Buy. Sun Art Retail Group (L) Moat widening in offline; gaining share in the other 95% ; stay Buy ACTION. Return Potential: 23% Equity Research

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1 ACTION Buy Return Potential: 23% Equity Research Moat widening in offline; gaining share in the other 95% ; stay Buy Source of opportunity We reiterate Buy on Sun Art as we view it as a long-term winner in China s US$1tn food/home & personal care market (c.40% of China s core retail sales) of which Sun Art has 1% market share vs. most peers at 0.1%-0.3%. While e-commerce (currently c.3-4% of market) is clearly a major disruptor, it has also accelerated the consolidation speed within brick-and-mortar, as most offline peers cut back on expansion. We think it is evident Sun Art s most important moat, its scale advantages vs. other players in the other 95% of the market, is widening, as it achieved the best recent earnings performance in our retail coverage (19% recurring profits CAGR vs. c.4% for peers). Investment Profile Low Growth Returns * Multiple Volatility Percentile 20th 40th 60th 80th 100th Asia Pacific Consumer Peer Group Average High Growth Returns * Multiple Volatility * Returns = Return on Capital For a complete description of the investment profile measures please refer to the disclosure section of this document. Catalyst We expect Sun Art to continue to deliver one of the best growth rates within the sector, with 15% EPS CAGR driven by 12% topline growth and 15-20bp OP margin expansion p.a. In particular, we expect 2014 topline reacceleration (+12% in 2014 vs. +8.4% in 2H13) to be a key positive development in One key driver is SSSG improvement we expect the YTD run-rate of 2% can continue through the rest of 2014, as management normalizes promotional intensity after opting to be less so in Valuation Sun Art s valuation has pulled back from the high of c.30x P/E in 2013 to 23X at present, offering an attractive entry point. We switch to a discounted cashflow (DCF) methodology from a P/E-based one (35X average E P/E) as we see significant operating performance divergence between Sun Art and China peers (Wumart, CRE)and believe DCF is better at encapsulating Sun Art s longer-term growth prospects. We reduce our 12-m TP to HK$12.0 from HK$13.9, implying 23% upside potential. We fine tune our EPS following 2013 results and introduce 2016 EPS (15% yoy growth). Key risks Stronger-than-expected e-commerce impact, unexpected SSSG slowdown. INVESTMENT LIST MEMBERSHIP Asia Pacific Buy List Coverage View: Neutral Joshua Lu Goldman Sachs does and seeks to do business with companies joshua.lu@gs.com Goldman Sachs (Asia) L.L.C. Ricky Tsang ricky.tsang@gs.com Goldman Sachs (Asia) L.L.C. The Goldman Sachs Group, Inc. Key data Current Price (HK$) month price target (HK$) Market cap (HK$ mn / US$ mn) 93,107.5 / 12,007.3 Foreign ownership (%) -- 12/13 12/14E 12/15E 12/16E EPS (HK$) New EPS revision (%) (1.6) (0.8) EPS growth (%) EPS (dil) (Rmb) New P/E (X) P/B (X) EV/EBITDA (X) Dividend yield (%) ROE (%) CROCI (%) Price performance chart Apr-13 Jul-13 Oct-13 Jan-14 Sun Art Retail Group (L) MSCI China (R) Share price performance (%) 3 month 6 month 12 month Absolute (11.1) (17.1) (8.3) Rel. to MSCI China (9.7) (12.8) (9.7) Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 4/17/2014 close. covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S. Global Investment Research

