Wumart’s SSSG for Q3 is around 10% YoY, in contrast of 1H11’s 12.0% and is expected to drop further in 4Q. Management indicated a slowdown in sales during October and November, which is in-line with the retail sales of 3,000 key retail enterprises under Ministry of Commerce's surveillance. We expect SSSG for 2H11 to be at high single digit, in-line with the market trend.
Total SG&A expenses amounted to RMB 1,164m in 1H11, though increased faster than turnover, we are still confident with company’s cost control prospect. We believe certain costs are necessary, given that the company is endeavouring to upgrade its overall operating capacity and we believe the staff cost ratio is unlikely to increase by large margin.
To advance the “farm-to-supermarket” project forward. Wumart established 67 direct purchase bases with area over 532 sq.km as at 1H11. Leveraged upon the advantage of reduced number of logistics process, the company is able to become more competitive in terms of cost and quality control. We expect the company will continue to expand the scale of the “farm-to-market” project.
Upgrade to Accumulate and raise TP to HK$ 19.85. We revised up the forecast for revenue and revised down the forecast for SG&A expenses increase. We believe Wumart will continue to achieve sustainable earning growth. Our TP translates to a 30.0x FY11 PE, 25.0x FY12 PE, 6.2x FY11 PBR, 5.4x FY12 PBR, representing a 1.7x FY10 - 13 PEG.