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Shanghai Shanghai Jiao Tong University

HighlightsWeinitiatecoveragewithaBUYrecommendationonSuningCommerceGroup(Suning)basedonaone-yeartargetpriceofCNY20.27usingDiscountedCashFlowandRelativeMultiples Valuation. This target price offers a 30.44%upside from its closing price ofCNY15.54onNovember13th,2015.Ourrecommendationisprimarilydrivenby:

• Promising O2O Layout - The future of retail depends on both online and ofRlinebusiness, providing customerswith not only convenient access to various ranges ofproducts,butalsocomprehensivelast-mileshoppingexperience.Asoneofthelargestspecialtyretailers inChina,SuningproactivelydevotestothedevelopmentofOnline-to-OfRlinebusiness,transformingintoacompetitiveretailconglomerate.

• OutstandingAdvantages -Unlikepureplaye-retailerssuchas JD(JD.OQ),Suning isRirmly supported by several strengths, including its nationwide retail chain, veteransupplychainmanagement,and logisticsbaseswith leadingstoragecapacity.Lookingbeyond ofRline industry standards, Suning has Rirst-mover advantage in onlineexpansion, logistics network and Rinancial services, widening the gap between itselfandothertraditionalretailers.

• Solid Liquidity Position andOperating EfFiciency - Suning’s outstanding liquidityandimprovingcashsufRiciencyindicatestrongabilityincashRlowmanagement,whichis crucial to retail companies.Besides, the shorteningoperating cycle and improvinginventoryturnoverratedemonstrateSuning’shighoperatingefRiciency.

• GrowthDrivers-ProspectivegrowthforSuningispoweredbysolidrevenuegrowthand increasingmarket share generated by (1) strong consumption growth, (2) O2Olayout, (3) strategic corporation with Big Macs including Alibaba and Wanda toeffectivelyimprovee-commercepositionandtoincreaseRlagshipstorescoverage.

RecentNews• RobustPerformanceonSingles’Day(Nov.11) -11/13/2015:Onthisannualonlineshoppingfestival,Suningranks1stinonlinesalesgrowth,outperformingAlibabaandJD. Sales surge358%YoY, inwhich67%orders are frommobile portals, andofRlinesalessolelyriseby153%.Cellphonesalesgrowat700%,refrigeratoratover1000%andbabyproductsat620%.

• CooperationDealwithDalianWandaCommercial(3699.HK)-09/06/2015:WandaGroupandSuningaredeepeningcooperationine-commercetogetgreatertractionbycombining their ofRline and online resources. The dealwill allow Suning to open 40storesatWandaPlazasacrossChinabyyear'send.

• StrategicCollaborationwithAlibaba(BABA.N)-08/11/2015:Suningwillinvestupto US$2.28 billion for 27.8 million newly issued shares of Alibaba at $81.51/share,whileAlibabawillinvestCNY28.3billionfor19.99%oftheenlargedequitycapitalofSuning at CNY15.23/share. After the closing of the deal, Alibabawill be the second-largestshareholder,andSuningwillholdapproximately1.1%stakeinAlibaba.

Source:CompanyDataandTeamEstimation

KeyStatistics 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020ETotalRevenue(MCNY) 98,357 105,292 108,925 129,565 146,573 165,231 186,845 212,396 242,165RevenueGrowthRate 4.8% 7.1% 3.5% 18.9% 13.1% 12.7% 13.1% 13.7% 14.0%NetProRit(MCNY) 2,505 104 824 1024 668 412 778 1270 1808InventoryTurnover 4.69 5.03 5.38 7.18 9.00 10.57 12.05 12.93 12.99DebttoTotalAssets 61.8% 65.1% 64.1% 47.9% 50.7% 53.7% 56.8% 59.8% 62.7%InterestCoverage 32.29 0.59 -3.08 -1.97 -0.10 2.62 4.06 5.79 7.61EPS(CNY) 0.37 0.05 0.12 0.14 0.07 0.04 0.08 0.14 0.19ROE 8.6% 0.4% 2.8% 1.7% 1.1% 0.7% 1.3% 2.1% 2.9%OnlineSalesPercentage 15.5% 24.8% 23.7% 22.4% 24.7% 27.4% 30.3% 33.4% 36.7%

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ThisreportispublishedforeducationalpurposesonlybystudentscompetinginTheCFAInstituteResearchChallenge.

Source:MarketData

Source:TeamComputation

Source:CompanyData


ShanghaiJiaoTongUniversityStudentResearchSpecialtyRetailIndustry,ConsumerDiscretionarySector

ShenzhenStockExchange SuningCommerceGroupDate:13November,2015 USD/CNY:6.37 Recommendation:BUY.Ticker:002024.SZ CurrentPrice:CNY15.54 TargetPrice:CNY20.27(UP30.44%)

MarketProFile

52-WeekHigh/Low CNY23.54/7.64AverageDailyVolume 241.86M

SharesOutstanding 7,383,043,150MarketCap. CNY114.732B

Beta 1.005P/S(TTM) 0.9

P/E(TTM) 58.5EV/Revenue(TTM) 1.0

StockPriceMovement

Valuation

DCF MultiplesEstimatedPrice 20.17 20.36

Weights 50% 50%

TargetPrice 20.27

EarningsPerShare(CNY)

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002024.SZCSI300Retailing

BusinessDescriptionSuningCommerceGroup,establishedin1990andheadquarteredinNanjing,isoneofthelargestretailersinChina.FormerlyknownasSuningApplianceCompanyLimited,thecompanyoperatesahomeapplianceretailchainofphysicalstores.In2004,Suningwentpublic at Shenzhen Stock Exchange. After opening its online shopping platform“Suning.com” in 2009 along with a series of M&A transactions, Suning proposed aninnovative business plan called “Cloud Business” in 2013, marking its thoroughtransitionfromofRline-onlytoOnline-to-OfRlinemodel.Suningcurrentlyoperates1,681physicalstoresacrossChina,inHongKongandJapan,andprovidesanopenplatformfornearly23,000merchants.Suningoffersproductsof15millionstockkeepingunits(SKU),covering not only home appliance, computers, and communication products, but alsoonline supermarkets, cosmetics, clothing, baby, Rinance, virtual products, etc.With therapid online expansion, 26.26% of total revenue comes from online self-operatingproductsand7.23%comesfromonlineopenplatformin2015Q1-Q3.

TransitiontoO2OAsaleaderinChina’sspecialtyretailindustry,SuningusedtoproRitbysellingproductsonconsignmentandwentthroughrapidgrowth.From2006to2015,SuningsuccessfullyexpandeditschainstoresinChinafrom351to1,681stores(Figure5)andbecameoneofthemostinRluentialdomesticbrands.Yetlater,Suningmetcompetitivepressurefromtheriseofe-commerce,followingtheendingoftrade-inpolicies.Theinactivegrowthofstorebaseandoperatingrevenue(Figure6),andhugelossesintotalproRitindicatedthatitwasurgentforSuningtotakeactionandtoadapttothetrendof“Internet+”.Differentfrom its former largest competitor Gome (0493.HK), Suning proactively embraced e-commerce,aimingtobetterintegrateitsresourcesandtoregainmarketshare.

OperationalStrategiesSuning operates under the structure of procurement, logistics, online and ofRlineoperations,aswellassupportiveITinfrastructure,allofwhicharecorecompetenciesforretailingenterprises.

Procurement -Running 8 purchasing centers specializing in procurement, Suning hassolid collaboration with headstream manufacturers such as Samsung, Haier, Midea,AppleandSiemens,whichguarantee theauthenticityof goodsand lowcosts. In2014,31%oftheprocurementamountcomesfromtheRivesuppliersmentionedabove.Asanexclusivedistributor,Suningalsoprovidesavarietyof customizedproducts,whichnotonly attach added value to products but also increase proRit margin. Besides, it alsoprovides supply chain Rinance services including loans to suppliers, factoring, anddeferralofpayments,toimprovesupplychainmanagement.

Logistics-Suninghas57regionaldistributioncenters,352citytrans-shipmentcenters,over1,700 last-miledelivery stations and4,055deliverypoints, covering almost all ofthe 2,800 counties and districts, or nearly 5millionm2 area in both urban and ruralareas.Withsuchsolid infrastructure,Suningshortens thedelivery time to12hours inmostareas,andeven2hoursin8majorcities.Suningalsopromotestheopenstrategybysharingitslogisticsnetworkwithsuppliersandthird-partymerchants.

OperationsofOf<lineChainandOnlinePlatform - In2015Q3,Suning’sofRlinelayoutconsists of 1625 chain stores in China, covering 296 cities nationwide, as well as 26stores inHongKong and30Laox stores in Japan. In 2014 and2015, Suning sells andleasesback25ofits38self-ownedstoresthroughRealEstateInvestmentTrust(REIT).The securitization of real estate properties brings Suning short-term proRitability andliquidity. With regards to online platforms, Suning intensively carries out promotionsand expands SKU to offerwider selections for customers. In 2015 Q3, the number ofregisteredmembershasreached214million,including45millionactiveusers.

IT Infrastructure - By analyzing big data to accelerate R&D of various applications,Suning is constantly enhancing its comprehensive IT platform to support precisionmarketing aimed at both customers and suppliers. With constantly updated datasupported by the SAP/ERP inventory management systems Rirst introduced in 2013,Suning isable toperformsubsequentanalysis tooptimize inventorycycle fordifferentproducts.

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Figure1:TotalRevenueandGrossMargin(inbillionsCNY,annual%)

Source:CompanyData

Figure2:2014RevenuebyProduct

Source:CompanyData

Figure3:BusinessProcess

Source:TeamAnalysis

Figure4:2013StoresbyRegion

Source:CompanyData

Figure5:NumberofStoresinChina

Source:CompanyData

Other1.1%IT

16.4%

Telecom16.7%

AC11.9%

Appliance53.9%

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>300200-299100-199<100AutoDC

ITSystem

Procurement

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Platform

Online OfRline

CorporateGovernanceandManagementAs one of the most well-known and leading companies in China, Suning has wellestablishedcorporategovernanceandmanagementstructure(SeeAppendixD&E)withhighlightslistedbelow:

• Management-Suning’smanagementteamconsistsof4keyexecutivesagingunder41withdecadesofexperiences in theirareas,whichguaranteesSuningbothyoungandreliablemanagementcapabilities.SuningalsomaintainsaRlatorganizationalstructureofregion–citytwoterminalmanagementmodel.

• Employee Incentive Plans - Two phases of employee stock ownership plan (ESOP)havebeenimplementedsince2014coveringfromBoardofDirectorstofrontlinestaff,whichhelpsattenuateprincipalagencyproblem.

• Horizontal Competition Segregation - Although the biggest shareholder JindongZhangholds26.44%stakesofSuning,he,alongwithseveralshareholders,hassignedthepromiseofHorizontalCompetitionSegregationtomakesurethatotherinvestors’interestsarenotharmed.

TofurtherevaluatethecorporategovernanceandmanagementofSuning,weapplythemodelofArgenti'sAScoreAnalysis (AppendixF) tocheckDefect,Mistakes,Symptomsand Failure existing in corporate governance andmanagement to seewhether Suningcanspecifyanddealwithpossiblerisksitmayface.Basedonouranalysis,SuninghasalowAscoreandcomplieswiththestandardrequirementsandbestpractices.Besides,tobetter understand its corporate culture,we applied a CultureWeb analysis on Suning(AppendixG)thatincludessixinterrelatedelements.

IndustryOverviewandCompetitivePositioningAs one of the fastest-growing industries in China, the specialty retail industry, inconsumerdiscretionarysector,iswhereSuninghasgaineditsstrengthtobecomearetailgiant.In2014,thesizeoftheindustry,determinedbythetotalretailsalesofconsumergoods, increased by 12.0% to CNY 23.2 trillion (Figure 8), to which online salescontributedaboutCNY2.79 trillion (10.6%). SpeciRically, in termsofmarket structure,thereexistsdistinctdivergencebetweenonlineandofRline retailmarket, as theofRlinemarketisrelativelydispersed(2014CR10:6.6%)whiletheonlinemarketplacepresentstobehighlyconcentrated(2014CR4:85.8%).TheindustrygrowthishighlyinRluencedbyexternaleconomicenvironmentandinternalfactors.

China’sEconomicPerformanceModerateEconomicGrowthWithStructuralTransformationAfterdecades of high-speed economyexpansion, Chinawitnessed itsGDPgrowth rategraduallydecreasedfrom10.6%in2010to7.3%in2014(Figure9),asthegovernmenthasattemptedtoshift fromtheexport-ledeconomytoaconsumerandservice-ledonesince 2013. The contribution to GDP from service sector has surpassed that frommanufacturingsector.ConsumptionisbecomingtheprimarydriverofChina’seconomy,inreplacementofinvestment.Toachievea“soft-landing”thatwouldfurthersupportthelong-termgrowth,severalpolicies,suchasthehomeappliancesubsidyprograminruralareas,wereimplementedtopromoteaveragewageandtostimulateconsumption.

ImpactofDemographicChangesonConsumerDiscretionarySectorIn 2014, with a stable 0.5% growth rate similar to that of some economies, such asFinland,FranceandtheUK,theChinesepopulationreached1.36billion,ofwhich10.1%are aged over 65. In addition, the dependency ratio slightly bounced back from thelowest34.2%in2010to36.14%in2014,whiletheurbanizationratealsoincreasedto54.8%(Figure10).Thesefactsindicatethatasthenecessityofhomecareelevatesandtheurbanpopulationkeeps rising,peoplemayhavegreaterdemandandeasieraccessthanbeforetohouseholdgoods,revealingarisingimportanceofdiscretionaryspendingandthereasonwhySuningishavingmorecommunitystoresinruralarea.

SpecialtyRetailIndustryRecentTrendsBeneaththeDramaticGrowthofOnlineShoppingOnlineshoppinghasseenaverystronggrowthandgraduallybecomeoneofthemajorchannelsforconsumergoods,posingahugethreattospecialtyretailstores.In2014,thescaleofonlineshoppinggrewby47.4%toCNY2.79trillion(Figure11),andisexpectedtokeepboosting in recentyearsbecauseboth thenumberofonline shoppers and thepenetrationratemayremainhigh.Basedonthemeritsofonlineshopping—thevariety

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Figure6:OperatingRevenueGrowth(annual%)

Source:CompanyData

Figure7:CultureWeb

Source:TeamAnalysis

Figure8:RetailSalesofConsumerGoods(intrillionsCNY,annual%)

Source:NationalBureauofStatistics

Figure9:GDPGrowth(annual%)

Source:IMF

Figure10:DependencyRatioandUrbanizationRate(annual%)


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TheParadigm Symbols

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and availability of goods, competitive pricing strategy and convenient home shoppingexperience,theonlinebusinesscandominateaconsiderablemarketshare.

StagnantConditionofTraditionalSpecialtyRetailStoresDespite thegeneraldownturn inRluencedby theriseofonlineshopping in thesebrick-and-mortar stores, the retail sales growth in specialty retail stores seemed to beespecially calm or even stagnant since the beginning of 2015 (Figure 12). To avoidbecoming mere “showrooms”, several specialty retail companies, such as Suning andGome,hadtakenactionstoestablishtheirownonlineplatforms,hopingtopromotetheirrevenuebysellingvariouskindsofproductsincludingfoods,clothesandcosmetics,andtocompeteagainstthegrowthofproperonlineretailcompanies.Nevertheless,theresultoftheseeffortshadbeenprovedtobelimited,as79.9%oftheonlinesalesin2014wasstilldominatedbyAlibabaandJD,leavingtheresthighlyfragmented(Figure13).

KeyTransitionfromOldCompetitorstoO2OCooperatorsButthesetrendscanalsobegreatopportunitiesfortraditionalretailerstothriveagain.Now, as the two big online players gain enough strength and the online sales growthslows, they are expanding sales channels to complete the lastmile to better customerexperienceandtofurtherdominatethemarket.Byconsideringthecostandtheriskofbuilding up their own shops from zero, online retailers are drawing support fromtraditionalretailerswhoarealsointerestedindevelopingonlinebusiness,directingtheironlinecustomerstothesephysicalshopswithfullafter-salesservicesandintegratingamutuallybeneRicialandcommunity-basedO2Oeconomy.

Source:CompanyDatauntiltheendof2014

CompetitivePositioningGiven the trend of O2O and the differences among thesemajor retailers, Suning,withover 25 years of experience, rich logistics resources and great brand awareness, isexpectedtoacquireafavorablepositioninthiscompetitiveindustry,whichhasmoderatechangesinpolitical,economic,socialandtechnologicalfactors(Figure14&AppendixH).Facedwithseverallevelsofcompetitionintheindustry(Figure15&AppendixI),Suningistakingtheadvantagesinthefollowingaspectstotacklethechallenges.

BetterCoherenceBetweenBricksandClicksInordertobalancethediscrepancyinpriceandexperiencebetweenonlineandphysicalshopping,Suninghasgraduallyreformeditsphysicalstoresandpricingstrategy.Suninghasmanagedtoshiftthepotentialvalueofitstraditionalstorestoaseriesofnew“CloudStores” that, like shoppingmalls, displaynotonly appliancesbut also variouskindsofhouseholdgoods,basedonaconvenientprice-checkingsystemthatenablescustomerstofocusonservicesandshoppingexperience.FromApriltoSeptemberin2015,Suninghadopened40cloudstores,anditisgoingtosetupanother40storesinWandaPlazaswithWandaGroup,China’sbiggestpropertydeveloper,underacooperationagreement.

SustainableGrowthBasedonALargerCustomerBaseSince2012,Suning’spivottoonlinebusinesshasledtoamassiveexpansionofitsserviceandSKU,whichhasexceeded15million.TheacquisitionsofLaox,RedBaby,Manzuo.com,etc. represent Suning’s ambition to reachmuchmore customers from different placesand to seek growth in the boundless retail industry. By the end of 2014, Suning hadacquiredmore than 167millionmembers, and is now enjoying a considerable onlinecustomerbasefromTmall,underastrategicpartnershipwithAlibaba.

CompetitorAnalysis Suning Gome Alibaba Jingdong

Procurement&LogisticsInventoryTurnover 5.38 5.37 N/A 10.87DistributionCenter 65 21 N/A 14TransshipmentWarehouse 352 407 N/A 123WarehouseSpace(thousandsm2) 4,030 1,950 N/A Over2,030DeliveryPoint 3,427 Over2,488 N/A 3,210OnlineOperationOnlineRevenueShare 24.1% 6.5% 100% 100%GrossMerchandiseVolume(CNY) 25.8B 7.7B 1172.0B 260.2BStockKeepingUnit 7.91M Over2M — Over30MPayingMembers 27.0M 0.5M 334.0M 96.6MOfFlineOperationStoreinChina 1,650 1,132 N/A N/AStoreSpace(thousandsm2) 6,583 3,732 N/A N/ASurfaceEfRiciency(CNY/m2) 12,600 16,173 N/A N/A

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Figure11:OnlineShoppingGrowth(intrillionsCNY,annual%)

Source:iResearch

Figure12:RetailSalesGrowthof5,000KeyEnterprises(monthly%)


Figure13:2014MarketShareofOnlineRetailSales

Source:iResearch

Figure14:PESTELAnalysis

Source:TeamAnalysis

Figure15:PorterFiveForces

Source:TeamAnalysis

Alibaba60.4%

Jingdong19.5%

Other20.1%

Vipshop,3.0%Suning,2.9%Gome,1.7%…

=

ThreatofNewEntrants

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StrongConnectionsThroughOpenPlatformOwningthecompetitiveinfrastructuresmentionedinourBusinessDescription,Suningissharing its capacity in logistics, retail management and advertisement with differentrolesofsupplychain.TheSuningOpenPlatform(SOP)enablesthird-partymerchantstodirectlysellproductstocustomers.Itaimstohelpdomesticsupplierseffectivelymanagetheirsalesandpromotetheirbrandsbyprovidingfreetrainingcourses,comprehensivestatistics,andrichresourcesofcustomersservices.In2014,thetransactionsizeonSOPhadreached3.20billion,12.4%ofthetotalonlinetransactions.

InvestmentSummaryWe issueaBUY recommendationonSuningwitha targetpriceofCNY20.27, usingaDiscountedCashFlow (DCF)Analysis andaRelativeMultiplesValuation.Our researchidentiRiesseveralmaindriversofvolatilityinSuning’sintrinsicvalue,includingRealGDPGrowth, Online Sales Expansion, Revenues from New Business Lines, Sales Expenses,WeightedAverageCostofCapital(WACC)andTerminalGrowthRate,etc.Thisvaluationissupportedbynumerousmerits,asbelow,andconcernstakenintoconsideration:

MeritsPromisingGrowthofHouseholdExpenditureWiththestructuraladjustmentsofChina’seconomy,andgrowthstabilizationtocushionthe slowdown, household expenditure keeps rising steadily. According to NationalBureauofStatistics,theHFCEpercapitaonhouseholdfacilities,articlesandservicestillperformsquitewell,reachingitshighestpointin2014,andislikelytocontinuegrowingata rapidrate.Thedata indicatesa rebalance fromgrowthdrivenby investmentsandindustrial production towards consumption and the services sector. The increasingproportionofconsumptionasGDPcomponentprovidesretailindustry,especiallySuningwhosetsfootinbothonlineandofRline,withanopportunityforgrowth(Figure17).

