Lianhua isn’t doing well in terms of its overall YTD operating condition. The YTD SSS growth of Lianhua is a negative mid-single-digit. The Company recorded “dozens of” net store closures YTD in 2014. Overall, the declining traffic is bringing pressure to turnover growth; we expect the SSS growth of Lianhua in 2H14 will not creep up significant ly despite higher CPI anticipation and recovering consumption sentiment.
Lianhua is working on resolving its structural issues yet time is needed. Several structural issues will continue to negatively impact Lianhua’s margins. Actually, Lianhua has already realised these issues and has been working on transforming the Company from scale driven growth to efficiency and margin driven growth. The structural issues of Lianhua are likely to remain in the short term and management’s efforts need time to be reflected on the retail end.
Maintain “Neutral” based on current valuation. The stock price of Lianhua was volatile during the past 12 months, and last closed at 0.92x FY13-16 PEG. We believe the current stock price is fairly valued. We forecast Lianhua’s basic EPS for FY14-16 to be RMB 0.115, 0.187 and 0.253. Target price of HK$ 4.54 translates to 1.0x FY13-16 PEG.