2 Sun Art Retail Group: Summary Financials Profit model (Rmb mn) 12/13 12/14E 12/15E 12/16E Balance sheet (Rmb mn) 12/13 12/14E 12/15E 12/16E Total revenue 86, , , ,880.8 Cash & equivalents 6, , , ,577.7 Cost of goods sold (67,582.0) (75,148.4) (83,675.9) (93,710.9) Accounts receivable 3, , , ,754.5 SG&A (15,106.0) (17,262.5) (19,741.9) (22,537.5) Inventory 11, , , ,624.5 R&D Other current assets 1, , , ,658.6 Other operating profit/(expense) Total current assets 22, , , ,615.4 EBITDA 6, , , ,254.3 Net PP&E 26, , , ,272.2 Depreciation & amortization (2,221.0) (2,538.6) (2,882.3) (3,253.8) Net intangibles EBIT 3, , , ,000.5 Total investments Interest income Other long-term assets Interest expense (13.0) (9.6) (4.8) (2.9) Total assets 49, , , ,218.3 Income/(loss) from uncons. subs Others Accounts payable 29, , , ,655.9 Pretax profits 4, , , ,249.2 Short-term debt Income tax (1,192.0) (1,363.5) (1,566.1) (1,799.8) Other current liabilities Minorities (167.0) (185.4) (212.9) (244.7) Total current liabilities 30, , , ,401.8 Long-term debt Net income pre-preferred dividends 2, , , ,204.7 Other long-term liabilities Preferred dividends Total long-term liabilities Net income (pre-exceptionals) 2, , , ,204.7 Total liabilities 30, , , ,564.8 Post-tax exceptionals Net income 2, , , ,205.7 Preferred shares Total common equity 18, , , ,377.4 EPS (basic, pre-except) (Rmb) Minority interest , ,276.1 EPS (basic, post-except) (Rmb) EPS (diluted, post-except) (Rmb) Total liabilities & equity 49, , , ,218.3 DPS (Rmb) Dividend payout ratio (%) BVPS (Rmb) Free cash flow yield (%) Growth & margins (%) 12/13 12/14E 12/15E 12/16E Ratios 12/13 12/14E 12/15E 12/16E Sales growth CROCI (%) EBITDA growth ROE (%) EBIT growth ROA (%) Net income growth ROACE (%) EPS growth Inventory days Gross margin Receivables days EBITDA margin Payable days EBIT margin Net debt/equity (%) (30.3) (26.0) (20.3) (16.9) Interest cover - EBIT (X) NM NM NM NM Cash flow statement (Rmb mn) 12/13 12/14E 12/15E 12/16E Valuation 12/13 12/14E 12/15E 12/16E Net income pre-preferred dividends 2, , , ,204.7 D&A add-back 2, , , ,253.8 P/E (analyst) (X) Minorities interests add-back P/B (X) Net (inc)/dec working capital 3, , , ,624.0 EV/EBITDA (X) Other operating cash flow (146.0) EV/GCI (X) Cash flow from operations 8, , , ,327.3 Dividend yield (%) Capital expenditures (6,791.0) (7,008.5) (7,474.2) (8,004.8) Acquisitions Divestitures Others 1, Cash flow from investments (5,523.0) (7,008.5) (7,474.2) (8,004.8) Dividends paid (common & pref) (1,982.0) (1,274.2) (1,463.5) (1,681.9) Inc/(dec) in debt (11.0) (195.5) (97.8) (19.6) Common stock issuance (repurchase) Other financing cash flows (48.0) (3.0) Cash flow from financing (2,041.0) (1,472.7) (1,561.3) (1,701.4) Total cash flow (496.1) (818.2) (379.0) Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates. Analyst Contributors Joshua Lu joshua.lu@gs.com Ricky Tsang ricky.tsang@gs.com Goldman Sachs Global Investment Research 2

3 Table of Contents Reiterate Buy on widening scale moat, share gain, and store rollout 3 SSSG Impact from e-commerce exists, but likely exaggerated 9 New store productivity: Down in the last few years, but we see stabilization ahead 10 Valuation: How much is a decade of double digit growth worth? 13 Disclosure Appendix 20 Prices in the body of this report are based on April 17 close unless stated otherwise. The authors would like to thank Emma Sun for her valuation contribution to this report. Reiterate Buy on widening scale moat, share gain, and store rollout (1) Moat within bricks & mortar retail is widening in terms of scale and margins Having superior scale is one of the most important moats in food retail. While e-commerce has created challenges (we discuss in more details below), we believe an important sideeffect from e-commerce is that it has forced bricks-and-mortar expansion to come to a halt. Latest 2013 financials show that that majority of China s leading food retailers saw just mid single-digit topline growth last year. Besides Sun Art, which leads in scale and growth vs. other China food retailers, the notable exceptions are CRE (largely driven by acquisitions) and Yonghui. Goldman Sachs Global Investment Research 3

