Morgan Stanley has issued a research note indicating that SUNART RETAIL (06808) continues to face revenue pressure from intense competition and weak consumer demand, with the recovery in average transaction value remaining uncertain.

Management anticipates that revenue for the 2027 fiscal year will be flat or show slight growth year-on-year, and expects to return to profitability driven by enhanced product competitiveness, store reforms, expansion of private labels, and online growth.

However, the 2027 fiscal year is still viewed as a period of investment and execution, and the firm desires to see more evidence of recovery in average transaction value and improvements in store productivity.

Morgan Stanley has rolled its valuation forward to the 2027 fiscal year, reducing the target price from HK$2.3 to HK$1.5, while maintaining an "In-line with the market" rating.

The report added that the stock's current price implies a forward price-to-earnings ratio of 29 times for the 2028 fiscal year, slightly above its historical average of 28 times.

However, its enterprise value to EBITDA ratio is only about 2 times, and its price-to-net asset value ratio is only about 0.5 times, reflecting a low valuation and limited downside potential.

Citing pressures on the offline and B2B businesses, along with reduced rental income, Morgan Stanley has lowered its revenue forecasts for SUNART RETAIL for the 2027 and 2028 fiscal years by 10% and 11%, respectively.

Concurrently, the firm has reduced its gross margin assumptions by 0.4 percentage points for each of those fiscal years.

Due to these downward revisions in revenue and gross margin, Morgan Stanley has cut its net profit forecasts for SUNART RETAIL for the 2027 and 2028 fiscal years by 95% and 63%, respectively.