StrategyAlliancewithAlibabatoBuildonSynergiesinRetailEcosystemSuninghasentered intoa strategicagreementwithAlibaba tobuildonsynergies ine-commerce, logistics and incremental business through joint omni-channel initiatives.This collaboration between No.1 and No.3 e-retailers would help both of them tocompeteagainstJD,theNo.2player,andgiveSuningthefollowingmerits:

• SuninghasopenedaRlagshipstoreonAlibaba’sTmallplatformanditwillbringSuningincredibleonlinecustomerRlowsthatTmallenjoys.

• Alibaba’srichonlineresourcesandoperationalexperienceswouldaccelerateSuning’sstrategictransitionfromofRline-onlytoO2O.

• Suning will share Alibaba’s advantages in big data analysis, mobile app portalsentrance,third-partypaymentstoprovidecustomerswithpersonalizedservices.

O2OLayoutBoostingRetailSalesThefutureofretailismulti-play,notpure-play,meaningO2Olayoutthatcontainsmulti-channelsisthemosteffectivelong-termbusinessmodel,remarkablypromotingsales.Ontheonehand,ofRlinelayoutshallreachcustomersRirsthandthroughbricks-and-mortarchainstores,whereSuningprovidescustomizedshoppingexperience,after-saleservices,andoffersselectionsofhigh-endproducts,whichcarryahigherproRitmarginthanthatofonlineproducts.On theotherhand,onlineplatformswouldbring in largecustomerRlowsfromawidercoverageofInternetandmobileusers,throughprecisionmarketing.

ConcernsObstaclesinOnlineExpansionasaNewEntrantAs a traditional retailer, Suning launched e-commerce transition in2009.The sluggishaccumulationofonlineusersandthelateinitiationofonlineplatformconstructionmightundermineSuning’spositioning,aftercompetitorsincludingJDandAlibabahavealreadyobtainedonlinemarketshareandestablishede-commerceecosystems(Figure18).Asanew entrant with a lagging position, Suning may face challenges in expanding onlinemarketshare.

IntensivePriceWarsHoldBackPro<itMarginGrossProRitMarginencountersdownwardpressure fromthethreeaspects: (1)Suningfaces quickened paces of price wars (Figure 19) waged by online retailers to expandcustomer base. After Suning uniRied the prices of online and ofRline products in 2013,lower onlinemargins dragged down ofRlinemargins. (2) Since online business, whichenjoys a lower proRit margin, has a much higher growth rate than the ofRline, the

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Figure16:SWOTAnalysis

Source:TeamAnalysis

Figure17:GDPComposition(intrillionsCNY,annual%)


Figure18:OnlineSalesGrowth(inbillionsCNY,annual%)

Source:CompanyData

Figure19:MarketShareofPriceWaronDouble11,2014

Source:B5M.com

Strengths

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Amazon Suning Others

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http://b5m.com

http://b5m.com

increasing proportion of online business will gradually drag down gross margin. (3)IncreasingmanufacturingcostsandlogisticscostsforsuppliersarepartlytransferredtoSuning’soperatingcosts.

UncertaintyofRevenuefromOtherBusinessLinesIn building an online ecosystem, Suning has established Rinance afRiliates to providethird-party payments tool (“Yifubao”), consumer credit-line Rinance and supply chainRinancialservices.Competitionfromothermaturethird-partypaymentsunitsandfromcustomerRinancialserviceproviderslikeAlibabaandTencentcastsuncertaintyonfutureperformanceofthesebusinesslines.

FinancialAnalysis

Source:CompanyDataandTeamEstimation

RapidRevenueGrowthandARisingProportionofOnlineRevenueSuning’s revenue consists of two parts, namely traditional ofRline stores sales revenue(72.3%, 2015Q3) and online Suning.com sales revenue (27.7%, 2015Q3) (Figure 20).Online sales come fromboth self-operating stores (21.7%,2015Q3)andmerchantsonthethird-partyopenplatform(6%,2015Q3).WiththetransitiontoO2O,onlinesaleswillcontribute to a higher proportion of total revenue (36.7%, 2020E), but will slightlyreduce gross proRit margin (2015Q3: 15.8%, 2020E: 14.7%). Lower value-addedproducts and accessible online price comparison result in lower margin, but it’sacceptableconsideringitspositioninthephaseofexpandingmarketshare(Figure21),whichisthekeytolong-termonlinebusinessgrowth.

OptimisticOutlookforSuning’sOnlineBusinessTocompetewithB2Cbusinessproviders,Suning’sO2Ostrategyandonlinesalesgrowtharecritical.Withregardstoonlineproducts,SKUincreasedatacompoundgrowthrateof55.4% to 15 million (2015Q3), while registered members at 17.8%(214 million,2015Q3) and active users at 34.3% (45 million, 2015Q3) (Figure 27). The rapidly-growing customer base contributes to high online sales growth (YoY 25%). Solely forthird-party platform income originating from 2013 that contains commission fees,advertising revenueandotherbusiness revenue, it growsat aCAGRof17.2% (23,000third-party stores, 2015Q3). Suning earns 5% commission fees of merchants’ dealamountontheplatform,insteadofchargingRixedadministrativefees.ThusweestimateanincreasingvalueofSuning'splatformandahigherproportionofrevenuefromthird-partymerchantsintotalrevenue.

FinancialCondition 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020EProFitabilityGrossProRitMargin 17.9% 15.2% 15.3% 16.0% 15.8% 15.5% 15.2% 15.0% 14.7%NetProRitMargin 2.5% 0.1% 0.8% 0.8% 0.5% 0.2% 0.4% 0.6% 0.7%EBITMargin 3.0% 0.1% -1.1% -0.6% 0.0% 0.6% 0.9% 1.1% 1.3%EBITDAMargin 4.5% 1.6% 0.4% 0.8% 1.3% 1.8% 1.9% 2.0% 2.0%SalesGrowth 4.8% 7.1% 3.5% 18.9% 13.1% 12.7% 13.1% 13.7% 14.0%LiquidityCurrentRatio 1.30 1.23 1.20 1.57 1.52 1.48 1.44 1.40 1.36QuickRatio 0.76 0.65 0.60 1.02 1.03 1.03 1.03 1.00 0.97CashRatio 0.73 0.64 0.59 1.00 1.02 1.01 1.01 0.98 0.96ActivityAccountReceivableTurnover 63.21 108.46 180.54 194.46 188.76 188.61 189.02 189.60 189.97AccountsPayableTurnover 8.52 8.51 9.74 10.28 10.45 10.10 9.80 9.53 9.27InventoryTurnover 4.69 5.03 5.38 7.18 9.00 10.57 12.05 12.93 12.99Sales&ManagementExpenses/Sales 13.1% 13.4% 14.6% 14.9% 14.2% 13.4% 13.0% 12.7% 12.3%OperatingCycle 83.60 75.93 68.89 52.68 42.50 36.45 32.23 30.16 30.03CashConversionCycle 31.65 32.53 31.91 17.17 7.56 0.31 -5.01 -8.13 -9.35SolvencyDebttoTotalAssets 61.8% 65.1% 64.1% 47.9% 50.7% 53.7% 56.8% 59.8% 62.7%Non-CurrentLiabilitytoLiability 19.9% 35.3% 35.7% 19.4% 20.7% 21.7% 22.5% 23.4% 24.4%InterestCoverageRatio 32.29 0.59 -3.08 -1.97 -0.10 2.62 4.06 5.79 7.61DebtCoverageRatio -13.0% -18.8% -3.8% -25.9% -1.3% -2.1% -1.4% -1.4% -1.4%FinancialLeverage 2.62 2.74 2.82 2.21 1.97 2.10 2.24 2.40 2.58InvestorRatiosCashFlowtoRevenue 5.4% 2.1% -1.3% 3.4% 5.7% 5.6% 5.9% 5.1% 5.4%CashFlowtoLiabilities -8.1% -12.7% -2.4% -14.4% -0.7% -1.2% -0.8% -0.9% -0.9%CashFlowtoIncome 5.5% 2.2% -1.3% 3.4% 5.8% 5.7% 5.9% 5.2% 5.4%ROCE -8.5% -11.6% -13.0% -15.8% -16.9% -17.8% -19.4% -21.3% -23.5%ROA 3.3% 0.1% 1.0% 0.9% 0.6% 0.3% 0.6% 0.8% 1.1%ROE 8.6% 0.4% 2.8% 1.7% 1.1% 0.7% 1.3% 2.1% 2.9%EPS 0.37 0.05 0.12 0.14 0.07 0.04 0.08 0.14 0.19

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Figure20:RevenueandSalesGrowth(inbillionsCNY,annual%)

Source:CompanyData,TeamEstimation

Figure21:GrossMarginBreakdown


Figure22:TurnoverRatio


Figure23:OperationandCashCycle


Figure24:LiquidityRatio


-1%

4%

9%

15%

20%

2012

2013

2014

2015E2016E2017E2018E2019E2020E

EBIT NetEBITDAGrossInd.Average19.8%

-30

0

30

60

90

2012

2013

2014

2015E2016E2017E2018E2019E2020E

13.1%13.4%

14.6% 14.9%14.2%

13.4% 13% 12.7%12.3%

OperationCycle CashConversionCycleSalesandManagementExpenses/Sales

Ind.Average16.23%

CashRatio

0.4

0.7

1.0

1.3

1.6

2012

2013

2014

2015E2016E2017E2018E2019E2020E

QuickRatioCurrentRatio

Ind.Average0.73

Ind.Average0.93

Ind.Average1.28

39.5%

30.2% 27.1%35.6%

39% 42.2%45.7% 47.7% 49.6%CashtoTotalAssets

Ind.Average1.3%Ind.Average7.7%

Ind.Average0.6%

0

5

10

15

20

0

50

100

150

200

201220132014

2015E2016E2017E2018E2019E2020E

Receivable Payable

Ind.Average2.19

Ind.Average121.57

0

75

150

225

300

2012

2013

2014

2015E2016E2017E2018E2019E2020E

4.8%7.1%

3.5%

18.9%

13.1%12.7% 13.1%13.7%14.0%Ind.Average17.4%

Online OfRlineTotalGrowth

Of<lineLayoutGuaranteesFutureCustomerBaseandPro<itMarginSuninghas1,681storesglobally(2015Q3),whileJDandAlibabadon’thaveofRlinestoresyet. Although e-commerce has been expanding dramatically, ofRline stores are stillirreplaceable in the foreseeable future, as the consumption habits of appliance buyersarestillpronetophysicalexperienceandservices.BATarealsopenetratingintoofRlinemarket, which indicates the importance of ofRline resources. Suning’s stores base,particularly thenewly-opened“CloudStores” that focusonO2Oshopping,willsupportcustomersof59millionvisitsperyearifweassume100visitsperstoreperday.Asforproductsinthesamecategory,ofRlinecustomersaremorelikelytobuyhighvalue-addedproducts,whichcarryahigherproRitmarginthanthatofonlinetop-sellers.

In comparison, JD had CNY 8.07 billion fulRillment expenses (warehouse sorting,distribution and other expenses after order submission) in 2014, as part of totaloperating costs. If all operatingexpensesare taken into consideration, thegrossproRitmargin of JDwas almost zero,which is signiRicantly lower than that of Suning due toSuning’sofRlinesaleswithahighermargin.

ClosePartnershipwithSuppliersandOperationsofHighEf<iciencyDuetoRiercepricewars,thepricesofproductsamongSuning,JDandGomearealmostidentical.However,paymentinadvanceofSuning(2014:3,852million)wassigniRicantlylower than Gome (2014: 5,026 million) and a little bit higher than JD (2014: 3,702million).Prepayments fromSuning’s top Rive suppliers,namelySamsung,Midea,Haier,AppleandSiemens (2014)havemadeupmore than10%ofprepayments theseyears.TheprolongedrelationshipwithsuppliersisbasedonSuning’sexperienceofmorethantwenty years in supply chain management, which won’t be easily exceeded bycompetitors.Suning’saccountreceivable turnover(1H2015:76.69)washigher than JD(1H2015:21.06),whichservesasastrongindicatorofquickercollectionofreceivablesinoperations.Besides,salesandmanagementexpenseswaskeptundercontrol(Figure23),showingsolidinternalcostscontrolcapacity.

HighLiquidityandCashCowThe current ratio of Suningwas always greater than1, andwe estimate an increasingcurrentratioandquickratio(2020E:1.36,0.97).Suningcollectspaymentsmuchquickerfrom customers than paying cash to suppliers.We expect that the cash to total assetsratio will rise robustly in the forecast period (2015Q3: 27.85%, 2020E: 49.6%)(AppendixL).Thistrendwillbefurtherimprovedbythecompany’sconsistentabilitytogainhigherrevenueatCAGR29.2%from2014to2020E,andalsobytheimprovementsintheprocessofprocurement,logistics,operationsandITsystems(Figure24).

HealthyLeverageConditionBene<itsInvestmentsinLogisticsSuning’s debt-to-total assets is 64.46% (1H2015), slightly higher than that of JD(1H2015: 54.81%) and Gome (1H2015: 60.76%). The ratiowill drop (2015E: 47.9%)post to CNY 283million equity investment of Alibaba in 2015. However, the logisticsrelatedCAPEX investment of Suning ismuchhigher than that of JD andGome (Figure25).Currentlythehealthygearingratiopermitsatleast10%upsidepotentialspacefordebt to total assets ratio, whichmeans an additional CNY 10 billion debt Rinancing ispossible under an acceptable debt structure to raise funds for logistics investments.Compared to JD’s logistics system running at full capacity, Suning’s enlarging logisticssystemwillimproveitsoperationsefRiciency.

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Figure25:SolvencyRatio


Figure26:LogisticsRelatedNon-currentAssets(inmillionsCNY)

Source:CompanyData

Figure27:OnlineCustomerBase(inmillions)

Source:CompanyData

Figure28:InvestorRatio


Figure29:SuningSharePrices

Source:CompanyData,iFind

0%

3%

6%

9%

2012

2013

2014

2015E2016E2017E2018E2019E2020E

Ind.Average2.4%

Ind.Average0.7%

ROE ROA ROCE

-10

0

10

20

30

40

2012

2013

2014

2015E2016E2017E2018E2019E2020E

InterestCoverage

FinancialLeverage

Debt/TotalAssets

39.5%

30.2% 27.1%

35.6% 39% 42.2%45.7% 47.7% 49.6%

Suning

JD

Gome

0 6000 12000 18000 24000

IntangibleAssetsFixedAssets

0

60

120

180

240

2014(1H) 2014 2015(1H) 2015(Q3)

RegisterUser SKUActiveUser

0300600900

681012141618202224

2012-11-12 2013-03-29 2013-08-15 2013-12-31 2014-05-20 2014-09-26 2015-02-11 2015-06-30 2015-11-13

1H2013ROE-5.13%YOY

ThepermissionofYifubao'sRinancialproducts

UncertaintyprospectabouttheacquisitionofPPTV

FoundationofSuningInsuranceCompany

Q12014ROE-3.26%YOY

Improvementofcorporategovernance

2014ROE+1.70%

Improvementoflogisticsandonlinesales

Liftingofrestrictedshares

StrategiccooperationwithAlibaba

Reasonableexpectationoffuturegrowth

CNY

Million

ValuationBoth a 6-yearDCF and a RelativeMultiples Valuation have been applied to derive theintrinsicvalueofSuning.

DCFModelWeutilizedDiscountedCashFlowsModel-FreeCashFlowstoFirms(FCFF)togeneratethe intrinsic value for Suning as CNY 20.17. The whole process includes a 6-yearprojectionofIncomeStatements,BalanceSheetandCashFlowsStatementsuccessively(Appendix U), WACC Analysis (Appendix T) and FCFF Derivation (Appendix V). Theestimation base for this model is built on historic pattern, micro-economy position,incisionsonretailindustryandkeydrivers’interpretationforshiftsinspeciRicaccounts.TheDCFmodelishighlysensitivetothefollowingfactors:

SalesRevenueTo project sales revenue, we break it down into several parts according to speciRicbusinesslines.Foreachpart,wechooseoneortwokeyproductsasrepresentativesandexaminetheshiftsinindustrysalesvolume,priceandrelativesizeofSuningtoidentifyrevenuegrowth.SpeciRically, industrysalesvolumesare forecastedbasedonstudiesofselected key drivers. By taking advantage of the forecasting model built based onregressionanalysis,weRindgrowthofhouseholdincome,populationandITinvestmentwouldboostthesalesvolumeofseveralbusinesslines(Table1).Furthermore,changesin prices and relative size of Suning are forecasted based on formedhistoric patterns,while the latterone shall alsobeneRit fromO2O layout (in linewithonlineexpansion)andcooperationwithBigMacsinindustries.Aspresentedbytheresults,ledbysalesofWhiteElectricalAppliances,LifeElectricalAppliancesandothers,aswellasDigitalandIT Products, total sales revenue of Suning is going to enjoy a CAGR of 14.2% in thefollowing6years.

GrossMarginWedividegrossmargin into4parts in regard todistinctbusiness lines (Table2).TheforecastofsalesmarginisbasedonquantitativeanalysisoftwofactorsincludingOnlineBusiness Expansion and the Policy of One Price. The former shall drag down salesmargindue to therelative lowmarginofonlinesales,while the implementationof thelatter would also squeezemargin by lowering down ofRline prices. For the remainingsections,weprimarilylayoutourprojectionsbasedonhistoricpattern.Withrespecttotheongoingquitofthepolicystartedfromthisyear,weexpectgrossmarginshallriseupto16.0%in2015.Butwithquickenedpacestoexpandonlinebusiness,weanticipatetheratiowouldgraduallydropto14.5%intheupcoming6years.

CapitalExpenditure(Figure30)Capitalexpendituremainlycoverscapitalspentontheconstructionof Rixedassetsandintangible assets.We apply themethod of BASE to forecast the accounts of Rixed andintangibleassetswithassumptionsthatnewaddedRixedassetsandintangibleassetsareinportiontooperatingincome.ButwithrespecttoSuning’ssloweddownconstructionofphysicalstoresandcompletionofDC layoutnationwide,weanticipate that theratioshall decline gradually. In addition, when checking added intangible assets, theacquisition of land-use right makes up the majority (95%) of it, while purchase anddevelopmentofsoftwaretakesabout5%ofthewhole.Weprojectthattheformerpartshallgraduallydecline,whilethe lattershallexpand. Ingeneral,weprojectthatcapitalexpenditurewouldrelativelydeclinecomparedwiththegrowthofrevenue.

WeightedAverageCostofCapital(WACC)The cost of equity is gained applying CAPMmodel.We take the yield on 1-year ChinaGovernment Bonds as the risk-free rate of 3.25%, while Beta of 1.005 is obtained byrunning a Rive-year lineal regression of weekly returns of Suning against ShenzhenCompositeIndexfrom2010to2014.Besides,marketriskpremiumof8.10%isbasedona 2014 study that collected opinions form8,288professors, analysts andmanagers ofcompanies.Thus,wecalculatecostofequityas11.39%.Inaddition,anaveragepost-taxcostofdebtof3.77%isbasedontheinterestratesofshort-termandlong-termdebtaswell as proportion of them.With regards to the target capital structure of Suning,wecalculateitsWACCas9.11%(Table3).

TerminalGrowthTerminal growth rate for Suning is projected based on two elements: inRlation andsustainable industry growth. We assume constant inRlation rate to be 1.5% with

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Table1:SalesRevenueBreakdown

Source：iFinD,CNII,TeamEstimation

Table2:GrossMarginDerivation

Source:TeamEstimationandComputation

Figure30:CapitalExpenditureDecliningTrend(inmillionsCNY)


Table3:WACCAnalysis

Source:CompanyData,ResearchPaper,TeamComputation

Recommendation:BUYTargetPrice:CNY20.27(USD3.18)

0

1,250

2,500

3,750

5,000

2012

2013

20142015E2016E2017E2018E2019E2020E

AddedIntangibleAssetsAddedFixedAssets

Variable Value

RiskFreeRate 3.25%Beta 1.01

MarketRiskPremium 8.10%CostofEquity 11.39%

Pre-taxCostofDebt 5.03%MarginalTaxRate 25%

Post-taxCostofDebt 3.77%CapitalStructure(equitytodebt) 70:30

CorrelationtoGrossProFitRatio 9.11%

2015E 2020E

ProportionofOnlineSales 22.4% 36.7%ImpactsofPolicyofOnePrice 0.5 0.3

SalesMargin 14.8% 13.7%SalesProportion 97.5% 97.1%

InstallationandMaintenanceServicesMargin 21.6% 21.6%

InstallationandMaintenanceServicesProportion 0.9% 0.9%

OthersMargin 25.0% 25.0%OthersProportion 0.3% 1.2%

MarginofPrimaryBusiness 14.7% 13.8%OtherBusinessMargin 1.1% 1.1%

OtherBusinessProportion 1.3% 0.8%GrossMargin 16.0% 14.5%

BusinessSegment KeyDrivers CAGR

WhiteElectricalAppliances Income,Population 23.56%

BlackElectricalAppliances Income,Population 5.55%

AirConditioner Income,Population 7.59%CommunicationProducts

Income,ITinvestment 13.44%

DigitalandITProducts

Income,ITinvestment,InternetAccess

10.00%

LifeElectricalAppliancesandothers

Income,Population 18.47%

referencetothelevelof2014.Whileforpermanentgrowthrateofretailindustry,weuseUShistoricalgrowthrateforretail(general)sectorof3.67%from2010to2014asourestimationwithanassumptionthatUSretailindustryhasreacheditssteadystate.SincetheaverageinRlationrateforUSinpastRiveyearsis1.7%,wecalculateterminalgrowthrateforSuningas3.66%.

