Sun Art Retail : Annual Report 2019

Sun Art Retail Group Ltd.

(Incorporated in Hong Kong with limited liability)

Stock Code: 6808

2019

Annual Report

LEADER IN THE NEW RETAIL

ACROSS CHINA

Multi format and Omni-channel • Digital Transformation • Restructuring Hypermarkets • Deepen Integration

CONTENTS

1. Corporate Information
2. Financial Highlights

1. Chairman's Statement
2. Chief Executive Officer's Statement

1. Management Discussion and Analysis

20 Profiles of Directors and Senior Management

1. Report of Directors

1. Risk Factors

1. Report of Corporate Governance

1. Independent Auditor's Report

89 Audited Consolidated Financial Statements and Notes

180 Financial Summary

Sun Art Retail Group Limited 1

Annual Report 2019

CORPORATE INFORMATION

2 Sun Art Retail Group Limited

Annual Report 2019

FINANCIAL HIGHLIGHTS

Notes:

1. The Group has initially applied HKFRS 16 at 1 January 2019 using the full retrospective approach. Under this approach, comparative information has been restated. See note 1(c).
2. Gross Sales Proceeds consist of gross proceeds from product sales including consignment sales and rental income, excluding value-added tax. For further information, please refer to the analysis of revenue on Page 8.
3. The calculation of basic and diluted EPS for the year ended 31 December 2019 and 2018 is based on the weighted average number of 9,539,704,700 ordinary shares in issue during each year.
4. The balance of net cash position is calculated as the sum of cash and cash equivalents and short-term investments and time deposits minus bank loans.
5. Gearing Ratio = Net Cash Position/Total Equity

Sun Art Retail Group Limited 3

Annual Report 2019

FINANCIAL HIGHLIGHTS

4 Sun Art Retail Group Limited

Annual Report 2019

CHAIRMAN'S STATEMENT

Dear Shareholders,

Thank you for your continued trust and support in Sun Art Retail.

2019 was a fruitful year for Sun Art Retail. Under the leadership of CEO Peter Huang, we delivered meaningful progress across the board as the two brands RT-Mart and Auchan were merged under a single operational and managerial umbrella.

We have successfully integrated business operations as part of our overarching strategy to preserve two distinct brands and implement digital transformation. We are enjoying the benefits of a solid foundation established over the past few years, and seeing more and more of the incremental value delivered namely by Alibaba's technology. We are operating with a comprehensive single view of the overall business and leveraging synergies with partners across the Alibaba ecosystem. We are continuing to raise the bar in all areas, from our customer service standards to our operational efficiency to our profit margins.

Our New Retail initiatives have also made substantive progress. Close to 500 stores across China have realized full omnichannel operations that is providing better products and services to customers both in and away from the store. Online orders continue to steadily climb and are having material contribution to Sun Art's results. To our delight, Sun Art fresh food e-commerce achieved profitability in 2019 ahead of schedule and solidified its leadership position in the industry.

The world is experiencing rapid and acute changes, with consumer behavior and lifestyles evolving every day. Like many other companies, we were confronted with the black swan event that is the COVID-19 at the advent of 2020. We are actively assessing and managing the impact, and proactively implementing necessary measures to conquer this challenging time together with our communities.

History has shown that crisis forces change and new opportunities. We see that more and more consumers are choosing and normalizing lifestyles via digital means. Brands and merchants are accelerating their digital transformation. We will continue to seek out constant in a time of turbulence. Alibaba, Auchan Retail and Sun Art Retail believe in the power of the digital economy, the power of innovation and the power of value creation. These serve as the North Star of our era. Sun Art Retail will work hard to lead the transformation of the retail industry in China and beyond in order to bring more joy to our customers and partners. We believe in the future, we believe in ourselves, and we will continue to persevere!

Daniel Zhang

Chairman of the Board

Sun Art Retail Group Limited 5

Annual Report 2019

CHIEF EXECUTIVE OFFICER'S STATEMENT

Dear Shareholders,

In 2019, retail industry has witnessed many changes. There are changes in the external environment as well as customer preferences. Combining Sun Art's team's profound industry expertise and Alibaba's internet expertise, through constant innovation and effort, we have succeeded in transforming and upgrading our legacy retail model.

2019 is also an important year for Sun Art Retail in terms of the transformation of New Retail and integration of the two banners. With our collective efforts, the integration of the two banners has brought good achievements.

In 2019, Sun Art executed four business strategies:

• Store digital transformation
• Restructuring of hypermarkets
• Development of multi-format and omni-channel
• Integration of the two banners

486 stores under Sun Art Retail accomplished digital transformation, of which 414 stores are under the RT-Mart banner and 72 stores are under the Auchan banner. The result have proved the viability of the "one-hour-delivery" services and B2B business models.

Regarding the strategy of restructuring hypermarkets, we always advocate that specialized categories should be managed by specialists. Thereby, we transferred the management of our home appliances offering to Suning. Sun Art Retail will concentrate on improving our expertise in fresh and foods and become experts of these fields.

The restructuring includes reconstructing our functions, our categories and our mindset, enabling our physical stores to rejuvenate and reinventing the reasons for customers to visit physical stores. In 2019, ten hypermarket were restructured.

6 Sun Art Retail Group Limited

Annual Report 2019

CHIEF EXECUTIVE OFFICER'S STATEMENT

In the development of multi-format and omni-channel, Frehippo and He Xiao Ma are still in development. We expect to accelerate the expansion and number of stores when the model is proved feasible.

In 2020, Sun Art will continue to deepen the execution of our four strategies of 2019:

• Development of multi-format and omni-channel
• Comprehensive digital upgrading and transformation
• Acceleration in restructuring hypermarkets
• Deepened integration of our two banners

Pursuant to the strategy of "Development of multi-format and omni-channel", we will concentrate on the initiatives regarding Inventory Sharing, Group Purchase and Supermarket.

Pursuant to the strategy of "Comprehensive digital upgrading and transformation", we will concentrate on the development of B2C and B2B. We will continue to expand and optimize, to improve efficiency and reduce fulfillment cost. In addition, we expect to facilitate our gallery tenants from offline to online.

Pursuant to the strategy of "Restructuring" initiative, we will accelerate the restructuring and plan to upgrade an additional 50 stores in 2020.

Pursuant to the strategy of "Integration of the two banners", by improving revenue and gross profit margin and managing the controllable and headquarter costs, we expect to further improve the benefits of integration.

I would like to express my gratitude to all shareholders for your support and trust to the Sun Art management team. Sun Art will endeavor to become a global benchmark of New Retail transformation.

HUANG Ming-TuanExecutive Director and

Chief Executive Officer

20 February 2020

Sun Art Retail Group Limited 7

Annual Report 2019

MANAGEMENT DISCUSSION AND ANALYSIS

FINANCIAL REVIEW

Revenue and Gross Sales Proceeds

Revenue is derived from sales of goods and rental income from tenants. Revenue from sales of goods is primarily derived from the hypermarkets and the online sales channels where merchandise, mainly food, groceries, textile and general goods, are made available for sale. Revenue from sales of goods is net of value added tax and other applicable sales taxes after deducting any trade discounts. Rental income from tenants is derived from renting gallery space in hypermarket complexes to operators of businesses that we believe are complementary to the stores.

The following table sets forth a breakdown of the revenue from sales of goods and rental income for the years indicated:

Gross sales proceeds, cash collected from sales generated at our hypermarkets, was RMB101,868 million for the year ended 31 December 2019, representing an increase of RMB553 million, or 0.5%, from RMB101,315 million for the year ended 31 December 2018.

For the year ended 31 December 2019, revenue from sales of goods was RMB91,279 million, representing a decrease of RMB4,272 million, or 4.5%, from RMB95,551 million for the year ended 31 December 2018. In our electronic appliance department, the business model has changed from self-operation to consignment with Suning from August 2018. Since then, only consignment fees received have been recognized in revenue instead of gross sales proceeds.

For the year ended 31 December 2019, the Same Store Sales Growth(1) ("SSSG") calculated on sales of goods excluding electronic appliances was -1.01%. From the beginning of 2019, our stores under both RT-Mart and Auchan banners have started to integrate their operating systems and supply chains. During the convergence process, Auchan stores had experienced changes in product mix, supplier structure and operating process. Currently, the convergence has been substantially completed and we expect the store performance to be back on track in 2020. The SSSG of stores under RT-Mart banner, calculated on sales of goods excluding electronic appliances, was positive.

Notes:

1. Same store sales growth: For stores opened over 12 full months as of 31 December 2019, we calculated and compared the sales derived in those stores from their opening month to the end of year 2018 with the same period in year 2019.

8 Sun Art Retail Group Limited

Annual Report 2019

MANAGEMENT DISCUSSION AND ANALYSIS

Our store-based online to offline ("O2O") business model has proved to be robust after one-year's development and contributed to our sales growth in the food sector. While the non-food sector continued to face intensive competition from different channels.

For the year ended 31 December 2019, the Group continued to expand in various areas of China and opened seven new stores, bringing the total number of stores to 486 after accounting for 5 closed stores.

For the year ended 31 December 2019, revenue from rental income was RMB4,078 million, representing an increase of RMB270 million, or 7.1%, from RMB3,808 million for the year ended 31 December 2018. This increase was primarily attributable to an increase in rentable area from new stores and an increase in revenue from tenants in existing stores as a result of better management of tenant mix.

Gross Profit

For the year ended 31 December 2019, gross profit was RMB25,731 million, representing an increase of RMB612 million, or 2.4%, from RMB25,119 million for the year ended 31 December 2018. The gross profit margin, calculated on gross sales proceeds, for the year ended 31 December 2019 was 25.3%, representing an increase of 0.5 percentage point from 24.8% for the year ended 31 December 2018. The Group has been working continuously to optimise product mix in order to improve the gross profit margin. The consolidation of supply chain between the two banners had positive impact on gross profit margin.

Other Income

Other income consists of income from the release of aged unutilised balances on prepaid cards, service income, income from the disposal of packaging materials, interest income, government grants and other miscellaneous income.

For the year ended 31 December 2019, other income was RMB1,489 million, representing a decrease of RMB254 million, or 14.6%, from RMB1,743 million for the year ended 31 December 2018. The decrease was primarily attributable to: (1) a decrease of RMB141 million in income from the release of aged unutilised balances on prepaid cards; and (2) a decrease in the disposal of packaging materials of RMB143 million which mainly resulted from the decreased sales price of cardboard boxes in 2019.

Sun Art Retail Group Limited 9

Annual Report 2019

MANAGEMENT DISCUSSION AND ANALYSIS

Operating Costs

Operating costs represent the costs attributable to the operations of the stores and O2O business. Operating costs primarily consist of personnel expenses, operating lease charges, expenses for utilities, maintenance, advertising, cost of order fulfillment and delivery together with the depreciation of property, plant and equipment.

For the year ended 31 December 2019, operating costs were RMB19,523 million, representing an increase of RMB206 million, or 1.1%, from RMB19,317 million (restated) for the year ended 31 December 2018.

The increase was primarily attributable to the development of the business including the on-going expansion of the hypermarket network and the development of the O2O business which required investment in personnel and other related projects. Meanwhile, the Group followed government guidance on the increase in the minimum wage for staff. These developments led to the increase in personnel expenses, operating lease charges and depreciation of property, plant and equipment and other operating expenses.

Expressed as a percentage, the amount of operating costs for the year ended 31 December 2019 as of the gross sales proceeds in the year of 2019 was 19.2%, representing an increase of 0.1 percentage points, from 19.1%, the restated percentage, for the year ended 31 December 2018.

Administrative Expenses

Administrative expenses primarily consist of personnel expenses, travelling expenses, depreciation of property, plant and equipment and other expenses for the administrative departments. For the year ended 31 December 2019, administrative expenses were RMB2,807 million, representing a decrease of RMB40 million, or 1.4%, from RMB2,847 million restated for the year ended 31 December 2018.

Expressed as a percentage, the amount of administrative expenses for the year ended 31 December 2019 as of the gross sales proceeds for the year of 2019 was 2.8%, which was the same as the restated percentage for the year ended 31 December 2018.

Profit from Operations

For the year ended 31 December 2019, the profit from operations was RMB4,890 million, representing an increase of RMB192 million, or 4.1%, from RMB4,698 million restated for the year of 2018. By adopting HKFRS 16, additional depreciation expenses, amounting to RMB1,237 million for the year ended 31 December 2019 and RMB1,280 million for the year ended 31 December 2018, were recognized on the right-of-use assets capitalised over the lease contract duration period, replacing the operating lease charges originally recognized, amounting to RMB1,739 million for the year ended 31 December 2019 and RMB1,735 million for the year ended 31 December 2018.

Had the impact of HKFRS 16 adoption been excluded for both years, the amount of profit from operations for the year ended 31 December 2019 would have been RMB4,365 million, an increase of RMB169 million, or 4.0%, from RMB4,196 million for the year ended 31 December 2018. Accordingly, the related operating margin, calculated on gross sales proceeds, would have been 4.3%, an increase of 0.2 percentage point, from 4.1% of the year ended 31 December 2018, which was mainly attributable to the improved gross profit margin.

10 Sun Art Retail Group Limited

Annual Report 2019

MANAGEMENT DISCUSSION AND ANALYSIS

Finance Costs

Finance costs primarily consist of the interest expenses on borrowings and lease liabilities. For the year ended 31 December 2019, the finance costs were RMB623 million, representing a decrease of RMB47 million, or 7.0%, from RMB670 million restated for the year ended 31 December 2018. By adopting HKFRS 16, additional interest expenses of RMB615 million for the year ended 31 December 2019, and RMB660 million for the year ended 31 December 2018 were recognized on the lease liabilities calculated at the present value of future payments over the lease contracts duration.

Had the impact of HKFRS 16 adoption been excluded for both years, the amount of financial costs for the year ended 31 December 2019 would have been RMB8 million, which was at the similar level as that for the year ended 31 December 2018.

Income Tax

For the year ended 31 December 2019, income tax expense was RMB1,207 million, representing a decrease of RMB113 million, or 8.6%, from RMB1,320 million restated for the year ended 31 December 2018. By adopting HKFRS 16, all additional deferred tax credit of RMB23 million for the year ended 31 December 2019, and RMB40 million for the year ended 31 December 2018 were recognized on the additional temporary differences subject to tax.

Had the impact of HKFRS 16 adoption been excluded for both years, the amount of income tax for the year ended 31 December 2019 would have been RMB1,230 million, a decrease of RMB130 million, or 9.6% from RMB1,360 million for the year ended 31 December 2018. The related effective tax rate would have been 28.3%, a decrease of 4.3 percentage points from 32.6% for the year ended 31 December 2018. The decrease in effective tax rate was attributable to the utilisation of previously unrecognised tax losses generated by certain legal entities, which were established in prior years since those legal entities started to generate profits to recover those losses.

Profit for the Year

For the year ended 31 December 2019, profit for the year was RMB3,045 million, representing an increase of RMB345 million, or 12.8%, from RMB2,700 million restated for the year ended 31 December 2018.

In summary, the adoption of HKFRS 16 under full retrospective method resulted in a profit decrease of RMB67 million for the year ended 31 December 2019 and RMB118 million for the year ended 31 December 2018.

Had the impact of HKFRS 16 been excluded for both years, the amount of profit for the year ended 31 December 2019 would have been RMB3,112 million, representing an increase of RMB294 million, or 10.4%, from RMB2,818 million for the year ended 31 December 2018. The related net profit margin, calculated on gross sales proceeds, for the year ended 31 December 2019 would have been 3.1%, increasing by 0.3 percentage point, from 2.8% of the year ended 31 December 2018.

Sun Art Retail Group Limited 11

Annual Report 2019

MANAGEMENT DISCUSSION AND ANALYSIS

Profit Attributable to Equity Shareholders of the Company

For the year ended 31 December 2019, the profit attributable to equity shareholders of the Company was RMB2,834 million, representing an increase of RMB356 million, or 14.4%, from RMB2,478 million restated for the year ended 31 December 2018.

Profit Attributable to Non-Controlling Interests

For the year ended 31 December 2019, the profit attributable to non-controlling interests was RMB211 million, representing a decrease of RMB11 million, or 5.0%, from RMB222 million restated for the year ended 31 December 2018. The profit attributable to non-controlling interests consisted of: (i) interests in Auchan (China) Investment Co., Ltd. ("ACI") and Concord Investment (China) Co., Ltd. ("CIC") from the Auchan Scheme* and the RT-Mart Scheme*; (ii) the interest held by independent third parties in two of the subsidiaries, People's RT-Mart Limited Jinan and Fields Hong Kong Limited ("Fields HK"); (iii) the interest held by Oney Bank S.A. ("Oney Bank") in Oney Accord Business Consulting (Shanghai) Co., Ltd. ("Oney Accord"); and (iv) the interest held by Alibaba (China) Network Technology Co., Ltd. in Shanghai Runhe Internet Technology Co., Ltd.

Liquidity and Financial Resources

For the year ended 31 December 2019, cash flow generated from operating activities was RMB4,605 million, representing a decrease of RMB3,548 million among which RMB769 million was related to restricted deposits, or 43.5%, from RMB8,153 million restated for the year ended 31 December 2018.

By adopting HKFRS 16, regular settlements under store lease contracts were treated as the payment of lease liabilities under financing activities, which led to the decrease of cash outflows from operating activities by RMB1,701 million for the year ended 31 December 2019 and RMB1,736 million for the year ended 31 December 2018.

For the year ended 31 December 2019, the inventory turnover days and trade payable turnover days were 85 days and 97 days, respectively, compared to 71 days and 94 days for the year ended 31 December 2018.

As of 31 December 2019, net current liabilities decreased to RMB3,290 million from RMB6,546 million restated as of 31 December 2018. This decrease was primarily attributed to (i) an increase in the current assets of RMB4,121 million, related to the increased stock level as at 31 December 2019, and the increase in restricted deposits; and (ii) an increase in current liabilities of RMB865 million mainly from the increased balance of prepaid cards of RMB1,254 million. The increase in current assets was greater than the increase in current liabilities, which resulted in a decrease to net current liabilities.

• The Group has established an Employee Trust Benefit Scheme of CIC and its subsidiaries ("RT-MartScheme") and an Employee Trust Benefit Scheme of ACI and its subsidiaries ("Auchan Scheme"). For further details please refer to Note 4(b) of "Notes to the Consolidated Financial Statements" on page 132 of the annual report.

12 Sun Art Retail Group Limited

Annual Report 2019

MANAGEMENT DISCUSSION AND ANALYSIS

Investing activities

For the year ended 31 December 2019, cash flow used in investing activities was RMB1,808 million, representing a decrease of RMB301 million, or 14.3%, from RMB2,109 million restated for the year ended 31 December 2018.

The cash flow used in investing activities mainly reflected the capital expenditure of RMB1,871 million in respect of the development of new stores and the remodelling of existing stores.

Financing activities

For the year ended 31 December 2019, cash flow used in financing activities was RMB3,015 million, with an increase of RMB78 million, or 2.7%, from RMB2,937 million restated for the year ended 31 December 2018.

By adopting HKFRS 16, the regular settlement under store lease contracts was defined as "capital element of lease rents paid" and "interest element of lease rents paid" under cash used in financing activities. The amounts settled for the year ended 31 December 2019 and for the year ended 31 December 2018 were RMB1,701 million and RMB1,736 million, respectively.

Had the impact of HKFRS 16 adoption been excluded for both years, the cash used in financing activities for the year ended 31 December 2019 would have been RMB1,314 million, an increase of RMB113 million, or 9.4%, from RMB1,201 million for the year ended 31 December 2018. The level of cash flows under financing activities remained stable.

Dividends

The Board proposed a final dividend of HKD0.15 (equivalent to RMB0.14) per ordinary share (the "Final Dividend") for the year ended 31 December 2019, amounting to approximately HKD1,431 million (equivalent to RMB1,290 million).

The payment of the Final Dividend is subject to the approval by the shareholders of the Company at the forthcoming annual general meeting ("AGM"). For details of the Final Dividend, please refer to the section headed "Final Dividend" in this annual report on page 27.

