Earnings growth misses management’s expectation, mainly due toweak sales growth in 1H12. Wumart’s total revenue of 1H12 grew by 7.2%yoy, and net profit yoy growth was 0.5%, missing our expectation. Marketdownside pressure and the running-in period of subsidiaries integrationbetween Tianjin Wumart, Merrymart and Wumart resulted in a weak top linegrowth. SSSG for 1H12 was 3.9%, representing an 8.1pct slowdown from2011H1.
Consolidated gross margin improved by 0.5pct in 1H12, SG&A costincreased by 1.3pct. Driven by the fast-growing other income fromsuppliers, Wumart’s consolidated gross margin went up 0.5pct to 19.8% in1H12. Rental expense and staff cost rose by 24.6%/23.1%, respectively,resulting in a higher SG&A cost ratio of 17.6% (16.3% in 2011H1).
SSSG is expected to slightly recover to ~5% in 2H12, gross margincontinuing to benefit from the suppliers’ integration of subsidiaries. Wepredict the consumption market will recover in 2012Q4 due to the economyrecovery and peak season effect. Wumart is expected to improve its SSSG in2H12 (5.0%2H12E vs. 3.9%1H12). Suppliers’ integration is expected toenlarge company’s scale advantages in Beijing market and thus gain strongbargain power as well as a better rebate. We expect the consolidated grossmargin to rise by 0.5pct in 2012E, compared with 19.2% in 2011.
Potential risks：Labor & rental costs inflation, the effects of subsidiaryintegration miss expectation.
Earnings forecast, valuation and investment rating：Considering theintegration running-in and recovery of sales in 2H12, we lower Wumart’s2012-14 EPS to HK$0.59/0.72/0.93 respectively, with a 3-year CAGR of18.3% (HK$0.66/0.85/1.06 previously). Considering the sector’s averagePEG and Wumart’s supply chain management as well as the scaleadvantage, we apply Wumart 2012 1.4X PEG (20% premium) and lower ourTP from HK$19.10 to HK$15.50. Downgrade from “Buy” to “Overweight” andwe value Wumart’s proactively expansion and efficient logistic operation in along term.