RelativeMultiplesValuationRelativemultiplesvaluationmainlyfocusesonaP/Svaluation,becauseof:(1) ThefeasibilityofsplittingapartonlineandofRlinebusiness.(2) TheexistenceofnegativeproRitforsomeonlineretailers.(3) Thestrongcorrelationbetweenstockpriceandsalesinretailindustry.P/SvaluationgeneratesasharepriceofCNY20.36(Table5),whichmeansapremiumof31.02%,and iscompatiblewithprice targetobtainedusingDCFmodel.Therefore, thisresultlendsfurthercredencetoourposition.BesidesP/S,wealsoapplyanEV/Revenuevaluation(AppendixW).

MonteCarloSimulationandSensitivityAnalysisWe apply themethod ofMonte Carlo Simulation to check how changes in key factorswouldinRluencetheintrinsicvalueforSuning.KeyfactorswetakeintoaccountincludeReal GDP Growth, Online Sales Expansion, Revenues from New Business Lines (SOP,Rinance, etc.), Sales Expenses, Company WACC and Terminal Growth. After running10,000randomsimulationswithrespecttochangesinthesefactors,westatisticallyandpractically interpret the results as probability distribution of Suning’s intrinsic value(AppendixY).We thenobtaina64.27%conRidence level inourBUY recommendation.Besides,we conduct sensitivity analysis for each factor, and conclude that factors likeReal GDP Growth, Sales Expenses, WACC and Terminal Growth would exercise greatimpactson the intrinsicvalueofSuning,while inRluences fromOnlineSalesExpansionandRevenuesfromNewBusinessLinesarerelativelyweak.


PriceTargetandConFidenceIntervalWeattaintheCNY20.27pricetargetforSuningmainlybasedontheDCFmodelandtheP/S valuation, and our BUY recommendation is solidiRied by Monte Carlo simulation.This targetpricemeansa30.44%space forappreciationgiven thepriceonNov.13th,2015.Forthesakeofvaluationrobustness,wederivea90%conRidenceinterval(basedonMonteCarloSimulation)forintrinsicvalueofSuningasCNY16.78to24.27.

ValuationConclusionFromthewholeprocessofvaluation,we’vefoundthatintrinsicvalueofSuningisRirmlysubstantiatedbypromising growthof household expenditure (in lineswith increasinghousehold income and population growth), O2O layout, cooperation with leadingenterprises in industries and implementation of asset-light strategy. And taking intoaccountsourprojection for the impactsof these factors,whichareprimarilybasedonmicroeconomic status, industrydynamics, companyoperation, strategic layout, aswellashistoricpattern,we’reexpecting toseemovements towardsprice target in thenearfuture. In otherwords, thesemeritswouldboostpricehike, bringing ideal returns forSuning’sshareholders.

MonteCarloSimulations

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Table4:FCFFSummary


Table5:P/SValuation

Source:YahooFinance,iFinD,TeamComputation

Table6:MonteCarloStatistics


Table7:SensitivityAnalysis


RealGDPGrowth IntrinsicValue ΔValue

-0.50% 18.10 -10.26%

-0.25% 19.09 -5.35%0.00% 20.17 0.00%

0.25% 21.35 5.85%0.50% 22.65 12.30%

TerminalGrowth ΔRate Intrinsic

Value ΔValue

8.61% -12.57% 18.63 -7.64%

8.86% -7.10% 19.26 -4.51%9.11% 0.00% 20.17 0.00%

9.36% 3.83% 20.66 2.43%9.51% 9.29% 21.45 6.35%

WACC ΔRate IntrinsicValue ΔValue

6.00% -5.49% 22.58 11.95%6.25% -2.74% 21.31 5.65%

6.51% 0.00% 20.17 0.00%6.75% 2.74% 19.09 -5.35%

7.00% 4.39% 18.51 -8.23%

StatisticalDescription(CNY)

Mean 20.36StandardDeviation 2.29

5%Percentile 16.78Median 20.24

99%Percentile 24.27

Variable ValueOnlineMedianP/S 2.4x

OnlineSalesPercentage 21.3%Onlinesalesrevenuepershare 3.53

OfRlineMedianP/S 1.7xOfRlineSalesPercentage 78.7%

OfFlinesalesrevenuepershare 13.04

TargetPrice 20.36

EnterpriseValueandIntrinsicValue(inmillionsCNY)

SumofFCFFPV 36,137Terminalgrowthrate 3.7%

Terminalvalue 215,904PVofTerminalValue 137,269

EnterpriseValue 173,406+Cashandcashequivalents 22,274

+Non-coralAssets 6,555-Totalliabilities 52,657

-Minorityshareholder’sequity 652ValueofEquity 148,926

Commonsharesoutstanding 7,383IntrinsicValue 20.17

Frequency

Intrinsic

Value

2.78% 22.42%10.53% 64.27%Hold Accumulate BuySell

InvestmentRisksEconomicRisksSlowdownofChina’sEconomy(ER1)Retail industry depends heavily on and GDP and consumption growth. UnfavorablemacroeconomicconditionsareputtingstressonGDPgrowth.China’s2015Q1-Q3GDPgrowthslidesto6.9%YoY,downbelow7%,theworstsince2009.Q1-Q3nominalgrowthrateofTotalRetailSalesofConsumerGoodsdeclinesto10.5%YoY(Figure31).Expecteddownwardtrendofoveralleconomicgrowthbelow7%innear futureandobstacles inChina’seconomictransformationwouldconstrainoveralldemandforconsumergoods.

MarketRisksForeignEconomicFactorsRisk(MR1)Suning is developing cross-border e-commerce. 3% of its total assets and 5.6% of itsliabilities is in JPY, HKD and USD, which is relatively a small proportion. Operatingrevenues fromHong Kong and from Japan respectively account for 7.1% and 3.3% oftotal operating income.With exchange rates Rluctuations, proRitswill slightly shrink ifJPY/CNYdepreciates orHKD/CNYappreciates. Suning alsohas long-term Rloating-ratebanksloanstiedtoLIBOR.WiththeexpectationofratehikeinUnitedStates(AppendixZ),anincreaseinUSinterestratesandtheappreciationofUSDCNYwouldaffectSuning’sabilitytorepaytheoutstandingbalance.

FinancialMarketsRisk(MR2)Suninginvestslargesumsofidlefunds(in2015nomorethanCNY8billion)inRinancialproducts of Rinancial institutions or (no more than CNY 3 billion) in money marketsfunds. In 2015, the money market, stock market and bonds market all witnessedunprecedented volatility, and future uncertainty would cast risk on the value of itsRinancialassetsinvestmentsonthebalancesheet.

OperationalRisksCompetitionRisk(OR1)The rise of E-Commerce poses threats to Suning’s traditional retail business. Intensepricewars,asamainapproach toexpandmarket shareamongonlinehomeapplianceretailers,signiRicantlysqueezedtheonlineproRitmargin,anddraggeddowntheoverallmarginofonlineandofRlinefrom19.23%in2011to15.51%in2014afterSuninguniRiedtheonlineandofRlinepricesin2013.Alsothecompetitiononmarketingaddedpressureon expenses. A declining margin due to online expansion in near future and a risinggrowth of sales expenses are estimated.With adjustments on distribution channels ofdifferentproductlinesandmorecoordinationwithsuppliers,proRitmarginisexpectedtobestabilized.

UnsustainabilityofIncomefromREITs(OR2)IlliquidityofSuning’s realestateassetsmayaffect its short-termnet income.After thetransfer of 25 self-owned stores through REITs in 2014 and 2015, only 13 stores areavailablefordisposal.ThenetincomewouldagaindropdramaticallyifSuningisunableto revitalize13 stockpropertiesproRitablynext yeardue to thedownwarddemand inrealestateinvestmentoriftheoperatingperformancedoesn’timprovetocoverthegap.

CollaborationwithAlibabaMayUnderperform(OR3)Suning’spartnershipwithAlibabamayunderperform if its storefrontonTmall fails toattract rewarding customer trafRic from other appliance brand stores on Tmall. AsAlibaba becomes the second largest shareholder of Suning (19.99% stake, next to thelargestshareholderof21%stake),itwillplayadecisiveroleonSuning’sBoard.PotentialfrictionsbetweenthetwomanagementteamsmayleadtoinefRiciency.

LiquidityRiskasCorporateBondsMature(OR4)Suninghastwolong-termRixedratebondsoutstanding,ofwhichCNY4.5billionmaturesin 2017 and CNY 3.5 billionmatures in 2019. If Suningwants tomaintain the capitalstructurebutfailstorolloverorissuenewbonds,itmayfaceliquidityriskatmaturity.

OtherRisksExcessiveControlfromBoardChair(ET1)Astheboardchair,founderandthelargestshareholder,JindongZhangholds26.44%ofSuning’s shares (21% after dealwith Alibaba) and actually controls 45.37% of votingrights,whichmayrepresenthisexcessivepoweroverSuning’soperations,leavingrisksincorporategovernance.

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Figure31:HouseholdConsumptionLevel(annual%)


Figure32:RiskMatrix

Source:TeamAnalysis

Table8:RiskMitigation

Source:TeamAnalysis

4%

7%

10%

13%

16%

200620072008200920102011201220132014

City AllVillage

Risk Rating MitigatingFactorsEconomicRisks

ER1 12

ImprovingGDPgrowth;stronggrowthofRinalgoodsconsumption;expandingcustomerRinancialservicesMarketRisks

MR1 3Usageofforwards,swapsandinterestrateswaps;deleverageofRloating-rateloansinUSD

MR2 4

Morestringentlimitationoffundsusedininvestments;transfertoless-riskyRinancialproducts

OperationalRisks

OR1 15Rapidincreaseinmarketshare;highgrowthinsalesofhighmarginproducts

OR2 8IssuanceofnewproRitableREITs;substantialincreaseinoperatingincome

OR3 4Managements’abilitytoavoidfrictionsandtoutilizeAlibaba’sresources

OR4 3Issuancesofnewbondswhenoutstandingbondsmature,higherfutureliquidityratiosOtherRisks

ET1 2

BetterstructuredcorporategovernmentofBoardofDirectors;policiestoprotectothershareholders’interests

OR1

MR2 OR2 ER1

MR1

ET1 OR3

OR4

Low Medium High

Low

Medium

High

Probability

Impact

Appendix:TableofContents

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Section Appendix Content Page

All A GlossaryofTerms 1

BusinessDescriptionB Pro9ileofMajorBrands 2

C ValueChain 3

CorporateGovernanceandManagement

D OrganizationChart 4

E KeyManagementPersonnelPro9ile 6

F Argenti’sAScoreAnalysis 9

G CultureWeb 10

IndustryOverviewandCompetitivePositioning

H PESTELAnalysis 11

I PorterFiveForcesAnalysis 12

InvestmentSummary J SWOTAnalysis 13

FinancialAnalysis

K BalanceSheet 15

L CommonSizeBalanceSheet 16

M IncomeStatement 17

N CommonSizeIncomeStatement 18

O CashFlowStatements 19

P CommonSizeCashFlowStatements 20

Q StatementofChangesinStockholders'EquityAccounts 22

R DupontAnalysis 23

S Altman’sZScoreAnalysis 23

Valuation

T WACCAnalysis 24

U DCFTable 25

V DCFDetails 25

W ComparativeValuation 34

X RatingDe9inition 35

Y MonteCarloSimulation&SensitivityAnalysis 36

InvestmentRisksZ FedFundsRateProjections 38

AA RiskMatrix 39

All AB Reference 40

AppendixA:GlossaryofTermsArgenti’sAScoreModel:Aqualitativemodel to judgebusiness failure followingapredictablesystem.Thesymptomsof failureonly become obvious in the later stages of failure, and failure could better be predicted by looking at root causes, laying inmanagement’sabilitytoleadabusiness.

Altman'sZScoreModel:Amodeluses9inancialmeasurestopredicttheprobabilitythata9irmwillgointobankruptcywithintwoyears.TheZ-scoreusesmultiplecorporateincomeandbalancesheetvaluestomeasurethe9inancialhealthofacompany.The9ivekeyindicatorsofthelikelyfailure(orsurvival)ofabusinessareliquidity,pro9itability,activity/ef9iciency,leverageandsolvency.

BASE–Amethodusedtoprojecttheendingvalueofanaccountbyaddingandsubtractingspeci9iccolumnsfromthebeginningvalueinaperiodoftime.

CloudStore–AnupgradedproductoftheO2OpatternofSuning,combiningon-lineandoff-linechannels.ThesceneexperiencesettingofSuningcloudstorecangetthroughoff-lineexperienceandon-linemarketing,generatingsynergisticeffect.

DependencyRate-Anage-populationratioofthosetypicallynotinthelaborforceandthosetypicallyinthelaborforce.Itisusedtomeasurethepressureonproductivepopulation.

HouseholdFinalConsumptionExpenditure(HFCE)–Atransactionofthenationalaccount'suseofincomeaccountrepresentingconsumerspending.

Johnson'sCulturalWeb-Itprovidesanexcellentwayofunderstandingtheelementsofculture,whichsuggestsdifferentelementsoforganizationalculture—symbols,powerstructures,organizationalstructures,controlsystems,ritualsandroutines,storiesandmythsandtheparadigm.Thesecharacteristicscanagainbeusedasausefulchecklisttoanalysisthecorporategovernance.

OnlinetoOfNline(O2O)-Itdescribese-commerceservicewhichprovidesinformationonlineaboutotherserviceof9line,whereasB2Cisasimpledistributionalchannelwherebusinessessellgoodsandservicedirectlytoendconsumers.O2Oismorecustomer-related and focuses on bringing faster andmore convenient services. B2C’s advantage is primarily dependent on the in-personexperienceitofferstocustomers.However,inregardstoelectronics,in-personshoppingexperiencesaregenerallylessimportanttocustomers,unlikeclothesandluxuries.

PriceConNidenceInterval–derivedbyMonteCarloSimulations,takingcorrespondingpercentilesofpricesamples.

Property,PlantandEquipment(PP&E)– It includescompanyassets thatarevital tobusinessoperationsbutcannotbeeasilyliquidated.

Real Estate InvestmentTrust (REIT) -A type of security that invests in real estate through property ormortgages and oftentradesonmajorexchangeslikeastock.

SAP/ERP systems – SAP/ERP is enterprise resource planning software developed by the German company SAP SE. SAP/ERPincorporatesthekeybusiness functionsofanorganization.BusinessProcesses includedinSAP/ERPincludeOperations(Sales&Distribution, Inventory Management, Production Planning, Logistics Execution, and Quality Management), Financials (FinancialAccounting,ManagementAccounting,FinancialSupplyChainManagement)andHumanCapitalManagement(Payroll,e-Recruiting).

SpecialtyRetailIndustry-TheSpecialtyRetailIndustryincludesownersandoperatorsofApparelRetail,Computer&ElectronicsRetail,HomeImprovementRetail,SpecialtyStores,AutomotiveRetail,andHome-furnishingRetail.

StockKeepingUnit(SKU)-Auniqueidenti9ierforeachdistinctproductandservicethatcanbepurchasedinbusiness.

SuningOpenPlatform(SOP)–AplatformofSuningaiming tohelpdomesticsuppliers toeffectivelymanage theirsalesandtopromotetheirbrandsbyprovidingfreetrainingcourses,comprehensivestatistics,andrichresourcesofcustomersservices.

SWOT Scoring –Amethod used to quantitatively examine the power of Strengths,Weaknesses, Opportunities and Threats byscoringeachcrossofinternalandexternalfactorsbasedonitslikelihoodandimpacts,where“3”isforthestrongestand“0”fortheleastornone.

UrbanizationRate-Cityandtownresidentpopulationasapropositionoftotalpopulation.Itisusedtoexaminetheprocessandthedegreeofurbanization.

ValueChainAnalysis-Interlinkedvalue-addingactivitiesthatconvertinputsintooutputswhich,inturn,addtothebottomlineand help create competitive advantage. A value chain typically consists of inbound distribution or logistics, manufacturingoperations, outbound distribution or logistics, marketing and selling and after-sales service. These activities are supported bypurchasingorprocurement,researchanddevelopment,humanresourcedevelopmentandcorporateinfrastructure.

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AppendixB:ProNileofMajorBrands

Source:CompanyData

Logo Description

Founded in2009,Suning.com is themainB2ConlineshoppingplatformofSuningGroup,now covering traditional home appliances, 3C appliances, daily necessities and othercategories.

Founded in 2004, Redbaby provides online retailing services for baby care andmaternalproducts. It also provides its products through catalog retail. Redbaby was acquired bySuningCommerceGroupCo.,Ltd.in2012.

Laox operates a chain of duty-free retail stores in Japan and China. It sells consumerelectronics,watches, cosmetics, folkcraftsandhobbygoodsandhouseholdproducts. It isalso involved in thedevelopmentofprivatebrandproducts.LaoxwasacquiredbySuningCommerceGroupCo.,Ltd.in2009.

Binggo.comusedtobeasub-brandofRedbaby,andit isnowanintegratedpartofSuningBeautychannel.Binggo.comwasacquiredbySuningCommerceGroupCo.,Ltd.in2012.

Suning Finance is a sub-brand of thewhole Suning Service. It has set up for suppliers ofsmallloancompaniesandcommercialfactoringcompanies.AlsoitprovidesinsuranceplansforSuningafter-salesservice,logisticsandotherservice,aswellasfundsalesforcustomers.ItalsorunsSuningconsumer9inancecompanyprovidingconsumerloans.

SuningYuntai isan important integratedpartof thestrategyofSuningGroup. Itprovidesonline shops, supply chain management, integrated payment and 9inancing service withSuningbrandand logisticsadvantages,settling forbusinessestoprovidea fullrangeofe-commercesolutions.

Suning Mobile is a virtual operator license independent company. Its of9icial websiteprovides userswith paragraph170 of interconnect card reservation, prepayment,mobilephones, tariffpackagesrecommendation,operatingroominformationprovisionandotherservices.

YiFuBaoisanindependentthird-partypaymentforSuning.Suning’sregisteredmembersall has easy access to pay by Yi Fu Bao account. Customers can make direct payments,recharge, pay treasure payment available. They can also enjoy the credit card payments,utilityfeespaymentandotherapplications.

PPLiveCorporation’sPPTVprovidesonlinevideo service inChinaandoperatesanonlinevideodistributionplatformthatprovideslivestreamingandvideo-on-demandservices.Thecompany also provides online live broadcast, online community, video accelerator, andvideo search services. It runs as a subsidiary of Suning as of 2013. In 2015 Q3, SuningplannedtotransfertheownershipofPPLiveCorporationatCNY2.588billion.

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AppendixC:ValueChain

PrimaryActivitiesInboundLogisticsSuning haswarehouse and delivery systems throughout the country, which sets the foundation for fast and ef9icient inventoryinboundlogistics.

OperationsIn terms of inventory managements, Suning mostly builds its own warehouses in contrast to competitors’ renting policies.Additionally,most of thewarehouses are sharedwith suppliers. This system allows Suning to own little actual inventories butproductscouldbedistributeddirectlyfromsuppliers’inventorytothecustomers.TheownershipofphysicalwarehousespositionsSuningforlongtermgrowthandpro9it.

OutboundLogisticsInadditiontooperatingunderamoreconvenientshoppingplatformforcustomers,Suninghasalwaysbeenaleaderindevelopingef9icient distribution channels. Stated earlier, Suning’s innovative and adaptive corporate culture propelled them to focus onresearchinganddevelopingconsolidateddistributioncentersin2002,furtherexpansionsin2003andhighlyautomatedcentersin2005and2009.Withe-commerceincorporatedintotheentireoperation,Suning’sabletoreceiveordersanddistributeproductswithin hours.With the recent cooperationwithTmall, Suning currently enjoys over 60 large distribution stations across China,coveringfrommunicipalstoevenvillages.