4 Exhibit 1: Sun Art is a leader in both scale and growth in 2013 Revenue growth in absolute and percentage terms, key retailers in China 2013 revenue growth Absolute (Rmb mn) 2012 revenue 2013 revenue amount YoY % chg Food retailers Sun Art 75,936 83,958 8, % CRE 67,363 75,542 8, % Walmart China 59,798 62,369 2, % Carrefour China 52,575 53,942 1, % Yonghui 24,684 30,543 5, % Wumart 15,363 16,988 1, % Tesco China 13,390 14, % Hualian * 12,323 13, % Ren Ren Le 12,913 12,716 (197) (1.5%) Better Life 10,006 11,388 1, % CP Lotus China 10,677 10, % E commerce Jingdong (net GMV) 60, ,900 43, % Suning.com 13,005 18,709 5, % Yihaodian 6,600 12,000 5, % VIP Shop (net GMV) 4,354 11,016 6, % Dang Dang (net GMV) 6,394 9,782 3, % Electric appliances Suning offline 85,352 86,583 1, % Gome offline 47,328 53,751 6, % Footwear / Jewelery Belle 32,859 36,249 3, % CTF (China retail/wholesale) ** 30,308 42,074 11, % Staples Tingyi (ex Pepsi) 51,753 58,575 6, % Mengniu 36,000 43,357 7, % Tsingtao 25,782 28,291 2, % CRE Brewery 22,787 26,351 3, % Want Want 21,211 23,674 2, % Uni President China 21,406 23,329 1, % Hengan 15,041 16,920 1, % * Consensus is used for Hualian data ** CTF data is based on financial year, 2013 data refers to FY3/14 Source: Company data, WIND. Equally important in our view is that Sun Art is the only company that have maintained and improved its margins over the last few three years most domestic peers have shown a declining margin trend (Exhibit 2). We believe these are strong signs that, compared to other offline players, Sun Art is now enjoying wider moats in the key areas of the business, including procurement, real estate negotiations, and leverage on fixed costs. Goldman Sachs Global Investment Research 4

5 Exhibit 2: Sun Art was the only hypermarket with flat or improving EBIT margins in recent years 7% 6% 5% 4% Sun Art OP margin 3% 2% 1% 0% -1% Yonghui CRE (retail) Wumart Lianhua -2% Source: Company data. (2) E-commerce threat? Yes, but there is a lot of white space 95% E-commerce has clearly impacted the retail market in China today, but we believe in the area of food retail the vast market potential for Sun Art ultimately outweighs the also inevitable market gains by online peers. Sun Art s market share in China s core retail sales (ex auto, gas, and restaurants) is still under just 1% as of Within the estimated Rmb6.2tn food and Home & Personal Care (HPC) retail market, Sun Art s market share is still relatively low at 1.0% (Exhibit 3). This is very different from the apparel industry where online penetration is already well in the double digits. We believe Sun Art can continue to gain market share by entering more markets in China. Goldman Sachs Global Investment Research 5

6 Exhibit 3: Within an extremely large Rmb 6.2tn Food and HPC retail market, Sun Art s relative share is still small and we believe it can grab market share from the other 95% Breakdown for China retail market (2013) Food and HPC - Rmb 6.2 tn Online (3.5%) Sun Art (1.0%) China total core retail sales (2013) - Rmb 14.5 tn Food and HPC (43%) Others (95.6%) Others (35%) Apparel + footwear - Rmb1.9 tn Electronics / appliances (10%) Apparel / footwear (13%) Others (41%) Online (27%) Dept stores (34%) Note: (1) We define China core retail sales as total China retail sales ex Automobiles, Gasoline and Food services (restaurants) ; (2) When calculating e- commerce penetration, we include cosmetics, mothers/childcare and F&B categories to proxy F&B+HPC total. Source: Euromonitor, China NBS, iresearch. (3) Sun Art still has the best store rollout story in China retail It is one of our fundamental beliefs in retail stock investments that over the medium/long term the best stories tend to come from retailers which can replicate and scale up its business. SSSG is clearly important, but our analysis shows that alone is not enough. Our previous case study of developed market retail leaders show that superior growth rates of retail success stories come much more from the superiority of the roll-out speed than the superiority of the SSSG (Exhibits 4-5) (see : Between SSSG and store growth, which is more important?, March 12, 2012). Goldman Sachs Global Investment Research 6

