Red Star Macalline Group Corp. Ltd (“Red Star Macalline” or the“Company”) is China’s largest home improvement and furnishingsshopping mall chain operator and was the top player in 2014 givenits 10.8% market share. It expands by opening portfolio malls in tierI & II cities and operating managed malls in tier III & IV cities underits brand.
Strong brand influence The company has strong brand influence withchannels spanning 115 cities and a portfolio covering 18,000 brands afterover 20 years of expansion. Its 25 portfolio pipeline projects are mostlylocated in tier II markets and 359 pipeline managed projects will besubmerged to tier III and other cities in a few years. In this sector, theinfluence of brands is weaker than channels on low purchase frequencyand high channel building costs. The company lives in symbiosis withupstream brands by helping small brands expand with its nationwidechannels.
High profitability The company earns by charging rent and managementfees. As no rental expense is incurred for its self-built malls and no dailyoperating cost is assumed for its managed malls, gross margin andoperating profit margin of over 70% and 45% are expected for the nextthree years. Overall core net profit margin is expected to improve from27.8% in 2014 to 30.8% in 2017 on higher profitability of its portfoliomalls. Its profitability is far better than international peers thanks to itsunique dual mall model. Without direct sales and inventory issues, itscustomer base and revenue are boosted by nationwide marketingactivities, tenant mix upgrade and good aftersales services.
High core profit growth With an expected 11.6% CAGR for operatingarea of portfolio malls in 2015-2017, 6-7% growth in same-store rent andmanagement fees and commencement of managed projects, CAGRs of20.1% and 24.3% respectively are expected for revenue and core netprofit. Its sound financial position is backed by lower net debt ratio(<30%) in the next three years. Earnings catalysts include higher-thanexpectedrent increase. Risks include failure of new malls and weakproperty market and demand.
Initiate BUY with TP HK$14.7 We derive our TP from the average ofSOTP and P/E valuation, corresponding to 0.94xPB, 13.4xEV/EBITDA,0.84xPEG, 16.2xP/E based on 2015E core earnings.