Investment positives
We initiate coverage of Red Star Macalline (RSM) with aConviction BUY rating and a TP of HK$16.0. RSM is China’slargest home furnishing retailer in terms of operating area, storeaccounts and geographic coverage. We believe RSM is the clearleader poised to gain shares in this fragment industry.
Large industry with robust growth. Frost & Sullivanpredicts chain home furnishing retail sales will reachRm863bn in 2019 with a CAGR of 11.1% over 2014~19.
Strong bargaining power positions to take firmadvantage of industry growth. RSM accounted for~20% of the total sales of leading product brands such asCheers and Sleemon; while the ten largest tenants onlyaccounted for 1.8% of RSM’s revenue in 2014. The averageoccupancy rate of the portfolio malls reached 96% in 2014.
Irreplaceable product display and experience
function in furniture sales. RSM’s one-stop shoppingmalls have become the most important showroom forcustomers to learn about and buy furniture.
Rapid expansion through asset light model. Weexpect 34 new stores will be opened in 2015 and 44 in 2016.
Self-operated malls secure prime locations with richasset value. Same-mall growth was 4.7% in 2013, and8.4% in 2014. Self-owned malls are also rich propertyassets. Total asset value (excl. MI) reached Rmb55.6bn.
Financials
We project revenue to reach Rmb9,692/11,946mn in 2015/16e,(23% CAGR); adjusted profit to grow 18%/32% toRmb2,609/3,449mn, giving 2015/16e EPS of HK$0.90/1.22.
Valuation and recommendation
We initiate coverage of Red Star Macalline Group with aConviction BUY rating and derive a TP of HK$16.0 usinga SOTP valuation (implying 17.8x 2015e P/E).
Risks
Increased competition, same-mall-growth is below expectations.