CGSI Research
September 11, 2025
Sun Art Retail Group Faces Headwinds as Instant Delivery War Hits Offline Traffic: Comprehensive Investment Analysis

Overview: Instant Delivery Shake-Up and Strategic Store Upgrades

Sun Art Retail Group, a leading food retailer in Hong Kong, has come under pressure from an intensifying instant delivery subsidy war, impacting its core offline operations. The latest research note from CGSI Research, dated September 11, 2025, provides a detailed review of Sun Art’s current standing, strategic initiatives, and financial outlook for FY3/26 and beyond.

Key Takeaways and Recent Developments

• Same-store sales (SSS) are expected to fall in the mid-to-high single digits year-over-year in 1HFY3/26, with a low-single-digit decline for the full year.
• Instant delivery subsidy war involving Meituan, Eleme, and JD began in April 2025, lifting online order volumes but shrinking average ticket sizes by ~30% to Rmb53 in 1HFY3/26.
• Store upgrades underway: Sun Art targets 70 upgrades by December 2025, with 200 slated through June 2026.
• Financial forecast: Projected revenue down 2% YoY for FY3/26, but net profit up 51.9% YoY as operational margins improve.
• Valuation update: Downgrade from Add to Hold; new DCF-based target price HK\$2.20, reflecting continued operational challenges.

Instant Delivery War: Impact on Traffic and Profitability

The ongoing subsidy war among major delivery platforms has shifted consumer behavior, boosting Sun Art’s online orders but at the cost of lower ticket sizes and increased distribution expenses. Average daily online orders per store now stand at 1,400, with distribution split across Sun Art’s app (35%), Meituan (20%), Eleme (40%), and JD/Douyin (5%).
The delivery fee per order (Rmb3-5) is embedded in distribution expenses, exerting downward pressure on operating profit margins. This dynamic is expected to persist until the competitive landscape stabilizes.

Store Upgrade Program: A Strategic Response

Sun Art is accelerating its store upgrade strategy, aiming to modernize 70 locations by the end of December 2025, each requiring approximately Rmb4 million in capex. The broader plan targets 200 upgraded stores by June 2026, focusing on:

• Expanding popular regional products nationwide via a centralized supply chain.
• Reducing overall store space and SKU counts, thereby increasing sales per square meter and optimizing sub-lease and front warehouse opportunities.
• Shifting SKU mix: Fewer F&B products, more fashion and collectible toys.
• Private label expansion: Private label products expected to rise from ~2% of revenue currently to 5% in FY3/27 and 10% in FY3/28.

Financial Performance: Snapshot and Forecast

Sun Art’s financials reflect the impact of industry disruptions and management’s strategic adjustments. Below is a summary of recent and projected results:

Revised Forecasts and Earnings Adjustments

Recent downward revisions reflect the persistent headwinds from the instant delivery market:

• FY3/26 EPS: cut by 5.4%
• FY3/27 EPS: cut by 7.6%
• FY3/28 EPS: cut by 6.9%

Sun Art is still working on improving its product offerings and store efficiency, which could affect its near-term earnings trajectory.

Sun Art’s DCF Valuation: Inputs and Methodology

The DCF-based target price for Sun Art is set at HK$2.20, with the following assumptions:

• WACC: 10.7%
• Risk-free rate: 3%
• Beta: 0.85
• Terminal growth rate: 3%

Balance Sheet Highlights

Sun Art’s financial position remains robust, with significant cash reserves and a healthy equity base:

Key Ratios and Drivers

Management Changes and Strategic Direction

Following the acquisition by private equity firm DCP Capital in February 2025, six DCP personnel have joined Sun Art’s senior management, actively driving supply chain improvements and store efficiency. Sun Art is expected to maintain its annual dividend payout of Rmb1bn for FY3/26-27, implying a robust dividend yield of 5.6% for FY3/26.

Investment Ratings and Target Price

• Current Rating: Hold (previously Add)
• Target Price: HK\$2.20 (down from HK\$2.50)
• Current Price: HK\$2.06
• Upside Potential: 6.8%
• Consensus Ratings: 7 Buy, 5 Hold, 0 Sell

Risks and Upside Scenarios

Downside Risks:

• Weaker-than-expected sales recovery due to low consumer confidence and offline traffic volatility.
• Higher operating expenses stemming from inefficiencies or additional investments in front warehouse and supply chain upgrades.

Upside Risks:

• Faster progress in store upgrades, boosting traffic and sales per sqm.
• Lower operating expenses thanks to improved efficiency, supporting higher net profits.

Shareholder Structure and Market Data

• Major Shareholder: Alibaba Group (83.4% ownership)
• Market Cap: HK\$19,653m (US\$2,523m)
• Average Daily Turnover: HK\$31.57m (US\$4.04m)
• Shares Outstanding: 9,540m
• Free Float: 16.6%

Recommendation Framework Explained

• Add: Total return expected to reach 15% or higher over the next 12 months
• Hold: Total return expected to be between -10% and +15% over the next 12 months
• Reduce: Total return expected to fall below -10% over the next 12 months

Conclusion: Navigating Uncertainty Amid Transformation

Sun Art Retail Group stands at a crossroads as it battles external pressures from the instant delivery landscape and undertakes an ambitious store upgrade initiative. While near-term financials reflect the strain, the company’s strategic direction and operational improvements—underpinned by new management and shareholder support—position it for potential recovery and margin expansion in future periods. Investors should closely monitor progress on store upgrades, margin trends, and competitive dynamics in the instant delivery space for further developments.

Disclaimer

This analysis is strictly for informational purposes and does not constitute an offer or solicitation to buy or sell any securities. Readers are advised to evaluate their individual investment objectives and consult professional advisors before making investment decisions related to Sun Art Retail Group or any other securities discussed herein.