Positive beyond FY13; Buy
We reiterate our Buy recommendation on Wumart as we believe its investment in fresh food, long-time efforts in integration, and Tianjin breakeven will start to pay off from FY14. In the short term, its earnings will continue to be affected by weak sssg and new openings. The company aims to be a leading consolidator in the segment. We believe some M&A could be on the horizon, probably in existing markets. We cut our FY13E NP by 6.6% to factor in more aggressive openings in 2H13, which may affect margin in the short term. Our FY14/15 NP forecasts are broadly unchanged. We maintain our target price of HKD16.5.
1H13 results broadly in line
Sales grew 11.3% to RMB8.5bn in 1H13 and net profit rose 0.4% to RMB340m. While the top line was 0.6% below our forecast, the bottom line beat our expectation by 4% on higher supplier income and better cost control. Operating profit declined slightly to RMB501m. As in 1H12, no interim dividend was declared. Net cash remained at RMB1.7bn.
Outlook – market consolidation, e-commerce, rising costs
Wumart aims to be a leading market consolidator, highlighting three key requirements: IT system, mgmt team and business model. It does not think e-commerce will replace physical store operators as the latter have an advantage in merchandising. July/August sssg was weaker than in 2Q13 due to less promotion. Fresh food has become a key traffic driver, and the next driver could be softlines given cooperation with brands. Mgmt raised its 2H13 opening target to 15 superstores, which was its full-year guidance previously.
Target price unchanged at HKD16.5; risks
We maintain our target price of HKD16.5, which translates into 27.4x FY13E P/E and 20.8x FY14E P/E. Our DCF value is based on a COE of 8.7%, beta of 1 and TGR of 2%. Downside risks: 1) cost pressure, 2) competition from foreign food retailers, and 3) inability to make value-accretive acquisitions.