Sun Art Retail Group Limited 13

Annual Report 2019

MANAGEMENT DISCUSSION AND ANALYSIS

BUSINESS REVIEW

Operating Environment

During 2019, China's gross domestic product ("GDP") growth slowed down from 6.6% in 2018 to 6.1%, amounting to approximately RMB99,086.5 billion, primarily driven by the deleveraging of the economy. The overall consumer price index ("CPI") was up by 2.9% compared to 2018, of which the food CPI was up by 9.2%, driven mainly by a sharp increase in pork CPI of 42.5% (especially from August 2019), bringing an increase in the meat CPI of 29.1% (of which beef CPI increased by 12.1% and lamb CPI increased by 11.9%). The Non-food CPI observed a minimal increase of 1.4%.

Total retail sales of consumer goods in China reached RMB41,164.9 billion, representing a growth of 8.0% year on year. Although the growth speed is slowing down, it still enjoys high single-digit growth. Sales of catering services achieved RMB4,672.1 billion, a growth of 9.4% compared to 2018. National online retail sales reached RMB10,632.4 billion, an increase of 16.5%. Online physical goods retail sales for the year 2019 amounted to RMB8,532.9 billion, representing an increase of 19.5%, slowed down but accounting for more than 20% of total retail sales.

Online Business Follow a Steady Growth

In 2019, the gross sales proceeds of Group's O2O business (online to offline business) was nearly 90% higher than that of last year. We expect that the proportion of online sales will continue to increase in the future.

B2C Business

At present, customers can choose one-hour-delivery-to-home service through our own mobile applications ("RT-MartFresh" and "Auchan Daojia"), and through the platform entrances of our partners such as Taoxianda, Eleme or Tmall supermarket. These can serve customers within 5-kilometer radius of the stores.

After a year of development, the current number of B2C users has exceeded 33 million, and the number of active users is more than 10 million. Daily Order per Store ("DOPS") and ticket size continue to grow steadily. Taking "double 11" day as an example, the total order volume was doubled compared to last year, exceeding our expectation, and our on-time delivery rate was above 99.5%.

The one-hour-delivery-to-home service has met the needs of younger customers' consumption habits and had been driven by changes in customer's lifestyle.

The success of our one-hour-delivery-to-home business derives from our national supply chain and store network, our "two-in-one" model i.e. integrated by store and warehouse, superior store management capacity, delivery fulfilment capacity and ongoing improvement of customers' experience.

14 Sun Art Retail Group Limited

Annual Report 2019

MANAGEMENT DISCUSSION AND ANALYSIS

B2B Business

Our B2B business is another way to leverage the strength of our supply chain and store network.

In 2019, B2B business revenue increased by approximately 50% compared to the corresponding period of 2018. We expect that the revenue of our B2B business will be further expanded in 2020.

At present, we had the excess of 530,000 existing users in our B2B business. Active users are close to 240,000 and the ticket size is more than RMB1,000. The main clients are wholesalers, retailers and corporates, along with catering businesses, canteens, entertainment and accommodation businesses.

In the future, our B2B team will further develop the operating model to satisfy the requirements of different types of customers. We will continue to engage with potential clients, improve the penetration within our service radius and deepen the collaboration with our existing clients.

Restructuring of Hypermarket Showed Remarkable Results

In 2019, we restructured ten stores, including five in Shanghai, one in Suzhou, one in Jinan, one in Shenyang, one in Wuhan and one in Guangzhou. Judging from the earliest pilot stores, significant improvement in SSSG has been observed. This was especially true for the SSSG of fresh products division, with an average of double-digit growth.

In 2020, we will accelerate the restructuring initiative and upgrade 50 existing stores.

Restructuring the hypermarket includes reconstructing our functions, our categories and our mindset. In addition to featuring a more vibrant shopping environment and more professional displays, the restructuring focuses on differentiated selection and combination of offerings. We endeavor to become experts in the field of fresh and foods and to create a hypermarket with the New Retail concept that delivers professional, fashionable goods that represent value for money.

We aim to encourage more young customers to experience our stores. The information regarding online customer profiles enables us to better understand the needs of young customers. This helps us to optimize our offerings, and reinvents reasons for customers to visit physical stores.

Sun Art Retail Group Limited 15

Annual Report 2019

MANAGEMENT DISCUSSION AND ANALYSIS

Tmall Supermarket Inventory Sharing is Ready

Based on LBS (location based services) technology, the "Tmall Supermarket Inventory Sharing" ("Inventory Sharing") initiative enables stores to serve customers within a radius of 5-20 kilometers.

Customers within 5 kilometers can be served by a one-hour delivery service, and customers within 5-20 kilometers can be served by a "half-day delivery" service. Facing the pressure from peer competition while offline customer footfall is being diluted, our "half-day delivery" service gives us an opportunity to expand our business radius and create incremental revenue for the Group.

By the end of September 2019, all Sun Art stores had launched a one-hour-delivery-to-home service from the "Inventory Sharing" initiative.

Since October 2019, 178 stores have rolled out our "half-day delivery" service. Due to the larger service radius of our "half-day delivery" service, a total of 280 selected stores are planned to provide this service. We expect this initiative will be rolled out to all selected stores before the end of May 2020.

At present, our half-day-delivery service can provide approximately 20,000 Stock Keeping Units ("SKUs"), mainly Fast Moving Consumer Goods ("FMCG") and daily necessity products. In the future, we expect to gradually expand our half-day-delivery service to fresh products.

Further deepen the integration to become Future Growth Momentum for both Revenue and Profit

This year we have integrated headquarters, supply chain, assortment and distribution centers of the two banners RT-Mart and Auchan. In terms of store operation and management under the Auchan banner, we have completed the I.T. system switch, store layout amendment and realized changes to organizational structure.

After a year of integration, headquarters costs under the Auchan banner have been reduced significantly, and the gross profit margin has been rising month by month. The benefits of integration has been greatly improved.

In 2020, we will further deepen the integration, improve revenue and gross profit, and reduce controllable expenses of stores. We believe that the performance of the Auchan stores will be further improved in the future.

16 Sun Art Retail Group Limited

Annual Report 2019

MANAGEMENT DISCUSSION AND ANALYSIS

Expansion Status

During 2019, the Group opened seven new hypermarket complexes, all of which were under the RT-Mart banner. Among the new stores, three were located in Eastern China, two were located in Central China and two were located in Southern China. For the year ended 31 December 2019, the Group closed five loss-making stores, of which one was located in Eastern China, one was located in Northern China, two were located in Central China and one was located in Southern China.

As of 31 December 2019, the Group had a total of 486 hypermarket complexes in China with a total gross floor area ("GFA") of approximately 13 million square meters. Approximately 70.0% of the GFA was operated as leased space, 29.7% of the GFA was in self-owned properties and 0.3% of the GFA was in Contracted Stores. Please refer to note 1 on page 18 for definitions of regional zones.

As of 31 December 2019, approximately 7.8% of the Group's stores were located in first-tier cities, 16.5% in second-tier cities, 46.3% in third-tier cities, 21.6% in fourth-tier cities and 7.8% in fifth-tier cities. Please refer to note 2 on page 18 for definitions of tiers.

As of 31 December 2019, through the execution of lease contracts or acquisition of land plots, the Group had identified and secured 43 sites to open hypermarket complexes, of which 37 were under construction. Given that more and more new stores are going to be opened in lower tier cities, in order to ensure the quality of the stores, the Group has upgraded its site selection standards.

As of 31 December 2019, the number of stores and their GFA in each major region of China are set out below:

Sun Art Retail Group Limited 17

Annual Report 2019

MANAGEMENT DISCUSSION AND ANALYSIS

Notes:

1. The Group adopts the following regional zoning according to the national regional economic planning guidelines:

1. City tiers were classified according to the following standards:

Human Resources

As of 31 December 2019, the Group had 146,683 employees.

As one of the core competitiveness of the Group, human resources will continue to strengthen the training and development of the employees and to provide them more promotion opportunities, hence to reserve sufficient talents for the future development of the Group.

18 Sun Art Retail Group Limited

Annual Report 2019

MANAGEMENT DISCUSSION AND ANALYSIS

Outlook

Having gone through initial years of development, Sun Art has transformed itself from a mere participant to the leader in the New Retail sector.

Thanks to the close collaboration with Alibaba, the bottleneck of physical stores has been removed, and a profitable O2O business model started to take shape. At the same time, by leveraging Alibaba's resources and technology, we are empowered to constantly explore new sales models, such as "Tmall Supermarket Inventory Sharing", "Group Purchase" and Supermarkets. By constantly diversifying the shopping scenarios and enhancing customer's shopping experience, we are driving our customers to adopt seamlessly into our retail ecosystem.

By leveraging off our digital tools, we have become more capable in serving online customers. This becomes the foundation of our long-term competitiveness.

At the same time, the physical stores have transformed from legacy hypermarkets to our "two-in-one model" of integrated store and warehouse. Our current system allows one unified supply chain to meet the needs of different sales channels, and all channels to share one unified inventory system. This not only enhances the efficiency of the supply chain, but also realizes the diversification of sales channels.

We hope 2020 to be the harvest year of our online business. We will center on multi-format and omni- channel development, comprehensive digital upgrading and transformation, acceleration in restructuring hypermarkets, and deepened integration of our two banners.

The prospects of 2020, however, have been affected by the disruption to life by the COVID-19 virus. The spread of COVID-19 virus has had a major impact on both market and the Group's operating environment in China. The Group's hypermarkets under both banners fall under the consumer necessity industry, and their operations have not been substantially impacted by the spread of the epidemic as of the date of this report. However, as a result of cooperating with the government's measures implemented against the spread of the epidemic, some of our tenants renting our gallery space in hypermarket complexes have been required to temporarily suspend their operations. While some of these tenants have been permitted to reopen their businesses recently, we are continuing to discuss with relevant government departments the timing of the reopening of the other such businesses.

Management is closely monitoring the development of the COVID-19 situation. We expect to discuss with relevant parties the reopening of those businesses temporarily suspended in our galleries to minimize the loss of rental income. It is too early to say at this stage how 2020 will turn out but we will do all we can to support our customers and partners in this difficult time. Every effort is being made to mitigate the negative impact to the bottom line. We may also make further announcement when appropriate.

Sun Art Retail Group Limited 19

Annual Report 2019

PROFILES OF DIRECTORS AND SENIOR MANAGEMENT

Executive Director

Mr. HUANG Ming-Tuan(黃明端), aged 64, is the Chief Executive Officer of the Company since 17 May 2019 and has been appointed as an Executive Director of the Company on 11 December 2019. Mr. Huang was already the chairman of the Group's subsidiaries operating under the "RT-Mart" banner in China. Mr. Huang received a Master of Business Administration from the College of Management, National Taiwan University in 1984. He is responsible for the overall strategic planning and management of the Group. Mr. Huang was a Director of the Company during the period from 28 April 2011 to 30 January 2018. He joined the Group in 2001 and has been the chief executive officer of RT-Mart Limited Shanghai where he is responsible for devising and implementing its overall strategies and

the supervision of its business operations. Mr. Huang has been involved in the business and operational strategies of its business operations, and he has also been involved in the business and operational strategies of the Company. Mr. Huang is also a director of certain subsidiaries of the Group.

Prior to joining the Group in 2001, Mr. Huang was the general manager of Ruentex Industries Limited from 1991 to 1997, where he was responsible for devising and implementing its overall strategies and the supervision of its business operations. From 1997 to 2000, Mr. Huang was the general manager of RT-Mart International Ltd. ("RT-MartInt'l").

Non-Executive Director

Mr. ZHANG Yong (張勇), aged 48, is the Chairman and a Non-Executive Director of the Company since 30 January 2018. Mr. Zhang has been appointed as the chief executive officer of Alibaba Group, a company incorporated in the Cayman Islands with its American depositary shares listed on the New York Stock Exchange (stock code: BABA) since May 2015, and he currently also serves on the board of directors of Alibaba Group. Prior to his current position, Mr. Zhang has held several other senior positions within Alibaba Group, including the chief financial officer of Taobao marketplace after joining in August 2007. He was appointed as the chief operating officer of Taobao marketplace and general manager of Tmall.com (then the Taobao Mall) in April 2008, and then as the

president of Tmall.com in June 2011 before his appointment as the chief operating officer of Alibaba Group in September 2013. Before joining Alibaba Group, Mr. Zhang served as a senior manager at PricewaterhouseCoopers' audit and business advisory division in Shanghai from 2002 to 2005, and later the chief financial officer of Shanda Interactive Entertainment Limited (an online game developer and operator then listed on NASDAQ) from August 2005 to August 2007. Mr. Zhang has served as a director of Weibo Corporation (a company listed on NASDAQ, stock code: WB) since May 2014. He was also a non-executive director of Haier Electronics Group Co., Ltd. (a company listed on The Stock Exchange of Hong Kong Limited (the "Stock Exchange"), stock code: 1169) from 25 March 2014 to 21 June 2017; a non-executive director of Alibaba Health Information Technology Limited (formerly known as CITIC 21CN COMPANY LIMITED, a company listed on the Stock Exchange, stock code: 241) from 30 April 2014 to 7 September 2015; and a non-executive director of Intime Retail (Group) Company Limited (a company then listed on the Stock Exchange and delisted on 19 May 2017) from 7 July 2014 to 19 May 2017.

Mr. Zhang received a bachelor's degree in finance from Shanghai University of Finance and Economics. Mr. Zhang is also a member of the Chinese Institute of Certified Public Accountants.

20 Sun Art Retail Group Limited

Annual Report 2019

PROFILES OF DIRECTORS AND SENIOR MANAGEMENT

Non-Executive Director

Mr. Benoit, Claude, Francois, Marie, Joseph LECLERCQ, aged 49, is a Non-ExecutiveDirector of the Company since 12 September 2012. Between 2011 and 2015, he was located in Shanghai to focus on the family investment activity in China. Since September 2015, Mr. Leclercq is the chairman of Creadev, the Mulliez Family investment company (www.creadev.com). The Mulliez Family comprises Mr. Gerard Mulliez, who is the founder of Auchan Holding S.A. and other members of this family in France, who hold interests in various companies such as Auchan Holding S.A. Through various companies under Auchan Holding S.A., the Mulliez Family conducts various business interests in food retail activities,

real estate development and banking.

Mr. Leclercq is the president of Jungle & MTL Holdings, a company incorporated in the U.S.A. since 1993. Mr. Leclercq is also a co-owner of (i) MTL, a weaving decoration production factory in the U.S.A.,

1. Breteuil, a company which is a fabric furnishing agent in the U.S.A., (iii) IPM US, a design company and converter in decoration in the U.S.A., and (iv) Bayart Tissage, a design company and converter in decoration in France. Moreover, Mr. Leclercq is a chief executive officer in charge of coaching at Donghia, a company engaged in high end upholstery in the U.S.A. since 2005.

Mr. Leclercq has been appointed as director of A-RT Retail Holdings Limited ("A-RT") and RT-Mart Int'l since September 2012 and June 2014 respectively. With effect from 31 October 2018, he has resigned as the director of RT-Mart Int'l. He has also been appointed as a director of Auchan Holding S.A. and Auchan Retail International S.A. since 5 March 2015, the ultimate controlling shareholders. With effect from 2 December 2015 and 7 March 2016, Mr. Leclercq resigned as director of Auchan Holding S.A. and Auchan Retail International S.A. respectively. Mr. Leclercq has been appointed as the director of Auchan Retail International S.A. on 25 March 2019. With effect from 17 December 2019, Mr. Leclercq resigned as a director of Auchan Retail International S.A.

Mr. Leclercq has been appointed as directors of Feiniu E-Commerce (Shanghai) Co., Ltd. on 8 August 2013, Feiniu E-Commerce Hong Kong Limited on 3 February 2015, and Fields Hong Kong Limited ("Fields HK") on 2 April 2015 respectively, subsidiaries of the Company. With effect from 5 November 2015, Mr. Leclercq resigned as a director of Fields HK.

Mr. Leclercq received a Bachelor of Arts major in international marketing and finance from Middlesex University in London in 1992 and a CESEM degree from Reims Management School in 1992.

Mr. Leclercq does not have any relationship with any directors or senior management or substantial shareholders or controlling shareholders of the Company except that he is one of the family members of the Mulliez Family.

Sun Art Retail Group Limited 21

Annual Report 2019

PROFILES OF DIRECTORS AND SENIOR MANAGEMENT

Non-Executive Director

Mr. Xavier, Marie, Alain DELOM de MEZERAC, aged 64, is a Non-ExecutiveDirector of the Company since 8 February 2001. Mr. Delom de Mezerac received a degree from ESSEC Business School (Diplome de L'ESSEC, Ecole Superieure des Sciences economiques et Commerciales) in 1978. From 1985 to 1993, Mr. Delom de Mezerac was with the Corning group (Corning), a global specialty glass and ceramics producer, in its United States, Mexico and France operations, where he worked in various financial and management positions including as financial manager for Corning's Europe operations. From 1994 to 1997, Mr. Delom de Mezerac

was with Euro Disney S.A.S. as its chief financial officer. From 1997 to 1999, Mr. Delom de Mezerac was with Alcatel Alsthom S.A. as its deputy chief financial officer. From 1999 to 2015, Mr. Delom de Mezerac was with Auchan Holding S.A. as its chief financial officer and a member of the executive committee. From 2014 until October 2019, he was the chairman of the Board of Oney Bank S.A., which is the consumer finance subsidiary of Auchan Holding S.A. Meanwhile, he has become permanent representative of Auchan Holding S.A., director of Oney Bank S.A. since 22 October 2019. Since December 2015, he has been the general secretary and a member of the "Directoire" of Auchan Holding S.A. Mr. Delom de Mezerac has also been appointed as permanent representative of Auchan Holding S.A., president of Soparalinea S.A.S. since July 2018. Furthermore, he has also been appointed as a director of Auchan (China) Hong Kong Ltd since May 2019 and a director of A-RT Retail Holdings Limited, which is one of the controlling shareholders of the Company, as well as certain of the subsidiaries of the Group, including RT-Mart Holdings Limited and Concord Champion International Ltd.

Non-Executive Director

Mr. Edgard, Michel, Marie BONTE, aged 46, is a Non-Executive Director of the Company since 17 May 2019. He has been appointed as chief executive officer of Auchan Retail International S.A. He is also the general manager of Auchan Holding S.A. since 13 February 2020, a company founded by Mr. Gerard Mulliez. Mr. Bonte was also appointed as director of A-RT Retail Holdings Ltd., the controlling shareholder of the Company since 11 December 2018.

His mandates also cover some other countries like Russia where he has held a mandate as chairman of the Board in Auchan Russie SARL since November 2019, as well as France where he has been appointed as chairman in the company Organisation Intra-Groupe des Achats SAS, a centralised organisation for international purchases, since October of that year.

Since leaving high school in France, Mr. Bonte has accumulated extensive experience working in businesses including trading and retail. From February 2011 until the year 2019, Mr. Bonte has been the chairman of Kiabi, a French ready-to-wear retail group created in 1978 and one of the leaders in this sector. Taking effect on 12 December 2009, he was also appointed as chairman of Volumiq Software SAS, a French company active in engineering sector.

22 Sun Art Retail Group Limited

Annual Report 2019

Profiles of Directors and Senior Management

Non-Executive Director

Mr. CHEN Jun (陳俊), aged 46, is a Non-Executive Director of the Company since 30 January 2018. Mr. Chen currently serves as a senior vice president of Alibaba Group, and is also a managing director of Alibaba strategic investment division and the investment head and chief investment officer of Alibaba new retail fund. He has more than 20 years of experience in strategy management, strategic market development, and business and financial advisory services. He has been in charge of strategic investments by Alibaba Group in various types of companies, including high-growth private companies and public companies listed in the PRC and overseas. The portfolio companies he manages are in a wide

spectrum of industries such as retail, logistics, travel, healthcare, sports, and software and solutions. Before joining Alibaba Group in 2011, Mr. Chen worked for SAP, a Fortune 500 high-tech software company from 1999 to 2011, taking roles including strategic adviser in the office of CEO and industry director. From 1995 to 1998, he worked as an auditor for Arthur Andersen Consulting Co. Ltd. Mr. Chen was a non-executive director of Alibaba Health Information Technology Limited (formerly known as CITIC 21CN COMPANY LIMITED, a company listed on the Stock Exchange, stock code: 241) from 30 April 2014 to 7 September 2015 and he is currently also a director of Best Inc. (a company listed on the New York Stock Exchange, stock code: BSTI), and a director of Singapore Post Limited (a company listed on the Singapore Stock Exchange, stock code: S08.SI). Mr. Chen received an EMBA degree from INSEAD.

