Net loss expected in 9M15Lianhua announced it expects to record a net loss in9M15; its net profit was Rmb51mn in 9M14.
Trends to watchThe poor results reflect the tough situation thesupermarket industry currently faces – this is attributableto weak consumption, the decline of prepaid cards, and theimpact of e-commerce; these trends are set to continue in 3Q15.Nevertheless, we are still positive on Lianhua’s reformpotential, especially after its change of Generalmanager. The tough industry environment and poor resultshave proved that Lianhua’s traditional operation method andbusiness model are not going to work in the “new normal” and itis need of structural reform. Despite Yonghui’s investment, themarket is still worried that it cannot help Lianhua to have asystematic reform. However, in its interim report the companyannounced that Mr. Lin Song, previously one of Yonghui’s seniormanagement team, had been appointed as Lianhua’s new GM.
Lin replaces Mr. Hua Guoping; we believe this move signals thestart of Lianhua’s reform. The announcement of national SOEreform guidelines may also accelerate its reform progress.Current valuation is attractive. Lianhua traded at 0.1x P/S in2015, vs. its A-share peers’ at 0.3~0.9x 2015 P/S.
Valuation and recommendationLower 2015/16e earnings from Rmb12mn & Rmb54mnto -Rmb55mn & Rmb12mn and cut TP by 10.7% toHK$7.3 (based on 0.25x 2015e P/S) but maintain ourConviction BUY rating. There is not much difference betweenmeager earnings and a minor loss, but a huge differencebetween to reforming or not.
Risks
Reform lower-than-expected; e-commerce development.