Xiao Nan Guo (XNG) released profit warning announcement last Friday.
Due to a drop in same store sales (SSS) growth in 1H13, XNG’s net profit is expected to record significant decline YoY. We expect XNG’s SSS growth in 1H13 to be -7% and net profit in 1H13 is expected to drop by 37%, to RMB35 million. The Chairlady and senior management intend to increase their shareholdings in XNG in the future to demonstrate commitment and confidence in XNG’s prospects.
We do not expect XNG to slow its original store expansion plan despite weak
1H13 results. In view of low SSS growth base in 2H12 (-8.5%) and continuous improvement in traffic flow, we expect XNG’s SSS growth in 2H13 (0.4%) to show huge HoH improvement. Due to lower SSS growth expectation, we cut XNG’s EPS in 2013 by 8.3% and we expect XNG’s EPS to fall by 18.6% in 2013, to RMB0.075. With an expectation on SSS recovery in the future, XNG’s EPS is expected to rebound by 21.5% and 15.0% in 2014-2015, to RMB0.092 and RMB0.105, correspondingly.
SSS growth recovery in 2H13 is highly anticipated. Valuation is not demanding on earnings recovery in 2014 and dividend yield is attractive. We maintain “Buy” on XNG and TP of HK$1.65 remains unchanged, which represents 17.1x 2013 PER, 14.0x 2014 PER and 12.2x 2015 PER.