Non-Executive Director

Mrs. Isabelle, Claudine, Françoise BLONDÉ ép. BOUVIER, aged 47,

is a Non-Executive Director of the Company since 17 May 2019. She has been appointed as the finance, performance and assets chief officer of Auchan Retail International S.A. (together with its subsidiaries, "Auchan Group") since November 2015 and she currently also serves as a director of various companies within the Auchan Group including Auchan France, Auchan Spain, Auchan Poland, Auchan Portugal, Auchan Romania, Auchan Russia and Auchan Senegal. She has been appointed as the permanent representative of Auchan Retail International S.A. and director

of Auchan Retail International Technology since March 2019. Since July 2019, she has held a mandate as a director of Feiniu E-Commerce Hong Kong Limited.

Prior to her current positions, Mrs. Bouvier has held several other senior positions within the Auchan Group, including the chief financial officer of Auchan Portugal from July 2013 to November 2015 and accounting, consolidation and financial systems manager from June 2008 to June 2013. Before joining the Auchan Group, Mrs. Bouvier served as an auditor of at KPMG's audit division in Paris of France from September 1995 to June 1999, and later a consolidation manager of Group Leroy Merlin from June 1999 to February 2004. Mrs. Bouvier has served as an accounting, consolidation and financial system manager of Group Adeo from February 2004 to May 2008. Mrs. Bouvier has obtained a bachelor's degree in corporate finance from EDHEC Business School in France in 1995.

sun art retail group limited 23 Annual Report 2019

PROFILES OF DIRECTORS AND SENIOR MANAGEMENT

Independent Non-Executive Director

Ms. Karen Yifen CHANG (張挹芬), aged 55, is an Independent Non-Executive Director of the Company and has been a director of the Company since 27 June 2011. Ms. Chang served as the chief executive officer of Jack Wolfskin Trading (Shanghai) Co., Ltd., a leading international outdoor brand, since August 2017 after being the non-executive director for 2 years. As a veteran from retail and consumer industry, she was chief executive officer for Natural Beauty Bio-Technology Limited (stock code: 157), the chief financial officer, the chief executive officer and executive director of Pou Sheng International

(Holdings) Limited (stock code: 3813) from October 2007 to December 2015. In addition, Ms. Chang has many years of management consultancy and investment banking experiences from working with KPMG in Washington DC and Los Angeles in the United States as well as Jardine Fleming, Merrill Lynch and Credit Suisse in Shanghai and Hong Kong from 1992 to 2006.

Ms. Chang received a Bachelor degree in Arts in English Literature from Fu-Jen Catholic University in Taiwan in 1986 and a Master of Business Administration degree from the George Washington University in Washington D.C. in the United States in 1988.

Independent Non-Executive Director

Mr. Desmond MURRAY, aged 64, is an Independent Non-Executive Director of the Company since 27 June 2011. Mr. Murray graduated with a Bachelor of Commerce from the University College Dublin in 1976 and is a qualified accountant and a member of the Hong Kong Institute of Certified Public Accountants. He was an audit partner in PricewaterhouseCoopers Hong Kong from 1987 to 2000. Since withdrawing from practice with PricewaterhouseCoopers, Mr. Murray has taken on a number of non-executive directorships. These include a major retailer in Ireland and Clear Media Limited ("CML", stock code: 100), a company listed on

the Main Board of the Stock Exchange. With effect from 1 July 2016, Mr. Murray has relinquished his position as chairman of the remuneration committee of CML. With effect from 9 August 2016, Mr. Murray has resigned as an independent non-executive director, as chairman of the audit committee, and as a member of each of the audit committee, the remuneration committee and the nomination committee of CML.

Mr. Murray was a non-executive director of iShares plc, iShares II plc, iShares III plc, iShares IV plc and iShares V plc, companies all listed on the Main Board of the London Stock Exchange until 31 March 2013. He was also a non-executive director of Black Rock Fixed Income Dublin Funds plc, Black Rock Institutional Pooled Funds plc and Institutional Cash Series plc, companies all listed on the Dublin Stock Exchange until 31 March 2013. Mr. Murray also acts as a business consultant to a number of smaller businesses. While working with PricewaterhouseCoopers, Mr. Murray advised boards and audit committees of companies listed in Hong Kong, both as an audit partner and as an adviser in relation to both internal audit and corporate governance. He was Honorary Consul for Ireland in Hong Kong from 1996 to 1999.

24 Sun Art Retail Group Limited

Annual Report 2019

PROFILES OF DIRECTORS AND SENIOR MANAGEMENT

Independent Non-Executive Director

Mr. HE Yi (何毅), aged 66, is an Independent Non-Executive Director of the Company since 27 June 2011. Mr. He studied management and strategy from HEC International Business School (école des Hautes Etudes Commerciales) from 1989 to 1991. From 2010 to 2017, Mr. He was a director of Essilor International (Compagnie Generale d'Optique), listed on the Euronext Paris stock exchange. From 1978 to 1989, he was a representative of the People's Republic of China Embassy in France, Paris where he was successively in charge of consular affairs, cultural affairs, protocol, relations with media and cooperation in administrative matters

between the PRC and France. From 1991 to 1996, he joined the Danone Group's Shanghai subsidiary as a general manager. Mr. He joined the Essilor Group as the chief executive officer of Shanghai Essilor Optical Co., Ltd. in 1996 and has been the chairman of Essilor (China) Holding Company, a director of Essilor International since 2010 and the chairman of Essilor Hong Kong Limited since 2018.

Independent Non-Executive Director

Mr. Dieter YIH (葉禮德) alias YIH Lai Tak, Dieter, aged 56, is an Independent Non-ExecutiveDirector of the Company since 11 December 2019. Mr. Yih received his Bachelor of Laws degree from King's College London and he is a Fellow of King's College London. Mr. Yih is admitted to practice law in Hong Kong, England & Wales, Singapore and Australia. He is a partner of the Hong Kong law firm Kwok Yih & Chan, where his practice focuses on corporate finance, capital markets, securities and regulatory compliance.

Mr. Yih was the president of the Law Society of Hong Kong between 2012 and 2013, and holds various public offices and community appointments in Hong Kong. He is currently a Justice of the Peace appointed by the Hong Kong Government, a member of the Listing Committee of the Hong Kong Stock Exchange, chairman of the Financial Dispute Resolution Centre, deputy chairman of council of the Education University of Hong Kong, a member of the Education Commission, a member of the Steering Committee of the Quality Education Fund, a member of the HKICPA Regulatory Oversight Board, a member of the Standing Committee on Judicial Salaries and Conditions of Service, a member of the Standing Committee on Legal Education and Training, and a member of the Banking Review Tribunal. He is also a member of the Guangdong Province of the Chinese People's Political Consultative Conference.

Senior Management

Mr. FAN Yigang (范益剛), aged 49, is the Chief Financial Officer of the Group. He graduated from Fudan University (Shanghai) in International Economics and Finance and from the University of Maryland USA (MBA Finance). He started his career in 1993 at HSBC Shanghai and Coopers & Lybrand. Then he moved to New York USA for Kraft Foods International in 1998 as FP&A and finance manager for 7 years. He went back to China in 2005 for Pepsico then worked at B&Q where he became SVP Strategy and Business Performance. From 2010 until 2018, he was CFO of SCA North Asia (Swedish hygiene company), Capstone Investment (start-up hedge

fund), Genimous (private equity firm investing in e-commerce) and Sanpower Retail Group, sequentially.

Sun Art Retail Group Limited 25

Annual Report 2019

PROFILES OF DIRECTORS AND SENIOR MANAGEMENT

Senior Management

Mr. CHIANG Yeong-Fang(蔣永芳), aged 63, is the Chief Executive Officer of the Group of subsidiaries operating under the "RT-Mart" banner in China, where his responsibilities include the management of hypermarket complexes as well as the formulation of strategies for our business operations under the "RT-Mart" banner. Prior to joining the Group in 2001, Mr. Chiang has been with Ruentex, previous controlling shareholders of the Group. From 2000 to 2001, Mr. Chiang was the vice-general manager of Ruentex Industries, where he was responsible for general operational matters of the group of companies under Ruentex Industries, including procurement, operational efficiency management of the group's factories,

human resource and administration. From 1979 to 2000, Mr. Chiang was a career army officer with the army of the Republic of China. Mr. Chiang is also a director of Shanghai RT-Mart, one of the subsidiaries of the Group.

Senior Management

Mr. HSU Sheng-Yu(徐盛育), aged 64, is the Chief Financial Officer of the Group of subsidiaries operating under the "RT-Mart" banner in China. He is responsible for the financial, controlling and legal matters of our operations under our "RT-Mart" banner. Prior to joining the Group in 1999, Mr. Hsu has been with Ruentex, previous controlling shareholders of the Group. From 1983 to 1999, Mr. Hsu held various positions in Ruentex's operations in Taiwan, including the position of finance manager, vice general manager, general manager and chairman in Ruentex Industries, Xingye Construction Co., Ltd., Ruentex Construction and Engineer Co., Ltd. and Runhong Engineering Co., Ltd. respectively.

Company Secretary

Ms. CHO Wing Han (曹詠嫻), FCIS, FCS, is a senior manager of Corporate Services of Tricor Services Limited and has over 20 years of experience in the corporate secretarial field. Ms. Cho has been providing professional corporate services to Hong Kong listed companies as well as multinational, private and offshore companies. Ms. Cho was a former company secretary of various Hong Kong listed companies. Ms. Cho is a Chartered Secretary and a Fellow of both The Hong Kong Institute of Chartered Secretaries and The Chartered Governance Institute in the United Kingdom.

26 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF DIRECTORS

The board (the "Board") of directors (the "Directors") of the Company are pleased to present this report and the audited consolidated financial statements of the Group for the year ended 31 December 2019.

Principal Activities

The principal activities of the Group are the operation of hypermarkets and online sales channels in the PRC. An analysis of the Group's revenue by category is set out in note 2 to the consolidated financial statements on page 130.

Financial Statements

The results of the Group for the year ended 31 December 2019 are set out in the Consolidated Statement of Profit or Loss and Other Comprehensive Income on page 89.

The financial position of the Group as at 31 December 2019 is set out in the Consolidated Statement of Financial Position of the Group on pages 90 to 91. The financial position of the Company as at 31 December 2019 is set out in note 25 to the consolidated financial statement on page 171.

The cash flows of the Group for the year ended 31 December 2019 are set out in the Consolidated Cash Flow Statement on pages 94 to 95.

Final Dividend

At the Board meeting held on 20 February 2020 (Thursday), the Directors proposed that a final dividend ("Final Dividend") of HKD0.15 (equivalent to RMB0.14) per ordinary share for the year ended 31 December 2019, amounting to approximately HKD1,431 million (equivalent to RMB1,290 million) be paid no later than 10 July 2020 (Friday) to the shareholders of the Company whose names appear on the Company's register of members at the close of business at 4:30 p.m. on 19 May 2020 (Tuesday). The proposed Final Dividend is subject to the approval by the shareholders of the Company at the forthcoming annual general meeting ("AGM") to be held on 12 May 2020 (Tuesday).

There is no arrangement under which a shareholder of the Company has waived or agreed to waive any dividends.

Sun Art Retail Group Limited 27

Annual Report 2019

REPORT OF DIRECTORS

Reserves

Details of the movements in the reserves of the Group and the Company during the year ended 31 December 2019 are set out in the Consolidated Statement of Changes in Equity on pages 92 to 93 and note 20(a) to the consolidated financial statements.

As at 31 December 2019, the Company's reserves available for distribution to the shareholders amounted to RMB1,398 million in accordance with the Company's new articles of association ("Articles of Association") adopted on 14 May 2015 and as amended on 17 May 2019.

Fixed Assets

Details of the movements in the fixed assets of the Group during the year ended 31 December 2019 are set out in note 10 to the consolidated financial statements.

The Group also manages retail galleries in our hypermarket buildings, in which we lease spaces to third parties. The portion of the properties containing the retail galleries of the Group which are owned or leased are classified as investment properties. The Group has applied the cost model for investment properties.

As at 31 December 2019, there are 113 and 197 retail galleries classified as investment properties respectively in owned and leased hypermarkets. All of the galleries were of similar nature and all located in the PRC. There were a large number of individual properties and none of the properties was material on an individual basis.

An independent professional valuer has been engaged to value the properties owned by the Group or leased by the Group which were recognized as right-of-use assets. As at 31 December 2019, the total fair value of such properties was RMB57,164 million, among which, the fair value of investment property was RMB22,775 million.

Details of the fair value of the investment properties as at 31 December 2019 and 2018 and the valuation technique are set out in notes 10(iv) and 10(v) to the consolidated financial statements respectively.

Donations

Donations made by the Group during the year ended 31 December 2019 was nil.

28 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF DIRECTORS

Share Capital

Details of the movements in share capital of the Company during the year ended 31 December 2019 are set out in note 20(c) to the consolidated financial statements.

Sufficiency of Public Float

Based on the information that is publicly available to the Company and within the knowledge of the Directors, as at the latest practicable date prior to the printing of this annual report, the Company has maintained the amount of public float as approved by The Stock Exchange of Hong Kong Limited (the"Stock Exchange") and as permitted under The Rules Governing the Listing of Securities on the Stock Exchange (the "Listing Rules").

Closure of Register of Members and Record Date

1. For determining the entitlement to attend and vote at the 2020 AGM
   The Company's register of members will be closed from 7 May 2020 (Thursday) to 12 May 2020 (Tuesday), both dates inclusive, during which period no transfer of shares will be registered. To ensure that shareholders are entitled to attend and vote at the 2020 AGM, shareholders must deliver their duly stamped instruments of transfer, accompanied by the relevant share certificates, to the Company's share registrar, Computershare Hong Kong Investor Services Limited, located at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong for registration no later than 4:30 p.m. on 6 May 2020 (Wednesday).
2. For determining the entitlement to the proposed Final Dividend
   The proposed Final Dividend is subject to the approval of the shareholders at the 2020 AGM. For determining the entitlement to the proposed Final Dividend, the record date is fixed on 19 May 2020 (Tuesday). Shareholders must deliver their duly stamped instruments of transfer, accompanied by the relevant share certificates, to the Company's share registrar, Computershare Hong Kong Investor Services Limited, located at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong for registration no later than 4:30 p.m. on 19 May 2020 (Tuesday).

Purchase, Sale or Redemption of Shares of the Company's Listed Securities

Neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company's listed securities during the year ended 31 December 2019.

Sun Art Retail Group Limited 29

Annual Report 2019

REPORT OF DIRECTORS

Directors

The Directors during the year ended 31 December 2019 and as of the date of this annual report were as follows:

Executive Director:

HUANG Ming-Tuan(Chief Executive Officer) (Appointed on 11 December 2019)

Non-Executive Directors:

ZHANG Yong (Chairman) (Appointed on 30 January 2018) (CHEN Jun as his alternate, appointed on 30 January 2018)

Benoit, Claude, Francois, Marie, Joseph LECLERCQ (Appointed on 12 September 2012)

(Xavier, Marie, Alain DELOM de MEZERAC was appointed as his alternate on 12 September 2012; Edgard, Michel, Marie BONTE and Isabelle, Claudine, Françoise BLONDÉ ép. BOUVIER were appointed as his alternates on 17 May 2019)

Xavier, Marie, Alain DELOM de MEZERAC (Appointed on 8 February 2001)

(Benoit, Claude, Francois, Marie, Joseph LECLERCQ was appointed as his alternate on 12 September 2012; Edgard, Michel, Marie BONTE and Isabelle, Claudine, Françoise BLONDÉ ép. BOUVIER were appointed as his alternates on 17 May 2019)

Edgard, Michel, Marie BONTE (Appointed on 17 May 2019)

(Xavier, Marie, Alain DELOM de MEZERAC, Benoit, Claude, Francois, Marie, Joseph LECLERCQ and Isabelle, Claudine, Françoise BLONDÉ ép. BOUVIER as his alternates, appointed on 17 May 2019)

CHEN Jun (Appointed on 30 January 2018)

(ZHANG Yong and XU Panhua as his alternates, appointed on 30 January 2018)

Isabelle, Claudine, Françoise BLONDÉ ép. BOUVIER (Appointed on 17 May 2019)

(Benoit, Claude, Francois, Marie, Joseph LECLERCQ, Xavier, Marie, Alain DELOM de MEZERAC and Edgard, Michel, Marie BONTE as her alternates, appointed on 17 May 2019)

Independent Non-Executive Directors:

Karen Yifen CHANG (Appointed on 27 June 2011)

(Desmond MURRAY as her alternate, appointed on 2 March 2018)

Desmond MURRAY (Appointed on 27 June 2011)

(Karen Yifen CHANG as his alternate, appointed on 2 March 2018)

HE Yi (Appointed on 27 June 2011)

(Isabelle, Claudine, Françoise BLONDÉ ép. BOUVIER was appointed as his alternate on 17 May 2019 and ceased as his alternate on 7 August 2019)

Dieter YIH (Appointed on 11 December 2019)

30 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF DIRECTORS

Biographies of the Directors as at the date of this annual report are set forth in the section headed "Profiles of Directors and Senior Management" of this annual report on pages 20 to 26.

In accordance with the Articles of Association, Mr. HUANG Ming-Tuan, Mr. Xavier, Marie, Alain DELOM de MEZERAC, Mr. Benoit, Claude, Francois, Marie, Joseph LECLERCQ, Mrs. Isabelle, Claudine, Françoise BLONDÉ ép. BOUVIER, Mr. HE Yi and Mr. Dieter YIH will retire as Executive Director, Non-Executive Directors and Independent Non-Executive Directors. Each of the retiring Directors will offer themselves for re-election at the 2020 AGM.

The Company has received annual confirmation of independence from each of the existing Independent Non-Executive Directors in accordance with Rule 3.13 of the Listing Rules. The Company considers that all of the Independent Non-Executive Directors are independent in accordance with the Listing Rules.

Directors of Subsidiaries

For the year ended 31 December 2019 or during the period from 1 January 2020 up to the date of this Report, the names of all directors who have served on the boards of the subsidiaries of the Company are available on the Company's website (http://www.sunartretail.com/en/about/cg/listofdirectorsofsubsidiaries.pdf).

Business Review

A fair review of the business of the Company and a discussion and analysis of the Group's performance during the year under review and the material factors underlying its results and financial position are provided in the Chairman's Statement, Chief Executive Officer's Statement, Financial Review, Business Review respectively from pages 5 to 19 of this annual report.

Description of the principal risks and uncertainties facing the Company can be found throughout this annual report, particularly in the Risk Factors section on pages 61 to 65.

Particulars of important events affecting the Company that have occurred since the end of the financial year 2019, if any, can also be found in the above mentioned sections and the notes to the consolidated financial statements.

The outlook of the Company's business is discussed throughout this annual report including in the Chairman's Statement and Chief Executive Officer's Statement from pages 5 to 7 of this annual report.

An account of the Company's relationships with its key stakeholders including its employees, customers and suppliers is included in the Report of Directors section, on pages 38 and 59 of this annual report, respectively.

Sun Art Retail Group Limited 31

Annual Report 2019

REPORT OF DIRECTORS

In addition, more details regarding the Group's performance by reference to environmental and social related key performance indicators and policies, as well as compliance with relevant laws and regulations which have a significant impact on the Company, are provided in the "Report of Directors" section, on page 60 in the annual report.

Permitted Indemnity

Pursuant to the Company's Articles of Association, subject to the statues, every Director shall be indemnified out of the assets of the Company against all costs, charges, expenses, losses and liabilities which he/she may sustain or incur in the execution of his/her office or otherwise in relation thereto. Subject to the applicable laws and the Company's Articles of Association, the Company has taken out insurance against the liability and costs associated with legal actions against the Directors arising out of corporate activities.

