Chee notes that ParknShop was last up for sale back in 2013 with bids ranging from US$3-4 billion and remains unsold since.
Citing estimates by Euromonitor, the anaysts notes that the two now hold a combined 92% market share of Hong Kong supermarket industry.
However, according to checks by Chee, Hong Kong's merger regime applies only to the telco industry.
"In addition, greater accessibility to the Greater Bay Area from Hong Kong has likely expanded the competitive landscape, including cross-border players, which could lead authorities to take a broader view and deem the merger less anti-competitive," says Chee in his April 17 note.
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If the two entities are to combine, significant economies of scale can be gained in this structurally low-margin business. DFI Retail will also have a much bigger platform to expand its digital media business of selling advertising space to brands from screens in the physical retail points.
DFI Retail had under previous management gained a reputation for overpaying in its bid to expand. It had in the last couple of years decisively divested some of these acquisitions in China, Singapore, Malaysia and the Phillipines.
With proceeds of these divestments, DFI Retail managed to turn its balance sheet to "cash-neutral", sparking a two-thirds gain in its share price in the past one year.
Chee, noting that DFI Retail has laid down a clear return on capital employed target of 15%, expects the company "to remain disciplined" in its M&A.
Chee estimates that Wellcome generates net operating after tax of between FY2026 of US$33-42 million.
Given comparable market share, he is assuming ParknShop's earnings to be in the same range.
After applying a 16.5% corporate tax rate, the implied valuation range to deliver 10–15% ROCE targeted by DFI Retail is around US$220–420 million - far short of the US$3-4 billion valuation touted more than a decade ago, and thus "the key obstacle" to any deal.
"Overall, while a merger could be value-accretive at the right price, the substantial valuation gap suggests that a transaction is unlikely to materialise,"says Chee, who is keeping his "buy" call and US$5 target price on DFI Retail.
DFI Retail Group shares closed at US$4.07 on April 17.
