1Q13 net profit declined by 2.8% due to higher opex related to fresh session
Total revenue grew by 10.2% to RMB5.28bn, mainly driven by the new storesopened in 2H12. SSS growth, although improving from 2012 (2.1%), remainedweak, slightly better than CPI-level (China’s 1Q13 CPI: 2.4%). Net profitdeclined by 2.8% to RMB199m. In 1Q13, the company continued itsinvestment in fresh food session with more experienced staff hiring atheadquarter level, which led to the increase in SG&A ratio by 1.4ppt.Consolidated gross margin improved by 0.8ppt to 20.7%.Deutsche Bank viewThe operating environment remains tough for food retailers in 1Q13 and weexpect such trend will continue in 2Q13 due to uncertain impact from bird flu.We agree on Wumart’s investment in fresh food session to be competitive inthe long term, and expect the one-time pain would start pay off with enhancedprofitability and competitiveness since 2Q13.
Currently bird flu has impacted Wumart’s Zhejiang business (c.16% of overallsales) where sssg became negative since the breakout in April as localconsumers avoid going out to public areas in short term. Impact was lesssignificant in Beijing and Tianjin area so far. Sales of chicken (<5% of productmix) have declined by 30% already. But the overall performance of fresh foodhas been good as more people shift to modern trade from wet market. Wemaintain Buy.