Sales&MarketingTogetherwithconvenientelectronicshoppingandfastdelivery,customersalsocouldpayonlinethroughthirdpartyapplicationssuchasAliPay,creditcardsorothers.Throughouttheentireprocessofidentifyingneeds,goingthroughselectionsandeventuallychoosing a suitable product, customers could 9inish the processeswithin hours on any electronic device. Besides, Suning offerscreditloanstocustomers.

ServicingUnlikeitscompetitorsthatusuallyoutsourcetheirinstallationandafter-salesservices,Suningownssubsidiariesanddivisionsthatspecializes and have rich experiences in these two segments. Although installation and after-sales services aremerely supportdivisions, they are themost direct, interactive and communicative segments in the 9irmwith the clients. By owning these twoservicetypesratherthanoutsourcing,Suningcanguaranteequalitiesandraisesitstrustworthinesswiththesuppliersaswell.

SupportActivitiesInfrastructureUntil June 30th, 2015, 3 automatic warehouses renovated in Beijing, Guangzhou and Nanjing; 2 automatic picking centerestablishedinShanghaiandShenyang;7automaticpickingcenterinconstructioninXi’an,Nanjing,Hangzhou,WuhanandChengdu,aswellashaving25regionaldistributingcentersinuse;established12distributingcentersinShijiazhuang,TaiyuanZhengzhou,othersand22engagedcentersnationwide.

HumanResourcesSuningisverykeenonraisingtheoverallemployee’swellness.ItisfocusingonbriningqualityhumanresourcesinIT,distribution,9inanceandotherareas,andhasimplementedtheemployeeincentiveprogramsin2014.Withamorede9inedcorporatestructureaswell as ef9icientmanagement policies, employee productivity keeps rising and eventually keeping the overall costs down forSuning.

TechnologyTheusageofERPsystemcouldalsoattributetoSuning’sef9icientinventoryturnover.Withconstantlyupdateddata,thecompanyisabletokeeptrackofhistoricdataandperformsubsequentanalysistoobtaintheoptimalamountof inventorycyclefordifferentproducts. Alongwithwarehouse ownership and ERP aswell as SAP systems later on, Suning has above industry level investedcapitalandcostsinhumanresources.AllofthesehavepositionedSuninginthelongtermasapotentialindustryleaderspecializedine-commerce,dataprocessingandqualitycontrol.

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Infrastructure HumanResources

Technology Procurement

InboundLogistics Operations OutboundLogistics Sales&Marketing ServicingServingSales&Marketing

OutboundLogisticsOperationsInbound

Logistics

ProcurementWithitsalreadyestablishedexpertiseinoperation,products,customeranalyticsandsupplychain,Suningwillbeabletoensurethequalityofitsproductsthroughdiversi9iedsupplierselection,customizedproducts,simpli9iedcorporatestructure.

AppendixD:OrganizationChartA.EquityStructure(asofJune30,2015)

Source:CompanyData

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26.44%

100.00%39.75%

14.60% 4.20%

BeijingRedBabyInformationTechnologyCo.,Ltd

SuningElectricalApplianceGroupCorporation

JindongZhang

SuningHoldingsGroupCo.,Ltd.

PPLiveCorporation

MaruetsuHongKong

SuningCommerceCo.,Ltd.

SuningFactoringCo.,Ltd.

GrandaMagicLimited

ChongqingSuningSmallLoansCo.,Ltd.

100%

100%

51%

LaoxCo.,Ltd.(8202:TSE)

separatelyestablishedinBeijing,Shanghai,Sichuan,Chongqingandothercities.

100%

100%

75%

46.81%

SuningCommerceGroupCo.,Ltd.(002024.SZ)

30%

B.EquityStructure(Current)

Source:CompanyData

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26.44%

100.00%39.75%

14.60% 4.20%

BeijingRedBabyInformationTechnologyCo.,Ltd

SuningElectricalApplianceGroupCorporation

JindongZhang

SuningHoldingsGroupCo.,Ltd.

Manzuo.com

MaruetsuHongKong

SuningCommerceCo.,Ltd.

SuningFactoringCo.,Ltd.

GrandaMagicLimited

ChongqingSuningSmallLoansCo.,Ltd.

100%

100%

51%

LaoxCo.,Ltd.(8202:TSE)

separatelyestablishedinBeijing,Shanghai,Sichuan,Chongqingandothercities.

100%

100%

75%

100%

SuningCommerceGroupCo.,Ltd.(002024.SZ)

30%

C.CorporateGovernanceStructure

Source:CompanyData

AppendixE:KeyManagementPersonnelProNile

BoardofDirectors

Name Position CareerHistoryPositioninOtherCompany

JindongZhang

ChairmanofTheBoard,andChairmanof

StrategyCommittee

Former chairman and general manager of Jiangsu Suning postappliances Ltd., Chinese People Consultative Conference Tenth,Eleventh National Committee, the Standing Committee of ChinaFederation of Industry, Vice-Chairman of the All-China Federation ofIndustry, the Eleventh Jiangsu Province Representative People’sCongress, the incumbent chairman of Suning Appliance Group Co.,China people's Twelfth National Committee of the PoliticalConsultative Conference, vice president of Chinese folk Chamber ofCommerce vice president of the China Association of ListedCompanies.

No

WeiminSun

ViceChairman,MemberofNomination

CommitteeandMemberof

Remuneration&AssessmentCommittee

SuningHomeAppliances(Group)Co.,Ltd.VicePresident,PresidentofSuning Appliance Co., Ltd. is currently vice chairman of SuningAppliance Group, vice president of China Chain Store & FranchiseAssociation, Tsinghua University, China retail expert membersInstitute, Nanjing CPPCC Standing Committee of Jiangsu ProvincialFederation of Industry Vice-Chairman. Mr. Sun Weimin also asubsidiarycompany-BeijingSuningApplianceSalesCo.,Ltd.,ShaanxiSuningApplianceSalesCo.,Ltd.,ShenzhenSuningApplianceSalesCo.,Ltd., Jiangsu Suning Commercial Investment Company, Xi'an MetroTradingCompanyasSuningAppliancelegalrepresentative.

No

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ShareholdersMeeting

President’sOffice

President

VicePresident

SecretaryoftheBoard

VicePresident

SupervisoryCommittee

NominatingCommittee

AuditCommittee

StrategyCommittee

RemunerationandAppraisalCommittee

BoardofDirectors

MingJin

President,Director,MemberofAuditCommitteeand

MemberofStrategyCommittee

Former Suning Home Appliances (Group) Co., Ltd. Marketing CenterDirectormanagement,vicepresidentofSuningApplianceCo.,Ltd.,theincumbent Suning Appliance Group Co., Ltd. Director and President.Mr. Jin Ming is also the Company's subsidiary -GRANDA MAGICLIMITED, GREAT ELITE LIMITED, Hong Kong Suning Appliance Co.,Ltd.,HongKongHongKongNingAdvertisingCo.,Ltd.,36subsidiariesoftheCompanyasthelegalrepresentative.

No

XiangshengMeng

VicePresident,Director,Memberof

NominationCommittee,MemberofRemuneration&

AssessmentCommitteeand


Former Marketing Manager Haier Pharmaceutical Zhejiang, NanjingOrient-industrymanagementconsultant. No

JunRen

VicePresident,Secretary,Director,MemberofAuditCommitteeand


IncumbentLtd.Director,VicePresident,SecretaryoftheBoard,deputydirector of the Internet Society of China Internet Financial WorkCommittee, Internet Society of China Internet business applicationsworkingcommitteechairmanSuningApplianceGroup.

No

JunjieChen Director

Intelligent Network and the Institute of Measurement and ControlSystemof thePresident of SoutheastUniversity SoutheastUniversityIntelligent Information and Control System and Virtual Institute,Professor. Now he serves as the backbone of a number of academicpositions at home and abroad agencies and bodies, the NationalScienceandTechnologyAwardAssessmentPanelexpert,theNational863high-techprojectevaluationexperts,JiangsuProvinceScienceandTechnology consultants, and international and domestic academicjournalsandeditorsfreelancereviewer.

No

GuanghuaXu

IndependentDirector,ChairmanofAuditCommittee,

MemberofNomination

CommitteeandMemberof

Remuneration&AssessmentCommittee

AccountingProfessorofSchoolofEconomicsandManagemen,NanjingUniversity of Technology, the college professor Standing Committee,NanjingUniversityofaccountingacademicleaders,membersofJiuSanSociety of Nanjing University, the Nanjing Xuanwu District CPPCCmembers. Now he is Branch Accounting Society of China, vicepresident of engineering colleges, Jiangsu Province audit Associationexecutive director, chief accountant in Jiangsu Province Association,the National Natural Science Foundation, National Social ScienceFoundationand theHenryFokEducationFoundationaswell aspeerreviewers of "MANAGEMENT" and "Business Accounting".Concurrently JinlingHotelCorporationand JiangsuShuntianCo., Ltd.IndependentDirectors.

Yes


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Source:CompanyData

BoardofSupervisors

Source:CompanyData

KeyExecutives

Source:CompanyData

HoucaiShen

IndependentDirector,ChairmanofRemuneration&

AssessmentCommittee,Member

ofStrategyCommittee,MemberofNominationCommitteeandMemberofAuditCommittee

Professor of Nanjing University College of Engineering, ManagementScience and Engineering doctoral tutor, Department of ManagementScience and Engineering, Mathematics Department, OperationalResearchandCyberneticsMasterInstructor.CurrentlyProductionandOperationsManagement Societymember, ChinaOperationsResearchSocietyandDirectorofChinaInstituteofManagementproductionandOperations Management sub-Committee members, China OperationsResearchSocietyrandomserviceandoperationsmanagementbranchexecutive director, and "Operations Research and Management"magazineeditorial.

No

QuanshengWang

IndependentDirector,ChairmanofNominationCommitteeandMemberofAuditCommittee

NUBSmarketingande-commercedepartment,Professor.Independentdirectors of the Company, concurrently Shenzhen Hirota DecorationGroupCo.,theindependentdirectors.

Yes



JianyingLi

ChairmanofSupervisoryBoard

andDirectorGeneralofFinancial

ManagementCenter-

CommodityOperationHead

Quarters

Former radio factory in Nanjing Zijin of9ice, a former director ofSuning Appliance Co. Settlement Center Management, the fourthPresident of the Board of Supervisors, the Financial Director of theCentreincumbentlogisticsmanagementcompany,the9ifthchairman.

No

XiaolingWang

DirectorGeneralofFinancial

ManagementCenter-Chain

PlatformOperationHeadquartersand

Supervisor

Former news Nanjing Development Corporation Of9ice, BudgetDirector of the Centre Suning Appliance Co. Financial ManagementCenter, the Fourth Board of Supervisors, Finance Director FinancialCenter headquarters support incumbent management company, theFifthBoardofSupervisors.

No

ZhisongHua

Director-GeneralofTheFinancial

PlanningCenter-Financial

ManagementHeadquartersand

Supervisor

Served as president commissioner for sponsored schemes, the9inancial headquarters Director,Manager of Finance and AccountingDepartment, currentlyFinanceDirectorof FinancialPlanningCentermanagementheadquarterscompany.

No


ZhongxiangXiao

CFO,andDirectorGeneralof

FinancialServiceCenter

Former radio Nanjing eight plants accountant, 9inance manager ofSuning Appliance Co., Ltd., Director of Financial Services Center, theFourthBoardofSupervisorsemployeerepresentativesupervisor.Heiscurrentlychief9inancialof9icer

No

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AppendixF:Argenti’sAScoreAnalysisThisscoremeasuresnon-9inancialareasincontradictiontoZscoreabout9inancialratios.Itdigsmoreintotherootcause,whichisaboutthemanagement’sabilitytoleadabusiness,anddevelopsapredictablesystem.

Defect→Mistakes→Symptoms→Failure

Source:TeamAnalysis

Suning’sAscoreis12,arelativelowmarkandfallsintotheregion0-18.Thusthereisnorisktoindicatethefailureofmanagementnow.Itre9lectsahealthy9inancialcondition.

Factor Observation Totalscore SuningScore

Maximumpermittedscore

Defects:Managementdefects

AutocraticChiefExecutive 8 2

10

ChiefExecutiveisalsoChairman 4 0

PassiveBoardofDirectors 2 0

UnbalancedBoardofDirectors(egnotrepresentingallbusinessfunctions,ordominatedbyonebusinessfunction) 2 1

WeakFinanceDirector 2 0

Poormanagementindepth 1 0

Poorresponsetochange:old-fashionedproducts;obsoleteproductionfacilities;out-of-datemarketingmethods 15 2

Defects:Accountingdefects

Nobudgetsorbudgetarycontrol 3 0

Nocash9lowforecasts,ornotuptodate 3 0

Nocostingsystem:costsandcontributionofeachproductorservicenotknown 3 0

DefectsinTotal 43 5

Mistakes:Managementmistakes

Highgearing;inabilitytoservicedebts 15 1

15

Overtrading:companyexpandingfasterthanfunding;capitalbasetoosmallforlevelofactivity;capitalbaseunbalancedfornatureandtypeofbusiness

15 3

Bigprojectthathasgonewrong;anyobligationthatthecompanywillbeunabletomeetifsomethinggoeswrong 15 1

TotalMistakes 45 5

Symptomsoftrouble

Financialanalysisappearstoindicatefailureofdif9iculty(egpoorZscore) 4 0

0Creativeaccounting(eggaming,misrepresentation) 4 0

Non-9inancialsignsofproblems;eghighstaffturnover;lowmorale;uncleaned/untidyof9icesandfactories;rumours 4 1

TotalSymptoms 12 1

TotalAscore 11 25

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AppendixG:CultureWebJohnsondevelopeda'CulturalWeb'whichsuggestsdifferentelementsoforganizationalculture:Arepresentationofthetaken-for-grantedassumptions,ofparadigm,ofanorganizationandthephysicalmanifestationsoforganizationalculture.

Source:TeamAnalysis

Schein Points Contents Analysis

Artifacts Symbols Logo,mission,slogan

Suning’slogo-the"kingofbeasts"lion,thelion'smouthforthecloudshape,symbolizingSuningwillusethecloudbusinessmodelwithbothonlineandof9linesalesplatform.Besides,theimageattractsyoungandpersonalizedconsumergroupsandenhancestheconsumerexperience.

PowerStructures Distributionofpower,leadershipbehavior

ZhangJindong,chairmanofSuning,with26.44%holdingofthecompany,appearedinthelogisticsbase,jointoperationscommandcenterandSuning’srestaurantonNovember8and9tosupervisethepreparationof11.11.Thisre9lectshisleadershipstyleisstrongandef9icient.

OrganisationalStructures

Formal/informal,tall/9lat,mechanistic/organic

Suninghasavery9latorganizationalstructurewithtwolevelsmanagementoflargearea-urbanterminal.Thisgreatlyenhancesregionaloperationsandlocalizationservicecapabilities,alsoimprovesoperationalef9iciency.

ControlSystems Performancemeasureandreward,culturein9luencesstrategy

Twophasesofemployeestockownershipplan(ESOP)havebeenimplementedsince2014,whichcoversfromBoardofDirectorstofrontlinestaff,successfullyincreasingthecompanymorale.

Espousedvalues RitualsandRoutines

Procedures Suning’sserviceismarketandcustomeroriented,andfocusoncontinuouslyenhancingcorporatepro9itability,diversi9ication,informationtechnology,andthepursuitofhighercustomersatisfaction.ItseekstocreatethebestO2ObrandinChina.

StoriesandMyths

Success/failurestory

Suning.comonlinetransformationismadeunderthebestperiod-rapiddevelopmentofof9linestoresin2011.Atthebeginning,thistransitionisundercriticalcriticismandhighpressurefrominvestorsduetodeclineofsalesrevenueandpro9its.ButitisthatdecisionwonthetransitiontimeandstrategicmaneuveringspaceofSuning.

Basicassumptionsandvalues

TheParadigm Theorganizationexiststoful9ilcharitableobjectives.

Suningisalsoveryproactiveregardingsocialresponsibilities.Besidesbeingenvironmentalfriendlywithvolunteeringfoundations,Suning’smissionisalsofocusedonprovidingcustomersandsupplierswithservicesofbestqualitiesaswellasassistingonregionalunemploymentratesbyspeciallydesignedhiringprograms.Activeinlocalcommunities,Suningisknownforbeingcharismaticaswellasgeneroustothegeneralpublic.Forinstance,donationsof50millionCNYtoWenchuanearthquakesfoundationsreceivedgreatcomplimentsfromboththecustomersandthegovernment.

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AppendixH:PESTELAnalysis

Source:TeamAnalysis

Political:3-ModerateFacedwiththeslowingdowneconomy,theChinesegovernmentregardsdomesticconsumptionaneffectivewaytomaintainGDPgrowth,toshifttoamodernconsumerandservice-ledeconomyandtopromotethelivingstandards,soithasimplementedseveralpoliciestostimulatetheretailindustry.Afterthehomeappliancesubsidyprogramhadexpiredin2013,thegovernmentannounced“The Implementation Scheme of Energy-ef9iciency Leader System” in 2015 that aimed to encourage companies to develop eco-friendlyproductsandconsumerstoupgradetheirhomeappliances.

Economic:3-ModerateTheslightlydecreasinginterestrate,currentlyatthelowestpointintenyears,mayencouragespendingandthereforestimulatethesalesinretailindustry.Moreover,basedonthepowerfuldemandonhouseholdgoodsandservices,thegrowthofhousehold9inalconsumptionexpenditure(HFCE) inChina,comparedtothat insomeadvancedeconomies,remainsstrongandhasvastroomtocontinue itsmomentum.According toMcKinsey’s report “InsightsChina -Meet the2020ChineseConsumer”,asmoreandmoreconsumersinChinastepoutfromthepoorincomeclass(lessthan6000USD),thediscretionaryspendingislikelytocontinueitsgrowth,supportingthesalesofhouseholdgoodsandservices.

Social(andCultural):3-ModerateThesocietyhaswitnessedanevolvingmaterialculture,asthepopulationthatcanaffordpremiumgoodsare increasing,andthepaceofmodernizationkeepsstimulatingpeopletoupgradetheir lifewithmodernappliances,suchashighde9initionTV,mobilephonesandtablets,andevencleaningrobots.Theincreaseinboththebudgetforadvertisementandthetransactionsizeinretailindustrycanprovethisphenomenon,andtheburgeoningbrandsandactivitiesofpromotion,namelythe“shoppingfestivals”,canactascatalyststhatencouragedomesticconsumption.

Technological:3-ModerateTherapidchangeintechnologyandtheenhancedcooperationamongbanks,suppliersandthirdpartiesthatenablecustomerstobuyandpayfortheirproductsthroughnumerousmethodsjustontheirmobileterminalscanimprovethelastmileofsupplychainandthereforehelpmorecustomerstoful9illtheirorders.Thistrendcanbeseenintheriseofe-commerce,andthetechnologyplaysanimportantroleinshapingtheretailindustry,asthepopulationofonlineusersisincreasingdramatically.

Environmental:1-InsigniNicantUnlikeindustriessuchastourism,farming,andinsurance,theretailindustryisrelativelyunaffectedbytheenvironmentalchange,especiallyinChina,acountrywithweakerenvironmentalregulationsthanthoseindevelopedcountries.Althoughinrecentyearsthere is an rising environmental awareness, to which lots of retail activities such as logistic services and the construction ofinfrastructurearegenerallysubject,butinshort-termsuchchangecanhardlyaffectthecompetitiveintensityoftheindustry.

Legal:2-LowInorder toprotectconsumersand tosupportproperdevelopment, thegovernmenthasmanaged toregulate theretail industry,especiallythee-commerce,showinganinclinationtoimplementstrictlaws.Severaldiscussionsanddirectionshasbeenconducted,yettheireffectsoneitherthesalesortheshoppingpatternsremainvagueandobscure.

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Political

Technological

Economic

Social

Legal

Environmental

3

3

3

1

2

3 The PESTEL Analysis is conducted in order toevaluate the vitality of China’s specialty retailindustry, and to determine the competitivepositioningofSuning.

This radar chart contains a scale of 0 to 5, inwhich 5 represents the most dramatic changerelevant to companies in the industry, includingSuning,and0representstheleastone.

AppendixI:PorterFiveForcesAnalysis

Source:TeamAnalysis

IntensityofCompetitiveRivalry:3-ModerateThecompetitionbetweenonlineandof9line retailer throughpricewarshas formeda rather intense rivalrywithin the industry.Althoughthebrandsofphysicalstores,suchasSuningandGome,usedtoburgeonanddominateaconsiderablemarketshare,therise of online business had become the new drivers of the industry and caused huge losses in revenue and net pro9it to thosetraditionalbrandswithfarmorecompetitivepricingstrategyandlargercustomerbase.Beforetheindustryreallydevelopintothemutuallybene9icialO2Oenvironment,basedonthecontinuouspromotionactivities,thecompetitiverivalryisgoingtomaintaininshortterm.

