My Personal Analysis of Convenience Retail Asia (HKEX:831)

My Personal Analysis of Convenience Retail Asia (HKEX:831)

Convenience Retail Asia Limited is a listed retailing member of the Fung Group. The company operates around a total of 600 Circle K convenience stores and Saint Honore bakeries in Hong Kong, Macau and the Pearl River Delta.

I noticed that the businesses under Convenience Retail Asia are all very customer focused, meaning that they invest heavily into Customer Relationship Management (CRM) platforms to attract, retain and reward its customers. It is also through this platform that they can create synergy between its businesses.

The next thing I notice about Convenience Retail Asia is that it only invest in businesses that focus on quality. This can be seen by the brands they acquire over the years which are Circle K, Saint Honore and Zoff.

Now, let us go into more details into each business brand under Convenience Retail Asia.

Business

Circle K Convenience Stores

Circle K is an international brand for a 24-hour service convenience store chain. The first Circle K Convenience Store in Hong Kong was opened in 1985.

As of 31st December 2019, Circle K has around 383 stores throughout Hong Kong and Macau. All the Circle K stores in Hong Kong are company-owned-and-managed. The stores in Macau and the Pearl River Delta are operated under sub-franchised arrangements. Below is a breakdown of the stores in each territory.

Circle K Stores Number of Stores Company Owned / Franchised
Hong Kong 336 Circle K owned
Macau 33 Franchised
Zhuhai 14 Franchised
Total 383

You can find the following services at Circle K convenience stores.

Circle K Convenience Stores Services

Circle K focus on three “Plus” strategies to make the business of its convenience stores successful, delivering solid sales and profit performances. They are

  1. Focusing on internet-savvy customers (“internet+”)
  2. Emphasising products, promotion, place and pricing plus great customer experience (“4P’s+”)
  3. Leveraging its Online-to-Offline (“O2O”) retail model (“bricks-and-mortar+”, or online plus storefront)

How does Circle K attract its customers and compete with other convenience stores?

Circle K’s O2O Customer Relationship Management (CRM) programme, “OK Stamp It” served as the fulcrum for many of its marketing efforts. Circle K delivered attractive promotions, e-stamp redemption offers, lucky draw games and more to over 1.5 million loyal members through a proprietary downloadable app. Imagine you can win the latest iPhone 11 Pro with a net purchase of just HK$20 or more.

OK Stamp It

Through its O2O platform, the group also has an advantage of enabling synergistic opportunities between its businesses. A good example is it has previously offered a summertime promotion featuring imported ice cream plus great deals and prizes from Zoff, the Group’s fast-fashion eyewear franchise from Japan.

Saint Honore Cake Shop

Saint Honore Durian Cake

Saint Honore manufacture, distribute and sell 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 was opened in Hong Kong in 1972 and it was the first cake shop chain in Hong Kong to be awarded the ISO 9001 and HACCP food safety accreditation, well-deserved recognitions of its consistently stringent quality control and high standard of food hygiene.

As of 31st December 2019, Saint Honore has 126 cake shops in Hong Kong, Macau and Guangzhou. Below is the breakdown of the number of stores in each territory.

Saint Honore Cake Shops Number of Stores
Hong Kong 90
Macau 9
Guangzhou 27
Total 126

Saint Honore’s “Cake Easy” O2O CRM programme had around 630,000 members. The platform allows the Group to engage members with promotions which drive sales and retain customers.

Saint Honore Cake Easy

Zoff

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, Convenience Retail Asia Limited obtained Zoff’s franchise for Hong Kong, Macau and the Southern China. The first Zoff eyewear shop was officially launched in Hong Kong in November 2017.

As of 31st December 2019, the group has 9 Zoff eyewear shop in Hong Kong.

The core values for Zoff are Japan Quality, Always Fresh and Fast Service. These are core values that successfully attract customers belonging to the young generation.

In 2019, the Group leveraged on Circle K’s extensive network of more than 300 stores and its O2O platform as mentioned earlier to hold a number of successful marketing promotions for Zoff.

Financial

Market Capitalization

As of 31st December 2019, the market capitalisation is HK$2,668,977,000 with 762,564,974 shares outstanding. Convenience Retail Asia Limited is considered as a small cap stock.

Revenue

Revenue has been impressive, increasing year-on-year.

Convenience Retail Asia Revenue

Net Profit

Net profit also increases year-on-year.

Convenience Retail Asia Net Profit

Earning Per Share

Convenience Retail Asia is able to grow its Earnings per Share (EPS) year on year as well.

Convenience Retail Asia EPS

Return On Equity

Return on Equity (ROE) also grow year-on-year.

My Personal Analysis of Convenience Retail Asia (HKEX:831)

Debt

Convenience Retail Asia has zero debt. The Group maintains a strong financial position with net cash of HK$643 million and no bank borrowings.

Dividends

Convenience Retail Asia has been consistently paying out dividends since 2014.

Financial Year Dividend (HKD) Special Dividend (HKD) Total (HKD)
2019 0.25 0.21 0.46
2018 0.22 0.22
2017 0.18 0.18
2016 0.165 0.27 0.435
2015 0.161 0.06 0.221
2014 0.161 0.161

Management

Dr Victor Fung Kwok King is Group Chairman of the Fung Group, a Hong Kong-based multinational which comprises major operating groups engaging in trading, logistics, distribution and retailing.

Mr Richard Yeung Lap Bun, the Chief Executive Officer for Convenience Retail Asia 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 Chief Executive Officer of the Group responsible for overseeing the Group’s operations, marketing, logistics and supply chain management, and is actively involved in new business development and repositioning of the Group’s businesses to the O2O business models.

Mr Pak Chi Kin is currently the Chief Operating Officer 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 Chief Executive Officer. He has over 20 years of experience in the retailing and food distribution business and has been a Director of the Company since 10 March 2011.

Ms Carrina Chan Wong Man Li is the Managing Director of Saint Honore Retailing Group. She has over 30 years of experience in the food and beverage and retail chain industry. She is currently responsible for the Saint Honore operations in Hong Kong and Macau overseeing marketing and category, retail operations, products and site development management.

Based on the above, I can see that the management is an experienced team with many years of accumulated experiences in the business they are in.

Current Valuation

At the point of writing, Convenience Retail Asia is trading at HK$3.72 on the Hong Kong Exchange. Based on the current Earning Per Share of HK$0.272, this translate to a PE ratio of 13.68 which is considered to be fairly valued.

Based on the dividend payout of HK$0.25 (exclude special dividend) in FY19, this translate to a current dividend yield of 6.72%.

Convenience Retail Asia Share Price 14 July 2020

Summary

I like Convenience Retail Asia being a debt free company and their proven ability to grow their EPS year-on-year.

The risk of investing in Convenience Retail Asia will be the Hong Kong riots and COVID-19 situation where the convenience stores and bakeries have to remain closed.

At current share price of HK$3.72, the dividend yield of 6.72% is definitely attractive as it is difficult to spot a company with such high dividend yield on the Singapore stock exchange.

This is not forgetting the company pays special dividend on certain occasions.

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