7 Exhibit 4: Starting off at a similar base in 1980, Wal-Mart has since grown to 5X the size of Target, driven primarily by store openings Wal-Mart (WMT) and Target (TGT) are covered by our US analyst Matthew Fassler. Source: Company data, Goldman Sachs Global Investment Research. Sun Art s store count can go up 5X over the coming decade We believe Sun Art is at a similar expansion stage as Wal-Mart in the early 1980s. Hence, we expect its store opening potential to remain tremendous over the medium term. We forecast Sun Art s store count to expand rapidly in the next decade at a 14% CAGR. We note that management also set target at low-teens, slightly slower than Wal-Mart s 18% CAGR. Sun Art has maintained a c.18% growth rate in store number in the past few years, whereas most of its national peers have slowed significantly (Exhibit 7). We expect the rate of increase to remain in the high teens, with store count increasing to 323 from 184 over the past three years. We think the company can hit 875 stores by 2020, and with the potential to increase to 1,244 in ten years from now. With a typical store servicing on average 100,000 to 200,000 people, Sun Art would just be servicing 200 to 250 million people ten years from now, or 20% of China s total population. In contrast, more than 60% of Americans shop at Wal-Mart every month. Goldman Sachs Global Investment Research 7

8 Exhibit 5: Sun Art is at a similar stage as Wal-Mart in early 1980s in terms of expansion Exhibit 6: Sun Art to compound its stores at a 14% CAGR in the next 10 years Store count: Wal-Mart vs. Sun Art vs. Carrefour WMT saw fastest network expansion during the 1980s Sun Art 323 stores in 2013 is similar to WMT in the 1980s Sun Art ('13) Sun Art to also expand rapidly in the next decade, but at a slightly lower pace (14% CAGR) 1,721 Sun Art ('23) 1,244 3,118 4,413 WMT: 1970 WMT: 1980 WMT: 1990 WMT: 2000 WMT: # of PoS Walmart Sun Art Carrefour (GSe) E2015E2016E E2019E2020E Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research Exhibit 7: Sun Art has the highest percentage store growth among national retailers POS growth comparisons Sun Art vs. Chow Tai Food vs. Belle 30% 25% 25% Sun Art Chow Tai Fook (China retail) 24% Belle (footwear) 20% 19% 18% 17% 16% 20% 18% 15% 14% 10% 12% 11% 11% 9% 8% 7% 5% 0% E 2015E Source: Company data, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 8

9 SSSG Impact from e-commerce exists, but likely exaggerated We believe the slowing SSSG was a key driver of Sun Art s share price performance in the past six months. In Jan-Feb 2014, however, SSSG already recovered to about +2%. This is despite some negative calendar effect (fewer trading days between Jan. 1 and CNY 2014 vs. same period in 2013), and negative impact from gifting-related slowdown. From our discussions with management, we believe management has been focusing more on promotions and the sharper pricing policy YTD has allowed Sun Art to deliver a better SSSG. This contrasts to 2013, during which management describes Sun Art s promotional intensity as weaker than usual 2 on a scale of 1-5, and 3 being normal. To promote more without hurting gross margin, Sun Art needs to continue to drive down procurement costs in our view. Our discussions with management also suggest that Sun Art is not having difficulties in getting the desired procurement terms improvements for As noted earlier, we believe this is a core attractive attribute of Sun Art being a leader in a scale-driven business. Another factor that will contribute to better SSSG is related to the ramp up of new stores. As discussed in the following section, first year sales output from new stores opened in the last two years has been materially lower than that of the past two to three years owing to greater concentration of new stores in tier 3 and tier 4 cities. Sun Art s SSSG calculation policy is on a rolling basis, meaning sales growth for stores opened in 2013 will enter SSSG calculation for 2014 based on the same number of trading days. What is the impact from e-commerce on SSSG slowdown? What is the e-commerce impact? Clearly there is some, especially in textiles (8% of total 2013 sales). However, we note that Sun Art s top 10 selling categories in 2013 include TVs, refrigerators, washing machines, which are some of the categories considered to be vulnerable to e-commerce. As an illustration, we think Pizza Hut in China today may be one retail franchise to gauge what the retail SSSG could be without a significant e-commerce impact, given the absence of e-commerce penetration in food services. As we can see from Exhibit 8, Pizza Hut China s SSSG also slowed significantly from 20% to 5% in the three years to end 2013, but remained at a respectable 5%, a level that we think reflects the best brick-and-mortar SSSG with minimal ecommerce disruptions. Based on that, we estimate for Sun Art, ecommerce has taken away 1%-2% of its SSSG in We think a SSSG target of +2%-3% is still realistic considering the greater management focus, low penetration of ecommerce in food, and the growing base of new stores with low sales productivity in the SSSG calculation. Goldman Sachs Global Investment Research 9

