1Q14 turnover in line, net profit better than consensusLianhua announced 1Q14 key data: turnover decreased 4.7% to Rmb8,912mn, net profit increased 5.9% to Rmb97.9mn vs. market consensus of a decrease due to last year's high base.
Gross margin improved and expenses well under control: we estimate 1Q14 SSSG will see a single-digit decline. However, leveraging on its improved gross margin (+0.6ppt YoY) and operating expense controls, net profit successfully increased from the bottom.
Trends to watch
Bottoming out in 2014. We expect its turnover increase will be limited because of low SSSG and some stores closures. However, sales will see some improvement trend in 2H14 and the company will reform its business to increase its operating efficiency. The key measures are: 1) Adopting a contract negotiation model to propel the fee-to-ratio transformation; 2) making its recruitment model more flexible to improve labor efficiency; 3) strengthening cost controls and improving incentive plans; and, 4) improving procurement and operations, and raising centralized distribution.Lianhua will be a beneficiary of SOE reform, and thus its earnings profitability and management incentives will improve in the long run.
Earnings revisions
We increase our 2014 net profit forecast to Rmb202mn (+18% on low base).
Valuation and recommendation
Better bottom line will increase investors' attention, while the small market cap also made the stock price more elastic when trends were much clearer. Watch for sales trends. Maintain HOLD rating and raise TP by 8.8% to from HK$4.5 to HK$4.9 on 0.13x 2014e P/S.
Risks
Consumption further slows down.