Target price cut by 6.0% to HK$17.15 (from HK$18.25); maintaining Buy
We cut our FY12-14E EPS by 9.0-9.6% to factor in a weaker sales momentumand headcount increase to support fresh product expansion. We believe thatthe short-term pain in profitability will likely pay off with enhancedcompetitiveness, starting in 2013. Our target price is lowered by just 6.0% toHK$17.15 from HK$18.25, helped by a valuation roll-over to six-month forward.We maintain our Buy rating on the company’s improved strategy and itremains the most profitable food retailer within our coverage.
Disappointing 1H12 results on several unexpected factors
Wumart’s results came below management and our expectations. Sales grewby 6.6% to RMB7.63bn, while net profit only rose by 0.5% to RMB338.6m.
Although we expected an underperformance for 1H12, the results surprised onweak sales in Tianjin, a headcount increase for fresh product expansion and adecline in government subsidy for store closure.
Sales to improve in 2H; profitability remains under pressure
Sales in July only slightly improved from 1H affected by heavy rains in Beijing.Although sales would get better in 2H on better sentiment and low base, weexpect profitability to remain under pressure in 2H due to more planned storeopenings. This, to some extent, could be relieved by CGPM improvement.
Valuation & risks
Our target price is derived from the average of PE/G and DCF valuations. Thistranslates into 24.0x rolling 12-month forward P/E. Our DCF value is HK$17.1(from HK$19.0) (COE of 8.6%, beta of 1 and a TGR of 2%) and the PE/G value isHK$17.2 (from HK$17.5). Downside risks: 1) cost pressure, 2) competition fromforeign food retailers, and 3) inability to make value-accretive acquisitions.