Directors Service Contracts

Each of the Independent Non-Executive Directors of the Company is appointed for a specific term of three years and shall be subject to retirement provisions stipulated in the Company's Articles of Association.

The Company will enter into a service agreement with each of the Executive and Non-Executive Directors with a term within three years from the relevant effective date.

There was no service contract entered by the Company and any Directors which is not determinable by the Company within one year without payment of compensation, other than statutory compensation.

Directors' Interests in Transactions, Arrangements or Contracts

Other than those transactions disclosed in note 24 to the consolidated financial statements and in the section headed "Connected Transactions" below, there was no transaction, arrangement or contract of significance to which the Company or any of its holding company or fellow subsidiaries or any member of the Group was a party and in which the Directors possessed direct or indirect material interests, subsisted during or at the end of the year.

Directors' Interest and Short Positions in Shares, Underlying Shares and Debentures

As at 31 December 2019, the interest or short position of the Directors or chief executives of the Company in the shares, underlying shares and debentures of the Company or its associated corporations within the meaning of Part XV of the Securities and Futures Ordinance (the "SFO") required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interest and/or short positions which they were taken or deemed to have under such provisions of the SFO) or which were required, pursuant to section 352 of the SFO, to be entered in the register, or which were required, pursuant to Model Code for Securities Transactions by Directors of Listed Companies as set out in the Appendix 10 to the Listing Rules (the "Model Code"), to be notified to the Company and the Stock Exchange, are as follows:

32 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF DIRECTORS

Notes:

1. The letter "L" denotes the person's long position in the shares.
2. Mr. Huang Ming-Tuan has been appointed as the Chief Executive Officer on 17 May 2019.
3. Ms. LEE Chih-Lan is the spouse of Mr. HUANG Ming-Tuan. Ms. LEE Chih-Lan holds 76,039,464 shares through Unique Grand Trading Limited and 1,551,238 shares under her name. Accordingly, Mr. HUANG Ming-Tuan is deemed to be interested in all of the shares held by Ms. LEE Chih-Lan.
4. Oney Bank S.A. (formerly "Banque Accord S.A.") is a company incorporated in France and a subsidiary of Auchan Holding S.A.. The major business of Oney Bank S.A. includes financial products and services as well as electronic banking provided to clients; and tailor-made solutions on payment and customer portfolio management provided to business partners. The issued share capital of Oney Bank S.A. as at 31 December 2019 is 1,465,331 shares.
5. This represents 938 free shares and 140 free shares in Oney Bank S.A. exercised on 25 August 2018 and 24 January 2019 respectively.
6. Mr. Edgard, Michel, Marie BONTE has been appointed as Non-executive Director on 17 May 2019.
7. Auchan Retail is a company incorporated in France which is more than 99.99% owned by Auchan Holding S.A.. A-RT Retail Holdings Limited ("A-RT") is 55.74% directly owned by Auchan Retail, therefore Auchan Retail is deemed to be interested in all the shares in which A-RT is interested in by virtue of Part XV of the SFO.
8. This represents 1 ordinary share in Auchan Retail allotted on 10 October 2018.

Sun Art Retail Group Limited 33

Annual Report 2019

REPORT OF DIRECTORS

Directors' Rights to Acquire Shares or Debt Securities

At no time during the year was the Company or any of its holding companies or its subsidiaries a party to any arrangements to enable the Directors to acquire benefits by means of the acquisition of shares in, or debentures of, the Company or any other body corporate.

Directors' Interest in Competing Business

During the year, none of the Directors of the Group had any interests in a business which competes, either directly, or indirectly, with the business of the Company or the Group.

Share Option Scheme

There is no share option scheme operated by the Company.

Employee Trust Benefit Schemes ("ETBS")

The Group has in place an ETBS for the employees of the Group, including the Directors and senior management, under each of the "Auchan" and "RT-Mart" banners of the Group. The Auchan Scheme and the RT-Mart Scheme are each implemented by way of a trust arrangement. The Auchan Scheme allows the employees of the Auchan banner to share the success of ACI, a key operating subsidiary under the Auchan banner while the RT-Mart Scheme allows the employees of the RT-Mart Banner to share the success of CIC, a key operating subsidiary under the RT-Mart banner.

Details of the ETBS are set out in the note 4(b) to the consolidated financial statements.

Calculated based on the actual paid-in capital, as at 31 December 2019, 0.225% of ACI and 7.17091% of CIC were held by the respective trusts under the Auchan Scheme and the RT-Mart Scheme.

34 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF DIRECTORS

Substantial Shareholders' Interests and Short Position in Shares and Underlying Shares of the Company

So far as is known to any Director or chief executive of the Company, as at 31 December 2019, the persons or corporations (other than Directors or chief executives of the Company) who had interests or short positions in the shares and underlying shares of the Company or its associated corporation(s) which were recorded in the register required to be kept under section 336 of the SFO were as follows:

Sun Art Retail Group Limited 35

Annual Report 2019

REPORT OF DIRECTORS

Notes:

1. The letter "L" denotes long position in the shares.
2. A-RTis directly owned by Auchan Retail as to 55.74% interest, therefore Auchan Retail is deemed to be interested in all the shares in which A-RT is interested in by virtue of Part XV of the SFO.
   The rest of shares of A-RT is owned by Taobao China as to 19.90%, Concord Greater China Limited ("CGC") as to 4.75%, Kofu International Limited ("Kofu") as to 4.41% and Monicole Exploitatie Maatschappij BV ("Monicole BV") as to 15.20%.
   Monicole BV is a company incorporated in the Netherlands, which is directly wholly-owned by Auchan Retail. Kofu is a company incorporated in the British Virgin Islands, which is indirectly wholly-owned by Mr. YIN Chung Yao.
   CGC is a company incorporated in the British Virgin Islands and a company under Ruentex (Ruentex Development Co., Ltd., Ruentex Industries Limited, CGC and Kofu collectively).
   Taobao China is a company incorporated in Hong Kong with limited liability, and is directly wholly-owned by Taobao Holding, which is in turn owned by Alibaba Group.
3. Auchan Retail is a company incorporated in France which is more than 99.99% owned by Auchan Holding S.A.. A-RT is 55.74% directly owned by Auchan Retail, therefore Auchan Retail is deemed to be interested in all the shares in which A-RT is interested in by virtue of Part XV of the SFO.
4. Auchan Retail is more than 99.99% owned by Auchan Holding S.A., therefore Auchan Holding S.A. is deemed to be interested in all the shares in which A-RT is interested in by virtue of Part XV of the SFO.
5. Auchan Holding S.A. is 65.73% owned by Au Marché S.A.S., therefore Au Marché S.A.S. is deemed to be interested in all the shares in which Auchan Holding S.A. is interested in by virtue of Part XV of the SFO.

36 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF DIRECTORS

1. Mulliez Family comprises the founder of Auchan Holding S.A., Gerard Mulliez, and other members of the Mulliez family in France. Au Marché S.A.S. is wholly-owned by the Mulliez Family through certain intermediate holding companies. No member of the Mulliez Family is solely able to exert a dominant influence over other members in their voting rights in Au Marché S.A.S.. The Mulliez Family is collectively represented by a member of the family, who plays an administrative role and is similarly unable to exert a dominant influence over other members of the Mulliez Family and does not control Au Marché S.A.S..
2. Taobao China is a company incorporated in Hong Kong with limited liability, and is directly wholly-owned by Taobao Holding, which is in turn owned by Alibaba Group, and as at 31 December 2019 had a long interest of 20.98% in the Company.
3. Taobao Holding is a company incorporated in Cayman Islands, which is wholly owned by Alibaba Group. Taobao China is wholly owned by Taobao Holding, therefore Taobao Holding is deemed to be interested in all the shares in which Taobao China is interested in by virtue of Part XV of the SFO.
4. New Retail is an investment vehicle wholly-owned by New Retail Strategic Opportunities Fund, L.P.. New Retail Strategic Opportunities Fund, L.P. is controlled by New Retail Strategic Opportunities Fund GP, L.P. as general partner, and in turn controlled by its general partner, New Retail Strategic Opportunities GP Limited and ultimately controlled by Alibaba Investment Limited (a wholly-owned subsidiary of Alibaba Group).
5. Alibaba Group is a company incorporated in the Cayman Islands and its American depositary shares are listed on the New York Stock Exchange. Each of Taobao China and New Retail is ultimately controlled by Alibaba Group, therefore Alibaba Group is deemed to be interested in all the shares in which Taobao China and New Retail are interested in by virtue of Part XV of the SFO.
6. Such 4,865,338,686 shares belong to the same batch of shares.
7. Such 2,001,753,643 shares belong to the same batch of shares.
8. Such 480,369,231 shares belong to the same batch of shares.

Save as disclosed above, as at 31 December 2019, the Directors of the Company are not aware of any other person or corporation having an interest or short position in shares and underlying shares of the Company or its associated corporation(s) which would require to be recorded in the register required to be kept by the Company pursuant to section 336 of Part XV of the SFO.

As at 31 December 2019, the shareholding interests of nine of the operating subsidiaries in the PRC are partially held by independent third parties. Those operating subsidiaries are Fields HK, RT-Mart Limited Shanghai, Jinan RT-Mart, Changshu Bairuenfa Hypermarket Co., Ltd., Shanghai Auchan Hypermarket Co., Ltd., Hangzhou Auchan Hypermarket Co., Ltd., Changzhou Immochan Real Estate Co., Ltd., Wuxi Immochan Real Estate Co, Ltd. and Shanghai Runhe Internet Technology Co., Ltd.. And the shareholding interest of Oney Accord is partially held by Oney Bank S.A., which is a connected person of the Company.

Sun Art Retail Group Limited 37

Annual Report 2019

REPORT OF DIRECTORS

Highest Paid Individuals and the Remuneration of the Directors and Senior Management

Details of the Directors' remuneration and the five individuals with highest emoluments are set out in notes 6 and 7 respectively of the consolidated financial statements in this annual report.

For the year ended 31 December 2019, the remuneration of the senior management whose profiles are included in the "Profiles of Directors and Senior Management" section of this annual report, except the Company Secretary who is an external service provider, fell within the following bands:

Remuneration Policy

As at 31 December 2019, the Group employed a total of 146,683 employees. The Group recruits and promotes individuals based on merit and their development potentials. Remuneration package offered to all employees including Directors is determined with reference to their performance, time commitment, responsibilities and the prevailing salary levels in the market.

Retirement/Pension Schemes

Details of the retirement benefit schemes of the Group are set out in note 4(b) to the consolidated financial statements.

38 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF DIRECTORS

CONNECTED TRANSACTIONS AND CONTINUING CONNECTED TRANSACTIONS

The Group has entered into the following connected transactions and continuing connected transactions during the year ended 31 December 2019:

Connected Transactions

1. Disposal of the entire equity interest in Hainan Hema to Shanghai Runhe
   On 31 May 2019, CIC entered into an equity transfer agreement ("Equity Transfer Agreement") with Shanghai Runhe Internet Technology Co., Ltd. ("Shanghai Runhe"), pursuant to which Shanghai Runhe agreed to purchase and the CIC agreed to sell the entire equity interest in Hainan Hema Network Technology Co. Ltd. ("Hainan Hema") at a consideration of US$5,000,000. Shanghai Runhe is indirectly owned as to 49% by Alibaba Group Holdings Limited ("Alibaba") and directly owned 51% by CIC, respectively.
   Taobao China is a substantial shareholder and a connected person of the Company. Taobao China is an indirect wholly-owned subsidiary of Alibaba. Alibaba is therefore also a connected person of the Company. Shanghai Runhe is indirectly owned as to 49% by Alibaba and directly owned as to 51% by CIC, respectively, and is therefore a connected subsidiary of the Company.
   Following the disposal of the equity interest as described above, Alibaba through its ownership in Shanghai Runhe, a connected subsidiary of the company, will control 49% of the equity interest Hainan Hema, and Hainan Hema will therefore become an associate of Taobao China and a connected person of the Company.
   For further details of the disposal of the equity interest in Hainan Hema, please refer to the announcement of the Company dated 31 May 2019.
2. Capital Increase of Shanghai Runhe
   On 17 September 2018, Alibaba (China) Network Technology Co., Ltd. ("Alibaba Technology") and CIC entered into a joint venture agreement ("Joint Venture Agreement") pursuant to which the parties have agreed to establish Shanghai Runhe to be owned as to 51% by CIC and the remaining 49% by Alibaba Technology. At the time when the Joint Venture Agreement was entered into, the transactions contemplated under the Joint Venture Agreement were fully exempt from shareholders' approval, annual review and all disclosure requirements pursuant to Rule 14A.76(1) of the Listing Rules.
   On 27 December 2019, Alibaba Technology and Hema (China) Co., Ltd. ("Hema (China)") entered into an equity interest transfer agreement whereby Alibaba Technology transferred its 49% equity interest that it held in Shanghai Runhe to Hema (China). Immediately after the equity interest transfer, Shanghai Runhe was owned as to 51% and 49% by CIC and Hema (China) respectively.

Sun Art Retail Group Limited 39

Annual Report 2019

REPORT OF DIRECTORS

On the same day, CIC entered into a capital increase agreement ("Capital Increase Agreement") with Hema (China), pursuant to which CIC and Hema (China) have agreed to increase the registered share capital of Shanghai Runhe from RMB100,000,000 to RMB300,000,000 in proportion to their respective shareholdings, among which RMB102,000,000 and RMB98,000,000 shall be contributed by CIC and Hema (China) respectively, in addition to the current amounts contributed of RMB51,000,000 and RMB49,000,000 by CIC and Alibaba Technology (which such portion is currently held by Hema (China) as a result of the aforementioned equity interest transfer from Alibaba Technology to Hema (China).

Taobao China is a substantial shareholder and a connected person of the Company. Taobao China is an indirect wholly-owned subsidiary of Alibaba. Alibaba is therefore also a connected person of the Company. Shanghai Runhe is indirectly owned as to 49% by Alibaba and directly owned as to 51% by CIC, respectively, and is therefore a connected subsidiary of the Company.

For further details of capital increase in Shanghai Runhe, please refer to the announcement of the Company dated 27 December 2019.

Non-exempt Continuing Connected Transactions

The following transactions of the Group constituted non-exempt continuing connected transactions of the Group for the year ended 31 December 2019.

1. Agency Agreement and Subcontracting Agreement with Patinvest

On 11 April 2019, the Company and Patinvest entered into an agency agreement ("Patinvest Agency Agreement"), pursuant to which Patinvest agreed to grant to the Company exclusive right to provide negotiation services in relation to certain international cooperation agreements to be entered into between the Company (on behalf of Patinvest) and selected international suppliers in Asia. The services provided by the Company included negotiating with selected international suppliers in Asia for the provision of joint and specific services, comprising, amongst others, exchange of market knowledge, facilitation of new product introductions and entry into new regions/ markets, coordination of product promotional activities and product performance data sharing.

On 11 April 2019, the Company and Patinvest entered into a subcontracting agreement (the "Patinvest Subcontracting Agreement", and together with the Patinvest Agency Agreement, the "Patinvest Agreements"), pursuant to which Patinvest agreed to exclusively subcontract to the Company Patinvest's performance obligations in Asia under the international cooperation agreements entered into by Patinvest with third party suppliers. The services subcontracted included, amongst others, the exchange of market knowledge, facilitation of new product introductions and entry into new regions/markets, coordination of product promotional activities and sharing of product performance data with suppliers.

40 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF DIRECTORS

Each of the Patinvest Agreements had a term commencing from 11 April 2019 and ending on 31 December 2019. The fees to which the Company was entitled under the Patinvest Agency Agreement was 15% of the amount payable by selected international suppliers in Asia for the provision of services by the Company. The consideration payable to the Company for the Patinvest Subcontracting Agreement was 85% of the amount payable by the international suppliers for the services performed in Asia under the international cooperation agreements entered into between Patinvest and such suppliers. By entering into the Patinvest Agreements, Patinvest could leverage on the expertise and resources of the Company to strengthen the negotiations and bargaining power with selected international suppliers in Asia, and the Company could leverage on Patinvest's relationship with such international suppliers to expand its suppliers' network, and both parties could be in a better position to bargain for more favourable conditions during negotiation.

As Patinvest is a subsidiary of Auchan Holding and Auchan Holding is one of the controlling shareholders of the Company, Patinvest is a connected person of the Company.

For further details of the Patinvest Agreements, please refer to the announcement of the Company dated 12 April 2019.

The annual cap of the Patinvest Agreements for the year ended 31 December 2019 is EUR22,000,000, while the actual transaction amount for the year ended 31 December 2019 is approximately EUR12.1 million (equivalent to RMB93 million).

In view of the increasing business transactions with Alibaba Group, and for the purpose of better governing the conduct of the continuing connected transactions between the Group and Alibaba Group in the long run, the Company has categorized such transactions and entered into the Master Agreements according to the different types/nature of goods and services. The categories of transactions and agreements entered into thereunder between the parties are as follows:

Sun Art Retail Group Limited 41

Annual Report 2019

REPORT OF DIRECTORS

2. Purchase of goods and services by the Group from Alibaba Group Master Purchase Agreement

On 11 April 2019, the Company (on behalf of the Group) entered into a master purchase agreement ("Master Purchase Agreement") with Taobao China Holding Limited ("Taobao China") (on behalf of and together with companies which the majority issued share capital is beneficially owned and controlled by Taobao China (collectively together with Taobao China, the "Taobao China Group")), pursuant to which the Group agreed to purchase certain products and services from the Taobao China Group. The relevant products and services include but not are limited to home furnishing, personal care products, travel and accessories, electronics, mothercare products and other household products under the label named "Taobao Xinxuan", imported fast moving consumer goods, household products and computer, communication and consumer electrical appliances, packaged food, poultry products, processed meat, edible oil, grains, vegetables, fresh and preserved fruits, groceries, agricultural products, fruit products, meat and aquatic products and any other merchandise customarily sold in hypermarkets operated by the Group. Pursuant to the Master Purchase Agreement, separate underlying agreements will be entered into between relevant parties of the Group and the Taobao China Group setting out the precise terms and conditions of the purchase of the relevant products and services. The term of the Master Purchase Agreement commenced on 1 January 2019 and shall expire on 31 December 2021.

The purchase price for the relevant products and/or services payable by the Group, will be determined at the time of the particular purchase based on arm's-length negotiations with reference to (i) the purchase price charged for the same category of services and/or products offered by independent suppliers at the time of a particular transaction; (ii) the gross profit margin expected by the Group in respect of products and services of the same categories as the relevant products and/or services; and (iii) the price of products and services of the same categories as the relevant products and/or services generally offered on the market by independent third parties. Payments of the transactions will be settled in arrears, or such other manners as agreed by the parties in accordance with the agreed timing and manners as specified in the separate agreements to be entered into between members of the Group and Taobao China Group from time to time.

On 14 August 2019, the Company and Taobao China entered into a master purchase agreement addendum ("Purchase Addendum") as a supplemental agreement to the Master Purchase Agreement, pursuant to which the parties agreed to extend the definition of Taobao China Group to subsidiaries and affiliates of Alibaba ("Extended Taobao China Group").

For further details of the Master Purchase Agreement (as amended by the Purchase Addendum), please refer to the announcements of the Company dated 12 April 2019 and 14 August 2019.

Taobao China is a substantial shareholder of the Company. As Taobao China is an indirect wholly owned subsidiary of Alibaba, Alibaba is therefore also a connected person of the Company. Taobao China and other members of the Extended Taobao China Group are associates of Alibaba and therefore are connected persons of the Company.

Annual cap under the category of the "Purchase of goods and services by the Group from Alibaba Group"

The annual cap of the category of purchase of goods and services by the Group from Alibaba Group for the year ended 31 December 2019 is RMB2,145,000,000, while the actual transaction amount of the year ended 31 December 2019 is approximately RMB269.6 million.