10 Exhibit 8: Pizza Hut s SSSG slowed to 5% in 2H13 from 15%+ in 2011, signifying the macro impact 5% SSSG may signify the best SSSG levels for a retail business without ecommerce disruptions SSSG Pizza Hut (China) vs. Sun Art 25% 20% 15% 10% 5% Sun Art's 1Q14 SSSG improved from 4Q13's negative levels Pizza Hut (China) 5% Sun Art 1-2% 0% -5% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 Source: Company data. New store productivity: Down in the last few years, but we see stabilization ahead Sun Art s new store productivity has been solid by industry standards in our view, given that the company has been able to maintain its EBIT margin with its store count now 76% higher than three years ago. Nevertheless, productivity has declined in 2012 and New stores contribution to total sales dropped to 9% in 2013 from 10.8% in 2012 and 12.3% in We calculate that the underlying average sales for new stores dropped to around Rmb150mn/store in 2013 from Rmb180mn in 2012 and Rmb209mn in This has reduced overall sales per store to Rmb293mn in 2013 from Rmb330mn in 2011, even that that is still well ahead of the industry average of Rmb mn. Management acknowledged that a major factor behind that is that many stores are in less affluent markets in 3 rd and 4 th tier cities, with city population as few as just 200,000 people. The rationale is that this creates early mover advantage, as competitors will find it simply uneconomical to enter these smaller markets once Sun Art enters. The flipside is that these stores ramp up slower. The silver lining here is that the dilutive effort should moderate significantly going forward, as we believe even in the most rural markets that Sun Art is entering, annualizing Rmb mn in first year of operation is achievable in our view (new store sales has stabilized to Rmb150mn recently). We still model for the new stores to annualize Rmb mn in first year sales, but see new store contribution to overall sales growth to remain steady at above 8% from Goldman Sachs Global Investment Research 10

11 Exhibit 9: Growing proportion of Sun Art stores are in tier 3/4 cities creating a first mover advantage but running at lower sales productivity initially Store count by city tier Sun Art has 45% of stores in 3rd tier cities % % % 120 6% 20% 44% % 52 19% % 30 11% st tier 2nd tier 3rd tier 4th tier 5th tier 6% 21% 45% 18% 10% Source: Company data Exhibit 10: The biggest adjustment has already happened in our view we expect stabilization in new store average sales going forward New store average sales vs. overall average sales (Rmb mn) down 31% from peak down 12% from E 2015E 2016E Overall store avg sales (Rmb mn) New store avg sales (Rmb mn) Source: Company data, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 11

12 Exhibit 11: Double-digit store growth to be driven mainly by new store openings Breakdown of total sales growth between SSSG and new stores contribution 25% 23.6% 20% 19.7% 21.1% 12.2% 15% 12.3% 14.1% 10% 5% 0% 14.2% 11.0% 11.2% 10.6% 10.9% 10.8% 9.0% 8.7% 11.4% 8.8% 8.1% 8.4% 5.6% 3.3% 2.0% 2.5% 2.5% 2.5% E 2015E 2016E SSSG New Store Growth Source: Company data, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 12