ThreatofSubstitutes:3-ModerateTheproductsandservice thateachretaileroffersaresimilar, socustomerscan thereforeswitchbetweendifferentsystemswithlittletransitioncost.Forinstance,customerscanpaywithany9inancialservicesprovidedbyretailersatsameprice.Butforsomeservicessuchasdeliveryandafter-sales,retailerswithspeci9icadvantagecanstandoutandbecomecustomer’s9irstchoice.

ThreatofNewEntrants:2-LowAlthoughmanyretailershavetriedtoestablishtheirownretailbusiness,noteveryonesucceedstogainmarketshareorstrategicpartnership,becausetheindustryhasalreadybeendominatedbyseveralonlineandof9linemajorbrandsthatalreadyhavemostofcustomer base, various products and best prices,making it hard for new entrants to develop full strength and in9luence. Eventhoughsomenewentrantswithspeci9ictechnologyornichemarkethadgraduallygainedsalesgrowth,theyarestilltoosmalltoattractmainstreamcustomersandmajorretailers.

BargainingPowerofSuppliers:2-LowTheretailconcentration,knownasthemarketsharebelongingtothetop4or5companies,ofbothonlineandof9linebusinessishighandhasbalancedthebargainingpowerofsuppliers.MajorplayerssuchasSuning,Gome,Alibaba,andJingdongalldominateaconsiderablemarketshare,andwithrichretailresourcesandcustomerbasetheycanensurethesalesandfurthernegotiatelowerprices. By contrast, there are numerous suppliers that sells different products occupying different local markets in China, anddecentralizingthebargainingpower.

BargainingPowerofCustomers:3-ModerateWith transparent price-checking and product information, customers have more selections on where to buy and gain certainbargaining power to retailers. To promote its own services or sales, retailers will also try to offer price discounts. But theconcentrationofmarketshareandcooperationwithbrandsalsomakeiteasyforretailerstoperformmonopoly.

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The Porter Five Forces Analysis is conducted inorder to evaluate the vulnerability of China’sspecialty retail industry, and to determine thecompetitivepositioningofSuning.

This radar chart contains a scale of 0 to 5, inwhich 5 represents the most serious threatrelevant to companies in the industry, includingSuning,and0representstheleastone.

ThreatofNewEntrants

ThreatofSubstitutes

BargainingPowerofCustomers

IntensityofCompetitiveRivalry

BargainingPowerofSuppliers

2

3

3

3

2

AppendixJ:SWOTAnalysis

� Source:TeamAnalysis

StrengthsWideCoveragePhysicalStoresPhysical stores, having boosted the sales growth since the establishment of the company, are the strategic resources of Suning.Nowadays at the turning point, they play even more signi9icant roles as the key drivers for O2O layout, and, combining withexpansion of online business, the trumps to help Suning standout amongother retailers.Withmore than1600physical storesacrossthecountryandaroundtheglobe,Suningoffersitscustomers9irst-handstoreexperiencesandchancestorightawaypickupgoods purchased. Besides, 9inancial services as well asmaintenance and other after-sale services are conveniently provided inphysicalstores,togethermakingitabettershoppingexperience.

VeteranManagementofSupplyChainWithmorethan20years’operationinretailindustry,Suninghasgainedprominentedgesinmanagementofsupplychainoveritscompetitors.RichaccumulationofnetworksandcooperativepartnersinsupplychainenablesSuningtoweakenbargainingpowerof suppliers (lower down cost of goods purchased) and run timely and accurate procurement plans, which improves salesprojections,inventoriesmanagementandcostperformance.

StrongSupportfromLogisticsBasesCompared with other online retailers, Suning excels in construction of logistic bases and ranks the 9irst in storage space andautomationrateofwarehouse.Tobemorespeci9ic,Suningmostlybuilds itsownwarehouses incontrast tocompetitors’rentingpolicies.Additionally,mostofthewarehousesaresharedwithsuppliers.ThissystemallowsSuningtoownlittleactualinventoriesbut products could be distributed directly from suppliers’ inventory to the customers. The ownership of physical warehousespositions Suning for long term growth and pro9it. Besides, the usage of ERP system could also attribute to Suning’s ef9icientinventoryturnover.

FavorableLiquidityPositionSuningpossessesandkeepsimprovingfavorableliquiditypositionwithitsdominantvoiceinsupplychain.Gainingnearlyinstantrevenues from customers and delaying debt-paying to suppliers, Suning is capable of shortening cash conversion cycle andexpanding business with abundant cash surplus. The current ratio of Suning is always greater than 1 and above the industryaveragelevel,thequickratioisgraduallyincreasing,whichsubstantiatesSuning’ssalientandkept-betteringliquidityposition,aswellasitsstrongcompetitivenessinretailindustry.

WeaknessesLimitedOnlineTrafNicFlowsDuetotherelativelatelaunchofonlinebusinesscomparedwithJD,BABAandotherpureonlineretailers,Suning’slaggingbehindaccumulationofonlineusersandconstructionofonlineplatformmightundermineitsO2Opositioning.Toelaborate,thereputationasanonlineretaileristhatrobust,atleastnotcompatiblewithitslong-builtfameasabrilliantof9lineretailer,leavingsomespacetoimproveonlineuserexperienceandfurtherpromotecompanyimage.

Need-to-ImproveExpressDeliveryThoughgainingstrongsupportfromlogisticsbasesaroundthecountry,Suninghasstillbeenleftbehindbyitsmainopponents,likeJD and BABA, in the 9ield of express delivery. And this is especially true for the distribution of small items including tiny lifeelectricalappliancesandotherdailyconsumergoods.Besides,thelast-miledistributionofgoodsalsoneedstobepolishedupsincecomparedwithJD,theretailerthat isdeemedtohavethebestexpressdeliveryservicesintheindustry,Suninglacksself–owneddistributionnetworkdirectlylinkingtocustomers.

�13

Strengths

Opportunities

WeaknessesThreats

21

12

14

17

OpportunitiesPromisingGrowthofHouseholdExpenditureWith the gradual recovery of the macroeconomic led by the effects of structural readjustment, growth stabilization andcorrespondingexpansionary9iscalandmonetarypolicies,household incomeshallrisesteadyandrobustly, levelingupconsumercon9idence and household expenditure. In addition, according toNational Bureau of Statistics of China, theHFCE per capita onhousehold facilities, articlesandservicestillperformsquitewell, reaching itshighestpoint in2014,and is likely tocontinue itsgrowthasthedemandmentionedaboveremainedstrong.ThemoreactiveroleofconsumptionasGDPcomponentprovidesSuningagreatopportunitytoexpandsalesandpro9it.

CooperationwithBigMacsInthepast6months,SuninghassuccessivelyannounceditscooperationwithBABA,theNo.1onlineretailerinChinaandWanda,aglobalrealestatetycoon.SuchcooperationwithbigmacsshallbringSuningdesirablechancestoincreaseonlinetraf9ic9lows,andatthesametime,solidifyof9lineexpansion.Withthetrendofchannel-sinkinginChina’sonlineretailindustryandactivetransitionofrealestatecompanies,Suningshallexpectfurtherandmorecomprehensivecollaborationwiththesebignames.

ThreatsIntensivePriceWarSituatedinthehighlycompetitiveretailindustry,Suningshallfacequickenedpacesofpricewarswagedbyonlineretailers.Directlyor indirectly,grosspro9itofSuningwouldencounterdownwardpressuredue to the lower-downprices inorder toattractmorecustomers.Thismightresultinthenarrowingdownpro9itmarginandpooroperationalperformances,seriousthreatstoSuning.

DecliningLoyaltyofCustomersDeclining loyaltyofcustomersshallremainagreat threat tothecompany ifSuning failuresto improveconsumerservicesand itwould hold back online revenue. Suning has higher customer complaint rates than competitors on the user-unfriendly onlineexperience,delayeddeliveryandunsatisfactoryafter-saleservices,whichwouldupsetconsumerstickinessandloyalty.

On basis of the SWOT analysis above, we derive following SWOTmatrix, demonstrating possible interactions between internalfactors(strengthsandweaknesses)andexternalfactors(opportunitiesandthreats).

To quantitatively examine the power of Strengths,Weaknesses, Opportunities and Threats,we score each cross of internal andexternal factors based on its likelihood and impacts, where “3” is for the strongest and “0” for the least or none. For specialillustration,whencheckingcrossesofStrengthsandThreats,thepowerofStrengthsis“0”atstartingstageandincreasewiththeirenhancingeffectiveness to soften threats theymeetwith,while thepowerofThreats startsat3, anddeclineby theamount thepoweroftheStrengthstheyencounter.SoisforcaseswhenOpportunitiescrosswithWeaknesses,thepowerofOpportunityis“0”atstartingstageandincreasewiththeirrisingeffectivenesstoimproveweaknessestheymeetwith,whilethepowerofWeaknessesstartsat3,anddropbytheamountthepoweroftheOpportunitiestheyencounter.(Incrossingcasesmentionedabove,scoresforrowsarelistedleftwardandscoresforcolumnsarelistedrightward).

Strength Weakness

S1WideCoveragePhysicalStores

S2VeteranManagementofSupplyChain

S3StrongSupportfromLogisticsBases

S4FavorableLiquidityPosition

W1LimitedOnlineTraf9icFlows

W2Need-to-ImproveExpressDelivery

Opportunities

O1PromisingGrowthofHouseholdExpenditure

O2CooperationwithBigMacs

O2+S1=SolidifycooperationwiththesestrategicresourcesO1+S2+S3+S4=Expandbusinesstakingadvantagesofthesestrengths

O2+W1+W2=Gainexperienceand9lowsfrombigmacs

O1+W1=Increase9lowsinpromisinggrowth

ThreatT1IntensivePriceWar

T2DecliningLoyaltyofCustomers

S1+S2+S3+S4+T1=Usethesetostandoutamongpricewar

S1+S3+T2=Usethesetoimprovecustomerexperience

T1+W1=Improvethistocatchupwithofrivals

T2+W2=Improvethistoincreasecustomerstickiness

�14


AppendixK:BalanceSheet

AsofDecember31,inmillionsCNYHistorical Projected

2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Assets

Cashandcashequivalents 30,067 24,806 22,274 40,638 47,408 54,874 64,033 72,708 82,924

Financialassetsheldfortrading 0 2,862 2,645 2,645 2,645 2,645 2,645 2,645 2,645

Accountsandnotesreceivable 1,273 672 536 648 733 826 934 1,062 1,211

Advancestosuppliers 3,105 4,121 3,852 5,458 6,174 6,960 7,870 8,947 10,201

Inventories 17,222 18,258 16,039 14,252 13,192 13,218 13,079 14,868 16,952

Othercurrentassets 1,759 2,783 5,302 4,146 4,690 5,287 5,979 6,797 7,749

TotalCurrentAssets 53,427 53,502 50,647 67,786 74,842 83,811 94,541 107,025 121,681

　　　　　　　　　

Available-for-sale9inancialassets 1 268 1,550 15,550 15,550 15,550 15,550 15,550 15,550

Long-termreceivables 500 482 503 598 677 763 862 980 1,118

Long-termequityinvestments 574 2,107 1,347 1,347 1,347 1,347 1,347 1,347 1,347

Investmentrealestates 1,270 1,015 1,014 1,014 1,014 1,014 1,014 1,014 1,014

Fixedassets-net 8,579 10,750 12,155 13,053 13,397 13,236 12,845 12,590 12,476

Intangibleassets-net 6,040 6,723 7,015 6,866 6,673 6,411 6,056 5,793 5,620

Goodwill 185 420 462 462 462 462 462 462 462

Deferredtaxassets 756 1,131 1,664 1,684 1,612 1,487 1,495 1,699 1,937

Othernon-currentassets 4,829 5,853 5,836 5,836 5,836 5,836 5,836 5,836 5,836

TotalAssets 76,162 82,252 82,194 114,197 121,408 129,916 140,008 152,297 167,040

%Growth 8.0% -0.1% 38.9% 6.3% 7.0% 7.8% 8.8% 9.7%

　　　　　　　　　Liabilities 　　　　　　　　　Short-termborrowings 1,752 1,110 1,837 725 0 0 0 0 0

Accountsandnotespayable 34,688 35,767 30,870 32,642 38,277 44,683 52,273 61,415 72,309

Paymentsreceivedinadvance 542 508 1,452 544 617 698 792 903 1,033

Otherpayables 3,743 5,292 6,920 8,224 9,261 10,388 11,735 13,327 15,181

�15


AppendixL:CommonSizeBalanceSheet

Othercurrentbutnon-operatingliabilities 520 738 1,039 1,039 1,039 1,039 1,039 1,039 1,039

TotalCurrentLiabilities 41,245 43,414 42,117 43,175 49,195 56,808 65,839 76,683 89,562

　　　　　　　　　

Long-termborrowings 0 594 914 1,635 2,178 2,546 2,823 3,138 3,497

Debtsecuritiesissued 4,465 7,946 7,961 7,961 7,961 7,961 7,961 7,961 7,961

Deferredtaxliabilities 163 186 159 218 247 279 317 361 413

Long-termoperatingliabilities 1,176 1,409 1,505 1,741 1,976 2,234 2,534 2,890 3,306

TotalLiabilities 47,050 53,549 52,657 54,729 61,557 69,828 79,474 91,033 104,739

%Growth 13.8% -1.7% 3.9% 12.5% 13.4% 13.8% 14.5% 15.1%

　　　　　　　　　Owners'Equity 　　　　　　　　　Commonstockandcapitalreserves 12,063 12,064 12,063 41,406 41,406 41,406 41,406 41,406 41,406

Retainedearnings 16,427 16,430 17,297 17,879 18,258 18,492 18,934 19,656 20,683

Othercomprehensiveincome 0 0 (77) (77) (77) (77) (77) (77) (77)Converteddifferenceinforeigncurrencystatements (30) (124) 0 0 0 0 0 0 0

TotalCommonEquity 28,459 28,369 29,282 59,207 59,587 59,821 60,263 60,984 62,012

%Growth -0.3% 3.2% 102.2% 0.6% 0.4% 0.7% 1.2% 1.7%

　　　　　　　　　Minorityshareholders'equity 652 334 255 261 265 267 271 279 289

　　　　　　　　　TotalOwners'Equity 29,112 28,703 29,537 59,468 59,851 60,088 60,534 61,263 62,301

%Growth -1.4% 2.9% 101.3% 0.6% 0.4% 0.7% 1.2% 1.7%

　　　　　　　　　

TotalLiabilitiesandOwners'Equity 76,162 82,252 82,194 114,197 121,408 129,916 140,008 152,297 167,040

%Growth 8.0% -0.1% 38.9% 6.3% 7.0% 7.8% 8.8% 9.7%


2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E


2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

AssetsCashandcashequivalents 39.5% 30.2% 27.1% 35.6% 39.0% 42.2% 45.7% 47.7% 49.6%

Financialassetsheldfortrading 0.0% 3.5% 3.2% 2.3% 2.2% 2.0% 1.9% 1.7% 1.6%

Accountsandnotesreceivable 1.7% 0.8% 0.7% 0.6% 0.6% 0.6% 0.7% 0.7% 0.7%

Advancestosuppliers 4.1% 5.0% 4.7% 4.8% 5.1% 5.4% 5.6% 5.9% 6.1%

Inventories 22.6% 22.2% 19.5% 12.5% 10.9% 10.2% 9.3% 9.8% 10.1%

Othercurrentassets 2.3% 3.4% 6.5% 3.6% 3.9% 4.1% 4.3% 4.5% 4.6%

TotalCurrentAssets 70.1% 65.0% 61.6% 59.4% 61.6% 64.5% 67.5% 70.3% 72.8%

　　　　　　　　　

Available-for-sale9inancialassets 0.0% 0.3% 1.9% 13.6% 12.8% 12.0% 11.1% 10.2% 9.3%

Long-termreceivables 0.7% 0.6% 0.6% 0.5% 0.6% 0.6% 0.6% 0.6% 0.7%

Long-termequityinvestments 0.8% 2.6% 1.6% 1.2% 1.1% 1.0% 1.0% 0.9% 0.8%

Investmentrealestates 1.7% 1.2% 1.2% 0.9% 0.8% 0.8% 0.7% 0.7% 0.6%

Fixedassets-net 11.3% 13.1% 14.8% 11.4% 11.0% 10.2% 9.2% 8.3% 7.5%�16

Source:CompanyData,TeamEstimation;commonsizegainedbydividingeachaccountbytotalsalesrevenueofcorrespondingyear

AppendixM:IncomeStatement

Intangibleassets-net 7.9% 8.2% 8.5% 6.0% 5.5% 4.9% 4.3% 3.8% 3.4%

Goodwill 0.2% 0.5% 0.6% 0.4% 0.4% 0.4% 0.3% 0.3% 0.3%

Deferredtaxassets 1.0% 1.4% 2.0% 1.5% 1.3% 1.1% 1.1% 1.1% 1.2%

Othernon-currentassets 6.3% 7.1% 7.1% 5.1% 4.8% 4.5% 4.2% 3.8% 3.5%

TotalAssets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

　　　　　　　　　Liabilities 　　　　　　　　　Short-termborrowings 2.3% 1.3% 2.2% 0.6% 0.0% 0.0% 0.0% 0.0% 0.0%

Accountsandnotespayable 45.5% 43.5% 37.6% 28.6% 31.5% 34.4% 37.3% 40.3% 43.3%

Paymentsreceivedinadvance 0.7% 0.6% 1.8% 0.5% 0.5% 0.5% 0.6% 0.6% 0.6%

Otherpayables 4.9% 6.4% 8.4% 7.2% 7.6% 8.0% 8.4% 8.8% 9.1%Othercurrentbutnon-operatingliabilities 0.7% 0.9% 1.3% 0.9% 0.9% 0.8% 0.7% 0.7% 0.6%

TotalCurrentLiabilities 54.2% 52.8% 51.2% 37.8% 40.5% 43.7% 47.0% 50.4% 53.6%

　　　　　　　　　

Long-termborrowings 0.0% 0.7% 1.1% 1.4% 1.8% 2.0% 2.0% 2.1% 2.1%

Debtsecuritiesissued 5.9% 9.7% 9.7% 7.0% 6.6% 6.1% 5.7% 5.2% 4.8%

Deferredtaxliabilities 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%

Long-termoperatingliabilities 1.5% 1.7% 1.8% 1.5% 1.6% 1.7% 1.8% 1.9% 2.0%

TotalLiabilities 61.8% 65.1% 64.1% 47.9% 50.7% 53.7% 56.8% 59.8% 62.7%

　　　　　　　　　Owners'Equity 　　　　　　　　　Commonstockandcapitalreserves 15.8% 14.7% 14.7% 36.3% 34.1% 31.9% 29.6% 27.2% 24.8%

Retainedearnings 21.6% 20.0% 21.0% 15.7% 15.0% 14.2% 13.5% 12.9% 12.4%

Othercomprehensiveincome 0.0% 0.0% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.0%Converteddifferenceinforeigncurrencystatements 0.0% -0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

TotalCommonEquity 37.4% 34.5% 35.6% 51.8% 49.1% 46.0% 43.0% 40.0% 37.1%

Minorityshareholders'equity 0.9% 0.4% 0.3% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%

TotalOwners'Equity 38.2% 34.9% 35.9% 52.1% 49.3% 46.3% 43.2% 40.2% 37.3%

　　　　　　　　　

TotalLiabilitiesandOwners'Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%


2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E


2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Revenues

Operatingrevenue 97,007 103,921 107,260 127,850 144,789 163,357 184,860 210,271 239,870

Otherincome 1,350 1,372 1,666 1,716 1,784 1,873 1,986 2,125 2,295

TotalRevenues 98,357 105,292 108,925 129,565 146,573 165,231 186,845 212,396 242,165

%Growth 7.1% 3.5% 18.9% 13.1% 12.7% 13.1% 13.7% 14.0%

　　　　　　　　　Operatingcosts (80,775) (89,240) (92,261) (108,807) (123,476) (139,634) (158,403) (180,631) (206,597)

Businesstaxandextra (313) (330) (357) (412) (467) (526) (595) (676) (771)

�17


AppendixN:CommonSizeIncomeStatement

Salesexpenses (10,852) (11,777) (13,202) (16,042) (17,103) (18,017) (19,692) (21,613) (23,789)

Managementexpenses (2,001) (2,306) (2,675) (3,239) (3,664) (4,131) (4,671) (5,310) (6,054)

EBITDA 4,416 1,640 430 1,065 1,864 2,922 3,485 4,166 4,954

%Growth -62.9% -73.8% 147.6% 75.0% 56.8% 19.2% 19.6% 18.9%

　　　　　　　　　

Depreciation (598) (733) (937) (1,045) (1,123) (1,152) (1,138) (1,105) (1,083)

