The China lockdown. The lockdown in China has triggered a sell-down (-15% from YTD high) at MRDIY’s share prices as >70% of its product is sourced from China. Cities such as Ningbo and Guang Zhou, where MRDIY sources most of their product, have posed a potential risk to MRDIY’s supply chain due to the extended restricted lockdowns since March. That being said, we reckon price increase is on the cards for MRDIY to defend its margin as management aims to raise prices and better cost management following the end of the “Harga Kami Tetap Sama” price lock campaign on 31st March.

Expansion plan remains intact. MRDIY’s key strengths are its agility in offering a variety of quality products at affordable prices coupled with its flexibility in product mix to sustain sales and margins, supported by its strong GP margins (~40% in the last three FYs). Following the robust new stores opening in FY21 (+166 stores), the pace of new MRDIY store expansion is set to escalate further to 180 stores in FY22. To recap, the group owns 900 stores locally, with 86% of the store located in east Malaysia in FY21. With the group ramping up its private SKUs coupled with more new stores in the pipeline, this will allow the group to leverage its scale to negotiate for competitive pricing from suppliers, thus maintaining its unchallenged position in the domestic space. Apart from the new revenue stream from new stores opening, MRDIY’s number of transactions and average baskets had also gradually improved following the normalization of store operations.

The recovering retail sales. For FY22, we believe MRDIY is set to capitalize on the recovering retail sales amid the transition of endemicity. To recap, Malaysia’s Feb retail trade value data recorded an impressive 10.2% YoY, while the retail trade volume index 5.4% YoY. Taking cue from the recovering footfall in the mall amid a better spending outlook due to the one-time RM10k EPF withdrawal programme coupled with the Hari Raya festival, we believe Malaysia 2Q’s retail sales data is likely to recover further, which bodes well for consumer discretion companies such as MRDIY.

Bottoming up. MRDIY is trading near its solid support area of RM3.28-3.35. Further retracements would provide a great opportunity to accumulate to ride on the recovery of the retail segment. Upside targets are RM3.70-4.15. Cut loss at RM 3.15.

Source: Hong Leong Investment Bank Research - 5 May 2022