1Q13 earnings were below expectations, dragged by high operating costs
Healthy sales growth but rising cost pressure may limit improvement in operating margins; cut FY13F-14F earnings by 7.5%-8.5%
Maintain HOLD with a lower TP of HK$13.40 (Prev HK$14.35)
1Q13 results below expectations. Wumart reported net profit of Rmb199m (-3% y-o-y), representing 28% of our and market's full year estimates. This seems low as 1Q is typically the strongest quarter and should comprise >30% of full year earnings. Revenue grew 10% y-o-y to Rmb5.3bn driven by 2.9% same-store-sales growth (SSSG) and contribution from new stores that were opened last year. Gross margin inched up 0.8ppts to 20.7%, thanks to improved product mix, especially from the fresh food segment. However, operating margins were squeezed by 0.8ppts to 5.6% as operating costs to sales ratio (particularly staff and administrative expenses) increased by 1.4ppts to 15.6%. This was attributable to the expansion in the fresh food segment that involved more food categories and a wider store network.
Sales improve but cost pressure remains. Wumart's expansion strategy in the fresh food segment should give a boost to overall sales growth this year. 1Q13's average purchase per transaction grew c.5% while the decline in store traffic was narrower. April's SSSG also see a sequential improvement. Gross margins should increase but higher staff and administrative costs related to fresh food initiatives may limit the increase in operating margins in the near term. As a result, we have cut FY13F-14F earnings by 8.5% and 7.5%, respectively as we assume higher operating costs. Meanwhile, Wumart has added 3 superstores and 6 mini-marts in 1Q13. It should be on track to open 15 superstores and 45 mini-marts this year.
Maintain HOLD. Following our earnings cut, TP is reduced to HK$13.40 (from HK$14.35), based on 20x 12-month rolling PE. Upside risk to our earnings will include better than expected operating leverage from higher sales.