Amortization (820) (769) (671) (797) (780) (758) (728) (688) (658)

EBIT 2,998 138 -1,178 -777 -39 1,012 1,618 2,374 3,213

%Growth -95.4% -954.6% -34.0% -95.0% -2729.4% 59.8% 46.7% 35.3%

　　　　　　　　　Financialexpenses 186 149 (67) (321) (382) (487) (626) (753) (906)

Gainfromdisposalofnon-currentassets 0 0 2,449 1,370 1,273 0 0 0 0

Othernonrecurringgainsandlosses 57 (143) (232) 1,040 0 0 0 0 0

Pre-taxIncome 3,242 144 973 1,312 853 525 993 1,621 2,307

　　　　　　　　　Incometaxes (736) (40) (149) (287) (185) (114) (215) (351) (500)

NetIncome 2,505 104 824 1,024 668 412 778 1,270 1,808

%Growth -95.8% 690.0% 24.3% -34.8% -38.4% 89.0% 63.3% 42.3%

　　　　　　　　　Minorityinterestincome (171) (267) (43) 10 7 4 8 13 18NetIncomeAttributetoShareholdsofParentCompany 2,676 372 867 1,014 661 407 770 1,257 1,790

%Growth -86.1% 133.2% 17.0% -34.8% -38.4% 89.0% 63.3% 42.3%

　　　　　　　　　

OthercomprehensiveincomeOthercomprehensiveincomeattributetoshareholdersofparentcompany 0 0 63 0 0 0 0 0 0

Othercomprehensiveincomeattributetominorityshareholders 0 0 (33) 0 0 0 0 0 0


2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E


2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

RevenuesOperatingrevenue 98.6% 98.7% 98.5% 98.7% 98.8% 98.9% 98.9% 99.0% 99.1%

Otherincome 1.4% 1.3% 1.5% 1.3% 1.2% 1.1% 1.1% 1.0% 0.9%

TotalRevenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

　　　　　　　　　

Operatingcosts -82.1% -84.8% -84.7% -84.0% -84.2% -84.5% -84.8% -85.0% -85.3%

Businesstaxandextra -0.3% -0.3% -0.3% -0.3% -0.3% -0.3% -0.3% -0.3% -0.3%

Salesexpenses -11.0% -11.2% -12.1% -12.4% -11.7% -10.9% -10.5% -10.2% -9.8%

Managementexpenses -2.0% -2.2% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5%

EBITDA 4.5% 1.6% 0.4% 0.8% 1.3% 1.8% 1.9% 2.0% 2.0%

　　　　　　　　　

Depreciation -0.6% -0.7% -0.9% -0.8% -0.8% -0.7% -0.6% -0.5% -0.4%

�18


AppendixO:CashFlowStatements

Amortization -0.8% -0.7% -0.6% -0.6% -0.5% -0.5% -0.4% -0.3% -0.3%

EBIT 3.0% 0.1% -1.1% -0.6% 0.0% 0.6% 0.9% 1.1% 1.3%

　　　　　　　　　

Financialexpenses 0.2% 0.1% -0.1% -0.2% -0.3% -0.3% -0.3% -0.4% -0.4%

Gainfromdisposalofnon-currentassets 0.0% 0.0% 2.2% 1.1% 0.9% 0.0% 0.0% 0.0% 0.0%

Othernonrecurringgainsandlosses 0.1% -0.1% -0.2% 0.8% 0.0% 0.0% 0.0% 0.0% 0.0%

Pre-taxIncome 3.3% 0.1% 0.9% 1.0% 0.6% 0.3% 0.5% 0.8% 1.0%

　　　　　　　　　Incometaxes -0.7% 0.0% -0.1% -0.2% -0.1% -0.1% -0.1% -0.2% -0.2%

NetIncome 2.5% 0.1% 0.8% 0.8% 0.5% 0.2% 0.4% 0.6% 0.7%

　　　　　　　　　Minorityinterestincome -0.2% -0.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%NetIncomeAttributetoShareholdsofParentCompany 2.7% 0.4% 0.8% 0.8% 0.5% 0.2% 0.4% 0.6% 0.7%

　　　　　　　　　

OthercomprehensiveincomeOthercomprehensiveincomeattributetoshareholdersofparentcompany 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Othercomprehensiveincomeattributetominorityshareholders 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%


2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E


2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

OperatingActivities

Netincome 2,505 104 824 1,024 668 412 778 1,270 1,808

Depreciation 598 733 937 1,045 1,123 1,152 1,138 1,105 1,083

Amortization 820 769 671 797 780 758 728 688 658Gainfromdisposalofnon-currentassets 0 0 (2,449) (1,370) (1,273) 0 0 0 0

Othernon-recurringgainsorlosses (57) 143 232 (1,040) 0 0 0 0 0

Financialexpenses (186) (149) 67 321 382 487 626 753 906

Decrease(increase)ofOWC 2,991 119 (2,219) 3,393 6,461 6,110 7,460 7,034 8,440Decrease(increase)oflong-termoperatingassets (23) 17 (20) (95) (79) (86) (100) (118) (137)

Increase(decrease)oflong-termoperatingliabilities 242 233 96 236 235 259 300 356 415

Decrease(increase)ofdeferredtaxassets (244) (375) (533) (20) 72 125 (8) (204) (238)

Increase(decrease)ofdeferredtaxliabilities (20) 22 (26) 58 29 32 38 44 52

Othercash9lowsfromoperatingactivities (1,326) 621 1,040 0 0 0 0 0 0

NetcashNlowsfromoperatingactivities 5,299 2,238 (1,381) 4,349 8,398 9,248 10,960 10,927 12,986

%Growth -57.8% -161.7% -414.9% 93.1% 10.1% 18.5% -0.3% 18.8%

　　　　　　　　　InvestingActivities

�19


AppendixP:CommonSizeCashFlowStatements

Addedintangibleassets (2,491) (1,452) (963) (648) (586) (496) (374) (425) (484)

Added9ixedassets (1,830) (2,903) (2,343) (1,943) (1,466) (991) (747) (850) (969)Gainfromdisposalofnon-currentassets 0 0 2,449 1,370 1,273 0 0 0 0

Othernon-recurringgainsorlosses 57 (143) (232) 1,040 0 0 0 0 0

Decrease(increase)ingoodwill 42 (235) (42) 0 0 0 0 0 0

Decrease(increase)ofnon-coralassets (3,244) (5,431) (286) (14,000) 0 0 0 0 0Othercash9lowsfrominvestingactivities 1,330 116 (591) 0 0 0 0 0 0

NetcashNlowsfrominvestingactivities (6,136) (10,048) (2,007) (14,181) (779) (1,487) (1,121) (1,274) (1,453)

%Growth 63.8% -80.0% 606.6% -94.5% 90.9% -24.6% 13.6% 14.1%

　　　　　　　　　FinancingActivities 　　　　　　　　　Paymentforbeginning9inancialgap 0 0 0 0 0 0 0 0 0

Financialexpenses 186 149 (67) (321) (382) (487) (626) (753) (906)Increase(decrease)ofshort-termliabilities (59) (425) 1,028 (1,111) (725) 0 0 0 0

Increase(decrease)oflong-termliabilities 4,465 4,074 336 720 543 368 277 315 359

Increase(decrease)ofcommonstockandcapitalreserves 4,549 1 (1) 29,343 0 0 0 0 0

Dividendsattributetoshareholdersofparentcompany 0 0 0 (432) (282) (174) (328) (536) (762)

Dividendsattributetominorityshareholders 0 0 0 (4) (3) (2) (3) (5) (8)

Othercash9lowsfrominvestingactivities (975) (926) (666) 0 0 0 0 0 0

NetcashNlowsfromNinancingactivities 8,167 2,874 629 28,195 (848) (295) (680) (979) (1,317)

%Growth -64.8% -78.1% 4385.8% -103.0% -65.2% 130.4% 44.0% 34.5%

　　　　　　　　　Adjustmentsofexchangerateandothersoncashandcashequivalents 33 (135) 289 0 0 0 0 0 0

Netcash9low 7,295 (5,126) (2,821) 18,363 6,770 7,466 9,159 8,674 10,216

Beginningcashandcashequivalents 22,740 30,067 24,806 22,274 40,638 47,408 54,874 64,033 72,708

Endingcashandcashequivalents 30,067 24,806 22,274 40,638 47,408 54,874 64,033 72,708 82,924


2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E


2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

OperatingActivitiesNetincome 2.5% 0.1% 0.8% 0.8% 0.5% 0.2% 0.4% 0.6% 0.7%

Depreciation 0.6% 0.7% 0.9% 0.8% 0.8% 0.7% 0.6% 0.5% 0.4%

Amortization 0.8% 0.7% 0.6% 0.6% 0.5% 0.5% 0.4% 0.3% 0.3%Gainfromdisposalofnon-currentassets 0.0% 0.0% -2.2% -1.1% -0.9% 0.0% 0.0% 0.0% 0.0%

Othernon-recurringgainsorlosses -0.1% 0.1% 0.2% -1.1% 0.0% 0.0% 0.0% 0.0% 0.0%

Financialexpenses -0.2% -0.1% 0.1% 0.2% 0.3% 0.3% 0.3% 0.4% 0.4%

Decrease(increase)ofOWC 3.0% 0.1% -2.0% 2.6% 4.4% 3.7% 4.0% 3.3% 3.5%

�20


Decrease(increase)oflong-termoperatingassets 0.0% 0.0% 0.0% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1%

Increase(decrease)oflong-termoperatingliabilities 0.2% 0.2% 0.1% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%

Decrease(increase)ofdeferredtaxassets -0.2% -0.4% -0.5% 0.0% 0.0% 0.1% 0.0% -0.1% -0.1%

Increase(decrease)ofdeferredtaxliabilities 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Othercash9lowsfromoperatingactivities -1.3% 0.6% 1.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

NetcashNlowsfromoperatingactivities 5.4% 2.1% -1.3% 3.4% 5.7% 5.6% 5.9% 5.1% 5.4%

　　　　　　　　　

InvestingActivitiesAddedintangibleassets -2.5% -1.4% -0.9% -0.5% -0.4% -0.3% -0.2% -0.2% -0.2%

Added9ixedassets -1.9% -2.8% -2.2% -1.5% -1.0% -0.6% -0.4% -0.4% -0.4%Gainfromdisposalofnon-currentassets 0.0% 0.0% 2.2% 1.1% 0.9% 0.0% 0.0% 0.0% 0.0%

Othernon-recurringgainsorlosses 0.1% -0.1% -0.2% 1.1% 0.0% 0.0% 0.0% 0.0% 0.0%

Decrease(increase)ingoodwill 0.0% -0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Decrease(increase)ofnon-coralassets -3.3% -5.2% -0.3% -10.8% 0.0% 0.0% 0.0% 0.0% 0.0%Othercash9lowsfrominvestingactivities 1.4% 0.1% -0.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

NetcashNlowsfrominvestingactivities -6.2% -9.5% -1.8% -10.9% -0.5% -0.9% -0.6% -0.6% -0.6%

　　　　　　　　　FinancingActivities 　　　　　　　　　

Paymentforbeginning9inancialgap 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Financialexpenses 0.2% 0.1% -0.1% -0.2% -0.3% -0.3% -0.3% -0.4% -0.4%Increase(decrease)ofshort-termliabilities -0.1% -0.4% 0.9% -0.9% -0.5% 0.0% 0.0% 0.0% 0.0%

Increase(decrease)oflong-termliabilities 4.5% 3.9% 0.3% 0.6% 0.4% 0.2% 0.1% 0.1% 0.1%

Increase(decrease)ofcommonstockandcapitalreserves 4.6% 0.0% 0.0% 22.6% 0.0% 0.0% 0.0% 0.0% 0.0%

Dividendsattributetoshareholdersofparentcompany 0.0% 0.0% 0.0% -0.3% -0.2% -0.1% -0.2% -0.3% -0.3%

Dividendsattributetominorityshareholders 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Othercash9lowsfrominvestingactivities -1.0% -0.9% -0.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

NetcashNlowsfromNinancingactivities 8.3% 2.7% 0.6% 21.8% -0.6% -0.2% -0.4% -0.5% -0.5%

　　　　　　　　　Adjustmentsofexchangerateandothersoncashandcashequivalents 0.0% -0.1% 0.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Netcash9low 7.4% -4.9% -2.6% 14.2% 4.6% 4.5% 4.9% 4.1% 4.2%

Beginningcashandcashequivalents 23.1% 28.6% 22.8% 17.2% 27.7% 28.7% 29.4% 30.1% 30.0%

Endingcashandcashequivalents 30.6% 23.6% 20.4% 31.4% 32.3% 33.2% 34.3% 34.2% 34.2%


2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

�21

AppendixQ:StatementofChangesinStockholders'EquityAccounts


Totalequityattributabletotheshareholdersofparentcompany

Commonstockandcapitalreserves

Othercomprehensiveincome

Converteddifferenceinforeigncurrencystatements

RetainedEarnings

Minorityshareholders'equity

TotalOwners'Equity

2011Ending 7513.3 0.0 14.7 14800.4 702.2 23030.5

Netincome 　　　 2676.1 (170.7) 2505.5

Othercomprehensiveincome (0.2) 　　　 (43.4) (43.7)Converteddifferenceinforeigncurrencystatements 　　 (45.1) 　　 (45.1)

Shareholderinputandcapitaldecrease 4549.5 　　　 164.3 4713.7

Pro9itdisposition 　　　 (1049.4) 　 (1049.4)

2012Ending 12062.5 0.0 (30.4) 16427.0 652.4 29111.5

Netincome 　　　 371.8 (267.5) 104.3

Othercomprehensiveincome 　　 (93.6) 　 (70.9) (164.4)

Shareholderinputandcapitaldecrease 0.3 　　　 21.7 22.0

Pro9itdisposition 　　　 (369.2) (2.1) (371.3)

2013Ending 12064.0 0.0 (124.0) 16429.7 333.6 28702.1

Netincome 　　　 866.9 (42.9) 824.0

Othercomprehensiveincome 　 (77.3) 　　 (33.2) 　Converteddifferenceinforeigncurrencystatements 　　 124.0 　　　

Shareholderinputandcapitaldecrease (1.3) 　　　 (2.7) 　Pro9itdisposition 　　　　　　

2014Ending 12062.6 (77.3) 0.0 17296.6 254.9 29536.8

Netincome 　　　 1014.0 10.2 1024.2


2015Ending 12062.6 (77.3) 0.0 17878.6 260.8 30124.7

Shareholderinputandcapitaldecrease 29343.2 　　　　 29343.2

Netincome 　　　 661.5 6.7 668.1


2016Ending 41405.8 (77.3) 0.0 18258.3 264.7 59851.4

Netincome 　　　 407.5 4.1 411.6


2017Ending 41405.8 (77.3) 0.0 18492.1 267.0 60087.7

Netincome 　　　 769.9 7.8 777.7


2018Ending 41405.8 (77.3) 0.0 18934.1 271.5 60534.1

Netincome 　　　 1257.5 12.7 1270.2


2019Ending 41405.8 (77.3) 0.0 19655.9 278.8 61263.2

Netincome 　　　 1789.6 18.1 1807.7


2020Ending 41405.8 (77.3) 0.0 20683.1 289.1 62300.8

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AppendixR:DuPontAnalysisWeuseDuPont analysis to evaluate Suning’s pro9itability and return on shareholders. In 2014, Suning exhibited low return onequity(2.8%).Themaindriverofpro9itabilitywastotalassetsturnover,aswellasequitymultiplierandnetincomemargin.Thisindicatedthatthecompanyhadahealthygearingandef9icientperformance.In2020,weforecastROEcanbehighermainlyduetohighernet incomemargin.Weexpect levelsofROEtobeattractivecomparingtohistoricalperformanceof theCompany(Figure29).WeforecastROEin2020Etobe2.9%.

DuPont analysis suggests the most important driver for sustaining future level of return on equity to be 9inancial leverage,calculatedasratioofassetdividedbyequity.Hence,weforecastincreaseofthecompany’sleveragetohavepositivein9luenceonpro9itability.Seconddriverappearstobeassetturnover,whichindicatesthebetterutilizationofCompany’sresources.

Source:CompanyData,TeamComputation

AppendixS:Altman’sZScoreAnalysisThecoef9icientswereestimatedbyidentifyingasetof9irmswhichhaddeclaredbankruptcyandthencollectingamatchedsampleof9irmswhichhadsurvived,withmatchingbyindustryandapproximatesize(assets).

Z=1.2X1+1.4X2+3.3X3+0.6X4+1.0X5

Source:CompanyData,TeamComputation

KEY

TheZscorehasprovensuccessfulintherealworld.Itcorrectlypredicted72%ofbankruptciestwoyearspriortotheevent.Zscorepro9ilesforfailingbusinessesoftenindicateaconsistentdownwardtrendastheyapproachbankruptcy.Suning’sZscoreisaround

Z-score Prediction

>3.0 Financiallysoundandrelativelysafe(i.e.non-failure)

<1.8 Likelytofail(i.e.failure)

1.8<Z<3.0 “Greyarea‟:failureornon-failurecannotbepredictedwithanycertainty

�23

Factor Calculation Measureof 2012 2013 2014

X1 Workingcapital/totalassets Liquidity 2.53 2.44 2.53

X2 Retainedearnings/totalassets Pro9itability 0.16 0.12 0.10

X3 EBIT/totalassets Ef9iciency 0.22 0.20 0.21

X4 Marketvalueofequity/bookvalueoftotaldebt Leverage 0.04 0.00 0.02

X5 Revenue/totalassets Solvency 104.35 124.50 126.19

ZScore Z=1.2X1+1.4X2+3.3X3+0.6X4+1.0X5 Generating 1.29 1.28 1.36

ROE

2012A 2020E

1.33 1.45

AssetTurnover

2012A 2020E

1.33 1.45

NetPro9itMargin

2012A 2020E

-0.9% 1.3%

Asset/Equity

2012A 2020E

2.78 2.68

NetIncome/EBT

2012A 2020E

1.33 1.45

EBT/EBIT

2012A 2020E

0.94 1.28

EBIT/Revenue

2012A 2020E

-1.1% 1.3%

2.5 in the past three years, which is in a grey area. Further investigation is likely to be required to assess whether they are9inanciallysoundor indangerof failing.Thismayre9lectarelativestable 9inancialsituation,butwithsomewarningsignsaboutratioslikeX3—EBIT/totalassets.Itislowercomparetothatofthecompetitors.Butaccordingtoourforecast,itwillbemuchbetterandingoodshapeinthefutureperiod.

AppendixT:WACCAnalysisCostofEquityWegaincostofequityforSuningmainlybasedonthemodelofCAPM.

1. Risk-freeRateWetaketheyieldon1-yearChinaGovernmentBondsonDecember31st,2014,whichis3.25%,astherisk-freerate.

2. BetaBetaisobtainedbyrunningalinealregressionofSuningstockshareweeklyreturnsagainstweeklyreturnsofShenzhenCompositeIndex,timerangehereisfromJanuary2010toDecember2014(a5-yearspan).Theresultpresentstobe1.005.

3. MarketRiskPremiumAccording to thepaper “MarketRiskPremiumused in88countries in2014:a surveywith8,228answers”byPabloFernandez,Pablo Linares and Isabel Fernandez Acín of IESE business school,we apply 8.10%,which is the average number responded by9inanceandeconomicsprofessors,analystsandmanagersofcompaniesaroundtheglobe,asthemarketriskpremiumforChinesestockmarket.

AccordingtobuildingblocksofCAPMlistedabove,wecalculatecostofequityas11.39%

CostofDebtWetaketheweightedaveragedebtcostofshort-termdebtandlong-termdebtascostofdebtforSuning.

1. Short-termDebtShort-termdebtforSuningmainlycoversshort-termborrowings,weusetheaverageinterestrateof3.75%in2014asthecostforthispart.

2. Long-termDebtLong-termdebtincludeslong-termborrowingsanddebtsecuritiesissued,theaverageinterestforthesetwoin2014is5.30%,soweusethisasthecostforlong-termdebt.

3. MarginalTaxRateAccordingtoSAT(China)StateAdministrationofTaxation,marginaltaxrateforcorporationis25%.

Sowecalculatetheafter-taxweightedaveragecostofdebtas3.77%.

WACCTakingthetargetcapitalstructure(70%equity,30%debt,takenintoaccountSOEin2015)asthecapitalstructureforfollowingyears,wecalculateWACCforSuningas9.11%.

