Outlook remains bleak; maintaining Hold on potential upside from SOE reform
Management is mapping out its three-year reform plan in terms of its profit model, operational efficiency and staff incentives. It has stressed that reform is not an option, but a must, for Lianhua, reflecting its decision to turn around the current loss-making situation. However, recovery will take time and will challenge management’s execution ability in a tough operating environment. Maintaining Hold until there is more visibility on the three-year plan.
2-3% SSSG target for FY14; focus on consolidated margin and cost control
SSSG was negative in 1Q14. Management has admitted that it will not be easy to achieve its 2-3% FY SSSG target but is confident that its efforts for reforms will pay off in the ensuing quarters. It also hopes improvements in consolidated GPM and cost control will be able to offset weak SSSG. Lianhua targets 300 new openings this year (4-5 hypermarkets, 150 supermarkets, 150 CVS).
A big loss of RMB132m in 4Q13 on lower associate income and high ETR
In 2013, sales grew 4.8%, to RMB30.4bn. NP dropped significantly, by 84.4%, to RMB53m. The company made a loss of RMB138m in 2H13 (loss of RMB6m in 3Q13 and RMB132m in 4Q13). No final dividend was declared, and the FY payout was nil. Net cash declined to RMB10.8bn, vs. RMB11bn in 2012.
New DCF-derived target price of HKD3.9; risks
Our target price cut to HKD3.9, from HKD4.1, reflects our reduced FY14-15E EPS, by 24.1-37.6%, to factor in the weaker-than-expected 2HFY13 results and YTD SSSG trend, but the cut is only 5% due to an upward revision in our sales/consolidated GPM estimates beyond FY17, as we believe management will introduce solid reforms to improve the operation in the long term. Our new target price translates into 1.0x FY14E PB and 14x FY16E PE, assuming the success of the reforms by then. Downside risk: inability to revamp hypermarket operations with sustainable margins. Upside risk: greater-than-expected margin improvement from the integration of Hualian.