42 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF DIRECTORS

3. Sale of goods and services by the Group to Alibaba Group Master Supply Agreement

On 11 April 2019, the Company (on behalf of the Group) entered into a master supply agreement ("Master Supply Agreement") with Taobao China (on behalf of and together members of Taobao China Group) pursuant to which the Group agreed to supply certain products and services to the Taobao China Group. The relevant products and services include but are not limited to fresh food products, pre-packaged food products, grocery products, household products and any other merchandise customarily sold in the relevant retail outlets operated by ACI and CIC. Pursuant to the Master Supply Agreement, separate underlying agreements will be entered into between relevant parties of the Group and the Taobao China Group setting out the precise terms and conditions of the supply of the relevant products and services. The term of the Master Supply Agreement commenced on 1 January 2019 and shall expire on 31 December 2021.

The selling price for the relevant products and services will be determined at the time of the particular sale based on arm's length negotiations with reference to (i) the selling price charged for the same category of services and/or products offered to independent purchasers at the time of a particular transaction; (ii) the gross profit margin expected by the Group in respect of the relevant products and/or services of the same categories; and (iii) the price of products and services of the same categories as the relevant products and/or services generally offered on the market by independent third parties. Payments of the transactions will be settled in arrears, or such other manners as agreed by the parties in accordance with the agreed timing and manners as specified in the separate agreements to be entered into between members of the Group and Taobao China Group from time to time.

On 14 August 2019, the Company and Taobao China entered into the master supply agreement addendum ("Supply Addendum") as a supplemental agreement to the Master Supply Agreement, pursuant to which the parties agreed to extend the definition of Taobao China Group to subsidiaries and affiliates of Alibaba ("Extended Taobao China Group").

The Company has announced the categorisation of continuing connected transactions with Alibaba and its associates in its announcement on 12 April 2019. The annual caps of the Master Supply Agreement are aggregated with annual caps of other agreements under the category of "Sale of goods and services by the Group to Alibaba Group". Details are set out further below.

For further details of the Master Supply Agreement (as amended by the Supply Addendum), please refer to the announcements of the Company dated 12 April 2019, 14 August 2019, 20 August 2019 and the circular dated 10 September 2019.

Taobao China is a substantial shareholder of the Company. As Taobao China is an indirect wholly owned subsidiary of Alibaba. Alibaba is therefore also a connected person of the Company. Taobao China and other members of the Extended Taobao China Group are associates of Alibaba and therefore are connected persons of the Company.

Sun Art Retail Group Limited 43

Annual Report 2019

REPORT OF DIRECTORS

Northeast China Hema Supply Agreement

On 31 May 2019, Qingdao Ruentex Enterprises Co., Ltd., branch of Shenyang ("Qingdao Ruentex"), a subsidiary of the Company, entered into a supply agreement ("Northeast China Hema Supply Agreement") with Shanghai Runhe, pursuant to which Shanghai Runhe agreed to appoint Qingdao Ruentex as supplier to supply certain products to Shanghai Runhe and retail stores operated under the "Hema" or "Hema Fresh" banner. The relevant products include but not limited to food, groceries, confectionaries, beverages, wines, household products, baby care products, pet care products, electrical compliances and clothing. The term of the Northeast China Hema Supply Agreement commenced on 31 May 2019 and shall expire on 31 December 2021.

Qingdao Ruentex shall provide quotation of the selling prices for the relevant products and the quoted selling prices are final once they are agreed by Shanghai Runhe. The selling price for the relevant products of the particular sale is based on arm's length negotiations with reference to (i) the selling price charged for the same category of services and/or products offered to independent purchasers at the time of a particular transaction; (ii) the gross profit margin expected by the Group in respect of the relevant products of the same categories; and (iii) the price of products and services of the same categories as the relevant products generally offered on the market by independent third parties.

Taobao China is a substantial shareholder of the Company. As Taobao China is an indirect wholly owned subsidiary of Alibaba. Alibaba is therefore also a connected person of the Company. Shanghai Runhe is indirectly owned as to 49% by Alibaba and directly owned as to 51% by CIC, respectively, and is therefore a connected subsidiary of the Company.

The Company has announced the categorisation of continuing connected transactions with Alibaba and its associates in its announcement on 12 April 2019. The annual caps of the Northeast China Hema Supply Agreement are aggregated with annual caps of other agreements under the category of "Sale of goods and services by the Group to Alibaba Group". Details are set out further below.

For further details of the Northeast China Hema Supply Agreement, please refer to the announcements of the Company dated 31 May 2019, 20 August 2019 and the circular dated 10 September 2019.

44 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF DIRECTORS

Hainan Hema Supply Agreement

On 31 May 2019, Guangdong Ruenhua Commercial Co., Ltd. ("Guangdong Ruenhua"), a subsidiary of the Company, entered into a supply agreement ("Hainan Hema Supply Agreement") with Hainan Hema, pursuant to which Hainan Hema agreed to appoint Guangdong Ruenhua as supplier to supply the relevant products to Hainan Hema and retail stores operated under the "Hema" or "Hema Fresh" banner. The relevant products include but not limited to food, groceries, confectionaries, beverages, wines, household products, baby care products, pet care products, electrical compliances and clothing. The term of the Hainan Hema Supply Agreement commenced on 31 May 2019 and shall expire on 31 December 2021.

Guangdong Ruenhua shall provide quotation of the selling prices for the relevant product and the quoted selling prices are final once they are agreed by Hainan Hema. The selling price for the relevant products of the particular sale is based on arm's length negotiations with reference to (i) the selling price charged for the same category of services and/or products offered to independent purchasers at the time of a particular transaction; (ii) the gross profit margin expected by the Group in respect of the relevant products of the same categories; and (iii) the price of products and services of the same categories as the relevant products generally offered on the market by independent third parties.

Following the disposal of the equity interest in accordance with the Equity Transfer Agreement as described above, Alibaba through its ownership in Shanghai Runhe, a connected subsidiary of the company, will control 49% of the equity interest Hainan Hema, and Hainan Hema will therefore become an associate of Taobao China and a connected person of the Company.

The Company has announced the categorisation of continuing connected transactions with Alibaba and its associates in its announcement on 12 April 2019. The annual caps of the Hainan Hema Supply Agreement are aggregated with annual caps of other agreements under the category of "Sale of goods and services by the Group to Alibaba Group". Details are set out further below.

For further details of the Hainan Hema Supply Agreement, please refer to the announcements of the Company dated 31 May 2019, 20 August 2019 and the circular dated 10 September 2019.

Sun Art Retail Group Limited 45

Annual Report 2019

REPORT OF DIRECTORS

Promotional Goods Supply Agreement

On 19 August 2019, CIC, ACI and Alipay (Hangzhou) Information Technology Co., Ltd. ("Alipay") entered into a promotional goods supply agreement ("Promotional Goods Supply Agreement"), pursuant to which CIC and ACI agreed to supply promotional goods in the form of tissue paper packs to customers upon presentation of e-coupons issued by Alipay. The term of the Promotional Goods Supply Agreement ended on 31 October 2019 after the promotional goods have been fully distributed.

Alipay shall pay to CIC and ACI a fixed price for each e-coupon, which price is determined after arm-length negotiation. Customers of Alipay may exchange each e-coupon for a specified number of tissue paper packs from any of the physical retail stores of the RT Mart and Auchan banners.

At the time of entry Promotional Goods Supply Agreement, Alipay was a subsidiary of Ant Financial Small and Micro Financial Services Group Co., Ltd. ("Ant Financial"), which, together with its subsidiaries, were deemed as connected persons of the Company by the Stock Exchange in August 2019 under Rule 14A.19 of the Listing Rules.

The Company has announced the categorisation of continuing connected transactions with Alibaba and its associates in its announcement on 12 April 2019. The annual caps of the Promotional Goods Supply Agreement are aggregated with annual caps of other agreements under the category of "Sale of goods and services by the Group to Alibaba Group". Details are set out further below.

For further details of the Promotional Goods Supply Agreement, please refer to the announcements of the Company dated 19 August 2019, 20 August 2019 and the circular dated 10 September 2019.

Annual cap under the category of the "Sale of goods and services by the Group to Alibaba Group"

As the transactions under the above agreements in the category of sale of goods and services by the Group to Alibaba Group are similar in nature, they are required to be aggregated pursuant to rule 14A.81 of the Listing Rules. As such, the annual cap of sale of goods and services by the Group to Alibaba Group for the year ended 31 December 2019 is RMB3,762,000,000, while the actual transaction amount of the year ended 31 December 2019 is approximately RMB373.1 million.

46 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF DIRECTORS

4. Consignment of goods from Alibaba Group to the Group Master Zhejiang Tmall Consignment Agreement

1. On 11 April 2019, the Company and the Zhejiang Tmall Supply Chain Management Co., Ltd. ("Zhejiang Tmall") entered into a consignment agreement ("Master Zhejiang Tmall Consignment Agreement"), pursuant to which the Company agreed to, and shall procure members of the Group to, permit Zhejiang Tmall and its subsidiaries ("Zhejiang Tmall Group") to sell on a consignment basis through members of the Group at designated exhibition shelves at the hypermarkets operated by the Group to customers. The term of the Master Zhejiang Tmall Consignment Agreement commenced on 1 January 2019 and shall expire on 31 December 2021.

   A commission fee will be paid to the Group by Zhejiang Tmall Group for each sale of consigned products successfully completed at the hypermarkets operated by the Group, such fees are to be calculated based on the price (tax inclusive) of each relevant products successfully sold (with no subsequent return and refund) to customers at the hypermarkets operated by the Group, multiplied by a consignment rate to be agreed between the Group and Zhejiang Tmall Group after arm's length negotiations between the Group and Zhejiang Tmall Group with reference to (i) the consignment rate of products of the same category as such products offered by independent third party consignees after having obtained at least two quotes from independent third parties,

2. the continuing partnership with the Alibaba Group, and (iii) the commercial benefits of such partnership to the Group.

Taobao China is a substantial shareholder of the Company. Zhejiang Tmall is an indirect wholly-owned subsidiary of Taobao China, Zhejiang Tmall is therefore a connected person of the Company.

The Company has announced the categorisation of continuing connected transactions with Alibaba and its associates in its announcement on 12 April 2019. The annual caps of the Master Zhejiang Tmall Consignment Agreement are aggregated with annual caps of other agreements under the category of "Consignment of goods from Alibaba Group to the Group". Details are set out further below.

For further details of the Master Zhejiang Tmall Consignment Agreement, please refer to the announcement of the Company dated 12 April 2019.

Sun Art Retail Group Limited 47

Annual Report 2019

REPORT OF DIRECTORS

Master Theland Consignment Agreement

On 11 April 2019, the Company and Theland New Cloud Shanghai Digimart Ltd. ("Theland") entered into a consignment agreement ("Master Theland Consignment Agreement"), pursuant to which the Company agreed to, and shall procure members of the Group to, permit Theland and its subsidiaries ("Theland Group") to sell on a consignment basis through members of the Group at designated exhibition shelves at the hypermarkets operated by the Group to customers. The term of the Master Theland Consignment Agreement commenced on 1 January 2019 and shall expire on 31 December 2021.

A commission fee will be paid to the Group by Theland Group for each sale of consigned products successfully completed at the hypermarkets operated by the Group, such fees are to be calculated based on the price (tax inclusive) of each relevant products successfully sold (with no subsequent return and refund) to customers at the hypermarkets operated by the Group, multiplied by a consignment rate to be agreed between the Group and Theland Group after arm's length negotiations between the Group and Theland Group with reference to (i) the consignment rate of products of the same category as such products offered by independent third party consignees after having obtained at least two quotes from independent third parties, (ii) the continuing partnership with the Alibaba Group, and (iii) the commercial benefits of such partnership to the Group.

Taobao China is a substantial shareholder of the Company. Taobao China is an indirect wholly-owned subsidiary of Alibaba. Alibaba is therefore also a connected person of the Company. Alibaba controls 40% equity interest of Theland. Theland is therefore an associate of Taobao China and a connected person of the Company.

The Company has announced the categorisation of continuing connected transactions with Alibaba and its associates in its announcement on 12 April 2019. The annual caps of the Master Theland Consignment Agreement are aggregated with annual caps of other agreements under the category of "Consignment of goods from Alibaba Group to the Group". Details are set out further below.

For further details of the Master Theland Consignment Agreement, please refer to the announcement of the Company dated 12 April 2019.

48 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF DIRECTORS

Win-Chain Consignment Agreement

On 11 April 2019, the Company and Shanghai Win-Chain Supply Chain Management Co., Ltd. ("Win-Chain") entered into a consignment agreement ("Master Win-ChainConsignment Agreement"), pursuant to which the Company agreed to, and shall procure members of the Group to, permit Win-Chain and its subsidiaries ("Win-ChainGroup") to sell on a consignment basis through members of the Group at designated exhibition shelves at the hypermarkets operated by the Group to customers. The term of the Master Win-Chain Consignment Agreement commenced on 1 January 2019 and shall expire on 31 December 2021.

A commission fee will be paid to the Group by Win-Chain Group for each sale of consigned products successfully completed at the hypermarkets operated by the Group, such fees are to be calculated based on the price (tax inclusive) of each relevant products successfully sold (with no subsequent return and refund) to customers at the hypermarkets operated by the Group, multiplied by a consignment rate to be agreed between the Group and Win-Chain Group after arm's length negotiations between the Group and Win-Chain Group with reference to (i) the consignment rate of products of the same category as such products offered by independent third party consignees after having obtained at least two quotes from independent third parties, (ii) the continuing partnership with the Alibaba Group, and (iii) the commercial benefits of such partnership to the Group.

Taobao China is a substantial shareholder of the Company. Taobao China is an indirect wholly-owned subsidiary of Alibaba. Alibaba is therefore also a connected person of the Company. Alibaba controls more than 30% equity interest of Win-Chain.Win-Chain is therefore an associate of Taobao China and a connected person of the Company.

The Company has announced the categorisation of continuing connected transactions with Alibaba and its associates in its announcement on 12 April 2019. The annual caps of the Master Win-Chain Consignment Agreement are aggregated with annual caps of other agreements under the category of "Consignment of goods from Alibaba Group to the Group". Details are set out further below.

For further details of the Master Win-Chain Consignment Agreement, please refer to the announcement of the Company dated 12 April 2019.

Annual cap under the category of the "Consignment of goods from Alibaba Group to the Group"

As the transactions under the above agreements in the category of consignment of goods from Alibaba Group to the Group are similar in nature, they are required to be aggregated pursuant to rule 14A.81 of the Listing Rules. As such, the annual cap of consignment of goods from Alibaba Group to the Group for the year ended 31 December 2019 is RMB160,000,000, while the actual transaction amount of the year ended 31 December 2019 is approximately RMB54.4 million.

Sun Art Retail Group Limited 49

Annual Report 2019

REPORT OF DIRECTORS

5. Business Cooperation between the Group and Alibaba Group

Original Business Cooperation Agreements and Implementation Agreements

On 7 December 2017, Hangzhou Alibaba Zetai Information Technology Company Limited ("Alibaba Zetai") (being an indirect wholly-owned subsidiary of Taobao China), the Company, ACI and CIC entered into a business cooperation agreement (the "Business Cooperation Agreement"), pursuant to which Alibaba Zetai has agreed to provide services including, among others, (a) granting access by the stores operated by ACI and CIC to its business model and online platform;

(b) data sharing; (c) integration of systems and POS hardware; and (d) last-mile delivery services. The Business Cooperation Agreement has a term commencing from 7 December 2017 for a fixed term of three years.

On 19 March 2018, Taobao (China) Software Co., Ltd. ("Taobao Software") (being a direct wholly owned subsidiary of Taobao China) entered into two implementation agreements (the "Implementation Agreements") with ACI and CIC, respectively, for the implementation of the cooperation contemplated in the Business Cooperation Agreement. The Implementation Agreements have a term commencing from 19 March 2018 and ending on 18 March 2021 and are extendable by further agreement between the parties subject to the Company's Compliance with the Listing Rules.

Pursuant to the Implementation Agreements, ACI and CIC agreed to cooperate with Taobao Software to adopt the "Taobao Daojia" ("淘寶到家") model across the Auchan Stores and the RT- Mart Stores, including, amongst others: (a) the Auchan Stores and the RT-Mart Stores accessing the business model and the online Platform; (b) completing the integration of the corresponding software systems in the Auchan Stores and the RT-Mart Stores; (c) Taobao Software supplying to the Auchan Stores and the RT-Mart Stores necessary hardware including POS hardware and providing maintenance support; (d) delivery services provided by delivery agent(s) designated by Taobao Software to deliver products sold on the Platform; and (e) other areas of cooperation such as assistance in procurement or sourcing, participation in marketing and promotional activities and the usage of Alipay.

On 18 October 2019, each of CIC and ACI has separately entered into a quadripartite implementation agreement with Taobao China, Hangzhou Taoxianda Network Technology Co., Ltd. ("Hangzhou Tao Xianda") and Hangzhou Rajax Internet Technology Company Ltd. ("Hangzhou Rajax") (the "RT-MartTao Xianda Quadripartite Implementation Agreement" and the "Auchan Tao Xianda Quadripartite Implementation Agreement", together the "Tao Xianda Quadripartite Implementation Agreements") which supplements the RT-Mart Implementation Agreement and Auchan Implementation Agreement (as applicable) and govern the cooperation in respect of the delivery of goods under the "Taobao Daojia" ("淘寶到家") model across the hypermarkets and supermarkets operated by CIC and ACI.

50 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF DIRECTORS

Each of the Tao Xianda Quadripartite Implementation Agreements has a term commencing from 18 October 2019 and ending on 18 March 2021.

Pursuant to the Tao Xianda Quadripartite Implementation Agreements, the parties agree that, all the rights and obligations of Taobao Software under the RT-Mart Implementation Agreement and Auchan Implementation Agreement (save for delivery service arrangements) shall be transferred to Hangzhou Tao Xian Da.

The Company has announced the categorisation of continuing connected transactions with Alibaba and its associates in its announcement on 12 April 2019. The annual caps of the Quadripartite Implementation Agreements are aggregated with annual caps of other agreements under the category of "Business Cooperation between the Group and Alibaba Group". Details are set out further below.

The Tao Xianda Quadripartite Implementation Agreements expressly stipulate that, in relation to the delivery service arrangement under the "Taobao Daojia" ("淘寶到家") model, the logistics and delivery services shall be provided by Hangzhou Rajax. Hangzhou Tao Xian Da shall provide training and management of the logistics and delivery services to Hangzhou Rajax.

Taobao China is a substantial shareholder and a connected person of the Company. Accordingly, each of Taobao Software and Alibaba Zetai, as a subsidiary of Taobao China, is a connected person of the Company.

Taobao China is an indirect wholly-owned subsidiary of Alibaba. Alibaba is therefore also a connected person of the Company. Each of Hangzhou Rajax, and Hangzhou Tao Xian Da is a subsidiary of Alibaba and is therefore an associate of Taobao China and a connected person of the Company.

For further details of the Business Cooperation Agreement, the Implementation Agreements, Tao Xianda Quadripartite Implementation Agreements, please refer to the announcements of the Company dated 8 December 2017, 19 March 2018 and 18 October 2019.

Sun Art Retail Group Limited 51

Annual Report 2019

REPORT OF DIRECTORS

Hema Business Cooperation Agreement

On 15 January 2019, Shanghai Runhe entered into the Hainan Hema business cooperation agreement (the "Hainan Hema Business Cooperation Agreement") and Northeast China business cooperation agreement (the "Northeast Hema Business Cooperation Agreement", together with the Hainan Hema Business Cooperation Agreement are hereafter referred as the "Hema Business Cooperation Agreements") with Shanghai Hema Internet Technology Co., Ltd. ("Shanghai Hema") in respect of the relevant business cooperation between the parties within Hainan, Heilongjiang, Jilin and Liaoning provinces. Each of the Hainan Hema Business Cooperation Agreement and the Northeast Hema Business Cooperation Agreement has a term commencing from 28 December 2018 for a fixed term of three years and is extendable by further agreement between the parties subject to the Company's compliance with the Listing Rules.