Tosummarize,theprocesstocalculateWACCforSuningarelistedbelow:

Source:CompanyData,ResearchPaper,TeamComputation

Variable Value Basis

RiskFreeRate 3.25% Yieldon1-yearChinaGovernmentBonds

Beta 1.01 RegressionofweeklysharereturnsagainstShenzhenCompositeIndexweeklyreturns(2010-2014)

MarketRiskPremium 8.10% Accordingto“MarketRiskPremiumusedin88countriesin2014:asurveywith8,228answers”byPabloFernandez

CostofEquity 11.39% Teamcalculations

Pre-taxCostofDebt 5.03% Historicalstatisticsandteamcalculations

MarginalTaxRate 25% RegulationofSAT(China)

Post-taxCostofDebt 3.77% Teamcalculations

CapitalStructure(EquitytoDebt) 70:30 Historicalstatistics,takenintoaccountSOEin2015

WACC 9.11% Teamcalculations

�24

AppendixU:DCFTable



AppendixV:DCFDetailsRevenueToproject,aspreciselyaspossible,theupcomingoperatingrevenueforSuning,webreakitdownintoseveralpartsaccordingtospeci9ic business lines, which includes sales revenues, installation and maintenance services, other products, (the previous 4constituterevenue frommainbusiness)andrevenue fromotherbusiness.Furthermore,we takegovernmental subsidyandgainfromdisposalofnon-currentassets(generatingfromleasebacktransactionandcorrespondingREITs)assustainable,atleastinthefollowing6years,bonusforrevenue.

2015—2020FCFF 2015E 2016E 2017E 2018E 2019E 2020E

EBIT -777 -39 1,012 1,618 2,374 3,213

-Adjustedincometax -170 -8 219 350 514 696

EBIAT -607 -30 793 1,268 1,860 2,517

+Depreciation 1,045 1,123 1,152 1,138 1,105 1,083

+Amortization 797 780 758 728 688 658

-IncreaseofOWC (3,393) (6,461) (6,110) (7,460) (7,034) (8,440)

-Addedintangibleassets 648 586 496 374 425 484

-Added9ixedassets 1,943 1,466 991 747 850 969

-Increaseoflong-termoperatingassets 95 79 86 100 118 137

+Increaseoflong-termoperatingliabilities 236 235 259 300 356 415

+Increaseofdeferredtaxassets -20 72 125 -8 -204 -238

-Increaseofdeferredtaxliabilities (58) (29) (32) (38) (44) (52)

FCFF 2,216 6,539 7,656 9,704 9,490 11,337

WACC 9.11% 9.11% 9.11% 9.11% 9.11% 9.11%

PVofFCFF 2,216 6,131 5,708 5,627 5,401 5,250

EnterpriseValueandIntrinsicValue(inmillionsCNY)

SumofFCFFPV 36,137

Terminalgrowthrate 3.7%

Terminalvalue 215,904

PVofTerminalValue 137,269

EnterpriseValue 173,406

+Cashandcashequivalents 22,274

+Non-coralAssets 6,555

-Totalliabilities 52,657

-Minorityshareholder’sequity 652

ValueofEquity 148,926

Commonsharesoutstanding 7,383

IntrinsicValue 20.17

�25

SalesRevenuesForsalesrevenues,wedividethemintorevenuesfromWhite“ElectricalAppliances”,“BlackElectricalAppliances”,“AirConditioner,”“CommunicationProducts”,“DigitalandITProducts”and“LifeElectricalAppliancesandConsumerGoods”.

Then,wetake“WashingMachine”and“Refrigerator”asthecoralrepresentativesforWhiteElectricalAppliances,“Television”forBlackElectricalAppliances,“Microcomputer”forDigitalandITProducts.Byexaminingdrivers,aswellastrends,ofsalesvolumes,prices and the ratio of industry sales to Suning corresponding revenues for these 4 products (including air conditioner),we’veachievedthegoalofrevenueforecastingwithrelevantcalculation.Inaddition,forLifeElectricalAppliancesandConsumerGoods,wedirectlyexaminetherevenues.

Source:TeamEstimation

SalesVolumeSalesvolumestudyiscarriedoutmainlybyapplyingthemethodofKeyDriverPrediction,whichincludesprocessesofpickinguppossible drivers, justifying the correlation, identifying key drivers and subsequent forecasting. Firstly, we’ve chosen severalpotentialdriversforeachproducts,showninthelistbelow:


Then,werunlinealregressionforthesepossibledriversseparatelyagainstsalesvolumeofeachproduct.Formobile,wetaketheformofYoY(yearonyearpercentage)oneachsideoftheequation.Datasamplescoveryearsfrom1998to2014.Theresultsarelistedbelow:

BusinessLine CoralProducts

WhiteElectricalAppliances WashingMachine,Refrigerator

BlackElectricalAppliances Television

AirConditioner AirConditioner

CommunicationProducts MobilePhones

DigitalandITProducts Microcomputer

Products PotentialDrivers

Refrigerator

RealEstateClimate,GDPpercapita,PopulationWashingMachine

AirConditioner

Television

MobilePhone RealGDPpercapita,ConsumerCon9idence(CCI),MobilePenetrationRate,SocialFixedAssetsInvestmentinITIndustry

Microcomputer RealGDPpercapita,ConsumerCon9idence(CCI),MobilePenetrationRate,SocialFixedAssetsInvestmentinITIndustry

Y X R-square T-statistic p-value

Refrigerator RealEstateClimate 0.551 -4.147 0.001

Refrigerator RealGDPpercapita 0.983 29.455 0.000

Refrigerator Population 0.941 14.907 0.000

WashingMachine RealEstateClimate 0.555 -4.180 0.001

WashingMachine RealGDPpercapita 0.982 28.688 0.000

WashingMachine Population 0.944 15.366 0.000

AirConditioner RealEstateClimate 0.482 -3.608 0.003

AirConditioner RealGDPpercapita 0.944 15.968 0.000

AirConditioner Population 0.957 17.661 0.000

�26


From the table above, taking intoaccountR-squareand correspondingp-valuewe can identifykeydrivers for eachproducts asfollowed:

Source:TeamEvaluation

Further,weprojectHouseholdIncome,Population,ITFixedAssetsInvestmentandHouseholdInternetAccessseparatelyaccordingto past growing pattern and current economic situation. To be more speci9ic, we anticipate that real GDP growth rate for thefollowing6yearswillbebelow7%(Seetablebelow)accordingtoIMFWorldEconomicOutlook(WEO),October2015,populationgrowthratewillbe0.55%,whilethegrowthrateforITFixedAssetsInvestmentandhouseholdswithinternetaccesswillbe0.1%and6%.Theforecastedkeydriversinthenext6yearsarepresentedinthefollowinglist:

Source:IMF,TeamComputation

Inthenextrun,bytakingadvantageoftheadjustedregressionmodel(putallkeydriversinoneequationforeachproducts),aswellastheanticipatedchangesofkeydrivers,weareabletoprojectthesalesvolumeforeachproduct.

Television RealEstateClimate 0.567 -4.281 0.001

Television RealGDPpercapita 0.954 17.541 0.000

Television Population 0.952 16.581 0.000

MobilePhone(YoY) RealGDPpercapita(YoY) 0.650 2.359 0.100

MobilePhone(YoY) ConsumerCon9idence 0.067 0.465 0.674

MobilePhone(YoY) MobilePenetrationRate(YoY) 0.504 1.747 0.179

MobilePhone(YoY) ITFixedAssetsInvestment 0.749 2.996 0.058

Microcomputer RealGDPpercapita 0.973 23.289 0.000

Microcomputer ConsumerCon9idence 0.652 -5.125 0.000

Microcomputer HouseholdInternetAccess 0.969 16.828 0.000

Microcomputer ITFixedAssetsInvestment 0.928 10.758 0.000


Products KeyDrivers

Refrigerator

HouseholdIncome,PopulationWashingMachine

AirConditioner

Television

MobilePhone HouseholdIncome,ITFixedAssetsInvestment

Microcomputer HouseholdIncome,HouseholdInternetAccess,ITFixedAssetsInvestment

2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E 2020E

RealGDPgrowthrate(YoY) 7.70 7.70 7.30 6.80 6.30 6.10 6.30 6.30 6.30

RealGDPpercapita(YoY) 7.17 7.17 6.84 6.22 5.72 5.42 5.52 5.72 5.72

Population(YoY) 0.50 0.49 0.52 0.55 0.55 0.55 0.55 0.55 0.55

ITFixedAssetsInvestment(YoY) 0.12 0.21 0.11 0.15 0.15 0.15 0.15 0.15 0.15

HouseholdInternetAccess(YoY) 15.46 10.91 7.91 7.00 6.50 6.40 6.00 6.00 6.00

�27

PricesAftertheprojectionofsalesvolume,wethenfocusonpricesofeachproduct.Wemainlyputforwardourforecastbasedonpricepatternofpreviousyears.Sincethenearertheyearto2014,thecloserit’stothefuture6years,sowegivetheyearof2014aweighof75%,whiletheyearof2013aweighof25%.Theresultsarepresentedbelow:


RelationbetweenIndustrySalesandRevenueTillnow,withtheprojectionofsalesvolumeandprice,wecanforecastthevolumeorgrowthrateof industrysalesforproductsmentionedabove.Thenextstepisto9indthelinkbetweenindustrysalesandcorrespondingrevenuesofSuning.WetaketheratioofindustrysalestoSuningcorrespondingrevenuesasthelinkage.Duetothefactthatwhatwecareaboutistherelativerelationbetweenrevenuesandindustrysales,withtheassumptionthatsalesofcoralproductsareinportiontosalesoftheentiremarket,wecantaketheratiomentionedaboveasarationalbridge.

Wethenexamineyear-on-yearpercentagechangeoftheratioforeachproduct,andformourprojectionmainlybasedonpreviouschangingpattern.Sincethenearertheyearto2014,thecloserit’stothefuture6years,sowegivetheyearof2014aweighof75%,whiletheyearof2013aweighof25%.

Onthebasisofthegrowthrateprojectedabove,wefurthertakeintoaccounttheimpactsofO2Ostrategiclayoutandstrongsupportfromlogisticbases,whicharesupposedtoofferSuningbonusmarketshare.

With respect to O2O Layout,we anticipate thatWEA, BEA and AC shall bene9it greatly fromO2O, since they aremore durableelectrical appliances whose functions and features can only be examined by in-store experience. Combining with expandingcustomertraf9icthroughwide-areacoverageandprecisionmarketingguaranteedbyonlinelayout,weexpectmarketshareoftheseproductswouldbene9it greatly fromO2O strategy.Besides, concerningCP,we assume that the effects of in-store selection shalldeclineduetothenot-that-durabletraitandconcentratedpurchaseofcertainproducts(likeIPhone),buttheintroductionofonlinetraf9ic 9lowswouldstrengthenthecapacityofSuningtoseizelargermarket inthis9ield.Finally, forD&ITP,sinceproducts inthisbusinesslinearerelativelystandardized,theimportanceofpre-purchaseexperienceswouldpale,butbythesamelogicmentionedabove, the trend of online shopping for these products has already been secured,we expect online expansionwould boost themarketshareofSuninginthisbusinesslines.Ingeneral,allofthe9ivebusinesslineswouldbene9itgreatfromO2OLayout,andthebonusgoesinlineswithonlineexpansion,equalingproportionofonlinesales(tototalsalesrevenue)timesO2Opremium,andweassumeO2Opremiuminreferencetotheadvantageslistedabove.

ForbonusofferedbycooperationwithBigMacsinindustries,allofthebusinesslineswouldbene9itgreatformitwithexpandingtraf9ic9lows,andbothcollaborationwithAlibabaandWandawould,throughonlinechannelorof9linechannel,increasethecapacityofSuningtoseizelargermarket.WeassumebonusfromBigMacs.


RevenueBeforecalculatingsalesrevenueforeachbusinesslinesmentionedabove,we9irstchecksalesrevenuesofLifeElectricalAppliances

AnnualPriceGrowth 2013A 2014A FollowingYears

Refrigerator(YoY) 3.47 5.05 4.66

WashingMachine(YoY) 4.90 1.74 2.53

AirConditioner(YoY) -0.76 -2.10 -1.77

Television(YoY) 3.55 -9.01 -5.87

MobilePhone(YoY) 0.36 2.61 2.05

Microcomputer(YoY) -5.15 -2.38 -3.07

AnnualPriceGrowth 2013A 2014A HistoricPattern

WhiteElectricalAppliances(YoY) 0.60 4.64 3.63

BlackElectricalAppliances(YoY) -2.35 -4.89 -4.26

AirConditioner(YoY) 10.60 -7.08 -2.66

DigitalandITProducts(YoY) 3.79 0.08 1.01

CommunicationProducts(YoY) 0.13 2.98 2.27

�28

andConsumerGoods.ApplyingthesamemethodofKeyDriverPrediction,wechooseseveralpossibledriversforthisbusinesslineaspresentedbelow:


Thenweexaminethecorrelationbetweenrevenuesandpotentialdriversbyrunninglinealregressionmodelofthelatteragainsttheformerandlisttheresultsbelow:


SowetakerealGDPpercapitaandpopulationasthekeydriversforrevenuesofLifeElectricalAppliancesandConsumerGoods.

Source:TeamEvaluation

Tillnow,we’vepreparedeachblock to forecast sales revenues, furtheralgorithmic calculationsbringus sales revenues foreachbusinesslineasfollowing:


OtherRevenuesForotherrevenuesfrommainbusinessandrevenuesfromotherrevenues,weprojectthembasedonfollowingassumptions.


GrossMarginTo forecast Suning’s gross margin for the next 6 years, we focus on the projection of gross pro9it ratio (depreciation andamortization have been removed from operating costs). To achieve this goal, we break it down into sales margin, margin forinstallation andmaintenance services,margin forotherprimarybusiness, aswell asmargin forotherbusiness. For the latter4accounts,weassumethemtobeconstantasthelevelof2014,andforsalesmargin,weprojectitbasedonanalysisonkeyratios.

BusinessLine PotentialDrivers

LifeElectricalAppliancesandConsumerGoods HouseholdIncome,Population,ConsumerCon9idence


LifeEA&CG RealGDPpercapita 0.988 31.380 0.000

LifeEA&CG Population 0.942 13.994 0.000

LifeEA&CG ConsumerCon9idence 0.684 -5.098 0.000

BusinessLine KeyDrivers

LifeElectricalAppliancesandConsumerGoods HouseholdIncome,Population

Products(inmillionsCNY) 2015E 2016E 2017E 2018E 2019E 2020E CAGR

WhiteElectricalAppliances 24,458 29,899 36,524 44,810 55,287 68,469 23.56%

BlackElectricalAppliances 23,610 24,823 25,997 27,163 28,325 29,450 5.55%

AirConditioner 14,754 15,848 16,913 17,947 18,942 19,868 7.59%

DigitalandITProducts 18,421 21,783 25,343 29,136 33,170 37,497 13.44%

CommunicationProducts 20,361 22,301 23,879 25,863 28,576 31,678 10.00%

LifeElectricalAppliancesandConsumerGoods 24,714 28,256 32,364 36,972 42,116 47,796 18.47%

TotalSalesRevenues 126,318 142,911 161,020 181,890 206,415 234,758 14.15%

Account Assumption

Installationandmaintenanceservices Percentageofsalesrevenue

Revenuesfromothermainbusiness Increaseattherateof50%withreferencetotheyearof2014andcompany’sstrategytokeepexpandingbusinessin9inanceandSOP.

Revenuefromotherbusiness Increaseatin9lationrate

�29

Accordingtorecent5years’annualreports,weextractmainlytwofactorsthatwouldexercisegreatimpactsonsalesmarginrate:OnlineBusiness(self-operatingpart)ExpansionandthePolicyofO2OOnePrice(whichlowereddownsalesmarginremarkablyin2013). We then, on the one hand, take the ratio of online business revenue to total sales revenue to describe the status andachievementsofOnlineBusinessExpansion.WeassumethatSuning’sonlineexpansionwouldcontinuouslydragdownsalesmarginsincethemarginforonlinebusinessisrelativelylowcomparedwithof9linesales.Ontheotherhand,forin9luencesofthePolicyofOnePrice,weconstructavariablewhosevaluevariesbetween0and1.0meanstheweakestimpacts, like2012whenthepolicyhadn’tbeenactually exercisedout, and1 indicated the strongest impacts in2013and2014. Since theyearof2015, Suninghasreachedouttoloosenuptherestrictionofsamepriceforonlineandof9line,weexpectthisvariableshalldeclinebeforereachingasteadyrateof0.3,resultinginlastingleveledupsalesmargin.Toquantitativelyidentifyimpactsongrosspro9itratioofthesetwofactors,weapplythemethodoflinealregressiontoconstructaforecastingmodel that incorporates both of the two factors as independent variables, andwe apply it to predict forward salesmargin.

To highlight, historical data seems to reveal that Suning’s online expansionhas already reached a deceleration stripwith sharpdroppingandlowgrowthrate.Butweanticipate,inregardtoperformanceinearly2015,thatwiththeimprovementoflogisticsandcustomer experience, the implementation of multi-channel strategic layout, the cooperation with Alibaba, and for the mostimportantpart,theaccumulationofpracticalexperience,onlinebusinessshouldenjoyanaverageyear-on-yeargrowthrateof25%inthenext6years.


Accordingtopreciousprojectionsandelaboration,wecalculategrosspro9itrateforthenext6yearsasfollowed:


BusinessTaxandExtra,ManagementExpenses&SalesExpensesWeremovedepreciationandamortizationpartfromsalesexpensesandmanagementexpenses,andprojectionfortheseaccountsarebasedonfollowingassumptions.DuetothefactthattheprimarybusinessofSuningisretail,webreakdownsalesexpensesintospeci9icaccountsandprojectthemonebyone.

AnnualPriceGrowth 2012A 2013A 2014A FollowingYears

OnlineSalesRevenue(YoY) 157.90 43.86 3.24 25.00

Products(inmillionsCNY) 2015E 2016E 2017E 2018E 2019E 2020E

ProportionofOnlineSales 22.4% 24.7% 27.4% 30.3% 33.4% 36.7%

ImpactsofPolicyofOnePrice 0.5 0.4 0.3 0.3 0.3 0.3

SalesMargin 14.8% 14.6% 14.4% 14.1% 13.9% 13.7%

SalesProportion 97.5% 97.5% 97.5% 97.4% 97.3% 97.1%

InstallationandMaintenanceServicesMargin 21.6% 21.6% 21.6% 21.6% 21.6% 21.6%

InstallationandMaintenanceServicesProportion 0.9% 0.9% 0.9% 0.9% 0.9% 0.9%

OthersMargin 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%

Others 0.3% 0.4% 0.5% 0.7% 0.9% 1.2%

MarginofPrimaryBusiness 14.7% 14.5% 14.3% 14.2% 14.0% 13.8%

OtherBusinessMargin 1.1% 1.1% 1.1% 1.1% 1.1% 1.1%

OtherBusinessProportion 1.3% 1.2% 1.1% 1.0% 0.9% 0.8%

TotalSalesRevenues 16.0% 15.7% 15.4% 15.1% 14.8% 14.5%

AccountandIntermediateVariable Assumption

Businesstaxandextra Percentageofsalesrevenue

Managementexpenses Percentageofoperatingrevenue

Salesexpenses

Salaryandwelfare Percentageofsalesrevenue,buttheratioshallriseupduetothequickenpacedoftalentintroduction.

�30


Depreciation,Amortization&FinancialExpensesDepreciation and amortization are collected from operating costs, sales expenses and management expenses, we form ourprediction for these twobasedon followedassumptions and lateronprojection forFixedAssets and IntangibleAssets.And for9inancialexpenses,weforecastthembasedonfollowedassumptionsandsubsequentprojectionforCash&CashEquivalentsandDebtFinancing.


OtherAccountsofIncomeStatementIn early2015, Suninghas launched the second roundofREITs, generatingCNY1,370million gain fromdisposal of non-currentassets,sinceSuningonlyhas13self-ownedphysicalstores,weexpectgainsfromREITsisnotsustainable.WeexpectSuningwilllaunchthe lastroundofREITs in2016whichwillbring ingainsofCNY1,273million(calculatedwiththeassumptionthateachstorewillgeneratethesamegains).

Besides, according toOct31st,2015announcement,weanticipate thatSuning shall sellPPTVout in the coming fourthquarter,createCNY1,040millionnon-recurringgains.

Non-recurring gains and losses apart from these two, due to uncertainty and discontinuity, should be equal to 0 for 9inancialsoundness.Thesamelogicisappliedtoothercomprehensiveincome.Besides,weassumesubsidiariesofSuning,excludingPPTV,wouldgetridof9inancialpredicamentandstarttomakepro9itsinthenext6years,whenadaptivephaseoftheprevious2yearshaspassedandbusinesssynergiesbegintowork.Sowelayoutourassumptionthattheratioofminorityinterestincometonetincomewouldturnpositiveandbeequaltotheratioofminorityshareholders'equitytototalequity.

Insurance Inproportiontosalesrevenue

Travelexpense Increaseatin9lationrate

Rent IncreaseremarkablyduetotheaddedrentpaidforstoresrunninginREITsmodel.

Advertisement

Percentageofsalesrevenue,butthepercentagewouldexpandinlineswithconcentratedpromotionprogramsforthecoming2years,butshalldeclineinthefollowingyearswhencorporateimagehasbeenpositivelysetandreputationhasbeenbuilt.

