20150123-交银国际证券-China_s_leading_consumer_appliances_retailer_with_strong_O2O_growth__Initiate_with_Buy_36页_1mb

GOME (493.HK) Summary

Core Content

GOME is recognized as China's leading consumer appliances retailer, with a strong focus on omni-channel (O2O) growth. The company is initiated with a "Buy" recommendation and a target price of HK$1.40, which is based on a 12x FY15E P/E ratio, reflecting its O2O development strategy.

Financial Highlights

Key Company Strengths

• Renowned brand: Strong brand recognition in the market.
• Extensive distribution network: With 1,117 stores nationwide, enabling efficient logistics and e-commerce operations.
• Cost advantage: Effective supply chain management provides a competitive edge.

Earnings and Margin Outlook

• Core net profit growth: Expected to increase by 40% in FY14E, and to grow at a 20% CAGR in FY15-16E.
• Revenue growth: Projected to be 9% in FY14E, and to grow at 12% CAGR in FY15-16E.
• Core operating margin: Expected to improve to 2.3% in FY14E, 2.6% in FY15E, and 2.8% in FY16E.
• Gross margin: Expected to expand to 18.6% in FY15E and 18.8% in FY16E.
• E-commerce margin: Expected to improve from 6.3% in FY14E to 6.7% in FY15E and 7.2% in FY16E.

E-commerce Development

• Growth strategy: GOME has accelerated its e-commerce development, leveraging its integrated supply chain (procurement, logistics, and IT).
• Revenue growth: E-commerce revenue is expected to grow by 50% in FY15E and FY16E, accounting for 9% and 13% of total revenue, respectively.
• Loss reduction: E-commerce operating loss is expected to narrow from RMB450mn in FY14E to RMB400mn in FY15E and RMB350mn in FY16E.
• Online platforms: GOME sells products through its own website, mobile terminals, and platforms like Tmall.com.

Market Share Gain

• Market share: Expected to increase to 8.2% in 2014E, 8.4% in 2015E, and 8.6% in 2016E.
• Strategies:
  • Store expansion: Resumed in FY14E, with a focus on lower-tier cities.
  • E-commerce integration: Enhances online presence and cross-selling capabilities.
  • Collaboration with local retail chains: Helps in expanding its reach and capturing market share.

Store Expansion

• Net store openings: Expected to be 60 in FY14E, 50 in FY15E, and 50 in FY16E.
• Store distribution: 62% of stores are in lower-tier cities, with an expected increase to 53% in FY16E.
• Sales performance: Lower-tier cities showed a 10% SSS growth in 3Q14, outperforming upper-tier cities at 2%.

Key Investment Risks

• Intense market competition: Both from traditional retailers and e-commerce platforms.
• Rising cost pressure: Due to increasing operational and promotional expenses.
• Management stability: Potential risks related to leadership changes.
• Sustainability of product mix enhancement: Maintaining high-margin differentiated products is crucial for long-term growth.

Valuation

• Current P/E: Trading at 9.8x FY15E P/E, which is 17% below its 2-year historical average.
• Target Price: HK$1.40 based on a 12x FY15E P/E ratio, which is a 10% premium over the retail sector average.
• Undervaluation: The current valuation is considered undemanding, reflecting the company's strong growth potential and O2O strategy.

Conclusion

GOME is well-positioned to capitalize on the growing home appliance market in China through its omni-channel business model, strong brand recognition, and extensive distribution network. The company is expected to continue its growth trajectory with a focus on e-commerce expansion and market penetration in lower-tier cities. Despite risks such as intense competition and cost pressures, the strong financial outlook and strategic initiatives support a "Buy" recommendation.