13 Valuation: How much is a decade of double digit growth worth? Our short answer is: 23% higher than current prices. As aforementioned, the key tenets to Sun Art s investment case lies in its ability to roll out stores in a sustained long period while maintaining profitability. We hence believe a DCF valuation is a better way to capture the longer-term growth potential. Given Sun Art s longer-term prospects and growing divergence in performance vs. China peers, we switch our valuation methodology from P/E (35X average P/E, a relative premium to Wumart [1025.HK, Not Covered] and CRE [0291.HK, Neutral, last close HK$22.85]), to a DCF methodology. Overall, we model a modest SSSG of 2%-3% to 2025 and a solid store opening plan (discussed earlier), coupled with flattish EBIT margins. Exhibit 12 shows our key DCF assumptions with a detailed DCF table in Exhibit 13. Our new 12-month target price is HK$12.00, while lower vs. previous HK$13.90, still implying 23% upside potential. Exhibit 12: Summary of DCF assumptions for Sun Art Key assumptions E Rationale SSSG % 2.0% 3.0% We expect SSSG to track CPI at 2-3% Store count # POS 323 1,535 Still see Sun Art as the best retail roll-out story in China - even with 1,535 stores by 2025 Store opening CAGR ( E) % 14% Store opening to reach low teens CAGR Sales per avg store Rmb mn Dilutive effect of new stores to fade and allow store opening to be more meaningful driver of topline growth Total sales CAGR ( E) Mkt Share as % core retail sales % 13% Store opening would be key driver for a 13% sales CAGR % 0.6% 1.0% Expect mkt share to increase by half, but still <1% of China retail mkt by 2025 Gross margins % 17.5% 19.2% EBIT margins % 4.4% 4.7% Group CROCI % 22% 17% GPM to gradually increase, but still below EU/US retailer levels of c.25% Overall OPM of 4.7% at steady-state is well below best-in-class DM peers' at 6%+ Expect CROCI to normalize to high teens from 20%+ at present; least adjusted CROCI at 12% DCF value / share HK$/shr 12.0 Variance to current shr px Based on the market close of April 17, 2014 % 23% Source: Company data, Goldman Sachs Global Investment Research, Datastream Goldman Sachs Global Investment Research 13

14 Goldman Sachs Global Investment Research 14 Exhibit 13: Sun Art s DCF summary Based on the market close of April 17, Note: 9.1% WACC is based on 3.5% risk free rate, 6.5% ERP, a 0.9X beta and a 0% debt structure Results from our DCF is similar to the DCF analysis conducted in our earlier reports ( Buy: Scale leadership increasingly evident: Upgrade to Buy, Sept 6, 2011), which had an implied equity value per share of HK$11.7. Source: Company data, Goldman Sachs Global Investment Research, Datastream. April 22, 2014

15 Exhibit 14: Our Sun Art steady-state margin forecasts of 4.7% is still well below DM peers at 5-6% OPM 8% OP margin 7% 6% 5% 4% 3% 2% Woolworths Australia WMT Tesco Sun Art Dairy Farm Supermarket division Carrefour Source: Company data. Cross checking our valuations Historical P/E range implies limited downside Our new target price implies 28.6x 14E P/E, or essentially 28.6x 12-month trailing P/E. This implies 7% premium to current trailing (13A) P/E of 27x. On a forward basis, our target price implies 25x 12-month forward (15E) P/E, also a c.7% premium to current forward 2014E P/E of 23x. On 52-week share price low, the stock was trading at trailing (2013) P/E of 23.3x. This gives us some comfort that, with the stock now trading at similar level, we see limited downside in the current price even if valuation were to retest the 52-week low share price.

16 Exhibit 15: We see limited downside in current prices, as the stock trading close to its 52- week low trailing P/E Summary of TP methodology changes and valuation ranges New Old Target price (HK$) Methodology DCF 35X avg 13/14 P/E 14E P/E on TP E P/E on TP 25.3 Current price (HK$) 9.76 Potential upside 23% 13A P/E on current price 27 14E P/E on current price 23 15E P/E on current price wk high (HK$) A P/E on 52-wk high 36 14E P/E on 52-wk high wk low (HK$) A P/E on 52-wk low 23 14E P/E on 52-wk low 20 Based on the market close of April 17, 2014 Current 14E P/E is similar to trailing P/E levels at 52-wk low prices, pointing to limited further downside Source: Company data, Goldman Sachs Global Investment Research, Datastream. Comparing with EM food retailers: target premium in line with historical average Exhibit 16 shows that emerging market peer average forward P/E is 21x, and our target price puts Sun Art at c.20% premium to average sector forward P/E, in line with historical average premium levels for EM peers. Goldman Sachs Global Investment Research 16