The Hainan Hema Business Cooperation Agreement and the Northeast Hema Business Cooperation Agreement contain identical terms and each covers stores of different provinces. The Hainan Hema Business Cooperation Agreement covers retails stores operated by Shanghai Runhe to be connected to the "Hema Fresh" business model located in Hainan province in the PRC (the "Hainan Hema Stores"). The Northeast Hema Business Cooperation Agreement covers retails stores operated by Shanghai Runhe to be connected to the "Hema Fresh" business model located in Heilongjiang, Jilin and Liaoning provinces in the PRC (the "Northeast Hema Stores").

Pursuant to the Hema Business Cooperation Agreements, Shanghai Runhe agreed to cooperate with Shanghai Hema to adopt the "Hema Fresh" ("盒馬鮮生") model across the Hainan Hema Stores and Northeast Hema Stores, including, amongst others:

1. the Hainan Hema Stores and Northeast Hema Stores accessing the "Hema Fresh" ("盒馬鮮 生") business model and the Hema APP;
2. completing the integration of the corresponding software systems in the Hainan Hema Stores and Northeast Hema Stores;
3. Shanghai Hema supplying to the Hainan Hema Stores and Northeast Hema Stores necessary software maintenance support;
4. delivery services provided by delivery agent(s) designated by Shanghai Hema to deliver products sold on the Hema mobile application ("Hema APP"); and
5. other areas of cooperation such as assistance in procurement and sourcing, advice with respect to the decoration of the Hainan Hema Stores and Northeast Hema Stores, training for employees of the Hainan Hema Stores and Northeast Hema Stores, participation in marketing and promotional activities and the usage of Alipay.

52 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF DIRECTORS

Pursuant to the Hema Business Cooperation Agreements, Shanghai Runhe agreed to pay to Shanghai Hema a software technical service fee ("Hainan Technical Service Fee") for the use of the Hema APP (in the case of online transactions) and the use of software system resources provided by Shanghai Hema in the relevant Hainan Hema Stores and Northeast Hema Stores (in the case of offline transactions). A delivery fee is also payable by Shanghai Runhe for the delivery of each online order made to the Hainan Hema Stores and Northeast Hema Stores. The delivery service will be provided by a delivery agent designated by Shanghai Hema. In addition, Shanghai Runhe also agreed to pay a service fee to Shanghai Hema for each transaction successfully completed by the Hainan Hema Stores and the Northeast Hema Stores through Alipay (the "Hainan Alipay Transaction Fee").

Shanghai Runhe and Shanghai Hema have agreed to share the marketing expenses for certain joint marketing campaigns (if any) to be held during the term of the Hema Business Cooperation Agreement, which will be allocated between them on a fair and equitable basis.

As set out above, the Company has announced the categorisation of continuing connected transactions with Alibaba and its associates in its announcement on 12 April 2019. The annual caps of the Hema Business Cooperation Agreement are aggregated with annual caps of other agreements under the category of "Business Cooperation between the Group and Alibaba Group". Details are set out further below.

Taobao China is a substantial shareholder and a connected person of the Company. Taobao China is an indirect wholly-owned subsidiary of Alibaba. Alibaba is therefore also a connected person of the Company. Accordingly, each of Taobao Software and Shanghai Hema, as an indirect wholly-owned subsidiary of Alibaba and therefore an associate of Taobao China, is a connected person of the Company.

For further details of the Hema Business Cooperation Agreements, please refer to the announcement of the Company dated 15 January 2019.

Sun Art Retail Group Limited 53

Annual Report 2019

REPORT OF DIRECTORS

Ele Me Business Cooperation Agreement

On 11 April 2019, CIC entered into the Ele Me business cooperation agreement (the "Ele Me Business Cooperation Agreement") with Shanghai Rajax Information Technology Co., Ltd. ("Shanghai Rajax").

Pursuant to the Ele Me Business Cooperation Agreement, CIC agreed to cooperate with Shanghai Rajax to adopt the "Ele Me" ("餓了麼") model across the Stores under the Auchan and RT-Mart banners, including, among others:

1. the Stores under the Auchan and RT-Mart banners accessing the business model and the online Ele Me Platform, allowing the operation of online stores under the two banners at the Ele Me Platform and providing takeaway meals to customers;
2. Shanghai Rajax providing online service functions such as online ordering, delivery order management and online payment; and
3. other areas of cooperation such as participation in marketing and promotional activities.

The Ele Me Business Cooperation Agreement has a term of one year which commenced from 1 January 2019 and ended on 31 December 2019.

CIC, through relevant Stores, agreed to pay to Shanghai Rajax a Platform Service Fee for the use of the Platform and software system resources. Shanghai Rajax will from time to time initiate joint marketing campaigns and promotions on the Ele Me Platform and CIC will participate pursuant to the Ele Me Business Cooperation Agreement. The costs for such joint marketing campaigns and promotions shall be borne as agreed by the parties.

As set out above, the Company has announced the categorisation of continuing connected transactions with Alibaba and its associates in its announcement on 12 April 2019. The annual caps of the Ele Me Business Cooperation Agreement are aggregated with annual caps of other agreements under the category of "Business Cooperation between the Group and Alibaba Group". Details are set out further below.

Taobao China is a substantial shareholder and a connected person of the Company. Taobao China is an indirect wholly-owned subsidiary of Alibaba. Alibaba is therefore also a connected person of the Company. Shanghai Rajax is a consolidated entity of Alibaba and therefore an associate of Taobao China under Chapter 14A of the Listing Rules. The Ele Me Business Cooperation Agreements and the transactions contemplated thereunder constitute continuing connected transactions of the Company under Chapter 14A of the Listing Rules.

For further details of the Ele Me Business Cooperation Agreement, please refer to the announcement of the Company dated 12 April 2019.

54 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF DIRECTORS

Dalian Hema Delivery Business Cooperation Agreement

On 11 April 2019, Dalian Runhe Cloud Network Technology Co. Ltd. ("Dalian Runhe") entered into the Dalian Hema business cooperation agreement (the "Dalian Hema Delivery Business Cooperation Agreement") with Hangzhou Rajax Information Technology Co., Ltd. ("Hangzhou Rajax").

The Dalian Hema Delivery Business Cooperation Agreement has a term of one year commencing from 1 March 2019 and ending on 29 February 2020.

Pursuant to the Dalian Hema Delivery Business Cooperation Agreement, Hangzhou Rajax agreed to provide delivery services to the customers of Hema Fresh ("盒馬鮮生") stores operated by Dalian Runhe, who made orders using the Hema APP contemplated under the Hema Business Cooperation Agreements.

A service fee will be charged for each completed delivery order and additional service fee will be charged by Hangzhou Rajax if a second delivery or collection of delivered goods is required due to the default of Dalian Runhe or its customers.

As set out above, the Company has announced the categorisation of continuing connected transactions with Alibaba and its associates in its announcement on 12 April 2019. The annual caps of the Dalian Hema Delivery Business Cooperation Agreement are aggregated with annual caps of other agreements under the category of "Business Cooperation between the Group and Alibaba Group". Details are set out further below.

Taobao China is a substantial shareholder and a connected person of the Company. Taobao China is an indirect wholly-owned subsidiary of Alibaba. Alibaba is therefore also a connected person of the Company. Hangzhou Rajax is a consolidated entity of Alibaba and therefore an associate of Taobao China.

For further details of the Dalian Hema Delivery Business Cooperation Agreement, please refer to the announcement of the Company dated 12 April 2019.

Sun Art Retail Group Limited 55

Annual Report 2019

REPORT OF DIRECTORS

Shenyang Hema Delivery Business Cooperation Agreement

On 31 May 2019, Shenyang Runhe Internet Technology Co., Ltd. ("Shenyang Runhe") entered into the Shenyang Hema delivery business cooperation agreement (the "Shenyang Hema Delivery Business Cooperation Agreement") with Hangzhou Rajax.

The Shenyang Hema Delivery Cooperation Agreement has a term of nine month commencing from 31 May 2019 and ending on 29 February 2020.

Pursuant to the Shenyang Hema Delivery Business Cooperation Agreement, Hangzhou Rajax agreed to provide delivery services to the customers of Hema Fresh ("盒馬鮮生") stores operated by Shenyang Runhe, who made orders using the Hema mobile application contemplated under the Hema Business Cooperation Agreements.

A service fee will be charged for each completed delivery order and an additional service fee will be charged by Hangzhou Rajax if a second delivery or collection of delivered goods is required due to the default of Shenyang Runhe or its customers.

As set out above, the Company has announced the categorisation of continuing connected transactions with Alibaba and its associates in its announcement on 12 April 2019. The annual caps of the Shenyang Hema Delivery Cooperation Agreement are aggregated with annual caps of other agreements under the category of "Business Cooperation between the Group and Alibaba Group". Details are set out further below.

Taobao China is a substantial shareholder and a connected person of the Company. Taobao China is an indirect wholly-owned subsidiary of Alibaba. Alibaba is therefore also a connected person of the Company. Hangzhou Rajax is a consolidated entity of Alibaba and therefore an associate of Taobao China and a connected person of the Company.

For further details of the Shenyang Hema Delivery Business Cooperation Agreement, please refer to the announcement of the Company dated 31 May 2019.

56 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF DIRECTORS

Rajax Network Shanghai Ele Me Business Cooperation Agreement (Promotion Service)

On 18 October 2019, CIC entered into the Rajax Network Shanghai Ele Me Business Cooperation Agreement (Promotion Service) (the "Rajax Network Shanghai Ele Me Business Cooperation Agreement (Promotion Service)") with Rajax Network Technology (Shanghai) Co., Ltd. ("Rajax Network Shanghai") in respect of the business cooperation between CIC and Rajax Network Shanghai whereby Rajax Network Shanghai provides marketing services to the stores based on the Ele Me online software system.

The Rajax Network Shanghai Ele Me Business Cooperation Agreement (Promotion Service) has a term which commenced from 18 October 2019 and ended on 31 December 2019 and has been extended to 31 December 2020 pursuant to its terms.

Pursuant to the Rajax Network Shanghai Ele Me Business Cooperation Agreement (Promotion Service), ACI and CIC may conduct marketing activities on the Ele Me platforms and Rajax Network Shanghai agreed to provide the promotion services for marketing activities and promotion of the Group's business via the Ele Me platforms, subject to the terms and conditions set out therein.

A service fee (exclusive of tax) will be charged by Rajax Network Shanghai for each text message sent by Rajax Network Shanghai to potential customers for the promotion of the Group's business.

As set out above, the Company has announced the categorisation of continuing connected transactions with Alibaba and its associates in its announcement on 12 April 2019. The annual caps of the Rajax Network Shanghai Ele Me Business Cooperation Agreement (Promotion Service) is aggregated with annual caps of other agreements under the category of "Business Cooperation between the Group and Alibaba Group". Details are set out further below.

Taobao China is a substantial shareholder and a connected person of the Company. Taobao China is an indirect wholly-owned subsidiary of Alibaba. Alibaba is therefore also a connected person of the Company. Rajax Network Shanghai is a subsidiary of Alibaba and therefore an associate of Taobao China and a connected person of the Company.

For further details of the The Rajax Network Shanghai Ele Me Business Cooperation Agreement (Promotion Service), please refer to the announcement of the Company dated 18 October 2019.

Annual cap under the category of the "Business cooperation between the Group and Alibaba Group"

As the transactions under the above agreements in the category of business cooperation between the Group and Alibaba Group are similar in nature, they are required to be aggregated pursuant to rule 14A.81 of the Listing Rules. As such, the annual cap of business cooperation between the Group and Alibaba Group for the year ended 31 December 2019 is RMB2,106,600,000, while the actual transaction amount of the year ended 31 December 2019 is approximately RMB1,148.8 million.

Sun Art Retail Group Limited 57

Annual Report 2019

REPORT OF DIRECTORS

The independent non-executive Directors have reviewed the continuing connected transactions and confirmed that the continuing connected transactions have been entered into:

1. in the ordinary and usual course of business of the Group;
2. on normal commercial terms or better; and
3. according to the agreement governing them, on terms that are fair and reasonable and in the interests of the shareholders of the Company as a whole.

The Company's auditor was engaged to report on the Group's continuing connected transactions in accordance with Hong Kong Standard on Assurance Engagements HKSAE 3000 "Assurance engagements Other Than Audits or Reviews of Historical Financial Information" and with reference to Practice Note 740 "Auditor's Letter on Continuing Connected Transactions under the Hong Kong Listing Rules" issued by the Hong Kong Institute of Certified Public Accountants. The auditor has issued their unqualified letter containing the findings and conclusions in respect of the continuing connected transactions disclosed by the Group on pages 39 to 57 of this annual report in accordance with the Rule 14A.56 of the Listing Rules. A copy of the auditor's letter has been provided by the Company to the Stock Exchange.

The auditor has reported to the Directors that (i) nothing has come to their attention that causes them to believe that the disclosed continuing connected transactions have not been approved by the Company's Board of Directors; (ii) for transactions involving the provision of services by the Group, nothing has come to their attention that causes them to believe that the transactions were not, in all material respects, in accordance with the pricing policies of the Company; (iii) nothing has come to their attention that causes them to believe that the transactions were not entered into, in all material respects, in accordance with the relevant agreements governing such transactions; and (iv) with respect to the aggregate amount of the continuing connected transactions, nothing has come to their attention that causes them to believe that the disclosed continuing connected transactions have exceeded the annual cap disclosed in the announcements made by the Company for the year ended 31 December 2019.

Deed of Non-competition

Pursuant to a deed of non-competition dated 29 June 2011 (the "Deed of Non-competition") entered into between A-RT, Auchan Retail International S.A., Monicole BV, CGC, Kofu (collectively, the "Covenantors") and the Company, each of the Covenantors has undertaken to the Company that it will not and will use its best endeavour to procure that none of its affiliates will, among other things, carry on or engage in any business, which directly or indirectly, competes or is likely to compete with the operation of hypermarket complexes under the banners of "Auchan" and "RT-Mart" in the PRC, which comprise hypermarkets and retail galleries of individual retail stores.

To the best knowledge of the Directors, there is no breach of the Deed of Non-competition by the Covenantors during the year ended 31 December 2019.

58 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF DIRECTORS

Securities Transactions by Directors

The Company has devised its own code of conduct regarding Directors' dealing in the Company's securities (the "Company Code") on terms no less exacting than the Model Code. Specific enquiry has been made of all the Directors and the Directors have confirmed that they have complied with the Company Code and the Model Code throughout the year ended 31 December 2019.

Corporate Governance

The Company is committed to maintaining a high standard of corporate governance standards to safeguard the interests of shareholders and to enhance corporate value and accountability.

Information on the corporate governance practices adopted by the Company is set out in the Corporate Governance Report in this annual report.

Audit Committee

The Audit Committee has reviewed the accounting principles and policies adopted by the Group and also discussed auditing, internal controls and financial reporting matters, including the review of the consolidated financial statements for the year ended 31 December 2019 with the external auditors, KPMG, and with management.

Major Customers and Suppliers

The nature of the Group's activities are such that the percentage of sales or purchases attributable to the Group's five largest customers or suppliers is significantly less than 10% of the total and the Directors do not consider any one customer or supplier to be influential to the Group.

Auditors

The consolidated financial statements for the year ended 31 December 2019 have been audited by KPMG, who will retire and, being eligible, offer themselves for re-appointment at the forthcoming 2020 AGM.

A resolution for the re-appointment of KPMG as auditors of the Company will be proposed at the forthcoming 2020 AGM of the Company.

Sun Art Retail Group Limited 59

Annual Report 2019

REPORT OF DIRECTORS

Compliance with the Relevant Laws and Regulations

As far as the Board is aware, the Company has complied in material respects with the relevant laws and regulations that have a significant impact on the business and operation of the Company.

Environmental and Social Responsibilities

Environmental, Social and Governance ("ESG") factors are three key benchmarks to evaluate an enterprise. As a responsible corporate citizen, the Group believes that ESG initiatives are very important to bring success of our business and to create a long-term value for the Group. The ESG practices build a transparent, accountable and trusted enterprise to the society and to our consumers. We also believe that sustainability is a fundamental to our future.

Detail information on the ESG practices adopted by the Company is set out in the Environmental, Social and Governance Report which will be presented in a separate report and published on the websites of the Company and the HKEX no later than three months after the publication of this annual report.

Events after the Reporting Period

Details of significant events occurring after the balance sheet date are set out in note 31 to the consolidated financial statements.

By order of the Board

HUANG Ming-TuanExecutive Director and

Chief Executive Officer

20 February 2020

60 Sun Art Retail Group Limited

Annual Report 2019

RISK FACTORS

The Group's businesses, financial condition, results of operations or growth prospects may be affected by risks and uncertainties pertaining to the Group's businesses. The factors set out below are those that the Group believes could result in the Group's businesses, financial condition, results of operations or growth prospects differing materially from expected or historical results. These factors are by no means exhaustive or comprehensive, and there may be other risks in addition to those shown below which are not known to the Group or which may not be material now but could turn out to be material in the future.

RISK ASSOCIATED WITH THE GROUP BUSINESS

Our growth prospects may be limited if we encounter difficulties executing our expansion strategy.

As part of our business strategy, we plan to expand the network of our hypermarkets through organic growth. Our ability to expand depends on, among other things:

• our ability to identify suitable sites for new hypermarkets and successfully negotiate purchase or lease agreements for these sites on terms acceptable to us;
• the availability of financing for our expansion, investments or other strategic transactions;
• our ability to attract, train and retain management talents in sufficient numbers for our expanded operations;
• our ability to obtain all the requisite governmental approvals, licences and permits in a timely manner;
• our ability to adapt and expand our operational and management systems, including our information technology systems, to support an expanded hypermarket network;
• our ability to effectively control and manage our costs in our expanded network, in particular, purchase costs, and expenses related to rent, logistics, human resources and marketing; and
• the timely completion of our new hypermarkets under development.

If we fail to achieve any of the above, we may not be able to achieve our planned expansion objectives. Our ability to manage our future growth will also depend on our ability to continue to successfully implement and improve our operational, financial and management systems in the evolving competitive markets. Our business growth could strain our managerial, operational and financial resources. Failure to effectively execute our expansion strategy may result in limited growth and reduced profitability.

Sun Art Retail Group Limited 61

Annual Report 2019

RISK FACTORS

We may not be able to find suitable locations for new hypermarkets on commercially acceptable terms, if at all.

Our performance depends, to a significant extent, on the location of our hypermarkets. When selecting a site for a hypermarket, we take into account various factors, including:

• population density, customer traffic and vehicle traffic;
• customer accessibility;
• potential growth of local population;
• development potential and future development trends;
• estimated spending power of the population and local economy;
• profitability and payback period, estimated on the basis of the expected sales potential;
• marketing or strategic benefits;
• proximity and performance of competitors in the surrounding area; and
• site characteristics and suitability with the specifications of our building plans.

We secure locations either through ownership or through long-term leases, as determined on a case-by- case basis. Going forward, we will need to secure more locations to open more hypermarkets. The supply of locations for new hypermarkets is scarce and, as a result, competition to secure these locations is intense. Our ability to purchase or lease suitable properties on terms acceptable to us is critical to the success of our expansion strategy. In the event that we encounter difficulties in securing suitable locations in regions that we plan to expand into, our growth prospects will be adversely affected.

62 Sun Art Retail Group Limited

Annual Report 2019

RISK FACTORS

Our new hypermarkets may not achieve our expected level of profitability within our desired time frame, or at all.

As part of our growth strategy, we plan to further enhance our leading position in China by increasing our market penetration and expanding our retail network. Opening new hypermarkets requires significant capital outlay up front, including the price of acquisition or rental of the premises, the cost of building, renovating and decorating the premises, and the cost of hiring and training employees. However, the new hypermarkets that we open may not achieve our expected level of profitability for a prolonged period of time, or at all. Whether or not the operation of our new hypermarkets will be successful depends on a number of factors, including:

• our ability to properly position our new hypermarkets to successfully establish a foothold in new markets and to execute our business strategy in the local market;
• our ability to successfully integrate the new hypermarkets with our existing operations and achieve related synergies;
• our ability to introduce an optimal mix of merchandise which successfully meets local consumer preferences at attractive prices;
• our ability to negotiate and obtain favourable terms from our suppliers;
• the effectiveness of our marketing campaigns;
• our ability to hire, train and retain skilled personnel;
• the competition that we face from incumbent and new players in the region; and
• any government development plans around our planned sites, such as construction, which could have an impact on the external traffic flow to our hypermarkets and the timely implementation of such changes.

