Results Review
1H15 results in-line with pre-announcement
In 1H15, Lianhua’s revenue fell 6.3%, and net profitplummeted 78.5%, as pre-announced.
SSSG remained weak at -6.3% in 1H15. SSSG ofhypermarkets, supermarket, and CVS were -8%, -3.78%,and +0.88%. Two new hypermarkets were opened, 41supermarkets and 57 CVSs were closed in 1H15 (net).
Gross margin widened 0.6ppt YoY to 15% after thecommodity structure adjustment and procurement costreduction, but a decrease in incomes from suppliers led to a0.5ppt drop in net margin.
Change of General Manager: As of August 28, Mr. HuaGuo-ping ceased to be the general manager and Mr. LinSong was appointed. Mr. Lin had been vice generalmanager of Yonghui’s e-commerce company.
Trends to watch
Weak results reflected low efficiency, especially underweak demand and fierce competition in the retail industry.We expect the replacement of GM is an important sign ofsystem reform. By leveraging Yonghui’s leading managementskills, Lianhua may gain: 1) higher gross margin throughprocurement integration; 2) better operating margin with tightercost control.
Valuation and recommendation
Maintain Conviction BUY. Lower 2015 earnings forecastfrom Rmb77mn to Rmb12mn and 2016 from Rmb142mnto Rmb54mn and cut TP by 19.8% to HK$8.1 based on0.3x 2015e P/S.
Risks
Expense hikes; lower-than-expected synergies.