Transpotation Increaseatin9lationrate

Others Increaseatthegrowthrateof2014



Depreciation Percentageofbeginning9ixedassets-net

Amortization Percentageofbeginningintangibleassets-net

Interestexpenses Drawnfromshortandlongtermborrowings,aswellasdebtsecuritiesissued

Interestrevenue Includinginterestfrombankreservesandother9inancialproducts

Other9inancialexpenses Includingbankchargesandnetlossofexchange

Interestrateforshort-termborrowings Averagerateofyear2014

Interestrateforlong-termborrowings Theaveragelevelofthepreviousyear

Debtcapitalizationrate Therateof2014

Interestrateforcashandcashequivalents Equaltodemanddepositsinterestrateattheendof2014

Otherinterestrevenue Equalto2014nominalamount

Bankcharges Percentageofcashandcashequivalents

Netlossofexchange Equalto0

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FixedAssetsandIntangibleAssetsWe apply the method of BASE to forecast 9ixed and intangible assets with the assumptions that new added 9ixed assets andintangible assets are in portion to operating income. But for Suning’s asset-light strategywhich can be aptly illustrated by thelaunchofREITs,weanticipatethattheratiomentionedaboveshalldeclinegradually.Inaddition,whencheckingaddedintangibleassets,theacquisitionofland-userightmakesupthemajority(95%)ofit,whilepurchaseanddevelopmentofsoftwaretakesabout5%of thewhole.By the same logic,weproject that the formerpart shall graduallydecline (moresharply inamount)while thelatteroneshallexpand,which,altogether,leadstothedeclineoftheratioofaddedintangibleassetstooperatingincome.Thispartshallhelp9inishprocessesofforecastingdepreciationandamortization.


OperatingWorkingCapitalThispartmainlydiscusses theprojectionofcurrentassets(excludingnon-operatingcurrentassets like“9inancialassetsheld fortrading”)andcurrent liabilities(excludingnon-operatingcurrentassets like“longtermliabilitiesduewithinayear”).Wemainlyrelyonlinkagebetweentheseaccountstorevenueandoperatingcoststoputforwardourforecast.


DebtFinancingThissectionstudiesaccountsrelatedtodebt9inancingandmostofthemshallgenerateinterestexpensesorinterestrevenue.Wemainlyformourprojectionbasedonfollowedassumptions:


Taxratio Equaltoaverageeffectivetaxratioofthepast3years

Minorityinterestincome Percentageofnetincome,turnspositiveinthefollowingyears

Othercomprehensiveincome Equalto0

Account(inmillionsCNY) 2015E 2016E 2017E 2018E 2019E 2020E

FixedAssets

Balanceatbeginningofyear 12,155 13,053 13,397 13,236 12,845 12,590

Addition 1,943 1,466 991 747 850 969

Subtraction(depreciation) 1,045 1,123 1,152 1,138 1,105 1,083

EndingBalance 13,053 13,397 13,236 12,845 12,590 12,476

IntangibleAssets


Addition 648 586 496 374 425 484

Subtraction(depreciation) 797 780 758 728 688 658

TotalSalesRevenues 6,866 6,673 6,411 6,056 5,793 5,620


Accountsandnotesreceivable Percentageoftotalrevenue

Advancedtosuppliers Inproportiontooperatingcosts

InventoriesPercentageofsalesrevenue,buttheratioshalldeclineduetotheimprovementoflogisticsandinventoriesmanagementspecialization

Otheroperatingcurrentassets Percentageoftotalrevenue

Accountsandnotespayable Increaseinlinewithoperatingcosts

Paymentreceivedinadvance Inproportiontototalrevenue

Otherpayables Percentageoftotalcosts

�32


OtherAssetsandLiabilitiesInearly2015,SuningincorporatedPPTVasadominatingshareholdingcompany,whichgeneratedCNY1,708milliongoodwillforSuning,butweexpect,accordingtoOct31stannouncement,SuningisgoingtosellPPTVout inthecoming4thquarter, thustheaddedgoodwillwouldbemovedoutalso.Weassumethereisnogoodwillimpairment.


Owners’EquityWeprojectthatinthefourthquarterof2015,Suningwill9inishthenewroundofSOEtoAlibaba,sotheaccountofcommonstockandcapital reserveswouldexpandcorrespondingly.We furtherassumethat there’snochange in “othercomprehensive income”and“converteddifferenceinforeigncurrencystatements”.

Tocontinue,weapplythemethodofBASEtoproject“retainedearnings”and“minorityshareholders'equity”.Processesmentionedabovewouldcoverdividendspaidbothtoshareholdersofpatentcompanyandminorityshareholders.WeanticipatethatSuningshallkeepadividendratioof42.6%toshareholdersofparentcompany,astheyearof2014.AndsincewepreviouslyassumedthatsubsidiariesofSuningwouldstarttomakepro9it,theabsenceofdividendspaidtominorityshareholderswouldbeendednextyear,andwealsoassumeadividendratioof42.6%forminorityshareholders.Thecalculationprocessesarelistedbelow:


Addedshorttermborrowings PercentageofchangeinOWC

Addedlongtermborrowings Percentageofadded9ixedassets

Debtsecuritiesissued Equalto2014nominalamount


Cashandcashequivalents WorksasabalanceitemandisobtainedafterbuildingoveralllinkagesamongBalanceSheet,IncomeStatementandCashFlowStatements.

Financialassetsheldfortrading Equalto2014nominalamount

Available-for-sale9inancialassets IncreasebytheamountofCNY14,000millionforinvestmentinAlibaba

Long-termreceivables Percentageoftotalrevenue

Long-termequityinvestments Keepsconstantatthelevelofthepreviousyearof2014

Investmentrealestates Equalto2014nominalamount

Goodwill Nogoodwillimpairment,addedgoodwillfromincorporatingPPTVwouldberemovedoffduetothesellingoutfollowed

Deferredtaxassets Percentageoftotalrevenue,buttheratioshalldeclineinlineswiththereductionofdeductiblelosses

Othernon-currentassets Equalto2014nominalamount

Othercurrentbutnon-operatingliabilities Remainconstantasthevalueof2014

Deferredtaxliabilities Percentageofoperatingcosts,


RetainedEarnings


Addition 1,014 661 407 770 1,257 1,790


EndingBalance 17,879 18,258 18,492 18,934 19,656 20,683

MinorityShareholders'Equity

Balanceatbeginningofyear 255 261 265 267 271 279

Addition 10 7 4 8 13 18

�33


AppendixW:ComparativeValuationTocarryout comparativevaluation,ormultiples analysis,we 9irst choose several comparable companiesof Suningaccording tosimilarities in primarybusiness. Since Suning is now implementing anO2O-oriented strategywhich covers retail business bothonlineandof9line,wecorrespondinglypickupcomparablecompaniesinbothofthetwoblocks,thatareonlineretailingandof9lineretailing.Foronlineretailers,wepickupJD,eBay,DangdangandAmazon,whileforof9lineretailers,wechooseGome,Wangfujing,IntimeandBubugao(thelatterthreeallhaveplanstodevelopandexpandO2Obusiness).Besides,accordingtocharactersofretailindustry,wechoosetocheckP/SandEV/Revenueforcomparativevaluation.TablebelowshowsthekeystatisticsofthesechosencompaniesonNovember12th,2015.

Source:ThomsonReuters,YahooFinance,iFinD


TotalSalesRevenues 261 265 267 271 279 289


Company 12MonthAveragedP/S(TTM) EV/Revenue

OnlineRetailers

JD 2.5x 1.4x

EBAY 3.4x 1.5x

AMZN 2.3x 2.8x

DANG 0.6x 0.2x

OfNlineRetailers

GOME 0.4x 2.2x

WFJ 0.6x 0.8x

BBG 1.2x 1.8x

INTIME 2.5x 18.76x

�34

0

1.25

2.5

3.75

5

JD.O EBAY.O AMZN.O DANG.N Suning

0

1.25

2.5

3.75

5

2014-11-13 2015-05-14 2015-11-11

GOME WFJ BBG INTIME Suning

P/SForcomparativevaluationapplyingP/Sastheindicator,wedivideitintotwoseparateparts,oneforonlinebusinessandoneforof9line.Wethenapplythesalesrevenue(TTM,Sep.30th)ofSuningtorunP/Svaluation.TheintrinsicvaluegeneratedbythisisCNY20.36,whichgoesinlineswiththeresultofDCFvaluation.


EV/RevenueForthispart,wealsotakeSuningasawholeforbothonlineandof9linebusiness.TogetridoftheundesirableeffectsgeneratedbyabnormalhighEV/Revenue,wetakeINTIMEawayfromourcalculationlistinthispart.WegeneratetheintrinsicvalueforSuningasCNY19.57whichfurthersolidifytheDCFandP/Svaluation.


AppendixX:RatingDeNinitionBenchmark:ShenzhenStockExchangeCompositeIndexTimehorizon:12months

Source:iFind

P/SValuation

OnlineMedianP/S 2.4x

Onlinesalespercentage 21.3%

Onlinesalesrevenuepershare 3.53

OfNlineMedianP/S 1.7x

Of9linesalespercentage 78.7%

Of9linesalesrevenuepershare 13.04

TargetPrice 20.36

EV/RevenueValuation

MedianEV/EBITDA 1.5x

Revenue 108,925

EV 168,590

+Cashandcashequivalents 22,274

+Non-coralassets 6,555

-Totalliabilities 52,657

-Minoritiesshareholders’equity 255

ValueofEquity 144,507

Commonsharesoutstanding 7,383

TargetPrice 19.57

Rating DeNinition

Buy Stockexpectedtooutperformbenchmarkbymorethan15%

Accumulate Stockexpectedtooutperformbenchmarkbymorethan5%butnotmorethan15%

Hold Expectedstockrelativeperformancerangesbetween-5%and5%

Sell Stockexpectedtounderperformbenchmarkbymorethan5%

�35

AppendixY:MonteCarloSimulation&SensitivityAnalysisMonteCarloSimulationTheMonteCarloSimulationexaminestheimpactsof6factorsonintrinsicvalueofSuning,includingRealGDPGrowth,OnlineSalesExpansion,RevenuesfromNewBusinessLines,SalesExpenses,CompanyWACCandTerminalGrowth.Foreachfactor,weassumeittoconformanormaldistributionandshallchangerandomly.Wethencreate10,000simulationsandobtaincorrespondingintrinsicvaluesoneachscenario.In-detaildescriptionsofthesefactorsarepresentedbelow:



ThesimulationsproduceaseriesofintrinsicvaluesofSuning,withthemeanofCNY20.36,medianofCNY20.24,whicharequiteclosetoourtargetpriceofCNY20.27.Besideswederivea90%con9idenceintervalforintrinsicvalueasCNY16.78toCNY24.27.

Factors AffectedAccount StatisticalParameters Interpretation

RealGDPGrowthRate SalesRevenueMean 0% Thisfactorchecksthesensitivityofsales

tomacroeconomicstatus.Std 0.25%

OnlineSalesGrowthRate GrossPro9itMarginMean 10% Thisfactorexamineshowsensitivegross

pro9itmarginandsalesrevenuearetoonlinesalesexpansion.Std 4.0%

RevenuesfromNewBusinessLinesGrowthRate TotalRevenue

Mean 50% Thisaccountteststheimpactsofrevenuesfromnewbusinesslinesontoatlrevenue.Std 5.0%

GainsfromREITsGrowthRate TotalRevenue

Mean 0% ThisaccountexaminesthesensitivityofEBITtosalesexpenses.Std 2.0%

WACC CostofCapitalMean 9.11% Thisfactorcheckstheimpactsofcostof

capitalonintrinsicvalueofthecompany.Std 0.25%

TerminalGrowthRate TerminalValueMean 3.66% Thisfactorincreasesensitivityofthe

terminalvaluetoterminalgrowthrate.Std 0.40%

MonteCarloSimulations

�36

Frequency

Intrinsic

Value

2.78% 22.42%10.53% 64.27%Hold Accumulate BuySell


SensitivityAnalysisWethencheckthefactorsmentionedaboveonebyonewhenholdingothersconstant, testingthesensitivityof intrinsicvaluetochangesineachfactor.ThenweconcludethatfactorslikeRealGDPGrowth,GainsfromREITs,WACCandTerminalGrowthwouldexercise great impacts on the intrinsic value of Suning, while in9luences fromOnline Sales Expansion and Revenues fromNewBusinessLinesarerelativelyweak.Theresultsarelistedbelow:

StatisticalDescription

Mean(CNY) 20.36

StandardDeviation 2.29

5%percentile(CNY) 16.78

Median(CNY) 20.24

95%percentile(CNY) 24.27

RealGDPGrowthRate IntrinsicValue %ChangeinValue Recommendation ReturnfromStock

-0.50% 18.10 -10.26% Accumulate 16.47%

-0.25% 19.09 -5.35% Accumulate 22.84%

0.00% 20.17 0.00% Buy 29.79%

0.25% 21.35 5.85% Buy 37.39%

0.50% 22.65 12.30% Buy 45.75%

OnlineSalesGrowthRate %ChangeinRate IntrinsicValue %ChangeinValue Recommendation ReturnfromStock

15.0% -40.00% 20.69 2.58% Buy 33.14%

20.0% -20.00% 20.46 1.44% Buy 31.66%

25.0% 0.00% 20.17 0.00% Buy 29.79%

30.0% 20.00% 19.80 -1.83% Buy 27.41%

35.0% 40.00% 19.32 -4.21% Accumulate 24.32%

RevenuesfromNewBusinessLinesGrowth

Rate%ChangeinRate IntrinsicValue %ChangeinValue Recommendation ReturnfromStock

40.0% -20.00% 19.71 -2.28% Buy 26.83%

45.0% -10.00% 19.92 -1.24% Buy 28.19%

50.0% 0.00% 20.17 0.00% Buy 29.79%

55.0% 10.00% 20.47 1.49% Buy 31.72%

60.0% 20.00% 20.82 3.22% Buy 33.98%

SalesExpensesDeviation IntrinsicValue %ChangeinValue Recommendation ReturnfromStock

-4.0% 21.77 7.93% Buy 40.09%

-2.0% 20.97 3.97% Buy 34.94%

0.0% 20.17 0.00% Buy 29.79%

2.0% 19.37 -3.97% Accumulate 24.65%

4.0% 18.57 -7.93% Accumulate 19.50%

WACC %ChangeinRate IntrinsicValue %ChangeinValue Recommendation ReturnfromStock

8.61% -5.49% 22.58 11.95% Buy 45.30%

8.86% -2.74% 21.31 5.65% Buy 37.13%

9.11% 0.00% 20.17 0.00% Buy 29.79%

9.36% 2.74% 19.09 -5.35% Accumulate 22.84%

9.51% 4.39% 18.51 -8.23% Accumulate 19.11%

�37


AppendixZ:FedFundsRateProjections

� Source:BoardofGovernorsoftheFederalReserveSystem,onSeptember17,2015

TerminalGrowthRate %ChangeinRate IntrinsicValue %ChangeinValue Recommendation ReturnfromStock

3.20% -12.57% 18.63 -7.64% Accumulate 19.88%

3.40% -7.10% 19.26 -4.51% Accumulate 23.94%

3.66% 0.00% 20.17 0.00% Buy 29.79%

3.80% 3.83% 20.66 2.43% Buy 32.95%

4.00% 9.29% 21.45 6.35% Buy 38.03%

�38

Each dot represents a prediction of the federalfunds rate by a member of the Federal OpenMarketCommittee (FOMC).TheFed’sdotplot isthebestpredictorofthefuturepathofshort-terminterestrates.Whiletheprevailingtargetrangeisstillbetween0-0.25,whichisset inDecemberof2008, the FOMC has taken a hawkish stance intheirpredictionsonthe federal fundsrate in themostrecentmeetingsoftheFOMC,referringtoa“possibleratehike”in2015.

AppendixAA:RiskMatrix

Risk Explanation Rating

EconomicRisks

ER1 SlowdownofChina’sEconomy

IndicatorshaveshownthattheeconomyofChinaisslowingdown,whichmayinevitablyaffectthedemandforconsumption.Othersignsshowmitigation.Eventhoughthegrowthrateofretailsalesisslidingyearbyyear,thenominalgrowthrateoftotalretailsalesofhouseholdappliancesandcommunicationdevicesinQ1-Q3arerelativelystable.Onlineretailsalesshowastronggrowthrateof36.2%inQ1-Q3,whereonlineretailsalesaccountfor10.0%oftotalretailsales.Alsothecontributionof9inalconsumptiontoGDPgrowthisincreasing.TheseindicatorsshowthateconomicimpactonSuning,asbothanonlineandanof9lineretailer,maybemitigated.

12

MarketRisks

MR1 ForeignEconomicFactorsRisk

AllitemsbelowarecalculatedinthecurrencyofCNY.Assetsinforeigncurrenciesaccountfor3.0%oftotalassets.Liabilitiesinforeigncurrenciesaccountfor5.6%oftotalliabilities.OperatingrevenuefromHongKongandfromJapanrespectivelyaccountfor7.1%and3.3%oftotaloperatingincome.TheimpactofforeignexchangeratesvolatilityonSuningisrelativelylimitedbecauseoflowproportionsofforeigncurrencyassets,liabilitiesandsales,butthepossibilityishighduetounstableforeignexchangemarketsthisyear.

3

MR2 FinancialMarketsRisk

ApprovedbytheBoardofDirectorsin2015,thecompanycaninvestnomorethanCNY3billionofitsownidlefundsinmoneymarketfunds,andnomorethanCNY8billion(comparedtoaCNY5billionlimitationin2014)in9inancialproducts.DuetounprecedentedvolatilityofChina’s9inancialmarkets,thehighuncertaintyofthevalueof9inancialassetsonbalancesheetposesrisks.Consideringthatmostoftheinvestmentsinvolvelow-riskproducts,theimpactwouldberelativelysmall.

4

OperationalRisks

OR1 CompetitionRisk

SuningrankedthirdinChinaonlineretailersmarketshares,nexttoTmallandJD.Onlineretailerstakepricewarasanimportantwaytoexpandmarketshareandtoboostsales.PricewarstakeplaceoncertaindayseveryyearsuchasNovember.11andAugust.15.Thecutting-pricestrategiessigni9icantlyincreasesalesatthecostoflowerpro9itmargin.

15

OR2 UnsustainabilityofIncomefromREITs

InMay2015,SuningannouncedthatitwouldlaunchanewroundofREITs,securitize14realestateassetsandgenerateapredictedafter-taxnetincomeof800millionyuan.Suningcanpossiblycontinuethisasset-lightstrategyinthenextyeartoavoidnegativenetincome,consideringitshugeoperatinglossesinpastfewyears.Butsinceonly13self-ownedstoresareavailablefordisposal,thenetincomemaydropsigni9icantlyafteralltheself-ownedstoresaresecuritized.

8

�39

OR1

MR2 OR2 ER1

MR1

ET1 OR3

OR4

Low Medium High

Low

Medium

High

Probability

Impact

AppendixAB:ReferenceDamodaran,Aswath,HistoricalGrowthRatesbySector,NY:NYU,2015-TerminalGrowthRate

Fernandez Pablo, Linares Pablo and Isabel FernandezAcín,MarketRisk PremiumUsed in 88 Countries in 2014:A Surveywith8,228Answers:SsrnElectronicJournal,2014-WACC

TheWorldEconomicOutlook(WEO):IMF,2015-Valuation

OR3Collaborationwith

AlibabaMayUnderperform

AsAlibababecomesthesecondlargestshareholderofSuning(19.99%stake,nexttothelargestshareholderof21%stake),itwillplayadecisiveroleonSuning’sBoard.Potentialfrictionsbetweenthetwomanagementteamsmayleadtoinef9iciency.ItwillbemitigatedifthecooperationturnsoutrewardingineventssuchasSingles’Dayandmanagementteamsshowsignsofsmoothcollaboration.

4

OR4LiquidityRiskasCorporateBonds

Mature

Suninghastwolong-term9ixedratebondsoutstanding,ofwhichCNY4.5billionmaturesin2017andCNY3.5billionmaturesin2019.SinceSuningkeepsitcreditratingofcorporatebondsatAAAwithnegativeprospect,itmaybenotdif9icultforSuningtoissuenewbondstoraisefunds.

3

OtherRisks

ET1 ExcessiveControlfromBoardChair

AsBoardChair,founderandthelargestshareholder,JindongZhangholds26.44%ofSuning’sshares(21%afterdealwithAlibaba)andactuallycontrols45.37%ofvotingrights,whichmayrepresenthisexcessivepoweroverSuning’soperations,includingdecisionsoninvestingand9inancing.

2

Risk Explanation Rating

�40

Disclosures: Ownership and material conflicts of interest:

The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation:

Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director:

The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making:

The author(s) does not act as a market maker in the subject company’s securities. Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA China, Shanghai, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

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