Some of these factors are not entirely within our control. If our new hypermarkets do not break even or achieve our expected level of profitability within our expected timeframe, or at all, our expansion plans and our results of operations, financial condition and profitability may be materially and adversely affected.

Sun Art Retail Group Limited 63

Annual Report 2019

RISK FACTORS

We may fail to anticipate and provide the appropriate mix of merchandise to satisfy customer tastes and demands.

We maintain a comprehensive selection of merchandise targeting a broad range of customers. The success of our business depends on our ability to maintain a comprehensive product selection and, at the same time, anticipate and respond in a timely manner to changing customer demands and preferences. Some of the products we offer, such as home electronics and electrical appliances, may be characterised by frequent introductions of new models and technology. Consumer demands and fashion trends in the PRC are changing at a rapid pace and customer acceptance of new products is affected by a number of factors, including prevailing economic conditions, disposable income, global lifestyle trends, price, functionality, technology, appearance and many other factors. The success of our operations depends on our continued ability to select products from suppliers that satisfy customer demand. If we fail to accurately foresee or quickly adjust to general trends in consumer demands and preferences, our business, financial condition and results of operations may be materially and adversely affected.

Real or perceived quality or health issues with the products offered at our hypermarket complexes could have a material and adverse effect on our results of operations.

Concerns regarding the safety of products offered at our hypermarket complexes or the safety and quality of our supply chain could cause shoppers to avoid purchasing certain products from us, or to seek alternative sources, even if the basis for the concern is outside of our control. Adverse publicity about these concerns, whether or not ultimately based on fact, and whether or not involving products sold at our hypermarket complexes, could discourage consumers from buying our products and have a material and adverse effect on our turnover and results of operations.

RISKS RELATING TO THE INDUSTRY IN THE PRC

The outbreak of any severe infectious disease in the PRC may materially and adversely affect our results of operations.

The outbreak of any severe infectious disease in the PRC could have a material adverse effect on the overall business sentiment and environment in the PRC. This in turn may have a material and adverse impact on domestic consumption and, possibly, the overall GDP growth of the PRC. In April 2009, a H1N1 influenza broke out in Mexico and spread globally, resulting in the loss of lives and widespread fear. In addition, certain areas of China have been subject to epidemics, such as severe acute respiratory syndrome (SARS) or swine or avian influenza or COVID-19 virus. As all of our turnover is derived from our PRC operations, any contraction or slowdown in the growth of domestic consumption or slowdown in the GDP growth of the PRC as a result of the outbreak of any severe communicable disease may materially and adversely affect our financial condition, results of operations and future growth. In addition, if the outbreak of any severe communicable disease occurs in the future and any of our employees or our customers in our hypermarkets are suspected of having contracted any severe communicable disease or any of our hypermarkets are identified as a possible source of spreading any severe communicable disease, we may be required to quarantine the employees that have been suspected of becoming infected, as well as others that had come into contact with those employees or customers. We may also be required to disinfect our affected hypermarkets and therefore suffer a temporary suspension of our retail operations. Any quarantine or suspension of our retail operations will affect our results of operations. Furthermore, the outbreak of any severe communicable disease may result in food safety concerns, which could have an adverse impact on our turnover. Such an outbreak would likely restrict the level of economic activity in affected areas, which would also materially and adversely affect our business operations.

64 Sun Art Retail Group Limited

Annual Report 2019

RISK FACTORS

Consumer spending patterns in China can be influenced by the state of China's economy.

Consumer spending patterns in China are influenced by the state of China's economy, which in turn affects our sales volume, turnover, profitability and our growth. We believe that Chinese consumers tend to increase their expenditures when the Chinese economy is experiencing strong growth and when they have more disposable income available for personal consumption. Conversely, a recession in the Chinese economy, or uncertainties regarding future economic prospects may result in a reduction in consumer spending at our hypermarkets. As a result, the state of the economy in China has had a significant impact on our historical, and will continue to have a significant impact on our future, performance, results of operations and profitability. Although in recent years, the PRC's economy has maintained rapid growth, and increases in GDP and per capita disposable income have strengthened consumers' purchasing power, we cannot assure you that such growth will not slow down or will continue in the future. In addition, the impact on the PRC economy of inflation and the unequal impact of inflation on different categories of products, such as food products, may affect consumer spending patterns and materially and adversely affect our business, financial condition and results of operations. A slowdown or downturn in the economies of the United States, the countries comprising the European Union and certain Asian nations, with which China has important trade relationships, could materially and adversely affect the economic growth of China. Any economic downturn in the PRC and its effect on consumer spending patterns may materially and adversely affect our business, financial condition and results of operations and our future prospects.

Future fluctuations in foreign exchange rates and government control in currency conversion may materially and adversely affect the ability of the Company to remit dividends.

A substantial proportion of our turnover and expenditure are denominated in Renminbi, which is currently not a freely convertible currency. We will require foreign currencies for dividend payment (if any) to our Shareholders. In addition, the price at which we purchase merchandise and products from our suppliers may be affected to the extent our suppliers' merchandise and products are imported or otherwise subject to foreign currency fluctuations. We will therefore be exposed to foreign currency fluctuations. Should there be significant changes in the exchange rates of US dollars or Hong Kong dollars against Renminbi, our Company's ability to make dividend payments in foreign currencies may be materially and adversely affected. In addition, any significant change in the exchange rates of the Renminbi against the US dollar or the Hong Kong dollar could materially and adversely affect the value of our Company's dividends, which would be funded by Renminbi but paid in Hong Kong dollars.

Sun Art Retail Group Limited 65

Annual Report 2019

REPORT OF CORPORATE GOVERNANCE

The board (the "Board") of directors (the "Directors") of the Company is pleased to present this Corporate Governance Report in the Group's Annual Report for the year ended 31 December 2019.

CORPORATE GOVERNANCE PRACTICES

The Board is committed to maintaining high corporate governance standards. The Board believes that high corporate governance standards are essential in providing a framework for the Company to safeguard the interests of shareholders, enhance corporate value, formulate its business strategies and policies, and enhance its transparency and accountability.

The Company has devised its own Corporate Governance and Compliance Manual which incorporates all the principles and practices as set out in the Corporate Governance Code (the "CG Code") contained in Appendix 14 of the Listing Rules.

The Company reviews regularly its organizational structure to ensure operations are in line with the good corporate governance practices as set out in the CG Code and aligned with the latest developments.

In the opinion of the Directors, the Company has complied with all the code provisions as set out in the CG Code for the year ended 31 December 2019, save and except for the deviations of code provisions A.3, A.4.2 and C.3.7(a) of the CG Code.

Code provision A.3 provides that the Board should include a balanced composition of executive and non- executive Directors (including independent non-executive Directors) so that there is a strong independent element on the Board, which can effectively exercise independent judgement. Following the resignation of Mr. Ludovic, Frédéric, Pierre HOLINIER, the Board did not have any Executive Director and deviated from paragraph A.3 of the CG Code. Details are set out in the interim report issued by the Company on 23 August 2019. On 11 December 2019, Mr. HUANG Ming-Tuan was appointed as an Executive Director of the Company. Reference is made to the announcement of the Company issued on 11 December 2019.

66 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF CORPORATE GOVERNANCE

Code provision A.4.2 provides that all directors appointed to fill a casual vacancy should be subject to election by shareholders at the first general meeting after appointment. In accordance with the Articles of Association of the Company, directors appointed to fill a casual vacancy shall hold office only until the next following annual general meeting of the Company and shall then be eligible for re-election. Mrs. Isabelle, Claudine, Françoise BLONDÉ ép. BOUVIER was appointed by the Directors on 17 May 2019 and shall be eligible for re-election at the next following annual general meeting to be held in 2020 according to the Articles of Association of the Company.

Code provision C.3.7(a) provides that under the terms of reference of the audit committee (the "Audit Committee"), the Audit Committee should review arrangements that can be used by the employees in confidence, to raise concerns about possible improprieties in financial reporting, internal control or other matters. The Audit Committee should ensure that proper arrangements are in place for fair and independent investigation of these matters and for appropriate follow-up action.

The Company had not established any formal arrangement for employees to raise concern about possible improprieties in financial reporting, internal control or other matters. In practice, employees have direct access to the internal audit department via either a telephone line or a mailbox. In addition, they have direct access by email to the Executive Director and the senior management. The Directors regularly receive and review monthly financial reports. The Directors, through the Audit Committee, meet quarterly with the Group's internal audit function, whose main responsibility is to review the internal control system of the Group. The Directors consider that the lack of such arrangements will not have a material effect on the functions of financial reporting, internal control or other related matters. The internal audit department, the Audit Committee and the Board will discuss the proper actions to deal with any issue reported by any employee about improprieties in financial reporting, internal control and other matters.

Sun Art Retail Group Limited 67

Annual Report 2019

REPORT OF CORPORATE GOVERNANCE

SECURITIES TRANSACTIONS BY DIRECTORS

The Company has adopted its own code of conduct regarding Directors' and relevant employees' dealings in the Company's securities (the "Company Code") on terms no less exacting than the Model Code for Securities Transactions by Directors of Listed Issuers (the "Model Code") as set out in Appendix 10 of the Listing Rules.

Specific enquiry has been made of all the Directors and the relevant employees and they have confirmed that they have complied with the Model Code and the Company Code throughout the year ended 31 December 2019.

BOARD OF DIRECTORS

The Board oversees the Group's businesses, strategic decisions and performance and should take decisions objectively in the best interests of the Company.

The Board should regularly review the contribution required from a Director to perform his/her responsibilities to the Company, and whether the Director is spending sufficient time performing them.

Board Composition

The Board currently comprises eleven Directors, consisting of one Executive Director, six Non-Executive Directors and four Independent Non-Executive Directors.

The composition of the Board is set out below:

Executive Director

HUANG Ming-Tuan, Chief Executive Officer

Non-Executive Directors

ZHANG Yong, Chairman

Benoit, Claude, Francois, Marie, Joseph LECLERCQ

Xavier, Marie, Alain DELOM de MEZERAC

Edgard, Michel, Marie BONTE

CHEN Jun

Isabelle, Claudine, Françoise BLONDÉ ép. BOUVIER

Independent Non-Executive Directors

Karen Yifen CHANG

Desmond MURRAY

HE Yi

Dieter YIH

68 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF CORPORATE GOVERNANCE

Notes:

1. Mr. Ludovic, Frédéric, Pierre HOLINIER resigned as Executive Director on 17 May 2019 in order to pursue other personal and business commitments.
2. Mr. Edgard, Michel, Marie BONTE was elected as Non-Executive Director while Mr. Wilhelm, Louis HUBNER has not offered himself for re-election and retired as Non-Executive Director on 17 May 2019 in order to pursue other personal and business commitments.
3. Mrs. Isabelle, Claudine, Françoise BLONDÉ ép. BOUVIER was appointed as Non-Executive Director on 17 May 2019.
4. Mr. HUANG Ming-Tuan was appointed as Executive Director and Mr. Dieter YIH was appointed as Independent Non-Executive Director respectively on 11 December 2019.

The biographical information of the Directors are set out in the section headed "Profiles of Directors and Senior Management" on pages 20 to 26 of the Annual Report for the year ended 31 December 2019.

None of the members of the Board is related to one another.

Chairman and Chief Executive Officer

The positions of Chairman and Chief Executive Officer are held by Mr. ZHANG Yong and Mr. HUANG Ming-Tuan respectively. The Chairman provides leadership and is responsible for the effective functioning and leadership of the Board. The Chief Executive Officer focuses on the Company's business development and daily management and operations generally. Their respective responsibilities are clearly defined and set out in writing.

Independent Non-Executive Directors

During the year ended 31 December 2019, the Board had at all times met the requirements of the Listing Rules relating to the appointment of at least three Independent Non-Executive Directors representing one-third of the Board with two of whom possessing appropriate professional qualifications or accounting or related financial management expertise.

The Company has received written annual confirmation from each of the Independent Non-Executive Directors in respect of his/her independence in accordance with the independence guidelines set out in Rule 3.13 of the Listing Rules. The Company is of the view that all Independent Non-Executive Directors are independent.

Non-Executive Directors and Re-election of Directors

Code provision A.4.1 of the CG Code stipulates that Non-Executive Directors shall be appointed for a specific term, subject to re-election, whereas code provision A.4.2 states that all directors appointed to fill a casual vacancy shall be subject to election by shareholders at the first general meeting after appointment and that every director, including those appointed for a specific term, shall be subject to retirement by rotation at least once every three years.

Each of the Non-Executive Directors of the Company is appointed for a specific terms of three years and is subject to retirement provisions stipulated in the Articles of Association.

Sun Art Retail Group Limited 69

Annual Report 2019

REPORT OF CORPORATE GOVERNANCE

Responsibilities of the Directors

The Board should assume responsibility for leadership and control of the Company, and is collectively responsible for directing and supervising the Company's affairs.

The Board directly, and indirectly through its committees, leads and provides direction to management by laying down strategies and overseeing their implementation, monitors the Group's operational and financial performance, and ensures that sound internal control and risk management systems are in place.

All Directors, including Non-Executive Directors and Independent Non-Executive Directors, have brought a wide spectrum of valuable business experience, knowledge and professionalism to the Board for its efficient and effective functioning.

The Independent Non-Executive Directors are responsible for ensuring a high standard of regulatory reporting of the Company and providing a balance in the Board for bringing effective independent judgement on corporate actions and operations.

All Directors have full and timely access to all the information of the Company and may, upon request, seek independent professional advice in appropriate circumstances, at the Company's expenses for discharging their duties to the Company.

The Board reserves for its decision all major matters relating to policy matters, strategies and budgets, internal control and risk management, material transactions (in particular those that may involve conflict of interests), financial information, appointment of directors and other significant operational matters of the Company. Responsibilities relating to implementing decisions of the Board, directing and coordinating the daily operation and management of the Company are delegated to the management.

Continuous Professional Development of Directors

Directors shall keep abreast of regulatory developments and changes in order to effectively perform their responsibilities and to ensure that their contribution to the Board remains informed and relevant.

Every newly appointed Director will receive formal, comprehensive and tailored induction training on the first occasion of his/her appointment to ensure appropriate understanding of the business and operations of the Company and full awareness of Director's responsibilities and obligations under the Listing Rules and relevant statutory requirements.

Directors should participate in appropriate continuous professional training to develop and refresh their knowledge and skills to ensure that their contribution to the Board remains informed and relevant. Internally-facilitated briefings for Directors would be arranged and reading material on relevant topics would be issued to the Directors where appropriate. All the Directors are encouraged to attend relevant training courses at the Company's expenses.

During the year ended 31 December 2019, the Company organized training sessions for all directors. Such training sessions cover a wide range of relevant topics including directors' duties, continuing connected transaction, proposed change of environmental, social and governance reporting regime and updates on Listing Rules. In addition, relevant reading materials including legal and regulatory update have been provided to the directors for their reference and study.

70 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF CORPORATE GOVERNANCE

BOARD COMMITTEES

The Board has established six committees, namely, the Audit Committee, Remuneration Committee, Nomination Committee, Disclosure Committee, Investment Committee and Operations Committee, for overseeing particular aspects of the Company's affairs. All Board committees of the Company are established with specific written terms of reference which deal clearly with their authority and duties. The terms of reference of the Board Committees are posted on the websites of the Company and the Stock Exchange and are available to shareholders upon request, except those for the Disclosure Committee, Investment Committee and Operations Committee.

The majority of the members of the Audit Committee, Remuneration Committee and Nomination Committee are Independent Non-Executive Directors and the list of the chairman and members of each of the Audit Committee, Remuneration Committee and Nomination Committee is set out under "Corporate Information" on page 2.

Audit Committee

The roles and functions of the Audit Committee are set out in its terms of reference. The terms of reference of the Audit Committee are of no less exacting terms than those set out in the CG Code. The primary duties of the Audit Committee are to assist the Board in overseeing and reviewing (i) the effectiveness of the Company's risk management and internal control systems and regulatory compliance of the Group; (ii) the balance, transparency and integrity of the Company's financial statements and application of financial reporting principles; and (iii) the relationship with the external auditors by reference to the work performed by the auditors, their fees and terms of engagement, and make recommendation to the Board on the appointment, re-appointment and removal of external auditors; and (iv) agree with internal auditors for their annual plan of work and the results of this work.

During the year ended 31 December 2019, the Audit Committee held five meetings to review the annual and interim financial results and reports for the year ended 31 December 2018 and for the six months ended 30 June 2019 and significant issues on the financial reporting, operational and compliance controls, the effectiveness of the risk management and internal control systems and internal audit function, appointment of external auditors and relevant scope of works, and connected transactions and arrangements for employees to raise concerns about possible improprieties.

The Audit Committee also met the external auditors once without the presence of the Executive Directors.

Remuneration Committee

The terms of reference of the Remuneration Committee are of no less exacting terms than those set out in the CG Code. The primary functions of the Remuneration Committee include reviewing and making recommendations to the Board on the remuneration packages of individual Executive Director and senior management, the remuneration policy and structure for all Directors and senior management; and establishing transparent procedures for developing such remuneration policy and structure to ensure that no Director or any of his/her associates will participate in deciding his/her own remuneration.

Sun Art Retail Group Limited 71

Annual Report 2019

REPORT OF CORPORATE GOVERNANCE

During the year ended 31 December 2019, the Remuneration Committee held four meetings to review and make recommendation to the Board on the remuneration policy and structure of the Company, appointments, service agreements and remuneration packages of the Executive Director, Non-Executive Directors and Independent Non-Executive Director, the remuneration package of the Chief Financial Officer and other related matters.

Nomination Committee

The terms of reference of the Nomination Committee are of no less exacting terms than those set out in the CG Code. The principal duties of the Nomination Committee include reviewing the Board composition, developing and formulating relevant procedures for the nomination and appointment of Directors, considering and assessing the possible contribution to be brought by the individual to the diversity of the Board and making recommendations to the Board on the appointment and succession planning of Directors, and assessing the independence of the Independent Non-Executive Directors.

The Company has formulated a policy for nomination of directors with the following procedures:

1. The Nomination Committee shall consider suitability of an individual pursuant to the Listing Rules, the Board Nomination Policy and Board Diversity Policy, and the independence of an individual for the position of Independent Non-Executive Director.
2. The Nomination Committee shall make recommendation to the Board's for consideration.
3. The Board shall consider the individual recommended by the Nomination Committee pursuant to the Listing Rules (including the corporate governance code as Appendix 14 to the Listing Rules), the Board Nomination Policy and Board Diversity Policy.
4. For casual vacancy and addition of new directors, the Board shall confirm the appointment of the individual and the new director shall be subjected to re-election by shareholders of the Company at the next annual general meeting in accordance with the Articles of Association of the Company.
5. For re-appointment of retiring directors, the Board shall, based on the recommendation of Nomination Committee, recommend the retiring directors to stand for re-election at the annual general meeting. The appointment of retiring directors shall be subjected to the approval of shareholder at the annual general meeting.
6. The Board reserves the right to final decision on the matters in relation to the selection and appointment of directors.

In assessing the Board composition, the Nomination Committee would take into account various aspects as well as factors concerning Board diversity as set out in the Company's Board diversity policy, including but not limited to gender, age, cultural and educational background, professional qualifications, skills, knowledge and industry and regional experience etc. The Nomination Committee would discuss and agree on measurable objectives for achieving diversity on the Board, where necessary, and recommend them to the Board for adoption.

72 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF CORPORATE GOVERNANCE

During the year ended 31 December 2019, the Nomination Committee held four meetings to review the structure, size and composition of the Board and the independence of the Independent Non-Executive Directors and to consider the qualifications of the retiring directors standing for election at the Annual General Meeting. The Nomination Committee considered an appropriate balance of diversity perspectives of the Board is maintained.

Corporate Governance Functions

The Board is responsible for performing the functions set out in the code provision D.3.1 of the CG Code.

