Lianhua Supermarket {Ticker: 0980.HK, Closing Price: 4.60 HKD, Target Price: 3.90 HKD, Recommendation: Hold}
Lianhua announced 1H14 results. Net profit dropped by 49% to RMB98m with a 3.7% decline in sales to RMB15bn. No interim dividend was declared, same as 1H13. Net cash declined to RMB10.1bn vs. RMB10.8bn by end 2013. Coupon liabilities dropped by 11% compared 2012 year end.
Key highlights of the results
SSSG was -5.37%, with -7.03% for hypermarket, -5.04% for supermarket and +17.1% for CVS.
GPM improved by 0.26ppt to 14.4% and consolidated GPM improved by 0.4ppt to 22.9%.
Opex declined by 0.1%, of which staff costs were up by 3%, D&A expense down 4%, rental cost up 3%. Accordingly, staff cost ratio increased by 0.7ppt to 9.7%, and rental cost ratio rose by 0.4ppt to 5.8%. D&A expense ratio maintained stable at 1.7%. During the period, Lianhua cut 2% staff count.
Earnings in 2Q14 was nil vs. RMB99m in 2Q13. To recap, Lianhua recorded 6% growth in earnings to RMB98m in 1Q14 despite 4.7% sales decline. Hypermarket OPM was down by 0.63ppt to 1.36%, supermarket OPM down 0.3ppt to 3.46% and loss at CVS expanded to RMB43m vs RMB36m in 1H13.
It net increased 1 hypermarket and net closed 36 supermarkets and 83 CVS to a total of 4412 outlets as of end Jun 2014. It opened 117 new stores, including 3 hypermarkets, 63 supermarkets and 51 CVS.
Deutsche Bank comment – Results came below expectation
While top line was in line, bottom line was below market/DB forecasts by 49.3%/52% respectively on higher-than-expected opex. Lianhua hopes the reforms and initiatives started in 1H would reverse the downward trend in 2H14. The company will have analyst conf call at 9:30am on 29 Sep. After that, DB will host a group conf call to investors at 10:45am. Please reach your DB sales contact for dial in details.