Best Mart 360 (2360 HK)

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Best Mart 360 (2360 HK - US$235 million) is a Hong Kong retailer of leisure food with 170 outlets in Hong Kong, Macau and Mainland China. I first heard about the stock from Twitter user “Arena Man Capital” here.

You can think of Best Mart as a mix between a supermarket and a convenience store. It offers most other food, beverage and household products you might need, including grains, confectionaries, snacks, bakery products, wine, dried fruits, nuts, shampoos, etc.

The name “Best Mart 360°” refers to the company’s drive to offer the best quality at the best prices. And on my numbers, Best Mart 360 is significantly cheaper than the competition.

For example, 500 grams of almonds cost only HK$49 compared to about HK$70-80 at ParknShop and Wellcome. A Toblerone costs only HK$10 compared to HK$16-20 at local supermarkets.

It achieves these low prices by sourcing its products from the grey market — from whatever country and brand is the cheapest at any given time. Best Mart also avoids selling perishables such as fruits and vegetables, focusing instead on products with long shelf lives and lower expiry risks. Its stores are also small, thus saving on rent.

Best Mart’s Google Review scores are average, but most comments are positive, emphasizing a limited selection of products at low prices. Customers go there for wine, chocolate and snacks.

There is a leisure food competitor called 759 Store, owned by CEC International (759 HK - US$19 million), listed on the Hong Kong Stock Exchange. Its margins are weak at just 3% vs Best Mart’s 10%. The explanation is probably that 759 Store focuses exclusively on Japanese products, offers perishables that depreciate fast and doesn’t buy as much from the grey market. It also doesn’t focus as much on habit-forming products such as wine, chocolate and coffee.

Best Mart’s success is evident in its financial metrics. It earns a return on equity of 49%. Its sales per store are the highest in the industry. The payback period on a new store is less than 1 year.

This success has meant that Best Mart has steadily expanded its store count at a 17% annual rate over the past five years. By increasing the penetration of private label products to 16%, it has compounded earnings per share at an even greater rate, at around 23% annually.

Best Mart’s valuation multiples are currently low at just 8.1x P/E and 10.6% dividend yield. These are incredible numbers, considering that it enjoys a clean balance sheet with a solid net cash position.

Is there a catch? Yes, maybe:

• In 2019, Best Mart was targeted by anti-government protesters due to co-founder Hugo Lam’s alleged links with Fujianese gangs. Both of Best Mart’s co-founders are from Fujian province in China. The rumor remains unsubstantiated, but Hugo is close to the senior CCP leadership, and it’s plausible that he might have helped quell the protests.
• In 2023, the two co-founders sold the majority of their holdings, equivalent to 49% of the total shares outstanding, to the Chinese state-owned enterprise “China Merchants Group,” which is involved in food distribution. An executive from that company has now become Best Mart’s new Chairman. It’s possible that Best Mart’s margin could suffer if it were to start trading extensively with China Merchants Group. Now that the SOE controls the board, it’s also possible that the company’s capital allocation will shift.

But I think the base case is that the business will continue growing as it has in the past. Co-founders Hugo Lam and Hui Chi Kwan are still running the business daily. The 2024 guidance is for the store count to grow by 9%. Together with same-store sales in the low-single digits, you’d end up with low double-digit top-line growth.

On the positive side, China Merchants could help grow the store network in mainland China through both directly operated- and franchisee stores. Having Beijing’s back could also help politically and in terms of support from lenders and landlords.

The bottom line is that Best Mart seems to have a winning formula. Now, it’s just a matter of expanding the store network to satisfy the demand for its low-priced and attractive selection of products.

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