During the year ended 31 December 2019, the Board reviewed the Company's corporate governance policies and practices, training and continuous professional development of the Directors and senior management, the Company's policies and practices on compliance with legal and regulatory requirements, the compliance of the Model Code, the Company Code, and the Company's compliance with the CG Code and disclosure in this Corporate Governance Report.

ATTENDANCE RECORD OF DIRECTORS

The attendance records of each Director at the meetings of the Board and Board Committees and the general meeting of the Company held during the year ended 31 December 2019 are set out below:

Apart from regular Board meetings, the Chairman also held a meeting with the Independent Non-Executive Directors without the presence of other Directors during the year.

Sun Art Retail Group Limited 73

Annual Report 2019

REPORT OF CORPORATE GOVERNANCE

DIRECTORS' RESPONSIBILITY IN RESPECT OF THE FINANCIAL STATEMENTS

The Directors acknowledge their responsibility for preparing the financial statements of the Company for the year ended 31 December 2019.

The Directors are not aware of any material uncertainties relating to events or conditions that may cast significant doubt upon the Company's ability to continue as a going concern.

The statement of the independent auditors of the Company about their reporting responsibilities on the financial statements is set out in the Independent Auditors' Report on pages 78 to 88.

AUDITORS' REMUNERATION

An analysis of the remuneration paid to the external auditors of the Company, KPMG, in respect of audit services and non-audit services, mainly tax services, for the year ended 31 December 2019 is shown on note 4(c) of the "Notes to the Consolidated Financial Statements" on page 135.

RISK MANAGEMENT AND INTERNAL CONTROLS

The Board acknowledge its responsibility for the risk management and internal control systems of the Company and reviewing their effectiveness. Such systems are designed to manage, rather than eliminate, the risk associated in failing to achieve certain business objectives, and can only provide reasonable but not absolute assurance against material misstatement or loss.

The Board has overall responsibility for evaluating and determining the nature and extent of the risks it is willing to take in achieving the Company's strategic objectives, and establishing and maintaining appropriate and effective risk management and internal control systems.

The Audit Committee assists the Board in leading the management as well as overseeing the formation, implementation and monitoring of the risk management and internal control systems.

The Board, through the Audit Committee, has reviewed and confirmed the effectiveness of the risk management and internal control systems of the Company and its subsidiaries for the year ended 31 December 2019, including the adequacy of resources, staff qualification and experience, training programs and budget of the Company's accounting and reporting function.

The management of the Company monitors the assessment of the risk management and internal controls and has reported and confirmed to the Board and the Audit Committee on the effectiveness of the risk management and internal control systems for the year ended 31 December 2019.

The internal audit department is responsible for performing independent review of the adequacy and effectiveness of the risk management and internal control systems. The internal audit department examined key issues in relation to the accounting practices and all material controls and provided its findings and recommendations for improvement to the Audit Committee.

74 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF CORPORATE GOVERNANCE

The Board, as supported by the Audit Committee, assessed the effectiveness of the risk management and internal control systems by reviewing the management report and the internal audit findings and considered that, for the year ended 31 December 2019, the risk management and internal control systems of the Company are effective and adequate.

The Company has developed its disclosure policy which provides a general guideline to the Company's Directors, officers, senior management and relevant employees in handling confidential information, monitoring information disclosure and responding to enquiries.

Control procedures have been implemented to ensure that unauthorized access and use of inside information are strictly prohibited.

Employees are required to keep confidential and are not permitted to the unauthorized use of all information relating to our suppliers, clients, transactions and the use of confidential information for the benefit of themselves and any third party is restricted.

DIVIDEND POLICY

The Company has adopted a policy on payment of dividends. The Board has absolute discretion as to whether to declare any dividend for any year and, if it decides to declare a dividend, how much dividend to declare. The rate of dividend payout of the Company is not less than 30% of the annual distributable profit attributable to the Company's shareholders. The Board will re-evaluate the dividend policy in light of the Company's financial position and the prevailing economic climate. However, the determination to pay dividends will be made at the discretion of the Board and will be based upon the Company's earnings, cash flow, financial condition, capital requirements, statutory fund reserve requirements and any other conditions that the Board deems relevant. In addition, the declaration and payment of dividends may be limited by legal restrictions or financial instruments that the Company may enter into in the future.

COMPANY SECRETARY

The Company has engaged Tricor Services Limited, external service provider, and Ms. CHO Wing Han, in replacement of Ms. CHAN Wai Ling, was appointed as the Company's company secretary with effect from 1 November 2019. Her primary contact persons at the Company are Mr. Chris FAN, the Chief Financial Controller, Mr. Germain SINPRASEUTH and Mrs. Helen HO, of the legal department of the Company.

The biographical details of Ms. Cho is set out in the section of "Profiles of Directors and Senior Management" on page 26 of this annual report. During the year ended 31 December 2019, Ms. Cho undertook not less than 15 hours of relevant professional trainings.

Sun Art Retail Group Limited 75

Annual Report 2019

REPORT OF CORPORATE GOVERNANCE

SHAREHOLDERS' RIGHTS

To safeguard shareholder interests and rights, separate resolution should be proposed for each substantially separate issue at general meetings, including the election of individual directors. All resolutions put forward at general meetings will be voted on by poll pursuant to the Listing Rules and poll results will be posted on the websites of the Company and of the Stock Exchange after each general meeting.

Convening General Meeting

General meetings may be convened by the Directors on requisition of shareholder(s) of the Company representing at least 5% of the total voting rights of all the shareholders having a right to vote at general meetings or by such shareholder(s) who made the requisition (as the case may be) pursuant to Sections 566 and 568 respectively of the Companies Ordinance (Chapter 622 of the laws of Hong Kong) (the "Companies Ordinance").

Shareholders should follow the requirements and procedures as set out in the Companies Ordinance for convening a general meeting.

Putting Forward Proposals at General Meetings

Pursuant to Section 615 of the Companies Ordinance, shareholders representing at least 2.5% of the total voting rights of all shareholders; or at least 50 shareholders (as the case may be) who have a right to vote at the relevant annual general meeting, may request to circulate a resolution to be moved at an annual general meeting.

Shareholders should follow the requirements and procedures as set out in the Companies Ordinance for circulating a resolution for annual general meeting.

Putting Forward Enquiries to the Board

For putting forward any enquiries to the Board of the Company, shareholders may send written enquiries to the Company. The Company will not normally deal with verbal or anonymous enquiries.

Contact Details

Shareholders may send their enquiries or requests as mentioned above to the following:

For the avoidance of doubt, shareholder(s) must deposit and send the original duly signed written requisition, notice or statement, or enquiry (as the case may be) to the above address, other than the registered office address in Hong Kong, and provide their full name, contact details and identification in order to give effect thereto. Shareholders' information may be disclosed as required by law.

76 Sun Art Retail Group Limited

Annual Report 2019

REPORT OF CORPORATE GOVERNANCE

COMMUNICATION WITH SHAREHOLDERS AND INVESTORS/INVESTOR RELATIONS

The Company considers that effective communication with the shareholders is essential for enhancing investor relations and investor understanding of the Group's business performance and strategies. The Company endeavours to maintain an on-going dialogue with the shareholders and in particular, through annual general meetings and other general meetings.

The Chairman of the Board, the chairmen of Audit Committee, Remuneration Committee and Nomination Committee, or, in their absence, other members of the respective committees, will make themselves available at the annual general meeting to meet the shareholders and answer their enquiries.

To promote effective communication, the Company maintains a website at http://www.sunartretail.com, which contains corporate information, updates on the Company's financial information, interim and annual reports, announcements and circulars issued by the Company, corporate governance practices as well as the recent developments of the Company.

During the year under review, the Company has revised its Articles of Association and adopted new Articles of Association in order to (i) improve corporate governance of the Company; (ii) strengthen the Company's ability to recruit talents to hold office in the management; (iii) enhance the administration or conduct of the business of the Company and (iv) promote the Company's sustainable and healthy development. Details of the amendments are set out in the circular dated 11 April 2019 to the shareholders. An up to date version of the Company's Articles of Association is also available on the websites of the Company and the Stock Exchange.

Sun Art Retail Group Limited 77

Annual Report 2019

INDEPENDENT AUDITOR'S REPORT

Independent auditor's report to the shareholders of

Sun Art Retail Group Limited

(Incorporated in Hong Kong with limited liability)

OPINION

We have audited the consolidated financial statements of Sun Art Retail Group Limited ("the Company") and its subsidiaries ("the Group") set out on pages 89 to 179, which comprise the consolidated statement of financial position as at 31 December 2019, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2019 and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards ("HKFRSs") issued by the Hong Kong Institute of Certified Public Accountants ("HKICPA") and have been properly prepared in compliance with the Hong Kong Companies Ordinance.

BASIS FOR OPINION

We conducted our audit in accordance with Hong Kong Standards on Auditing ("HKSAs") issued by the HKICPA. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the Group in accordance with the HKICPA's Code of Ethics for Professional Accountants ("the Code") and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

KEY AUDIT MATTERS

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

78 Sun Art Retail Group Limited

Annual Report 2019

INDEPENDENT AUDITOR'S REPORT

KEY AUDIT MATTERS (CONTINUED)

Supplier arrangements

Refer to the accounting policies set out in note 1(o) and 1(x) to the consolidated financial statements.

Sun Art Retail Group Limited 79

Annual Report 2019

INDEPENDENT AUDITOR'S REPORT

KEY AUDIT MATTERS (CONTINUED)

Valuation of inventories

Refer to note 13 and the accounting policies set out in note 1(o) to the consolidated financial statements.

80 Sun Art Retail Group Limited

Annual Report 2019

INDEPENDENT AUDITOR'S REPORT

KEY AUDIT MATTERS (CONTINUED)

Potential impairment of property, plant and equipment including right-of-use assets of certain of the Group's stores

Refer to notes 4(c) and 10 and the accounting policies as set out in note 1(n)(ii) to the consolidated financial statements.

Sun Art Retail Group Limited 81

Annual Report 2019

INDEPENDENT AUDITOR'S REPORT

KEY AUDIT MATTERS (CONTINUED)

Potential impairment of property, plant and equipment including right-of-use assets of certain of the Group's stores (continued)

Refer to notes 4(c) and 10 and the accounting policies as set out in note 1(n)(ii) to the consolidated financial statements.

82 Sun Art Retail Group Limited

Annual Report 2019

INDEPENDENT AUDITOR'S REPORT

KEY AUDIT MATTERS (CONTINUED)

Other income arising from recognition of unutilised balances on aged prepaid cards

Refer to notes 3 and 18 the accounting policies in note 1(x)(iii) to the consolidated financial statements.

Sun Art Retail Group Limited 83

Annual Report 2019

INDEPENDENT AUDITOR'S REPORT

KEY AUDIT MATTERS (CONTINUED)

Adoption of HKFRS 16－Leases

Refer to notes 10 and 17 the accounting policies in note 1(k) to the consolidated financial statements.

84 Sun Art Retail Group Limited

Annual Report 2019

INDEPENDENT AUDITOR'S REPORT

KEY AUDIT MATTERS (CONTINUED)

Adoption of HKFRS 16－Leases (continued)

Refer to notes 10 and 17 the accounting policies in note 1(k) to the consolidated financial statements.

Sun Art Retail Group Limited 85

Annual Report 2019

INDEPENDENT AUDITOR'S REPORT

INFORMATION OTHER THAN THE CONSOLIDATED FINANCIAL STATEMENTS AND AUDITOR'S REPORT THEREON

The directors are responsible for the other information. The other information comprises all the information included in the annual report, other than the consolidated financial statements and our auditor's report thereon.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

RESPONSIBILITIES OF THE DIRECTORS FOR THE CONSOLIDATED FINANCIAL STATEMENTS

The directors are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with HKFRSs issued by the HKICPA and the Hong Kong Companies Ordinance and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

The directors are assisted by the Audit Committee in discharging their responsibilities for overseeing the Group's financial reporting process.

AUDITOR'S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. This report is made solely to you, as a body, in accordance with section 405 of the Hong Kong Companies Ordinance, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

86 Sun Art Retail Group Limited

Annual Report 2019

INDEPENDENT AUDITOR'S REPORT

AUDITOR'S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As part of an audit in accordance with HKSAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.
• Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with the Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence and, where applicable, related safeguards.

Sun Art Retail Group Limited 87

Annual Report 2019

INDEPENDENT AUDITOR'S REPORT

AUDITOR'S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

From the matters communicated with the Audit Committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor's report is John Paul Chattock.

KPMG

Certified Public Accountants

8th Floor, Prince's Building

10 Chater Road

Central, Hong Kong

20 February 2020

88 Sun Art Retail Group Limited

Annual Report 2019

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND

OTHER COMPREHENSIVE INCOME

For the year ended 31 December 2019

Note: The Group has initially applied HKFRS 16 at 1 January 2019 using the full retrospective approach. Under this approach, comparative information has been restated. See note 1(c).

The accompanying notes set out on pages 96 to 179 form part of these financial statements. Details of dividends payable to equity shareholders of the Company attributable to the profit for the year are set out in note 20(b).

Sun Art Retail Group Limited 89

Annual Report 2019

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 31 December 2019

Note: The Group has initially applied HKFRS 16 at 1 January 2019 using the full retrospective approach. Under this approach, comparative information has been restated. See note 1(c).

The accompanying notes set out on pages 96 to 179 form part of these financial statements.

90 Sun Art Retail Group Limited

Annual Report 2019

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 31 December 2019

Approved and authorised for issue by the board of directors on 20 February 2020.

Note: The Group has initially applied HKFRS 16 at 1 January 2019 using the full retrospective approach. Under this approach, comparative information has been restated. See note 1(c).

The accompanying notes set out on pages 96 to 179 form part of these financial statements.

Sun Art Retail Group Limited 91

Annual Report 2019

Limited Group Retail Art Sun 92 2019 Report Annual

Note: The Group has initially applied HKFRS 16 at 1 January 2019 using the full retrospective approach. Under this approach, comparative information has been restated. See note 1(c).

93

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 31 December 2019

Note: The Group has initially applied HKFRS 16 at 1 January 2019 using the full retrospective approach. Under this approach, comparative information has been restated. See note 1(c).

94 Sun Art Retail Group Limited

Annual Report 2019

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 31 December 2019

Note: The Group has initially applied HKFRS 16 at 1 January 2019 using the full retrospective approach. Under this approach, comparative information has been restated. See note 1(c).

The accompanying notes set out on pages 96 to 179 form part of these financial statements.

Sun Art Retail Group Limited 95

Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 SIGNIFICANT ACCOUNTING POLICIES

1. Statement of compliance
   These financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards ("HKFRSs"), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards ("HKASs") and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (the "HKICPA"), accounting principles generally accepted in Hong Kong and the requirements of the Hong Kong Companies Ordinance. These financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Stock Exchange"). Significant accounting policies adopted by the Company and its subsidiaries (together referred to as the "Group") are disclosed below.
   The HKICPA has issued certain new and revised HKFRSs that are first effective or available for early adoption for the current accounting period of the Group. Note 1(c) provides information on any changes in accounting policies resulting from initial application of these developments to the extent that they are relevant to the Group for the current and prior accounting periods reflected in these financial statements.
2. Basis of preparation of the financial statements
   The consolidated financial statements for the year ended 31 December 2019 comprise the Group and the Group's interest in associates and joint ventures.
   The consolidated financial statements are presented in Renminbi ("RMB"), rounded to the nearest million (unless otherwise stated). RMB is also the functional currency of the Company and the Company's operating subsidiaries, as the Group's hypermarkets and Online sales channels are all operated in the People's Republic of China ("PRC"). The consolidated financial statements have been prepared on the historical cost basis except for derivative financial instruments that are measured at fair value.
   The preparation of consolidated financial statements in conformity with HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
   The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
   Judgements made by management in the application of HKFRSs that have significant effect on the financial statements and major sources of estimation uncertainty are discussed in note 28.

96 Sun Art Retail Group Limited

Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

1. Change in accounting policies
   The HKICPA has issued a new HKFRS, HKFRS 16, Leases, and a number of amendments to HKFRSs that are first effective for the current accounting period of the Group.
   Except for HKFRS 16, Leases, none of the developments have had a material effect on how the Group's results and financial position for the current or prior periods have been prepared or presented in this report. The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period.
   HKFRS 16, Leases
   HKFRS 16 replaces HKAS 17, Leases, and the related interpretations, HK(IFRIC) 4, Determining whether an arrangement contains a lease, HK(SIC) 15, Operating leases - incentives, and HK(SIC) 27, Evaluating the substance of transactions involving the legal form of a lease. It introduces a single accounting model for lessees, which requires a lessee to recognise a right-of-use asset and a lease liability for all leases, except for leases that have a lease term of 12 months or less ("short-termleases") and leases of low-value assets. The lessor accounting requirements are brought forward from HKAS 17 substantially unchanged.
   HKFRS 16 also introduces additional qualitative and quantitative disclosure requirements which aim to enable users of the financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of an entity.
   The Group has initially applied HKFRS 16 as from 1 January 2019. The Group has elected to use the full retrospective approach and has therefore applied the new standards retrospectively to the comparative information for each prior reporting period presented.
   Further details of the nature and effect of the changes to previous accounting policies and the transition options applied are set out below:
2. 1. New definition of a lease
      The change in the definition of a lease mainly relates to the concept of control. HKFRS 16 defines a lease on the basis of whether a customer controls the use of an identified asset for a period of time, which may be determined by a defined amount of use. Control is conveyed where the customer has both the right to direct the use of the identified asset and to obtain substantially all of the economic benefits from that use.
      The Group applies the new definition of a lease in HKFRS 16 only to contracts that were entered into or changed on or after 1 January 2019. For contracts entered into before 1 January 2019, the Group has used the transitional practical expedient to grandfather the previous assessment of which existing arrangements are or contain leases. Accordingly, contracts that were previously assessed as leases under HKAS 17 continue to be accounted for as leases under HKFRS 16 and contracts previously assessed as non-lease service arrangements continue to be accounted for as executory contracts.

Sun Art Retail Group Limited 97

Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

1. Change in accounting policies (continued)
2. 1. Lessee accounting and transitional impact
      The Group's leasing activities as a lessee primarily relate to leasing of land and buildings for use as hypermarket stores, for subleasing and for warehouses.
      HKFRS 16 eliminates the requirement for a lessee to classify leases as either operating leases or finance leases, as was previously required by HKAS 17. Instead, the Group is required to capitalise all leases when it is the lessee, including leases previously classified as operating leases under HKAS 17, other than those short-term leases and leases of low-value assets which are exempt. As far as the Group is concerned, these newly capitalised leases are primarily in relation to property, plant and equipment. The Group also tested right-of-use assets for impairment. For an explanation of how the Group applies lessee accounting, see note 1(k)(i).
      The following tables summarise the impacts of the adoption of HKFRS 16 on the Group's consolidated financial statements.
   2. 1. Impact on the financial result of the Group (increase/(decrease)):
         After the retrospective recognition of right-of-use assets and lease liabilities for current year and each prior reporting period, the Group as a lessee is required to recognise interest expense accrued on the outstanding balance of the lease liability, and the depreciation of the right-of-use asset, instead of the previous policy of recognising rental expenses incurred under operating leases on a straight-line basis over the lease term. This results in a positive impact on the reported profit from operations in the Group's consolidated statement of profit or loss, as compared to the results if HKAS 17 had been applied during 2018.

98 Sun Art Retail Group Limited

Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

1. Change in accounting policies (continued)
2. 1. Lessee accounting and transitional impact (continued)
   2. 1. Impact on the financial result of the Group (increase/(decrease)) (continued):

Sun Art Retail Group Limited 99

Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

1. Change in accounting policies (continued)
2. 1. Lessee accounting and transitional impact (continued)
   2. 1. Impact on the consolidated statements of financial position (increase/(decrease)):

100 Sun Art Retail Group Limited

Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

1. Change in accounting policies (continued)
2. 1. Lessee accounting and transitional impact (continued)
   2. 1. Impact on the consolidated statements of financial position (increase/(decrease)) (continued):

Sun Art Retail Group Limited 101

Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

1. Change in accounting policies (continued)
2. 1. Lessee accounting and transitional impact (continued)
   2. 1. Impact on the consolidated statements of financial position (increase/(decrease)) (continued):