Can Convenience Retail Asia Limited Survive The COVID-19 Crisis?
April 6, 2020
Convenience Retail Asia Limited (“CRA” HKG: 0831) is a listed retailing member of the Li & Fung Group. It operates a total of 600 retail stores under the Circle K, the Saint Honore Cake Shop and Zoff brands in Hong Kong, Macau and the Pearl River Delta.
In this article, we will examine the Group’s business, management and financials to determine whether it is worth an investment.
CRA has three strategic business units, namely:
Circle K: Circle K is an international brand for a 24-hour service convenience store chain. The first Circle K convenience store in Hong Kong opened in 1985. Today, over 380 stores throughout Hong Kong and Macau serve close to 10% of the population every day. All the Circle K stores in Hong Kong are company-owned-and-managed. Meanwhile, Circle K stores in Macau and the Pearl River Delta operate under sub-franchised arrangements.
Saint Honore: Saint Honore manufactures, distributes and sells bakery products and festive products through its own retailing operations in Hong Kong, Macau and the Pearl River Delta. The first Saint Honore Cake Shop opened in Hong Kong in 1972. Today, the Group has a network of 126 Saint Honore stores.
Zoff: Zoff is one of the top three leading fast-fashion eyewear chains in Japan, with over 200 stores across Japan, China and Singapore. In 2017, CRA obtained Zoff’s franchise for Hong Kong, Macau and Southern China. The first Zoff eyewear shop officially launched in Hong Kong in November 2017. Today, the Group has a network of 9 Zoff stores.
The table below shows the change in CRA’s store count from FY2018 to FY2019.
(Source: 2019 presentation slides)
Separately, the chart below indicates the composition of CRA’s revenue for the financial years (“FY”) 2014 to FY2019. In FY2019, merchandise and bakery sales made up more than 98.1% of total revenue for the year.
Customer Relationship Management (“CRM”)
CRA developed online-to-offline (“O2O”) CRM programmes – Circle K’s “OK Stamp It” and Saint Honore’s “Cake Easy”- to boost traffic and transactions at its stores. Promotions and offers are delivered to loyal members through proprietary mobile apps. Members then redeem the promotions in-store, driving footfall at their locations. “OK Stamp It” and “Cake Easy” have reached milestones of 1.5 million and 630,000 members respectively.
The O2O CRM programmes will continue to serve as the fulcrum for many of the Group’s marketing efforts. This is because mobile payment and gift cards have become increasingly popular ways to purchase items.
As an example, in 2019, the Group partnered with Union Pay to launch a Union Pay QR payment option. It incentivise customers with an introductory offer for an instant HK$10 discount on any purchase over HK$25. It also held mobile payment joint promotions with HSBC, American Express, WeChat and AliPay.
Additionally, the Group held a summertime gift card promotion by offering a HK$10 Circle K cash coupon for any gift card purchase of HK$200 or more. This promotion was done with partners including Apple Store, Google Play, MasterCard and UnionPay.
(Source: 2019 presentation slides)
(Source: 2019 presentation slides)
CRA’s key leaders are as follows:
Dr Victor Fung Kwok King (Non-executive Chairman): Dr Victor Fung, brother of Dr William Fung Kwok Lun, is Group Chairman of the Fung Group, a Hong Kong-based multinational which comprises major operating groups engaged in trading, logistics, distribution and retailing. These include publicly listed Li & Fung Limited, Global Brands Group Holding Limited and CRA, as well other privately held entities.
Dr William Fung Kwok Lun (Non-Executive Director): Dr William Fung is Group Chairman of Li & Fung Limited, Chairman and Non-Executive Director of Global Brands Group Holdings Limited, and a Non-Executive Director of Trinity Limited, all within the Fung Group.
Mr Richard Yeung Lap Bun (Chief Executive Officer (CEO)): Mr Yeung has over 30 years of experience in general management, food distribution and supply chain management and has been a Director of the Company since 1 November 2000. He is currently the CEO of the Group responsible for overseeing the Group’s operations, marketing, logistics and supply chain management.
Mr Pak Chi Kin (Chief Operating Officer (COO)): Mr Pak has over 20 years of experience in the retailing and food distribution business and has been a Director of the Group since 10 March 2011. He is currently the COO of the Group responsible for overseeing the Circle K operations of Hong Kong and providing strategic guidance, leadership support and advice to the operations of the Group jointly with the CEO.
CRA’s largest shareholders are Dr Victor Fung and Dr Wiliam Fung with approximate equity stake of 40.89%. CEO Mr Richard Yeung and COO Mr Park also own shares in the Group with equity stakes of 3.46% and 0.67% respectively. We like owner-operator management as their interests are likely aligned with minority shareholders.
(Source: 2018 annual report)
Measure 1: Growth in revenue and profits
CRA has recorded growth in revenue and profits of 4.5% and 7.7% over the past 6 years. As the growth in profits is faster than the growth in revenue, this indicates that management is more efficient in managing costs.
Measure 2: Profitability
CRA’s gross profit margins and net profit margins were relatively stable during the past 6 years. Separately, the Group’s return on equity ratios improved from 18.3% in FY2014 to 28.6% in FY2019. This indicates proper usage and allocation of shareholders’ funds.
Measure 3: Liquidity
While CRA’s current and cash ratios are relatively low, the Group should not face liquidity issues as it has cash and cash equivalents of HK$642.6 million with zero borrowings as at 31 December 2019.
In fact, CRA has had negative cash conversion cycles over the past 6 years, meaning that it is generating revenue and collecting monies from customers before it has to pay its suppliers for inventory.
Round 4: Dividends payout
CRA is a consistent and generous dividend payer as it has distributed more than 80% of its profits out as dividends over the period under review. In fact, its dividend per share has increased from HK$0.16 in 2014 to HK$0.46 in 2019.
With a closing share price of HK$3.67 as at 20 March 2020, CRA is trading at a price of earnings (PE) ratio of 13.48, with a market capitalisation of HK$2.80 billion. At this valuation, the indicative yield of 6.81% may be attractive to income investors, especially in this low interest rate environment.
Nevertheless, CRA has in its recent FY2019 results announcement, cautioned that the Covid-19 outbreak has seriously impacted its normal day-to-day operations in the city. Many people have canceled their travel plans to the Chinese Mainland and Hong Kong. Local residents preferred to stay home from offices and schools. To retain healthy profitability, the Group will manage its costs by seeking rental reductions and monitor currency fluctuations.
Therefore, investors interested in the stock should expect near-term decline in business performance particularly in the first half of 2020. Its operations will be impacted by this still-unfolding health crisis. Nevertheless, with an experienced management at the helm, I am quite confident that the Group is able to navigate the difficult business conditions well. It might even come out stronger in the end.
An accountant by training, F.I.R.E 2030 is a student of value investing since 2012. She believes that successful investing requires discipline and patience. But with the right knowledge and temperament, ordinary investors can achieve extraordinary results. These articles are her journals on stocks and the investing journey toward financial freedom in 2030.