short tenure(5-6years) of CEOs
4. Red Tape/Tall Organization Chart, Hands-off CEO.

The size/purchasing powerr/ diversified offerings in different sectors, store formats have kept them profitable for a long time.But are they a well oiled machine? Your guess is as good as mine.

DFI's total investments in Yonghui was ~1.1billion (as per analyst reports) and at 640mil reported sell price, that is ~40% capital loss (where ~10% is attributed to FX). Yonghui probably paid some dividends but since DFI was in a net debt position, interest costs may have negate those dividends (if any).

Some time back, I re-read DFI's VB thread. Those good old days had VBs purring about the franchise of its business. They were right - the grocery business franchise is durable but Mgt wasn't, or at least changing dynamics obsoleted DFI Mgt. 2 business re-orgs by experienced outsiders in the space of a few years suggest that DFI is still trying to find its foot.

Finally to cut them some slack, I believe "Jardine CFOs" were right to invest in Yonghui because it was a very promising business back then, at least until group buy came into vogue. Those CFOs in their skyscraper tower offices, couldn't have predicted group-buys to become popular, as much as 99.99% of us typing such messages on a keyboard. IPO prospectus of 99 Speed Mart reveals that they have started some sort of bulk grocery purchase channel for B2B and B2C, is this going to disrupt this region soon?

I wonder how does Sheng Siong stores in China continues to make profit for the past few years despite presence of group buy and yong hui making losses.

(01-10-2024, 01:04 PM)Bibi Wrote: I wonder how does Sheng Siong stores in China continues to make profit for the past few years despite presence of group buy and yong hui making losses.

Hi Bibi,

Comparing SSG's 6 stores in Kunming (capital of Yunan) to Yonghui's 1000+ stores in all major urban centers of China, is probably not a fair one.

I have a close relative who ventures deeper into (more) rural areas of Kalimantan to set up their own retail businesses. They were originally from Jakarta. When I understood why, then I slowly start to understand a bit more about Business 101 - (1) Money is made when things are less efficient, not more. (2) How you perform is not as important as how your competitors (if any) perform.

Unless we are talking about building "world class businesses", or else it is really about winning the losers' game and avoiding competition.

Incumbents like Yonghui and RT-Mart all suffer from operating deleveraging as the hypermart format no longer works as effectively. If you look at the grocery scene in China, the market structure/format changes every 10-12 years. Yonghui and RT-Mart were merely the yesteryears equivalent of PDD/Meituan when modern trade took over the grocery scene in China. It makes you wonder how conservative it was to pay above 20x earnings multiple in the past for the supposedly defensive grocery sector.

Actually, SSG is still profitable but not without challenges. If you look at their minority interests for 1H2024 which is a proxy for China's profits, it has fallen by 67% YoY