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Market Report Summary - 31 October 2014

Core Content

This market report provides an overview of the performance of Gome Electrical Appliances (493.HK) and the TMT sector as of 31 October 2014. It includes financial highlights, stock market performance, valuation statistics, and key industry developments.

Gome Electrical Appliances (493.HK)

Key Financial Highlights

• 3Q14 Profit Alert: Gome reported a significant earnings growth of over 70% for the first nine months of 2014, with a net margin expected to exceed 2%, compared to 1.5% in 2013.
• Earnings Growth Momentum: The report expects the earnings growth momentum to continue into 4Q14.
• Performance Drivers: The growth is attributed to:
  1. Strong same-store sales growth (SSSG) at 6%.
  2. Improved gross profit margin above 18%.
  3. Lower operating expenses.
• Valuation: The stock is currently trading at 11.1x FY15F P/E, below its historical average of 14.0x P/E. It is also trading at 0.26x FY15F P/S, which is significantly lower than Suning's 4.3x and JD.com's 1.4x.
• Rating: The report reiterates a "BUY" rating with a target price of HK$1.83, indicating a 52.5% upside from the current price of HK$1.20.

Long-Term Outlook

• Earnings Growth: The report forecasts 41% YoY earnings growth for FY14.
• Strategic Moves: Gome is building strength in procurement cost and expense control, which is expected to help it outperform peers in 2H14 and 2015.
• Next Catalysts: Updates on double 11 sales, progress in cooperation with supermarkets, and breakthroughs in e-commerce sales growth are highlighted as potential catalysts.

Financial Ratios

• ROE: Expected to increase from 5.6% in 2013 to 9.3% in 2016.
• Net Margin: Projected to rise from 1.6% in 2013 to 2.3% in 2016.
• Payout Ratio: Expected to decrease from 60% to 20% over the period.
• Effective Tax Rate: Expected to drop from 43% to 25% by 2016.

Shareholding Structure

• Shinning Crown: 27.24%
• Bain Capital: 9.97%
• Huang & Du: 5.19%
• Free Float: 57.60%

TMT Sector

Key Highlights

• Baidu: Prioritizes mobile investment despite a slower-than-expected 52% revenue growth in Q3. Mobile now accounts for the majority of Baidu's traffic.
• Sina Weibo: Plans to introduce new functions to drive sales, including a payment system to enable merchants to sell products to followers.
• TMT Investments: Record PE and VC investments in Q2, totaling $5.35 billion across 214 deals, marking a two-and-a-half-year high.
• Lenovo: Completed a $2.91 billion acquisition of the Motorola handset unit from Google, aiming to expand its presence in the U.S. smartphone market.
• Tencent: Achieved 100 million daily app downloads through its app store, up from 76 million in July, indicating a 25 million increase in three months.

Stock Market Performance

• Hang Seng Index (HSI): Price at 23,702, with a 0.5% decline.
• H-share Index: Price at 10,629, with a 0.9% decline.
• Turnover: HK$67.6 billion, with a 15.1% decline.
• China Equities: CSI 300 Index at 2,469, with a 0.7% increase.
• Asian Equities: Nikkei 225 at 15,658, with a 0.7% increase.
• US/European Equities: DJIA at 17,195, with a 1.3% increase; S&P 500 at 1,995, with a 0.6% increase.

Other Indicators

• Oil Prices: WTI oil at $81.1, with a 1.3% decline.
• Gold: At $1,199.6, with a 2.0% decline.
• Copper & Aluminum: Prices remained stable at $6,815.0 and $2,030.0 respectively.
• CRB Index: At 272.7, with a 0.8% decline.
• Baltic Dry Index: At 1,424.0, with a 0.3% decline.
• Interest Rates: UST yield 3m at 0.01%, with a 0.01% decline; UST yield 10y at 2.31%, with a 0.012% decline. HIBOR 3m at 0.38%, with a 0.001% increase; USD LIBOR 3m at 0.23%, with a 0.000% increase.

Peer Comparison

• Gome: Expected to outperform peers in 2014-15 with a projected 41% YoY earnings growth.
• Digital China Holdings (861.HK): Expected to show a significant increase in EPS growth (191.3% for next 1 year) compared to Gome.
• Haier Electronics (1169.HK): Expected to show steady growth in EPS and margin improvements.
• Suning Commerce (002024.CH): Shows a lower EPS growth and margin compared to Gome.

Valuation Statistics

• 2014F: Market Cap at HK$20.52 billion, EPS at 0.03, P/E at 12.8, EV/EBITDA at 5.6.
• 2015F: Market Cap at HK$20.52 billion, EPS at 0.04, P/E at 11.1, EV/EBITDA at 4.8.
• 2016F: Market Cap at HK$20.52 billion, EPS at 0.05, P/E at 9.2, EV/EBITDA at 4.3.

Income Statement

• Revenue: Expected to grow from Rmb 56,401 million in 2013 to Rmb 77,343 million in 2016.
• Gross Profit: Projected to increase from Rmb 8,502 million to Rmb 12,375 million.
• Operating Income: Expected to rise from Rmb 1,015 million to Rmb 1,896 million.
• Net Income: Projected to grow from Rmb 892 million to Rmb 1,802 million.

Balance Sheet

• Cash: Expected to increase from Rmb 9,016 million in 2013 to Rmb 12,359 million in 2016.
• Total Assets: Projected to rise from Rmb 39,324 million to Rmb 46,898 million.
• Total Liabilities: Expected to grow from Rmb 24,007 million to Rmb 28,339 million.
• Stockholders' Equity: Projected to increase from Rmb 15,927 million to Rmb 19,342 million.

Cash Flow

• Operating Cash Flow: Expected to increase from Rmb 1,995 million in 2013 to Rmb 2,229 million in 2016.
• Investing Cash Flow: Expected to be negative in 2014, with a purchase of PPE at Rmb 1,585 million.
• Financing Cash Flow: Expected to have a positive impact in 2014 with new loans of Rmb 717 million.

Ratio Analysis

• Sales Growth: Expected to grow from 10.4% in 2013 to 11.1% in 2016.
• EBIT Margin: Projected to increase from 1.8% in 2013 to 2.5% in 2016.
• Net Margin: Expected to rise from 1.6% in 2013 to 2.3% in 2016.
• ROE: Projected to increase from 5.6% in 2013 to 9.3% in 2016.
• Net Debt/Equity: Expected to decrease from -39% in 2013 to -43% in 2016.

Key Takeaways

• Gome is expected to continue its strong earnings growth and outperform peers in the TMT sector due to effective cost control and integration between online and offline operations.
• The TMT sector is experiencing significant investment and growth, with Baidu, Sina Weibo, and Lenovo leading the way.
• Valuation metrics for Gome are favorable, with a low P/S ratio and a "BUY" rating.
• The report highlights the importance of strategic moves and market dynamics in shaping the future of Gome and the TMT sector.