RS MACALLINE Sells Itself and Rises Again

Before the sale of Red Star Macalline (601828.SH, 1528.HK, referred to as "Red Star Macalline") was completed, doubts about its financial performance continued. This time, the Shanghai Stock Exchange, which is responsible for transaction review, raised questions.

Recently, Jianfa Group (600153.SH), one of the buyers in the transaction, announced that it had received an inquiry letter from the Shanghai Stock Exchange regarding the "Draft Report on Major Asset Purchases."

The Shanghai Stock Exchange requested that Jianfa Group explain five issues: the reasonableness of the change in the actual controller; whether Red Star Macalline's evaluation of investment properties meets evaluation standards and the situation of mortgage guarantees; whether the transaction of non-current assets involves related parties and whether the provision for impairment is sufficient; whether there is any situation of financial assistance to the actual controller; and the provision for significant pending litigation.

In response, a Red Star Macalline securities official told TradeWind01, "This inquiry has no substantive impact and is only a routine inquiry by the Shanghai Stock Exchange. Share delivery requires confirmation from the Shanghai Stock Exchange."

Since announcing its asset restructuring plan in January of this year, Red Star Macalline's stock price has been on a roller coaster ride. After resuming trading, it gained three consecutive daily limit-up, with a market value increase of more than 6 billion yuan in three days. It then began to fluctuate downward and closed at 4.89 yuan/share on June 12.

Interestingly, on the day after Jianfa Group announced its plan to invest in Red Star Macalline, its stock price almost hit the limit-down, with a daily decline of 9.58%, losing more than 4 billion yuan in one day. On June 12, Jianfa Group closed at 11.13 yuan/share, a drop of 25.5% compared to the stock price before the announcement.

The difference in the stock price trends of the two companies inevitably raises new questions: Is Red Star Macalline a "good target"? Is a furniture store a "good business"?

The Cost of Aggressive Expansion

Compared to furniture retailers, Red Star Macalline is more like a real estate operator that owns properties. Its aggressive debt expansion strategy ultimately led to its sale to Xiamen State-owned Jianfa Group.

Many of Red Star Macalline's properties are self-operated with heavy assets. Unlike retailers, it is more like a landlord that collects rent. By constantly buying land, building shopping malls, and subleasing shops to brand owners to collect rent and management fees, Red Star Macalline has become the world's largest in terms of the number and scale of stores. In 2016, founder Che Jianxing proposed the concept of "home mall," and Red Star Macalline's store count quickly surpassed 200, exceeding Wanda Plaza's 190 and Kai De Plaza's 102.

In the following year, Red Star Macalline, which tasted the sweetness, began to intensify its efforts. It issued bonds of 2.5 billion yuan that year, mortgaging the assets and rental income rights of two home furnishing malls in Shanghai and Tianjin, and paid about 2.1 billion yuan to purchase an office building in Minhang District, Shanghai.

In 2017, the non-current liabilities of Red Star Macalline due within one year increased by 87.3% YoY to 5.49 billion yuan, pushing up the ratio of current liabilities to total liabilities to a historical high of 42.8%.

Red Star Macalline's high-leverage business model continued until 2020. In that year, RS MACALLINE acquired 11% of Jinke's shares sold by Sunac for 4.7 billion yuan, and began to buy low against the trend during the epidemic. Its asset-liability ratio also reached a new high since its listing, increasing from 54.72% in 2017 to 61.16%.

But "cruel pleasure will eventually end in cruelty."

In 2020, the sudden outbreak of the epidemic became the last straw that overwhelmed Red Star Macalline. During the reporting period, Red Star Macalline's revenue was 14.236 billion yuan, a YoY decrease of 13.56%; its net profit was 1.731 billion yuan, a significant YoY decrease of 61%. At that time, Red Star Macalline had only 5.9 billion yuan in cash and cash equivalents, but its current liabilities were as high as 31.6 billion yuan, and its liquidity pressure increased sharply.

So in 2021, Red Star Macalline started to "sell off."

In July of that year, Red Star Macalline sold 70% of the equity of Hongxing Real Estate for 4 billion yuan to Far Ocean Group and Far Ocean Holdings. In October, Red Star Macalline sold 80% of the equity of Kailong Property for 696 million yuan to Xuhui Yongsheng (Hainan) Investment Co., Ltd. After these operations, Red Star Macalline's asset-liability ratio at the end of the year was still as high as 57.44%, and the current ratio and quick ratio were 0.49 and 0.48, respectively, while the corresponding indicators of Juran Home were 0.95 and 0.91.

A Red Star Macalline securities official told TradeWind01, "Red Star Macalline's debt ratio has decreased from 61% to 55% in the past three years, and the reduction of interest-bearing debt by more than 10 billion yuan has exceeded the target. We are adjusting the debt structure and may rely on medium- and long-term bank loans for new debt after short-term debt repayment."

From 2018 to 2022, due to Red Star Macalline's debt problems, rating agency Fitch downgraded its rating from BBB- with a "stable" outlook to B and put it on the negative rating watchlist.

The Struggle of Home Furnishing Stores

The shift in the real estate industry signals the end of the golden age for the home furnishing industry, and even the leading company Red Star Macalline cannot stand alone.

The furniture market is a typical "ant market" with a large industry capacity but low concentration and a dispersed market structure. According to data from Guojin Securities, the furniture market capacity reached 711.7 billion yuan in 2019, and the CR5 of China's furniture market in 2018 was only 4.2%, a typical anti-monopoly and inspection-free industry.

This is also true for the home furnishing mall industry. According to the China Building Decoration Association Home Furnishing Market Committee, the sales of the top 50 home furnishing stores reached 64.7 billion yuan in 2021, accounting for only 8.5% of the total sales of all national stores. According to Frost & Sullivan data, Red Star Macalline, as the industry leader, accounts for 17.5% of the chain home decoration and home furnishing mall industry.

However, Red Star Macalline's market share may not be sustainable. In the past, Red Star Macalline has always boasted about the location of its stores in first- and second-tier cities, providing a one-stop shopping experience for mid-to-high-end products, thus forming a core barrier.

Compared with online channels, offline furniture stores, which have low frequency and high unit prices, are inherently lacking in drainage methods, and their SKUs are far fewer than those of e-commerce platforms. Guangdong Lin's Home Furnishing Co., Ltd., which took advantage of the e-commerce trend, had already exceeded 5 billion yuan in sales in 2018 and is preparing to go public.

A Red Star Macalline securities official told TradeWind01 that in the future, Red Star Macalline will no longer acquire new sites, but will release existing inventory and maintain a scale of opening self-operated stores in the single digits each year, while planning to open 20 franchised stores.

At the same time, the other party stated that online channels are more for drainage purposes for Red Star Macalline, and the online unit price is only about 3,000 yuan, while the offline unit price is about 20,000 yuan, with a huge gap between the two.

"On platforms like Tmall, we tend to focus on selling 'explosive products' and standardized products. However, our purpose for being online is not to complete transactions, but to provide consultation services. We offer consumers some benefits and hope they will experience our products offline before placing an order," the official added.

In 2022, Red Star Macalline recorded revenue of 14.14 billion yuan, a year-on-year decrease of 8.86%; and net profit of 750 million yuan, a year-on-year decrease of 63.43%. In the first quarter of this year, Red Star Macalline's revenue and net profit both fell by 22.47% and 79.1% year-on-year, respectively. A Red Star Macalline securities official attributed this to the impact of the epidemic and said that the performance would have a "lagging reaction process".