FY12 net profit of Rmb602m was within expectations; Final DPS of RMB0.21 declared, c.45% payout
Healthy SSSG, improved product mix and contained staff cost ratio should help margins to improve in FY13
Upgrade to HOLD with TP revised up to HK$14.35 FY12 results in line. Wumart reported Rmb602m net profit (+3% y-o-y) on the back of Rmb17bn in revenue (+6% y-o-y) - within expectations. Final DPS of Rmb0.21 declared, at c.45% payout, consistent with FY11. Same-store sales (SSS) grew 2.1% led by core territory of Beijing (78% of group revenue) which registered c.3% SSSG. Gross margin improved 0.3ppts helped by positive synergies from Merry Mart’s integration and improved fresh food product mix (comprising 22% of total revenue). Operating margin declined 0.3ppts due to higher staff cost (+0.8ppts to 4.9% of sales) and rental cost (+0.2ppts to 4.3% of sales). Meanwhile, Wumart incurred Rmb40m additional expenses on fine-tuning it s strategy for Tianjin stores and Rmb30m for new store losses. It had 538 stores as of end-2012 with 19 net new stores (includes 16 superstores).
Margins could improve. Jan-Feb13 SSSG was slightly better than FY12 while Mar slowed. In 1Q13, Wumart started direct negotiations with major manufacturers and suppliers for merchandise procurement. Fee income from suppliers may be lower in the near term but earnings should benefit given potential lower procurement cost. Tianjin stores had bottomed in Oct12 and should see narrower losses ahead. Also, staff cost to sales ratio should be flat or decline slightly as most of the recruitment was done in FY12. Wumart has hired 6,353 part-timers (c.19% of total employees) as part of its strategy to keep staff cost low (ex-social benefits) and flexible. In FY13, it aims to add 15 superstores and 45 mini-marts. Upgrade to HOLD. We raised FY13F-14F earnings by 2-2.4% following FY12 results. Given the improving margin prospects as well as operating efficiencies, we upgrade Wumart to HOLD (from FULLY VALUED) with new TP of HK$14.35, based on 20x 12-month rolling PE.