China Galaxy International Securities (Hong Kong) Co., Limited
Date of Report: September 11, 2025

Sun Art Retail Group Faces Headwinds from Delivery Wars: Outlook, Upgrades, and What Investors Need to Know

Introduction: Navigating a Disrupted Retail Landscape

Sun Art Retail Group, a prominent player in Hong Kong’s food retail sector, is at a crossroads as it contends with intensifying competition from instant delivery platforms and evolving consumer habits. This comprehensive analysis delves into Sun Art’s latest performance, strategic initiatives, financial outlook, and the implications for investors, based exclusively on the latest broker research.

Key Takeaways at a Glance

• Broker Call Downgrade: Rating moved from “Add” to “Hold”; target price lowered to HK\$2.2.
• Instant Delivery War: Fierce subsidy battles between Meituan, Eleme, and JD are pressuring Sun Art’s offline traffic and margins.
• Store Upgrade Ambitions: 70 stores targeted for upgrade by end-2025; 200 in total by mid-2026.
• Financials: FY3/26F revenue forecast to decline 2.0% year-on-year, but net profit to rise 51.9% on margin improvements.
• Dividend Outlook: Expected to maintain annual dividend payout, offering a yield of 5.6%.
• Major Shareholder: Alibaba Group holds 83.4% of shares.

Instant Delivery War: A Double-Edged Sword

The emergence of an “instant delivery subsidy war” among e-commerce giants has reshaped the competitive landscape in 2025. While Sun Art has benefited from a surge in online orders, this has come at the expense of:

• Falling Offline Traffic: Fewer shoppers are visiting physical stores as they turn to heavily subsidized delivery platforms.
• Shrinking Basket Size: Average online order value dropped by around 30% to RMB 53 in 1HFY3/26F.
• Margin Pressure: Delivery fees (RMB 3–5 per order) are weighing on operating margins, as these costs are included in distribution expenses.

Currently, Sun Art’s daily online order volume is 1,400 per store, with sources as follows:

• 35% from Sun Art’s own app
• 20% from Meituan
• 40% from Eleme
• 5% from JD/Douyin

Store Upgrades: Strategic Pivot for Growth

In response to these challenges, Sun Art is investing aggressively in store enhancements. Key initiatives include:

• Upgrades in Progress: 3 stores upgraded in Shanghai and Jiangsu in the first 8 months of 2025; 70 targeted by end-2025; 200 by June 2026.
• Capex: Approximately RMB 4 million per store for upgrades.
• Optimized Store Model:
  • Broader regional product availability nationwide via centralized supply chain.
  • Reduced store space and streamlined SKUs, boosting sales per sqm and enabling more sub-leasing and front warehouse space.
  • Shift in SKUs: Fewer F&B items, more fashion toys and collectibles.
  • Private label ramp-up: Target to grow private label revenue from 2% now to 5% in FY3/27F and 10% in FY3/28F; two private label lines (value & high-end) with 200 SKUs each.
• Focus on opening new supermarkets and optimizing front warehouses to increase proximity to consumers.
• Regional growth prioritized, particularly in East China, South China, and Northeast regions.

DCP Capital’s Role: Management Revamp and Efficiency Focus

A significant management change occurred in February 2025 as international private equity firm DCP Capital acquired Sun Art. Six DCP personnel have since joined Sun Art’s senior management, driving efforts to boost:

• Supply chain efficiency
• Store operations
• Overall corporate governance

DCP is also expected to help maintain Sun Art’s annual dividend payout of RMB 1 billion through FY3/27F.

Financial Performance: Latest Results and Forecasts

Recent Performance and Revisions

Valuation and Market Metrics

• Current Price: HK\$2.06
• New Target Price: HK\$2.20 (down from HK\$2.50)
• Market Cap: HK\$19.653 billion (US\$2.523 billion)
• Free Float: 16.6%
• Average Daily Turnover: HK\$31.57 million (US\$4.04 million)
• Consensus Ratings: 7 Buy, 5 Hold, 0 Sell

Risks and Upside/Downside Scenarios

Downside Risks:

• Weaker-than-expected sales recovery due to declining consumer confidence and offline traffic.
• Higher-than-expected operating expenses (opex), especially from investments in front warehouses and supply chain upgrades.

Upside Risks:

• Faster progress in store upgrades, leading to improved sales per sqm and revenue growth.
• Lower opex as a result of improved operational efficiency, boosting net profits.

Operating Metrics and Key Ratios

Dividend Policy and Shareholder Structure

• Committed to maintaining a dividend payout of RMB 1 billion per annum in FY3/26F and FY3/27F.
• Expected dividend yield of 5.6% in FY3/26F.
• Major shareholder: Alibaba Group (83.4% ownership).

Valuation Methodology and Target Price

The broker values Sun Art using a discounted cash flow (DCF) approach, with key assumptions:

• WACC: 10.7%
• Risk-free rate: 3.0%
• Beta: 0.85
• Terminal growth rate: 3.0%

The target price is set at HK\$2.2, reflecting a more cautious outlook due to slower revenue growth and ongoing upgrade investments.

Final Thoughts: Investment Outlook

Sun Art Retail Group is at a pivotal moment. While its ambitious store upgrade strategy and the backing of DCP Capital offer medium-term promise, near-term challenges from the instant delivery war and margin pressures are likely to weigh on performance. The company’s strong dividend yield and market leadership are positives, but investors should monitor execution risk and the pace of offline recovery closely.

Analyst Coverage

• Lei Yang
• Charlotte Zhou
• Aaron He Wei

Summary Table: Sun Art Retail Group Snapshot

Rating Framework

• Add: Total return expected to reach 15%+ in 12 months.
• Hold: Total return between -10% and +15% in 12 months.
• Reduce: Total return below -10% in 12 months.

Sector and country ratings definitions use standard overweight/neutral/underweight terminology for market positioning.

Conclusion

Sun Art’s medium-term prospects hinge on successful execution of its store upgrades, margin management, and a rebound in offline traffic. While the current environment is challenging, especially with intense competition from instant delivery platforms, the company’s strategic initiatives and strong shareholder backing position it for recovery if execution risk is contained. Investors should weigh the attractive dividend yield against ongoing volatility and operational headwinds.