Targ et price of HKD16.71 unchang ed; maintainin g Buy
Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
We cut our FY13-14 forecasts by 4.7-6.5% to factor in a lower-than-expected operating profit in 2012. Besides those unfavorable industry factors, Wumart also experienced unsuccessful trial integration of Tianjin and Beijing, and investment in fresh food which outwei ghs its margin under tough operating environment. We believe the short-term pain will likely pay off with enhanced profitability and competitiveness, star ting in 2013. Our target price was unchanged at HKD16.71 as we introduced FY15 forecasts and adopted a new lower China COE. Maintaining Buy.
FY2012 – results in line; GPM expansion despite tough operating environment Wumart recorded a 2.7% increase in net profit to RMB602m riding on 5.5% growth in sales to RMB15.4bn. Both sales and net profit were in line with our forecast, but below market consensus. Operating profit, however, missed our expectation by 4% on higher opex. This was offset by a lower ETR. Total GPM improved by 0.4% mainly driven by hi gh rental income, and optimized product mix. OPM was down by 0.9ppt to 5.4% due to weak SSS growth. The payout was 44% vs. 43% in 2011. Net cash improved by 45% to RMB1.6bn.
FY2013 – investment in fresh food to drive both traffic and profitability Management commented ytd SSS growth improved from 2012 and slight growth during CNY. Wumart targets to open 15 superstores and 45 mini stores this year, +15% gross space growth. The investment in fresh food started to pay off, being a key driver for store traffic and profit ability. The Tianjin business hit bottom in 4Q12. Despite no breakeven th is year, the loss should fall further.
Valuation and risks
We maintain our target price of HKD16.71, which translates into 24.5x FY13E P/E. Our DCF value is based on a COE of 8.5%, beta of 1 and a TGR of 2%. Downside risks: 1) cost pressure, 2) competition from foreign food retailers, and 3) inability to make value-accretive acquisitions.