17 Exhibit 16: Our target price for Sun Art is in line with the historical average premium for EM supermarkets NTM P/E for Sun Art and EM food retailer avg (X) 40.0 Valuation premium (RHS) EM Avg (All) Sun Art historical premium (RHS) 12m fwd P/E 90% % Sun Art: % EM avg: Sun Art has been trading at about 20% premium historically 0% Source: Datastream. Comparisons with HK/China peer group is less meaningful We previously set the target P/E for Sun Art at a 15% premium relative to the 25-28x P/E for Wumart and CRE (in 2011). However, as shown in Exhibit 17, Wumart s earnings in 2012 and 2013 came under significant pressure. CRE saw some improvement in retail earnings in 2013 but its beer division that accounted for the bulk of group earnings struggled (4.6% ROE in 2013). We believe this makes it less meaningful to set our target price relative to these two names, hence our change in valuation methodology. Exhibit 17: The growth and return profile of Sun Art vs. CRE/Wumart has diverged in recent years Growth and returns profile for Sun Art vs. CRE/Wumart SSSG Sales growth Sun Art 8.8% 3.3% 2.0% Sun Art 21.2% 14.3% 10.7% CRE (retail) 10.9% 4.1% 4.7% CRE (retail) 27.3% 19.5% 14.0% Wumart 9.8% 2.1% 3.0% Wumart 15.8% 5.5% 10.6% OP growth ROE Sun Art 20.5% 11.0% 17.8% Sun Art 14.3% 14.7% 15.1% CRE (retail) 6.1% -8.3% 34.5% CRE (group) 5.5% 3.9% 4.0% Wumart 11.4% 1.3% -17.0% Wumart 19.4% 17.9% 12.7% * Sun Art sales growth includes only retail sales growth Source: Company data. Goldman Sachs Global Investment Research 17

18 Exhibit 18: Valuations have decoupled in recent years as well Forward P/E: Wumart vs. Sun Art vs. CRE 40 12m fwd P/E Wumart Sun Art CRE CRE 27.5X Sun Art 23.5X 20 Wumart 16.9X Note: Wumart (1025.HK, Not Covered) is based on Bloomberg consensus. Source: Company data, Goldman Sachs Global Investment Research, Bloomberg. Exhibit 19: We fine tune our Sun Art estimates by -0.8% to +1% as we factor in actual 2013 financials and operating trends. We also introduce 2016E EPS of HK$0.55 (15% yoy growth) Our new estimates for Sun Art Rmb mn E 2015E 2016E Actual New Old Chg New Old Chg New Total sales/revenues 86,195 96,536 98, % 108, , % 121,881 Gross profit 18,613 21,388 21, % 24,568 24, % 28,170 EBIT* 3,803 4,443 4, % 5,167 5, % 6,001 Operating income (mgmt defined) 4,147 4,744 4, % 5,443 5, % 6,252 Net income 2,775 3,185 3, % 3,659 3, % 4,205 EPS (HK$) % % 0.55 YoY% Total sales/revenues 10.7% 12.0% 13.0% -1.0pt 12.1% 12.3% -0.1pt 12.6% Gross profit 15.3% 14.9% 14.7% 0.2pt 14.9% 14.2% 0.6pt 14.7% EBIT 17.8% 16.8% 16.1% 0.7pt 16.3% 14.5% 1.8pt 16.1% Operating income (mgmt defined) 17.9% 14.4% 13.9% 0.5pt 14.7% 12.9% 1.8pt 14.9% Net income 15.2% 14.8% 13.7% 1.1pt 14.9% 12.8% 2.1pt 14.9% Margins Gross profit 21.6% 22.2% 21.5% 0.7pt 22.7% 21.8% 0.9pt 23.1% EBIT 4.4% 4.6% 4.5% 0.1pt 4.8% 4.6% 0.2pt 4.9% *EBIT excludes interest/investment income. Management defined operating income includes interest/investment income. Source: Company data, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 18

