3Q17 results miss expectation
GOME Retail Holdings Limited announced its 1-3Q17 results: revenuewas Rmb57,429mn, up 3.7% YoY; net profit was Rmb220mn, down10.7% YoY, or Rmb0.01 per share. 3Q alone revenue was down 3.6%and net profit was down 19.9%. The results were slightly lower thanmarket expectation.
SSSG was +4.0% in 3Q17 （-9.4% in 2016 and +2.3% in 1H17），from a low base （>100 stores being under renovation in 2016）and overall offline recovery.
3Q consolidated gross margin stayed flat at 15.5%. However,higher online loss, higher interest expenses and foreignexchange loss dragged down the bottom line performance.
Trends to watch
Net profit is expected to recover from a low base in 2018, due tomajor store reopening and lower forex loss.
Watch GOME’s new retail reform. GOME aims to transform itself intoan integrated home solution provider, introducing home designstudios within physical stores. It aims to attract more offline traffic todrive sales of related products. We expect Home decoration businessto generate revenue of Rmb1.5~2.0bn in 2018.
GOME is increasing self-owned logistic capacity. 4 self-ownedwarehouses are under construction. New warehousing area underplanning reached 1.96mn sqm.
Earnings forecast
Considering higher expense pressure, we lower our 2017/18 netprofit forecasts by 18.6%/6.3% to Rmb381mn/681mn.
Valuation and recommendation
The stock is trading at 23x 2018e P/E. We maintain our HOLD rating,but lower our target price by 1% to HK$0.83, implying 5.5%downside room from the current price, based on SOTP valuation.
Risks
Effects of store transformations fall short of expectation