20130820-美银美林-Beware_of_startup_loss,_but_still_our_dept_store_top_pick_14页_381kb

Summary of Intime Department Store Analysis

Core Content

This document is an investment report on Intime Department Store, a leading department store operator in Zhejiang Province, China, published by Bank of America Merrill Lynch on 20 August 2013. The report highlights Intime's performance, competitive advantages, and future outlook, while also addressing potential risks such as startup losses.

Main Points

1. Performance Highlights

• Core Net Profit (NPAT): For 1H13, core NPAT rose by 11.2%, surpassing the analysts' expectations of 5-10% growth.
• Reported NPAT: Increased by 33.8% in 1H13, driven by disposal gains.
• Earnings Estimates: The 2013E estimate was adjusted up by 2%, with a price objective of HK$10.50 per share.
• Earnings Outlook: Despite startup losses in 2H13, the report suggests that Intime can achieve 5-10% annual earnings growth over the next two years due to its strong SSSG (Same Store Sales Growth) and margin resilience.

2. Startup Losses

• 2013 Startup Loss: Estimated at RMB150-200mn, with RMB55mn already booked in 1H13.
• New Stores: Four new stores are expected to open in 2H13, including the Hubin Store, which will contribute to the 2013 losses.
• 2014 Outlook: Aggressive expansion, especially in mega malls, is expected, continuing the startup loss pressure. However, the firm believes this is a manageable risk due to its strong execution track record.

3. Competitive Advantages

• Hybrid Model: Intime is an early mover in the hybrid model combining department stores and malls, with successful new store openings (e.g., Cixi, Qujiang, and Hefei Yintai Centre) that reached break-even within 1-1.5 years.
• Asset Portfolio: Strong commercial property holdings and retail expertise provide a competitive edge.
• Defensive Return Profile: Due to the relatively young store age, the return profile is considered more defensive compared to peers.

4. Valuation and Financial Metrics

• Valuation Ratios:
  • P/E ratio: 13.39x (2013E)
  • Dividend Yield: 2.27% (2013E)
  • EV/EBITDA: 8.48x (2013E)
  • Free Cash Flow Yield: 4.51% (2013E)
• Financial Performance:
  • Net Income (Adjusted): Expected to increase from CNY821mn in 2011A to CNY1,100mn in 2013E.
  • EPS Growth: Projected to increase from 0.422 in 2011A to 0.543 in 2013E.
  • EBITDA Margin: Declined from 34.4% in 2011A to 33.0% in 2013E.
  • Free Cash Flow: Positive in 2013E (CNY656mn), indicating improved cash flow generation.
  • Net Debt: Decreased from 2,561mn in 2012A to 3,503mn in 2013E.
  • ROE: Increased from 13.8% in 2011A to 14.4% in 2013E.

5. Store Performance and Pipeline

• SSSG: Intime's SSSG for 2013 is expected to be slightly better than 2012 (9.1%), driven by strong gold and jewelry sales and performance of semi-new stores.
• Individual Store Performance:
  • Hangzhou Qingchun: 21.7% YoY growth
  • Yiwu Yimei: 33.4% YoY growth
  • Cixi Intime City: 206.3% YoY growth
  • Beijing Red Gate: 67.6% YoY growth
• Store Pipeline: Includes new projects in various provinces, with a mix of lease and own properties. Some projects, like Hefei Intime Center and Hangzhou Hubin Store, are under development or have partial ownership, indicating future growth opportunities.

6. Asset Valuation

• Property Valuation: The company has a significant asset portfolio, with property values showing appreciation over time. For example, Hangzhou Wulin Store Property appreciated by 40% over 5.5 years.
• CAPEX: Expected to be around RMB1.5bn annually, with potential reductions due to asset disposals.
• Asset Disposal Strategy: Intime aims to continue disposing of non-core assets to improve its balance sheet and optimize returns, with no concrete plans at the moment.

Key Information

Investment Thesis

• Intime is a fast-growing department store operator with a dominant position in Zhejiang, a wealthy region in China.
• The company has a strong execution track record and a younger store portfolio compared to peers, which is expected to lead to improved margins and earnings over time.
• It is viewed as a long-term growth story, with the potential for further earnings upgrades and re-rating.

Risk Considerations

• Startup Losses: A potential risk in 2013 and 2014 due to new store openings, but considered manageable.
• Volatility Risk: High volatility is noted, indicating potential market fluctuations.
• E-commerce Losses: Expected to decrease in 2013 compared to 2012, with total losses estimated at RMB50-60mn in 1H13.

Analyst Notes

• SSSG Trend: The report includes a chart showing the trend of SSSG, highlighting the performance of individual stores.
• SG&A Cost Control: SG&A costs have been declining due to cost control measures and property acquisitions.
• Dividend Policy: Dividends per share are expected to increase from CNY0.166 in 2013 to CNY0.192 in 2015.

Conclusion

Intime is highlighted as a top pick in the department store sector due to its early adoption of the hybrid mall-department store model, strong retail expertise, and solid asset base. While it faces startup losses and high volatility, the report suggests that these are manageable and part of a broader strategy to achieve long-term growth. The company's financial performance, including improved earnings and free cash flow, supports its investment potential.