19 Exhibit 20: We see management share purchase as a positive as we believe it reflects management s confidence in the business Summary of Sun Art s management buying in the past 12 months Source: hkex.com. No. of shares bought/sold/ involved Average Date of price per relevant event share (HKD) (dd/mm/yyyy) Name Role Huang Ming-Tuan Chairman, RT-Mart China 200, /3/2014 Murray Desmond Independent Director 25, /3/2014 Huang Ming-Tuan Chairman, RT-Mart China 200, /3/2014 Mercier Bruno Robert CEO 50, /12/2013 Mercier Bruno Robert CEO 50, /11/2013 Goldman Sachs Global Investment Research 19

20 Disclosure Appendix Reg AC We, Joshua Lu and Ricky Tsang, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Investment Profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the environmental, social and governance issues facing their industry). Disclosures Coverage group(s) of stocks by primary analyst(s) Joshua Lu: Asia Pacific Consumer and Retail, Asia Pacific Media, Hong Kong/China Consumer. Asia Pacific Consumer and Retail: Ace Hardware Indonesia, Amorepacific, CJ CheilJedang, China Foods, China Resources Enterprise, China Yurun Food Group, E-Mart, GS Retail Co., Greatview Aseptic Packaging Company, Hengan International, Huishan Dairy, Hyundai Department Store, KT&G, LG Household & Healthcare, Lotte Shopping, Matahari Department Store, Mengniu Dairy, Mitra Adiperkasa, Orion, PT Gudang Garam Tbk, PT Indofood CBP Sukses Makmur, PT Indofood Sukses Makmur Tbk, PT Kalbe Farma Tbk, PT Unilever Indonesia Tbk, Ramayana Lestari Sentosa, Shinsegae, Stella International Holdings, Sun Art Retail Group, Tingyi (Cayman Islands) Holdings, Tsingtao Brewery (A), Tsingtao Brewery (H), Uni- President China Holdings Ltd., Want Want China Holdings, Yue Yuen Industrial. Asia Pacific Media: Astro Malaysia Holdings Berhad, Autohome Inc, Baidu.com, Inc., CJ E&M Corporation, Changyou.com, Ctrip.com International, Daum Communications, Dish TV India, Info Edge India Ltd, Just Dial Ltd, Makemytrip Ltd, NAVER Corporation, NCSOFT, New Oriental Education & Technology Group Inc. (ADR), Qihoo 360 Technology Co. Ltd., Qunar.com, SINA Corporation, Sohu.com, SouFun Holdings Limited, Sun TV Network, TAL Education Group, Television Broadcasts, Tencent Holdings, Vipshop Holdings Limited, Xueda Education Group, Youku Tudou Inc., Zee Entertainment Enterprises. Hong Kong/China Consumer: Anta Sports Products, Beijing Hualian Hypermarket Co., Belle International Holdings, Better Life Commercial Chain Share Co., Bosideng International Holdings, Chow Sang Sang Holdings International Ltd., Chow Tai Fook Jewellery Group, Daphne International Holdings, Esprit Holdings, Fujian New Hua Du Supercenter Co., Golden Eagle Retail Group, Gome Electrical Appliances Holding, Hengdeli Holdings Ltd., Intime Retail (Group) Company Limited, Lao Feng Xiang Co., Li & Fung, Li Ning Company, Lifestyle International Holdings, Luk Fook Holdings International Ltd., Maoye International Holdings, Renrenle Commercial Group Co., Samsonite International SA, Sanjiang Shopping Club Co., Suning Commerce Group Co Ltd., Yonghui Superstores, Zhejiang Ming Jewelry Co., Zhongbai Holdings Group Co.. Company-specific regulatory disclosures The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research. Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Sun Art Retail Group (HK$9.76) Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global coverage universe Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 32% 53% 15% 53% 47% 40% As of April 1, 2014, Goldman Sachs Global Investment Research had investment ratings on 3,662 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below. Goldman Sachs Global Investment Research 20

21 Price target and rating history chart(s) Stock Price Currency : Hong Kong Dollar Goldman Sachs rating and stock price target history Stock Price Sep 5 B M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 3/31/2014. Rating Aug 17, 2011 N Covered by Joshua Lu, Price target as of Aug 17, 2011 Index Price Price target at removal Not covered by current analyst MSCI China The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets. 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22 Ratings, coverage groups and views and related definitions Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations focused on either the size of the potential return or the likelihood of the realization of the return. 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