2017 results miss expectations
GOME Retail Holdings announced its 2017 results: revenue wasRmb71,575mn, down 6.7% YoY with a net loss of Rmb450mn. Theresults were lower than expected.
SSSG was 0.4% for 4Q and 2.3% for 2017 （vs. -9.4% in 2016 & 4% in3Q17）。 Consolidated gross margin +2.2ppt to 18.3%, thanks to theproduct mix upgrade and less impact from B2C business.
However, non-operating items dragged earnings: 1） impairment oflong-term assets and goodwill （-Rmb589mn）； and, 2） higher financialcosts and higher forex losses （from -Rmb207mn to -Rmb597mn）。
Trends to watch
Developing new format: county stores. GOME plans to use the smallcounty store model with O2O services to penetrate tier-4/-5 citymarkets. The company targets opening 800 county stores in 2018followed by another 3,000 stores over the next three years.
Enhancing logistics network: GOME plans to invest an additionalRmb5bn in its logistics business. Four self-owned warehouses areunder construction; with 1.96mn sqm of new warehouse area underplanning.
Earnings forecast
Considering high expense pressure and lower margin led by smallstores and online expansion, we lower our 2018 net profit forecastby 37.8% to Rmb423mn and introduce that of 2019 at Rmb465mn.
Valuation and recommendation
The stock is trading at 36x/32x 2018e/19e P/E. We maintain ourHOLD rating, but lower our target price by 6.8% to HK$0.77,implying 12% downside room from its current price.
Risks
Effects of store transformation falls short of expectation;development of online business misses expectations.