What's newLianhua announced a series of reforming measures:1) Management turnover: the previous chairman and threeother executive directors resigned from the board. Mr. Ye,the Chairman of Bailian, was appointed as the Chairman ofLianhua. Besides, two of Yonghui’s leaders stepped into theboard as non-executive directors.
2) Procurement integration: Lianhua entered into apurchase framework agreement with Yonghui, and wouldpurchase various kinds of goods (mainly fresh produce andfoods) till December 31, 2015.
Comments The big turnover shows a strong determination forSOE reform. A tough supermarket industry environmentand the poor results have proved that Lianhua’s traditionalmanagement and operation method is not going to work inthe future. Shanghai government has realized a systematicreform is needed for Lianhua. After the managementreshuffle, we expect the strategic investor may have astronger impact on Lianhua.
Creating an undisputed scale advantage inpurchasing. The sales of Lianhua and Yonghui will sum upto >Rmb70bn. This will help Lianhua improve its grossmargin in the future. It may also enhance the quality offresh produce and foods operation of Lianhua.
Valuation and recommendationMaintain Conviction BUY and lower TP by 9% to HK$6.6,based on 0.2x 2016e P/S.
RisksReform misses expectations; e-commerce developmentdisappoints.