Rising expense from new store openings in 4Q
The company closed 1 self-operated store and planned to open 4-5stores this year. It has opened 7 managed malls in the 1H and planned toopen altogether 37 in 2015. For self-operated stores, same store rentalgrew 6.2% in 1H. Gross margin of self-operated store improved 5 ppt YoYto 76.4% & gross margin of managed mall slid 0.4 ppt to 72.5%.Redstar’s own store occupancy rate stood at 97% in 1H15.
Lots of room for growth in managed mall
Based on population density, Redstar’s managed mall business couldpotentially expand into another 2,500 cities within China. In 1H15, thecompany has 112 managed malls and 409 reserve projects. 215 of whichhave obtained land permits.
2015-17E core net profit growth to exceed 20% p.a.We have fine-tuned earnings and revenue forecasts. 2015-2017E coreprofit is expected to be RMB2.65, RMB3.36 & RMB4.16 billion, implyingCAGR of 25%.
Stable growth, relatively low valuation at 10.6x 2015E P/EAverage valuation of Hong Kong's retail industry has dropped to 10.3x2015P/E from 15.1x 2015P/E in July. Our new TP of HK$12.7 (previouslyHK$14.7) is based on SOTP valuation methodology, implying 14.2x2015P/E. The stock is trading at a discount of 57% to NAV of its ownproperties. Risk to our forecast comes from weaker-than-expectedexpansion of managed malls.